CONTRACTS RULES! Flashcards
1
Q
Contract
A
A contract is a legally enforceable agreement that can arise expressly or implicitly in fact by conduct.
2
Q
Creation of Contract
A
A contract exists if there is (1) mutual assent (offer & acceptance), and (2) consideration by both parties.
3
Q
Goods v. Services
A
If contract involves goods & services, court will determine which aspect is dominant. However, if the contract divides payment between the two, Article 2 will apply to the goods portion and common law applies to services.
4
Q
Bilateral Contract
A
A bilateral contract is one consisting of the exchange of mutual promises – accepted in any reasonable way.
5
Q
Unilateral Contract
A
A unilateral contract is one in which the offer can be accepted only by performance.
6
Q
Offer
A
An offer is the manifestation of willingness to enter into a bargain so made as to justify another in understanding that his assent to the bargain is invited and will conclude it.
7
Q
Advertising
A
Advertisements are generally construed as invitations for offers UNLESS it specifies a quantity available.
8
Q
Open Price Term
A
A price need not be included in an offer, and courts will read in a reasonable price: NOT for Real Property.
9
Q
Requirements Contracts – ARTICLE 2
A
A requirements contract is one that (1) measures the quantity by buyer’s requirements, (2) is exclusive, and (3) must be proportionate to standard estimates or normal prior requirement.
10
Q
Outputs Contracts – ARTICLE 2
A
An output contract is one that (1) measures the quantity by seller’s output, (2) is exclusive, and (3) must be proportionate to standard estimate or any prior output.
11
Q
Offer Terminated by Lapse
A
An offer lapses on the date stated or after a reasonable time has passed if no deadline.
12
Q
Offer Terminated by Revocation
A
An offer can be revoked any time before acceptance.
13
Q
Direct Revocation & Indirect Revocation
A
An direct revocation of an offer occurs where offeror directly indicates to offeree that he has changed his mind. Indirect revocation occurs where (1) offeror conduct indicates he has revoked, & (2) offeree is aware of conduct
14
Q
Option Contract – Common Law
A
An option is created where offeror promises to keep offer open for specified time in exchange for consideration.
15
Q
Firm Offer – ARTICLE 2
A
A firm offer is created if (1) merchant promises, (2) in signed writing, (3) to keep offer open for a period of time not to exceed 3 months. However, it could exceed 3 months if consideration is paid by the offeree.
16
Q
Foreseeable Reliance Before Acceptance
A
Where an offeree reasonably relies to her detriment on the offer, the offer will be irrevocable as an option.
NC DISTINCTION – a contractor’s reliance does NOT make offer irrevocable.
17
Q
Partial Performance in Unilateral Contract
A
Generally, part performance under a unilateral contract makes the offer irrevocable.
NC DISTINCTION – offer can be revoked until performance is complete, but offeree can recover in restitution.
18
Q
Mail Box Rule
A
An offer is accepted upon the date that properly stamped mail is mailed. Revocation is effective upon receipt.
19
Q
Revocation by Rejection
A
An offer terminates when the offeree rejects it.
20
Q
Counteroffer
A
A counteroffer operates as a rejection to the offer; however, mere bargaining does not constitute a counteroffer.
21
Q
Conditional Acceptance
A
An acceptance with a condition operates as a rejection and a counteroffer.
22
Q
Mirror Image Rule
A
Under the mirror image rule, acceptance must mirror the offer and a change in ANY term is a rejection.
NC DISTINCTION – only a material change operates as a rejection.
23
Q
Battle of the Forms – ARTICLE 2
A
Under the UCC, the offeree’s additional or changed term does not prevent acceptance. However, the new term is included only if (1) both parties are merchants, (2) no material change, and (3) no objection within a reasonable time. If material change, the contract is still good, but the change is not included. Customary term in industry is not material. Look for a condition; conditional acceptance is always a rejection with counteroffer.
24
Q
Acceptance
A
An acceptance is the manifestation of assent to the offer’s terms, timely communicated to the offeror, and delivered in way that a person relinquishes control of it.
25
Language of Offer Controls
One can accept only by complying with the prescribed method; if not, any reasonable acceptance is appropriate.
26
Improper Performance
If performance was completed but improper, it operates as an acceptance and a breach.
27
Silence as Acceptance
Although silence can be an acceptance, it must be agreed upon by both parties.
28
Mailbox Rule
If offeror sends rejection first, then sends acceptance, whichever is received first controls.
29
Auction Contracts – ARTICLE 2
In auction, sale is complete when auctioneer announces by fall of the hammer. With reserve: auctioneer may withdraw goods any time before he announces completion unless explicitly put w/o reserve: he can’t withdraw unless no bids. If seller drives up, the winner can avoid the sale or take goods at price of last good bid.
30
Formation Defenses
Lack of Capacity – Minors & Mental
An incapacitated defendant has the right to disaffirm the contract, even if minor lied about his age. However, if the minor retains the benefit after gaining capacity, then he has no defense in capacity.
NC DISTINCTION – under Cogan’s Law, minor athletes, artists, or performers with court approval cant void it.
31
Lack of Capacity – Minors & Mental Necessaries Exception
An incapacitated party is liable for necessaries, but only for the reasonable value, not the contract price.
32
Lack of Capacity – Intoxication
Intoxication can be a defense if the other person knew or had reason to know the other was intoxicated.
33
Undue Influence
Undue influence is present if there is (1) a dominant party in fiduciary relationship, (2) which justified victim in believing the dominant would not violate his interest, & (3) the dominant abused relationship by unfairly persuading the victim to enter into the bad contract.
34
Duress
Duress is an (1) improper threat that leads to inducement, and (2) leaves victim with no reasonable alternative.
35
Unconscionability
To be unconscionable, a contract must exhibit both procedural (bargaining unfairness) and substantive unconscionability (unfair or oppressive terms).
36
Ambiguous Language leading to Different Result
There is not a contract unless one party knew or had reason to know there was an ambiguity. If so, the contract is construed to the subjective intent of the unknowing party. If both parties knew, then there is no contract UNLESS they both subjectively intended the same meaning.
37
Fraud in the Inducement
Fraud in the inducement is fraud for the purpose of inducing the contract by a deliberate and dishonest express statement, deliberate concealment of fact, or a deliberate non-disclosure; and with justifiable reliance.
38
Fraud in the Factum
Fraud in the factum is found if the very nature of the document itself contains a deliberate and dishonest express statement, deliberate concealment of fact, or a deliberate non-disclosure; and with justifiable reliance.
39
Illegal Contract
A contract is illegal if it is in violation of a statute or common law rule; if so, it is void and unenforceable. However, if plaintiff was unaware, and defendant knew it was illegal, the innocent party can recover.
40
Mutual Mistake
Where both parties make a mistake at the time of contract that relates to a basic assumption on which it was made, and has a material effect on the agreement, then the contract is not enforceable. However, the complaining party must not have borne the risk of the mistake to prevail. Mistake of Price not a defense.
41
Unilateral Mistake
Generally, a mistake of one party will NOT prevent formation of a contract UNLESS the non-mistaken party knew or had reason to know of the mistake; if so, it is voidable by the mistaken party.
42
Consideration
Consideration is a bargained for legal detriment in exchange for a benefit; the adequacy is irrelevant.
43
Past Consideration
Generally, past consideration is not consideration at all.
NC DISTINCTION: consideration if act was requested & reasonable expectation of compensation (employment
44
Modification – Common Law & UCC
Under common law, the pre-existing duty rule declares that new consideration is required to modify a contract. Under the UCC, consideration is NOT required to modify a contract so long as modification made in good faith.
45
Promissory Estoppel with NO Consideration
Promissory estoppel can be asserted when consideration is not present, and one party reasonably relied on the promise of another. To assert, a party must show (1) there was a promise that reasonably expected to induce (in)action of (2) a definite substantial character, & (3) reasonable reliance on promise that induced detriment.
NC DISTINCTION – does NOT recognize promissory estoppel as substitute for consideration.
46
Statute of Frauds
Common Law
The statute of frauds is a defense used to void contractual obligation. To comply, the contract must contain a writing, signature of defendant, and provide all material terms.
47
Agent to Sell Land
Under the equal dignities rule, to authorize agent to sell, agent’s auth must comply with the SOF.
NC DISTINCTION – does not apply.
48
Performance within 1 Year
The general rule is that contracts that cannot be performed within 1 year, must comply with the statute of frauds. However, as long as full performance within 1 year is theoretically possible, no writing is required.
NC DISTINCTION – there is NO 1 year period in the statute of frauds.
49
Sale of Goods for $500 or More
A sale of goods for $500 or more must comply with the statute of frauds; thus, it must be (1) in writing, (2) signed by party whom enforcement is sought, and (3) state a quantity.
50
Lease of Goods for $500 or More
A lease of goods for $500 or more must be comply with the statute of frauds pursuant to Article 2A.
51
Suretyship
A suretyship must be in writing UNLESS the surety’s main purpose is to benefit himself.
52
Modification of Contract
A contract must be in writing only if the contract as modified is within the statute of frauds.
53
Covenant Not to Compete with Former Employer – NC ONLY
A covenant not to compete must have reasonable restriction on duration, territory, and type of employment. Courts may cross-out a clause, not rewrite. New consideration required if the employee is already working.
54
Bank Promises to Make a Commercial Loan over $50,000 – NC ONLY
It must be in writing to be enforced.
55
Apartment/House Leases of 1 Year or Less
A lease of real property for one year or less need not comply with the statute of frauds.
NC DISTINCTION – a lease of real property for 3 months or less need not comply with the statute of frauds.
56
Special Manufacturing – ARTICLE 2
A contract that does not satisfy the statute of frauds, is still enforceable if the seller specially manufactured goods for buyer and they are not suitable for sale to others in the ordinary course of business.
57
Between Merchants Statute of Frauds – ARTICLE 2
One party can use its own signed writing to satisfy the SOF against another if (1) between merchants, (2) the writing is signed, and (3) the receiving party gets the goods having reason to know of its contents, and (4) does not object within 10 days after it is received.
58
Parole Evidence Rule
Parol Evidence Rule – Common Law
The parol evidence rule prohibits extrinsic evidence of a prior or contemporaneous written agreement, if it contradicts a later writing. However, it is available to correct a clerical error or to establish a formation defense.
Where writing is fully integrated, parol evidence may not be admitted to supplement or contradict. If partially, parol may be admitted to define a vague/ambiguous term if such term cannot be decided by its plain meaning.
59
Parol Evidence Rule – ARTICLE 2
Under the UCC, parol evidence may used to supplement a fully integrated contract by evidence of course of performance, course of dealing, or usage of trade.
60
Warranties Under Article 2
Express Warranty
An express warranty arises when seller affirmatively represents to buyer the description of the goods, a promise, or uses of a sample or model. Any attempt by seller to disclaim is not permitted.
61
Implied Warranty of Merchantability
A warranty of merchantability is implied if (1) the transaction is a contract of sale, and (2) the seller is a merchant with respect to goods of that kind. A seller can disclaim merchantability so long as he states the word merchantability; if in writing, the word must be conspicuous. “as is” or by performance, dealing, usage of trade.
62
Implied Warranty of Fitness for a Particular Purpose
A warranty of fitness for a particular purpose is implied if (1) seller knows buyer has a special purpose for goods, and (2) buyer relies on seller to select suitable goods. A seller can disclaim the warranty by general language if such disclaimer is in writing and conspicuous; he need not specifically mention its name. Can be Excluded by “as is” or by course of performance, dealing, or usage of trade.
63
Limitation of Damages for Breach of ANY Warranty
A seller can limit buyer’s remedies for breach of any warranty so long as it is not unconscionable; limiting remedies for personal injury in CONSUMER GOODS is presumed unconscionable.
64
Privity of Contract with Breach of Warranty– NC ONLY
In NC, warranty liability extends to buyer’s guests or member of buyer’s household who suffers personal injury because of a breach of warranty, and Seller cannot narrow the scope of NC’s privity provision.
65
Products Liability – NC
NC has not adopted strict products liability in tort. Instead, the proper action is a breach of warranty under article 2 which is further expanded by NCGS 99B. Plaintiffs may include the buyer, buyer’s family, buyer’s/buyer’s family’s guests, and employee’s of buyer. Defendant is generally only the manufacturer unless the seller damaged/mishandled the goods OR if seller received non-sealed goods & had reasonable opportunity to inspect them in a way, in the exercise of reasonable care, revealed their defective condition.
Statute only applies to suits seeking damages for personal injury, death, or property damage: NOT to suits seeking purely economic loss.
Statute of limitations is 3 years after injury becomes or should have become apparent, but never more than 12 years after the initial purpose.
Defenses include all UCC defenses, plus alteration or modification of product, improper use contrary to express and adequate warning instructions, assumption of risk buy user, and contributory negligence.
66
Risk of Loss – ARTICLE 2
Damaged Goods
If seller bears the risk, he must provide new or liable for breach. If buyer bears the risk, he must pay the price.
67
Breach Unrelated to Loss
A breaching party always bears the risk of loss, even if the loss is unrelated to the breach.
68
Shipment Contract – Common Carrier
A shipment contract is always presumed if silent. Once seller gets goods to carrier, make delivery arrangements, & notify buyer, risk of loss transfers to buyer. If the FOB destination is sellers location, it’s a shipment contract.
69
Destination Contract – Common Carrier
If the contract specifies destination, the risk of loss is with seller until the goods reach destination or FOB.
70
Non-Common Carrier
If seller is a merchant, seller bears the risk of loss until buyer takes possession of the goods. If not a merchant, the buyer bears the risk of loss once seller makes them available (tenders) to buyer.
71
Performance of the Contract
Perfect Tender Rule – ARTICLE 2
Under the perfect tender rule, the seller’s performance must be perfect.
72
Option to Cure – ARTICLE 2
A seller has an option to cure imperfect tender if (1) buyer rejects goods and time of performance has not expired and seller seasonably notifies buyer of intention to cure, OR (2) if time has expired but seller had reasonable grounds to belief that imperfect tender would be acceptable and seasonably notifies intent to cure.
73
Installment Contracts – ARTICLE 2
An installment contract can be created if the contract requires or authorizes delivery in separate installments, or by usage of trade customs. Perfect tender rule does not apply, and buyer may only reject substantial impairment.
74
Implied Acceptance – ARTICLE 2
A buyer’s acceptance is implied, and he cannot later reject goods, if he is silent after having a reasonable opportunity to inspect them. However, buyer can still get damages even though he cannot reject the goods.
75
Revocation of Acceptance – ARTICLE 2
If the non-conformity of the goods substantially impairs their value and was difficult to discover, he may still revoke his acceptance of the goods.
76
Consequences of Rejection/Revocation of Acceptance – ARTICLE 2
A buyer can (1) return goods at seller’s expense, (2) receive refund, or (3) get damages for breach of contract.
77
Buyer’s Obligation to Pay – ARTICLE 2
A buyer has an obligation to pay for goods. He can pay by check, but seller can refuse check unless contract states otherwise. If so, buyer has reasonable time to come up with cash even if the deadline for payment passed.
78
Substantial Performance – Common Law
Under the common law, perfect performance is not required, only substantial performance.
79
Excuse Based on Later Events
Other Party’s Breach – ARTICLE 2
The other party’s breach may provide an excuse for non-performance: absent contractual provisions to the contrary, a buyer who receives imperfect delivery may reject or accept all the goods, OR he can accept some and reject the rest. Nevertheless, the buyer is entitled to damages because the seller breached the contract.
80
Other Party’s Breach – Common Law
Only a material breach provides an excuse for non-performance; however, plaintiff can still recover damages for any breach – material or not.
81
Divisible Contract – Common Law
If party performs one of the units of a divisible contract, he is entitled to the agreed-on equivalent to that unit even if he fails to perform as agreed. A divisible contract is found if (1) performance is divided into two or more parts, (2) number of parts due from each party is same, & (3) each performance is the quid pro quo of the other.
82
Anticipatory Repudiation – Common Law
Anticipatory repudiation occurs when a party intentionally and voluntarily makes it clear that he will breach when performance comes due. However, one can retract an anticipatory repudiation so long as the other party did not rely on it to her detriment or accepts the repudiation.
83
Failure to Give Adequate Assurance – ARTICLE 2
Where a party has reasonable grounds for insecurity regarding the other party’s performance, he may make a demand for adequate assurance of due performance. Until assurance is received, he may suspend his own performance; however, the receiving party must provide adequate assurance within a reasonable time or he will be deemed to have repudiated the contract. CANNOT USE this provision to rewrite the contract or demand particular assurance (cash v credit).
84
Rescission – Common Law
A rescission is an agreement between the parties to cancel the contract. To be effective, each party must have some performance remaining; otherwise, there would be no consideration.
85
Modification by Later Agreement – Common Law
Parties may modify a contract by agreeing to replace an existing one with a new one; once executed, the modification takes effect immediately.
86
Accord and Satisfaction
An accord is an agreement to accept performance in future satisfaction of an existing duty; thus satisfaction is performance of the accord and the existing duty is only extinguished when the accord is satisfied. An accord is present when the promise takes effect in the future; modification is present if takes effect now.
87
Novation – Common Law
A novation is an agreement between the parties to substitute a new party for an existing one. If novation occurs, then the substituted party is no longer liable for the new party’s breach.
88
Impossibility – Common Law
A seller is excused from performance if a later unforeseen event makes performance objectively impossible.
89
Impracticability – ARTICLE 2
A party may assert impracticability as an excuse if after the contract was formed, (1) an event occurred, (2) non-occurrence was a basic assumption, (3) event render’s the party’s performance impracticable, (4) the party was not at fault, and (5) did not bear the risk of the event occurring. However, seller is only excused if the destroyed goods had been specifically identified.
90
Impossibility by Death or Injury of Essential Person – Common Law
Death or physical incapacity of person can excuse performance if that person was essentially necessary to effectuate the contract.
91
Supervening Government Regulation
A change in law will excuse a party from performing.
92
Increase in the Cost of Seller’s Performance
An increase in the seller’s cost almost never excuses the seller from having to perform.
NC DISTINCTION – Seller may be excused: (1) the absolute cost of increase, and (2) relative % increase.
93
Frustration of Purpose
Frustration of purpose can provide an excuse if there was a (1) supervening act/event, (2) parties did not foresee the act/event, (3) the purpose of contract is almost completely destroyed, and (4) both parties knew about the purpose at time of contract.
94
Express Conditions
Failure of Express Condition
An express condition is one that limits other obligations in a contract, but which does not create an independent obligation (so long as, if, when, provided that, unless, on condition that, etc.). Strict compliance required.
95
Satisfaction Clauses
Where a contract declares that payment is due only upon buyer’s satisfaction, the satisfaction is measured by a reasonable person standard UNLESS the contract deals with art or matters of personal taste.
96
Condition Precedent
A condition precedent is a condition that must occur before the performance will become due.
97
Condition Subsequent
A condition subsequent is an event that discharges an existing duty.
98
Failure to Cooperate – Obstructive Conduct
If a party to a contract faithlessly undermines a term by betraying the other party’s reasonable expectations, the occurrence of the condition may be excused by the later action/inaction of the person protected by the condition.
99
Waiver
A waiver is a one-sided abandonment of a right without receiving consideration. A waiver is shown by words or conduct that a beneficiary of a non-material condition will not require that condition to be satisfied as a prerequisite to his performance. However, a waiver can be retracted to the extent the other party has not relied.
100
Non-Money Damages
| Specific Performance – Common Law
Specific performance is an equitable remedy that is only available if monetary damages are inadequate to compensate the injured party. Generally, it is always available for real property contracts.
101
Specific Performance – ARTICLE 2
Specific performance is available only if the goods are so unique/irreplaceable or there are other proper circumstances (can’t buy the goods in the market).
102
Seller’s Right to Reclaim Goods – ARTICLE 2
A seller generally does not have a right to reclaim unpaid goods from buyer UNLESS (1) buyer was insolvent when it received the goods, and (2) seller makes a demand within 10 days after buyer received them.
Additionally, seller can reclaim any time if buyer misrepresented its solvency to seller in writing within 3 months before delivery.
103
Monetary Damages
Liquidated Damages
Liquidated damages is an amount of damages the parties agree to in the event of a breach. Liquidated damage clauses are enforceable if (1) the damages were difficult to estimate at formation, and (2) they were a reasonable forecast of compensatory damages in the case of breach. However, they cannot serve as a penalty.
104
Expectation Damages – Common Law
Expectation damages are the general rule in breach of contract cases as they are intended to put an injured party in as good a position as full performance.
105
Buyer’s Damages – Cover Damages – ARTICLE 2
Buyer is entitled to cover damages if the buyer covers in good faith; measured by cover price less contract price.
106
Buyer’s Damages – Market Damages – ARTICLE 2
If buyer does not cover in good faith or at all, he is entitled to market damages; market price less contract price.
107
Buyer’s Damages – Loss in Value – ARTICLE 2
If the buyer keeps non-conforming goods, he’s entitled to the value lost: value promised less value delivered.
108
Seller’s Damages – Resale Damages – ARTICLE 2
If seller, in good faith, resells goods buyer did not purchase in breach, resale damages: K price -resale price.
109
Seller’s Damages – Market Damages – ARTICLE 2
If the seller does not resell in good faith or at all, he is still entitled to market damages: K price - market price.
110
Seller’s Damages – Lost Profit – ARTICLE 2
Only a lost volume seller is entitled to damages based on lost profits which is measured by the actual profit the seller would have earned but for buyer’s breach.
111
Seller’s Damages – Contract Price – ARTICLE 2
Seller may recover the full contract price if seller cannot resell the goods either b/c they are so unique or specifically manufactured or they were destroyed after the risk of loss passed to buyer.
112
Incidental Damages – ARTICLE 2
Incidental damages are generally available which include the incidental costs of either party’s storing/transporting/caring for goods after a breach and the costs of arranging a substitute transaction.
113
Consequential Damages – Common Law & ARTICLE 2
Consequential damages consists of losses resulting from the breach that were reasonably foreseeable at the time of contract. There are NOT available to a seller under Article 2, only a buyer.
Avoidable Damages – Common Law
An injured party cannot recover avoidable damages; thus, a party has a duty to mitigate with reasonable effort.
114
Third-Party Problems
Entrustment – ARTICLE 2
An owner who entrusts goods to a merchant who deals in goods of the kind has no rights against a BFP.
115
Third-Party Beneficiary
A 3rd party beneficiary arises when two parties enter a contract intending to benefit a 3rd party.
116
Donee Beneficiary v Creditor Beneficiary
A donee beneficiary is one who is getting the performance as a gift. A creditor beneficiary is one who gets the performance as repayment for a debt.
117
Rescission and Modification
The promisor and promisee can rescind or modify the contract until the rights of the 3rd party beneficiary have vested unless the contract permits such. A party’s right vests once he has knowledge of the K and relies on it.
118
Promisor Liable to 3rd Party Beneficiary
An intended beneficiary can sue a breaching promisor even though there is no privity of contract between them. However, if the promisee breached first, then 3rd party donee beneficiary has no rights either.
119
Promisee Liable to Creditor Beneficiary
An intended creditor beneficiary (NOT DONEE) can recover against the promisee if promisor fails to perform.
120
Delegation of Duties
Generally, contractual duties may be delegated without the consent of the person whom performance is owed unless the contract prohibits delegation or prohibits assignments.
121
Delegation of Duty with Special Skill/Reputation
A person with a special skill or reputation who has been contracted to perform, can never delegate his duty.
122
Assignment of Rights
An assignment involves a transfer of benefits under a contract. To be valid, an assignment must (1) be a present transfer (not a promise to transfer), and (2) not substantially change the obligor’s duties.
123
Multiple Assignments
The general rule is that the first assignee for consideration prevails over all subsequent assignees.
* On January 1, A assigns the right to payment from B to C as a gift.
* On February 2, A promises to assign the same right to D.
* On March 3, A sells the same right to E for $100.
* On April 4, A sells the same right to F for $1000.
o E will prevail b/c he was the first assignee who paid consideration.
However, a later assignee for consideration prevails if he (1) has no knowledge of earlier assignments, and (2) is the first to notify the obligor.
* F notifies B of his assignment before E.
o Then F will prevail.
