Contracts [Highly Tested Rules]

Question 1

What is the implied covenant of good faith and fair dealing?

Answer 1

UCC:
Under the UCC, every contract imposes an implied obligation of good faith in its performance and enforcement
* “Good faith” is “honesty in fact and the observance of reasonable commercial standards of fair dealing”

Common Law:
The common law also imposes a duty of good faith and fair dealing
* A breach of this duty usually involves exercising discretion in a way that deprives the other party of the benefits of their bargain

Question 2

What are the essential terms of a contract?

Answer 2

1. Quantity (UCC): In a contract for the sale of goods, the quantity term must be certain or capable of being made certain
2. Time: If the time for performance is not specified, the law implies that it is to be performed within a “reasonable” time
3. Identity of Parties: Must sufficiently identify the parties
4. Price: Required for real estate contracts. If not specified in a contract for the sale of goods, Article 2 provides that the price will be a “reasonable price at the time of delivery”
5. Subject Matter: Must be certain and identified

Specific Types of Contracts:
* Real Estate: Must identify the land and price terms
* Sale of Goods: The quantity of goods must be certain or capable of being made certain

Question 3

How can an offer be terminated?

Answer 3

An offer can be terminated by:
1. Rejection: An express rejection of the offer by the offeree; effective when received by the offeror
2. Counteroffer: Under common law, a counteroffer made by the offeree to the offeror regarding the same subject matter as the original offer but on different terms constitutes both a rejection and a new offer (note: might not be rejection and counteroffer under Article 2 “battle of the forms” provision)
3. Revocation: An offeror can revoke an offer any time before it has been accepted, either (a) by directly communicating the revocation to the offeree or (b) indirectly, if the offeree receives correct information, from a reliable source, of acts of the offeror that would indicate to a reasonable person that the offeror no longer intends to contract (e.g., selling a good that is the subject of the offer to someone else); effective when received by the offeree
4. Lapse of Time: An offer terminates if not accepted within the time specified by the offeror, or if no deadline is specified, a “reasonable” time
5. Death or Incapacity: An offer is terminated automatically by operation of law if either the offeror or offeree dies or loses the legal capacity to enter into a contract (exception: option supported by consideration)
6. Destruction of Subject Matter: An offer terminates by operation of law when the subject matter of the offer is destroyed
7. Supervening Illegality: When the subject matter of the offer is subsequently made illegal, the offer terminates by operation of law

Question 4

When can an offer be revoked, and when are offers irrevocable?

Answer 4

An offer can be revoked at will by the offeror before acceptance, even if the offeror promised not to revoke for a certain period, except in the following circumstances:
1. Options: An option is a distinct contract in which the offeree gives consideration for the offeror’s promise not to revoke an outstanding offer for a specified period of time
2. Merchant’s Firm Offer (UCC): Under Article 2, if (i) a merchant offers to buy or sell goods (ii) in a signed writing, and (iii) the writing gives assurances that it will be held open, then the offer is not revocable for lack of consideration during the time stated, or if no time is stated, a “reasonable” time (not to exceed 3 months for offers not supported by consideration)
> BUT NOTE:If the offeree pays consideration for the temporary irrevocability, it is an option contract and the 3-month limit does not apply; it can be held open for as long as the parties specify
3. Detrimental Reliance: When the offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so rely, the offer will be held temporarily irrevocable as an option contract for a reasonable length of time
4. Beginning Peformance: An offer becomes temporarily or permanently irrevocable once the offeree begins performance, depending on whether the offer is for a unilateral or bilateral contract
> Unilateral Contract: An offer for a unilateral contract becomes temporarily irrevocable once the offeree begins performance, and the offeree must be given a reasonable time to complete performance (substantial preparations to perform do not make the offer irrevocable but may constitute detrimental reliance)
> Bilateral Contract: An offer for a bilateral contract may be accepted by the offeree beginning performance, in which case revocation becomes impossible (note: notification of the start of performance may be necessary)

Question 5

What is an acceptance, and what are the methods of acceptance?

Answer 5

An acceptance is a manifestation (by words or conduct) of assent to the terms of an offer
* Acceptance must be within the time specified in the offer or, if no time is specified, within a “reasonable” time
* Only the offeree or a member of a class of offerees may accept an offer, but the power to accept an offer under an option contract is transferable
* The offeree must know of the offer in order to accept it

Question 6

What is the mirror image rule?

(Common Law)

Answer 6

At common law, each and every term of the offer must be accepted (the “mirror image rule”)
* Any different or additional terms in the acceptance make it a rejection and counteroffer

Question 7

What is the result when the terms of an acceptance vary from the terms of an offer under the UCC?

(UCC)

Answer 7

Article 2 of the UCC does NOT follow the mirror image rule–any “expression of acceptance” or “written confirmation” that includes additional or different terms is still effective as an acceptance UNLESS the acceptance is expressly made conditional on the original offeror’s assent to such new terms
* Whether the additional or different terms become part of the contract depends on whether or not both parties are merchants (“battle of the forms”)

One or More Parties Are Non-Merchants
If any party to the contract is NOT a merchant, the additional or different terms are considered mere modification proposals and do not become part of the contract

Both Parties Are Merchants
* Additional Terms: If BOTH parties are merchants, additional terms in the acceptance will be included in the contract unless:
(i) they materially alter the original terms of the offer (e.g., changing risk, remedies);
(ii) the offer expressly limits acceptance to the original terms; or
(iii) the offeror objects within a reasonable time after receiving notice of the additional terms
* Different Terms: There is a split of authority over whether terms in the acceptance that are different from (i.e., conflicting) those in the original offer become part of the contract–some courts treat different terms like additional terms (following the above test), but the majority of courts follows the “knockout rule” whereby conflicting terms are knocked out of the contract (any gaps are filled by the UCC’s gap-filler provisions)

Question 8

What is the mailbox rule?

Answer 8

The “mailbox rule” provides that an acceptance by mail or similar means is effective at the moment of dispatch (assuming properly addressed and stamped) UNLESS:
1. the offer stipulates that acceptance is not effective until received;
2. an option contract is involved (acceptance under an option contract is effective upon receipt);
3. the offeree first sends a rejection and then subsequently sends an acceptance (the first to arrive is effective); or
4. the offeree first sends an acceptance and then subsequently sends a rejection (mailbox rule makes acceptance effective, unless (i) the rejection arrives first and (ii) the offeror detrimentally relies on it)

Question 9

What does “bargained-for exchange” require?

Answer 9

The bargained-for exchange element of consideration requires that the promise induce the detriment and the detriment induce the promise
* There is no bargain involved (i.e., no consideration) when one party gives a gift to another
* A promisee’s act or forbearance (or promise to act or forbear) is sufficient consideration if it benefits the promisor (need not be economic; includes the gratification of influencing the mind of another)
* A promise given in exchange for something already done does NOT satisfy the bargain requirement

Question 10

What does “legal value” mean?

Answer 10

The legal value element of consideration means that which is bargained for must constitute a benefit to the promisor or a detriment to the promisee
* In general,** courts do NOT inquire into the** adequacy or fairness of consideration, but (1) something entirely devoid of value is insufficient and (2) a de minimis sum recited in the contract is insufficient if not paid

Question 11

What is an “illusory promise”?

Answer 11

An illusory promise is one made by a party that does NOT actually bind the party to their detriment and is insufficient consideration
* When the promisor has the unfettered right to choose among alternatives, and they do NOT all involve legal detriment to the promisor, the promise is illusory
* Requirements and output contracts may facially appear to involve an illusory promise, but the promisor suffers a legal detriment by parting with the legal right to buy (or sell) the goods they may need (or manufacture) from (or to) a source other than the promisee

Question 12

What is the “preexisting legal duty” rule?

Answer 12

The preexisting legal duty rule is the principle that the promise to perform, or the performance of, an existing legal duty is not consideration because it is not “bargained for” by the other party UNLESS:
1. new or different consideration is promised;
2. the promise is to ratify a voidable obligation (e.g., a promise to ratify a minor’s contract after reaching majority);
3. the preexisting duty is owed to a third person rather than to the promisor;
4. there is an honest dispute as to the duty; OR
5. there are unforeseen circumstances sufficient to discharge a party (e.g., impracticability), or, under the modern view, if the modification is fair and equitable in view of circumstances not anticipated when the contract was made

Question 13

What is required to modify a contract at common law?

Answer 13

Traditionally, at common law a contract cannot be modified unless the modification is supported by new consideration
* The modern view permits modification if (1) the modification is due to circumstances that were unanticipated by the parties when the contract was made and (2) it is fair and equitable

Question 14

What is required to modify a contract under the UCC?

Answer 14

Under the UCC, no consideration is necessary to modify a contract; all the parties need are good faith promises of new and different terms
* “Good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing

Question 15

What is promissory estoppel?

Answer 15

A promise is enforceable absent consideration if the elements for promissory estoppel are present:
1. the promisor should reasonably expect to induce the promisee’s action or forebearance;
2. such action or forbearance is actually induced; and
3. enforcing the promise is necessary to prevent injustice

Question 16

What are contract FORMATION defenses?

“SAMMI DUI”

Answer 16

Defenses to formation of a contract include:
1. Statute of Frauds
2. Ambiguity
3. Mistake: Mutual Mistake and Unilateral Mistake
4. Misrepresentation
5. Incapacity
6. Duress and Undue Influence
7. Unconscionability
8. Illegality

Question 17

What is the Statute of Frauds, and what types of agreements does it apply to?

“MY LEGS”

Answer 17

Although an oral contract is valid in most instances, the following types of agreements are unenforceable UNLESS evidenced by a writing that is signed by the party sought to be bound (i.e., the defendant):
1. Marriage: Promises in consideration of marriage
2. Year: Promises that, by their terms, are incapable of being performed within one year
3. Land: Promises creating an interest in land (real estate sale contracts, leases for >1 year, easements of >1 year, mortgages and other security liens, fixtures, mineral rights)
4. Executors and Administrators: Promises by an estate executor or administrator to pay the estate’s debts out of their own funds
5. Goods Priced at $500 or More (UCC): Contracts for the sale of goods for a price of $500 or more
6. Suretyship: A promise to answer for the debt or default of another (unless the promisor’s main purpose is to serve his own pecuniary interest)

Question 18

What is the Statute of Frauds writing requirement?

Answer 18

To satisfy the Statute of Frauds, the contract must:
1. be memorialized in one or more writings;
2. indicate that a contract has been made;
3. state the essential terms of the contract with reasonable certainty (including the subject matter); AND
4. the writing must be signed by the party to be charged

Question 19

When does the Statute of Frauds writing requirement not apply at common law?

Answer 19

At common law, the Statute of Frauds (“SOF”) writing requirement does NOT apply in the following circumstances:
1. Contract Modifications: A written contract can be modified orally UNLESS the contract, as modified, falls within the SOF
> Contractual provisions prohibiting oral modification are NOT effective
2. Promissory Estoppel: Promissory estoppel may be applied if it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim
3. Full Performance of Services Contract: An oral services contract that cannot be completed within one year is still enforceable if one party has fully performed
4. Doctrine of Part Performance: An oral contract to purchase real property may be enforceable under the doctrine of part performance, if the purchaser can show at least two of the following:
(i) the purchaser took possession;
(ii) the purchaser paid the purchase price or a substantial portion thereof; and/or
(iii) the purchaser made valuable improvements
5. Judicial Admissions: If the party against whom enforcement is sought admits that the contract was made in pleadings, testimony, or otherwise in court, the contract is enforceable as if that party signed a writing

Question 20

When does the Statute of Frauds writing requirement not apply under the UCC?

Answer 20

Under the UCC, the Statute of Frauds (“SOF”) writing requirement does not apply in the following circumstances:
1. Specially Manufactured Goods: If goods are to be specially manufactured for the buyer and are not suitable for sale to others by the seller in the ordinary course, the contract is enforceable without a writing if the seller has, under circumstances that reasonably indicate that the goods are for the buyer, made a substantial beginning in their manufacture or commitments for their purchase before notice of repudiation is received
2. Judicial Admissions: If the party against whom enforcement is sought admits that the contract was made in pleadings, testimony, or otherwise in court, the contract is enforceable without a writing (but only to the extent of the quantity of goods admitted)
3. Merchants’ Confirmatory Memo: When one merchant, within a reasonable time after an oral agreement has been made with another merchant, sends the other merchant a written confirmation of the oral agreement that is sufficient to bind the sender under the Statute of Frauds, the confirmatory memo will also bind the recipient merchant if the recipient (i) has reason to know its contents and (ii) does not object within 10 days of receipt
> NOTE: Must involve two merchants
4. Promissory Estoppel: Promissory estoppel may be applied if it would be inequitable to allow the Statute of Frauds to defeat a meritorious claim
5. Buyer Paid for or Accepted Goods: A contract for the sale of goods is enforceable without a writing when the buyer has paid for or accepted the goods
> If the goods have only been partially paid for or accepted, the contract is only enforceable to the extent of the partial payment or acceptance

Question 21

When is mutual mistake a defense to formation?

Answer 21

If BOTH parties to a contract are mistaken about existing facts (not future happenings) relating to the agreement at the time it was made, the contract may be voidable by the adversely affected party if:
1. the mistake concerns a basic assumption on which the contract was made;
2. the mistake has a material effect on the parties’ bargain; AND
3. the adversely affected party did not assume the risk of the mistake

BUT: Mistakes in assumptions as to the value of the subject matter of the contract will generally NOT be remedied

Question 22

When is unilateral mistake a defense to formation?

Answer 22

If only ONE party to a contract is mistaken about existing facts relating to the agreement at the time the contract was made, the unilateral mistake is generally NOT a defense to formation of a contract UNLESS:
1. the mistake concerns a basic assumption on which the contract was made;
2. the mistake has a material effect on the parties’ bargain;
3. the OTHER party knew or had reason to know of the mistake made by the mistaken party; AND
4. the mistaken party did not assume the risk of the mistake

Question 23

When is incapacity a defense to formation?

Answer 23

Where one party to an agreement lacks legal capacity to enter into a contract, the contract is voidable by the party lacking capacity
* However, even when a contract is voidable by a party for lack of capacity, the incapacitated party is still liable in quasi-contract (restitution damages) for the value of any “necessaries” (items necessary for subsistence, health or education) received

Question 24

When is a contract voidable by a minor?

Answer 24

In most jurisdictions, anyone under the age of 18 generally lacks capacity to enter into a contract binding on themselves; but contractual promises of an adult made to an infant are binding on the adult
* An infant (minor) may choose to disaffirm a contract any time before (or shortly after) reaching the age of majority; the contract must be disaffirmed in its entirety
* Upon reaching the age of majority, a minor may affirm (i.e., choose to be bound by) the contract in its entirety
* Affirmance may be made expressly or by conduct, such as by failing to disaffirm the contract within a reasonable time after reaching majority

Question 25

When is a contract voidable by a party with diminshed capacity?

Answer 25

Where one party's **mental capacity is so deficient** that they are **incapable of understanding the nature and significance of a contract**, the contract is **voidable by the party when lucid** or **by a later appointed legal representative** * Note that a mentally incompetent person has ***no ability to contract once a guardian has been appointed***; any attempted contracts by an incapacitated person who is under a guardianship are ***void***

Question 26

When is a contract voidable by an intoxicated party?

Answer 26

A contract is also **voidable** by a party who, **at the time of entering into** the agreement: 1. ***was so intoxicated*** that they ***did not understand the nature and significance*** of their contractual promise; AND 2. the ***other party had reason to know of the intoxication***

Question 27

When is unconscionability a defense to formation?

Answer 27

The concept of unconscionability allows a court to **modify or refuse to enforce** an entire contract or a provision in it to avoid **"unfair" terms** that ***shock the conscience of the court***, usually due to some unfairness in the bargaining process (procedural unconscionability) * Unconscionability is ***determined by the circumstances as they existed at the time the contract was formed***

Question 28

What may a court do upon finding that a contract or clause was unconscionable?

Answer 28

If a court finds that a contract or clause of the contract was **unconscionable** when made, the court may: 1. ***refuse to enforce the entire contract***; 2. ***enforce the remainder*** of the contract ***without the unconscionable clause***; OR 3. ***limit the application*** of any clause so as ***to avoid an unconscionable result***

Question 29

What is a "final integration"?

Answer 29

When the parties to a contract express their agreement in a **writing with the intent that it embody the final expression of their bargain**, the writing is said to be a "final integration"

Question 30

What is a "partial integration"?

Answer 30

A "partial integration" is a writing that **does not contain a complete expression** of the parties' agreement * The **UCC presumes that all writings are partial integrations**

Question 31

What is a "merger clause"?

Answer 31

A merger clause **recites that a writing is the complete agreement** between the parties * The presence of a merger clause is **usually dispositive proof** that a writing is a **final integration** in large commercial contracts, but the **modern trend** is to consider it as **one factor in determining integration**

Question 32

What is the parol evidence rule?

Answer 32

The parol evidence rule provides that, when a writing is a **final integration**, extrinsic evidence of **prior discussions or writings** or **contemporaneous discussions** is **INADMISSIBLE** to **vary, contradict or add to** the terms of the writing * If the writing is a **partial integration**, extinsic evidence may **NOT** be used to **contradict** the terms of the writing, but **MAY** be used to **supplement** the writing with **consistent additional terms**

Question 33

What are exceptions to the parol evidence rule?

Answer 33

The parol evidence rule does **NOT** bar extrinsic evidence: 1. to correct ***clerical mistakes***; 2. to show contract ***formation or enforcement defects***; 3. to show ***conditions precedent*** to the contract's ***effectiveness***; 4. to show the ***"true consideration" paid***; 5. to ***supplement*** a **partial integration** with ***consistent additional terms***; 6. to show ***subsequent modifications*** of the writing; 7. to aid in the ***interpretation of ambiguous terms*** > But parol evidence is ***inadmissible*** if the ***meaning is plain*** (the **"plain meaning rule"**)

Question 34

What is the warranty of title? (UCC)

Answer 34

Every **seller** of goods (merchant or non-merchant) warrants that: 1. the ***title transferred is good***; 2. the ***transfer is rightful***; AND 3. there are ***no liens or encumbrances*** against the title of which the buyer is unaware at the time of contracting

Question 35

What is an express warranty? (UCC)

Answer 35

An **express warranty** is created when any affirmation of fact or promise made by the seller to the buyer, any description of the goods, or any sample or model is part of the ***basis of the bargain*** * A statement, description, sample or model is part of the basis of the bargain if it ***came at such a time that the buyer could have relied on it*** when entering into the contract * The ***buyer does not need to prove she actually did rely***, but the ***seller may negate*** the warranty by proving the ***buyer as a matter of fact did NOT rely***

Question 36

How can an express warranty be disclaimed? (UCC)

Answer 36

An express warranty is very difficult to effectively disclaim * Parties **may include** in their contract a **clause limiting the remedy available in the case of breach of warranty**, but such a limitation generally **will** **NOT** **be upheld** if it is **unconscionable** because, e.g., it ***causes the remedy to fail of its essential purpose*** * Warranty **disclaimers that limit damage for personal injury** caused by a breach of warranty on **consumer goods** are ***prima facie unconscionable***

Question 37

What is the implied warranty of merchantability? (UCC)

Answer 37

Every contract for a sale of goods by a **MERCHANT** ***who deals in goods of the kind sold*** includes the **implied warranty of merchantability**, which warrants that the goods are ***"fit for the ordinary purpose for which such goods are used"*** * However, when the buyer, before entering into the contract, has **examined** the goods or a sample or model as fully as she desires or has **refused to examine**, there is ***no warranty as to defects that a reasonable examination would have revealed***

Question 38

How can the implied warranty of merchantability be specifically disclaimed? (UCC)

Answer 38

The implied warranty of merchantability can be **specifically disclaimed** or modified only by ***mentioning merchantability*** * If the sales contract is in **writing**, the disclaimer must be ***conspicuous***

Question 39

How can the implied warranty of merchantability be generally disclaimed? (UCC)

Answer 39

The implied warranty of merchantability can be **generally disclaimed** by expressions such as ***"as is,"*** ***"with all faults,"*** or other expressions that in common understanding call the buyer's attention to the fact that there are no implied warranties

Question 40

What is the implied warranty of fitness for a particular purpose? (UCC)

Answer 40

A contract for the sale of goods includes the **implied warranty of fitness for a particular purpose** whenever the **seller** (**MERCHANT or NON-MERCHANT**) ***has reason to know the particular purpose*** ***for which the goods are to be used***, and that the ***buyer is relying on the seller's skill and judgment*** to select suitable goods However, when the buyer, before entering into the contract, has **examined** the goods or a sample or model as fully as she desires or has **refused to examine**, there is ***no warranty as to defects that a reasonable examination would have revealed***

Question 41

How can the implied warranty of fitness for a particular purpose be specifically disclaimed? (UCC)

Answer 41

The implied warranty of fitness for a particular purpose can be **specifically disclaimed** only by a ***conspicuous writing***

Question 42

How can the implied warranty of fitness for a particular purpose be generally disclaimed? (UCC)

Answer 42

The implied warranty of fitness for a particular purpose can be **generally disclaimed** by expressions such as ***"as is,"*** ***"with all faults,"*** or other expressions that in common understanding call the buyer's attention to the fact that there are no implied warranties

Question 43

What contract rights may be assigned?

Answer 43

Generally, **all contractual rights may be assigned UNLESS** the assignment: 1. would ***substantially change the obligor's duty or risk*** (e.g., personal service contracts where the service is unique); 2. is an assignment of ***future rights to arise from future contracts*** (not future rights in existing contracts); OR 3. is ***prohibited by law***

Question 44

What is the effect of an anti-assignment clause?

Answer 44

Parties to a contract **can** **bar assignment** by providing that **attempts to assign** **will be VOID** * A clause **prohibiting assignment of** **"THE CONTRACT"** will be construed as ***barring only delegation*** of the assignor's duties * A clause **prohibiting assignment of** **"CONTRACTUAL RIGHTS"** generally ***does NOT bar assignment*** but, rather, merely ***gives the obligor the right to sue for damages***

Question 45

What is delegation?

Answer 45

Delegation is when a **party to an existing contract** (the delegator) **delegates their duties owed** to the other party (the obligee) **under the contract to a third party** (the delegate) * The ***delegator remains liable*** on the contract; thus, the obligee may sue the delegator if the delegate fails to perform * The ***obligee may require the delegate to perform ONLY IF there has been an assumption*** (i.e., the delegate expressly or impliedly promises they will perform the duty delegated, and this promise is supported by consideration or its equivalent)

Question 46

What is required to make a delegation?

Answer 46

The delegator **must manifest a present intention to make a delegation** * There are ***no special formalities*** to be complied with

Question 47

What duties may be delegated?

Answer 47

Generally, **all contractual duties may be delegated UNLESS**: 1. the duties involve ***personal judgment and skill***; 2. delegation would ***change the obligee's expectancy*** (e.g., requirements and output contracts); 3. ***special trust was reposed in the delegator*** ***by the other party*** to the contract; OR 4. there is a ***contractual restriction on delegation***

Question 48

What is a party's duty of performance? (Common Law)

Answer 48

A party's duty of performance at **common law** is to ***substantially perform*** their obligations under the contract

Question 49

What is the perfect tender rule? (UCC)

Answer 49

Article 2 of the UCC does not follow the common law substantial performance doctrine, but instead follows the **"perfect tender" rule**, which requires the **delivery and condition of the goods** to be ***exactly* as promised** in the contract

Question 50

What are the exceptions to the perfect tender rule? (UCC)

Answer 50

There are two exceptions to the perfect tender rule: (1) the **seller's right to cure**; and (2) **installment contracts**

Question 51

When does a seller have a right to cure? (UCC)

Answer 51

If a **buyer** has **rejected nonconforming goods** under a sale of goods contract, the **seller** may, **within the time originally provided** for performance, **"cure"** by (1) ***giving the buyer reasonable notice*** of their intention to cure, and (2) ***making a new tender of conforming goods*** that the buyer must then accept * Ordinarily, the seller has **NO right to cure AFTER the original time for performance**; however, if the **buyer rejects** a tender of nonconforming goods that the **seller reasonably believed would be acceptable** (e.g., based on trade practices or prior dealings, or where the seller could not have reasonably discovered the defect), upon a **reasonable notification** to the buyer, the seller has a **further reasonable time within which to make a conforming tender**

Question 52

What is the "installment contracts" exception to the perfect tender rule? (UCC)

Answer 52

Installment contracts for the sale of goods follow a rule akin to the common law substantial performance doctrine * The **buyer may reject an installment** only if the **nonconformity *substantially impairs* the value of that *installment*** and **cannot be cured** * The ***entire contract*** is **breached** only if the nonconformity ***substantially impairs*** the **value of the *entire* contract**

Question 53

What is a condition?

Answer 53

A condition **modifies a party's obligation of performance** under a contract **by excusing their performance **if some **condition does or does not occur**

Question 54

What is a condition precedent?

Answer 54

A condition precedent is an **event or state of the world** that **must occur or fail to occur** ***before*** a party has a **duty to perform**

Question 55

What is a condition subsequent?

Answer 55

A condition subsequent is an **event or state of the world**, the **occurrence or nonoccurrence of which** ***releases*** a party from their **duty to perform**

Question 56

What is the effect of a failure of a condition?

Answer 56

The failure of a contractual provision that is only a condition is **not a breach of contract** * Rather, it **discharges the performance obligation of the party whose obligation was subject to the condition**

Question 57

When does a duty of permance subject to a condition become absolute?

Answer 57

A duty of immediate performance subject to a condition **does not become absolute until** the condition has been **satisfied** or **excused**

Question 58

When is a condition excused by an estoppel waiver?

Answer 58

An estoppel waiver occurs when a **party indicates through words or conduct that they are waiving a condition** before it is to happen, or they are waiving some performance before it is to be rendered, and the **other party detrimentally relies on the waiver** * The promise to waive a condition ***may be*** ***retracted*** at any time ***before the other party has changed their position to their detriment***

Question 59

When is a party's performance excused by waiver?

Answer 59

A waiver is the **voluntary and intentional relinquishment** of a **known contract right** by words or conduct * A party's duty of performance is **excused** when it has been waived

Question 60

What is anticipatory repudiation?

Answer 60

An anticipatory repudiation occurs when a party, **prior to the time for performance** of his contractual obligations, **unequivocally communicates** to the other party that he is **unable or unwilling to perform** such that the nonrepudiating party will be deprived the substantial benefit of their bargain * Applies **ONLY** to **bilateral contracts with executory (unperformed) duties of BOTH parties**

Question 61

What are a nonrepudiating party's alternatives when the other party has anticipatorily repudiated?

Answer 61

In the event of an anticipatory repudiation, the **nonrepudiating party** party has **four alternatives**: 1. treat the anticipatory repudiation as a total repudiation and ***immediately sue*** for breach of contract; 2. ***suspend their own performance***, wait until the repudiating party's performance becomes due, and ***sue for breach of contract after the repudiating party fails to perform***; 3. treat the repudiation as an ***offer to rescind***, and ***treat the contract as discharged***; OR 4. ***ignore*** the repudiation and ***urge the repudiating party to perform***

Question 62

When may an anticipatory repudiation be withdrawn?

Answer 62

A **repudiating party** party may, at any time **before** their performance is due, **withdraw their repudiation UNLESS** the **nonrepudiating** party has: 1. ***canceled*** the contract; 2. ***materially changed their position in reliance*** on the repudiation; OR 3. otherwise ***indicated*** that ***they consider the repudiation final*** Withdrawal of a repudiation may be accomplished in **any manner that clearly indicates the repudiating party's intention to perform**, but **must include any adequate assurances of future performance** justifiably demanded by the other party

Question 63

What is prospective failure of condition?

Answer 63

Prospective failure of condition occurs when a **party has reasonable grounds to believe that the other party will be unable or unwilling to perform** when their performance is due

Question 64

What is the effect of prospective failure of condition?

Answer 64

The effect of prospective failure is to **allow the innocent party to suspend further performance on their part until they receive adequate assurances of future performance** by the other party * If the other party **fails to provide adequate assurances** of future performance, the **innocent party is excused from performance** and may treat the failure to provide assurances as a **repudiation**

Question 65

When does a breach of contract occur?

Answer 65

When the **promisor has an absolute duty to perform** that has **not been discharged**, the promisor's **failure to perform** in accordance with contractual terms amounts to a **breach** of the contract * The ***nonbreaching party*** who sues for breach of contract must show that they are ***willing and able*** to perform but for the breaching party's failure to perform

Question 66

What is a minor breach of contract? (Common Law)

Answer 66

A breach of contract is **minor** if the obligee receives the ***substantial benefit of their bargain*** despite the obligor's defective performance (i.e., the **breaching party substantially performed**) * A minor breach **does not relieve the nonbreaching party of their duty of performance** under the contract; it merely gives them a **right to damages (setoff)** for the minor breach

Question 67

What is a material breach of contract? (Common Law)

Answer 67

A breach of contract is material if the obligee ***does NOT receive the substantial benefit of their bargain*** (i.e., the **breaching party did NOT substantially perform**) * In the event of a material breach, (1) the ***nonbreaching party's duty of counterperformance is discharged***, and (2) the ***nonbreaching party has an*** ***immediate right to all remedies*** for breach of the entire contract, including total damages

Question 68

What factors are considered in determining whether a contract breach is minor or material? (Common Law)

Answer 68

In determining whether a contract breach is minor or material, courts will consider the following factors: 1. the ***amount of benefit received*** by the ***nonbreaching*** party; 2. the ***adequacy of compensation*** for damages to the injured party; 3. the ***extent of part performance*** by the ***breaching*** party; 4. ***hardship*** to the ***breaching*** party; 5. ***negligent or willful behavior*** of the ***breaching*** party; AND 6. the ***likelihood that the breaching party will perform the remainder*** of the contract

Question 69

When is failure to timely perform a minor breach? (Common Law)

Answer 69

Failure to perform by the time stated in the contract is **generally NOT a material breach** if performance is rendered **within a *reasonable time***

Question 70

When is failure to timely perform a material breach? (Common Law)

Answer 70

If the nature of the contract makes **timely performance *essential***, or if the **contract expressly provides that "time is of the essence,"** then **failure to perform on time is usually a material breach** * **Traditional Rule:** Traditionally, a ***"time of the essence" clause was dispositive*** on the issue of whether delay in performance constitutes a material breach * **Modern Rule:** The modern approach ***considers the facts and circumstances*** to determine ***whether performance on the specified date was vitally important*** and whether the ***parties truly intended it to be so***

Question 71

When does a seller breach under the UCC?

Answer 71

Because Article 2 of the UCC follows the "perfect tender" rule, a **seller** **breaches** its duty of performance if the **delivery or condition of the goods delivered *deviates in any way*** from the contract specifications

Question 72

What are a buyer's rights if a seller breaches under the UCC?

Answer 72

If a seller breaches a contract for the sale of goods by delivering nonconforming goods, the **buyer** generally may: 1. **reject *all* goods** delivered; 2. **accept *all* goods** delivered; OR 3. **accept any *conforming* goods** and **reject the *nonconforming* goods**

Question 73

When is a buyer's right to reject nonconforming goods cut off? (UCC)

Answer 73

A **buyer's right to reject nonconforming goods** under the perfect tender rule is generally **cut off by acceptance**, which occurs when: 1. after a reasonable opportunity to inspect the goods, the ***buyer indicates to the seller*** that the ***goods conform to requirements*** or that the ***buyer will keep the goods even though they fail to conform***; 2. the ***buyer fails to reject*** the goods ***within a reasonable time*** after tender or delivery of the goods, or ***fails to seasonably notify the seller of the rejection***; OR 3. the buyer ***does any act inconsistent with the seller's ownership*** of the goods

Question 74

When does a buyer have a right to revoke an acceptance? (UCC)

Answer 74

A **buyer may revoke an acceptance** if the goods have a **defect that substantially impairs their value** to the buyer and the **buyer accepted** the goods: 1. on the ***reasonable belief*** that the ***defect would be cured***, but it has not been; OR 2. due to the ***difficulty of discovering the defect*** or the ***seller's assurance that the goods conformed*** to the contract

Question 75

When must a buyer revoke an acceptance? (UCC)

Answer 75

Revocation of acceptance must occur: 1. ***within a reasonable time*** after the buyer ***discovers*** or ***should have discovered*** the defect; ***AND*** 2. ***before any substantial change in the goods occurs*** that is not caused by a defect present at the time the seller relinquished possession

Question 76

When are parties' duties of performance discharged by impossibility?

Answer 76

The contractual **duties of *both* parties** will be **discharged** if: 1. it has become ***objectively* impossible to perform** them (i.e., the duties could not be performed by anyone) as a result of an ***unanticipated* supervening event** 2. the ***nonoccurrence* of such event was a basic assumption** of the parties in making the contract; AND 3. ***neither* party expressly or impliedly assumed the risk** of such event occurring

Question 77

When does death or incapacity of party render a contract voidable under the impossibility doctrine?

Answer 77

The **death** or **physical incapacity** of a **person *necessary* to effectuate the contract** serves to discharge the contract

Question 78

When does supervening illegality render a contract voidable under the impossibility doctrine?

Answer 78

Supervening illegality may serve to discharge a contract; **many courts treat such supervening illegality as a form of impossibility**

Question 79

When does destruction of a contract's subject matter or designated means of performance render the contract voidable under the impossibility doctrine?

Answer 79

If the contract's **subject matter** or **designated means for performance** are **destroyed** at ***no fault of either party***, the parties' contractual duties will be discharged if the **thing destroyed was *necessary*** to fulfill the contract * **BUT:** A contractor's ***duty to construct a building*** is **NOT** discharged by the ***destruction of the work in progress***; however, ***most courts will excuse*** the contractor from ***meeting the original deadline*** for completion

Question 80

When are parties' duties of performance discharged by impracticability? (Common Law)

Answer 80

Under the **impracticability** doctrine, a court will also discharge the contractual **duties of *both* parties** where: 1. an ***unanticipated*** or ***extraordinary*** event occurs ***after*** the contract was formed; 2. the **nonoccurrence** of such event was a **basic assumption** of the parties; 3. the event has made performance by the adversely affected party ***extremely* and *unreasonably* difficult** or **expensive**; AND 4. the ***adversely affected* party did *not* assume the risk of such event occurring**

Question 81

When are parties' duties of performance discharged by impracticability? (UCC)

Answer 81

Under Article 2, the ***seller* generally assumes the risk** of the occurrence of unforeseen events and must continue to perform * Events **sufficient to discharge** performance include a **shortage of raw materials** or the **inability to convert them into the seller's product** because of contingencies such as war, strike, embargo, an unforeseen shutdown of a major supplier, or catastrophic local crop failure * Mere **increases in costs are *rarely sufficient*** to discharge a party's duty of performance **UNLESS they change the *nature* of the contract** * There is **no bright-line test** for determining when a rise in price changes the nature of a contract, but an **increase in costs of *more than 50%*** has been held to be **insufficient**

Question 82

When are parties' duties of performance discharged by frustration of purpose?

Answer 82

Under the **"frustration of purpose"** doctrine, a court will discharge the parties' contractual duties if: 1. a ***supervening act or event*** that is ***not the fault of the party seeking discharge*** occurs ***after the contract was formed***; 2. at the time of entering into the contract, the ***parties did not reasonably foresee such act or event*** occurring; 3. the ***purpose*** of the contract has been ***completely (or nearly completely) destroyed*** by such act or event; AND 4. the ***purpose*** of the contract was ***known by BOTH parties at the time the contract was formed***

Question 83

When are parties' duties of performance discharged by mutual rescission?

Answer 83

A contract may be discharged by an express agreement between the parties to rescind * The agreement to rescind is itself a binding contract supported by consideration--namely, each party giving up their right to counterperformance from the other * For a contract to be effectively discharged by rescission, the **duties must be executory on both sides** * **Unilateral Contracts:** If the contract is unilateral, a contract to mutually rescind where one party still has a duty to perform will be **ineffective** **UNLESS** there is (i) an offer of ***new consideration by the nonperforming party***, (ii) elements of ***promissory estoppel*** (meaning detrimental reliance) or (iii) manifestation of an ***intent by the original offeree to make a gift*** of the obligation owed to them * **Bilateral Contracts:** A mutual agreement to rescind will generally be enforced when a bilateral contract has been ***partially performed***