MBE CONTRACTS
Learning Objectives
After completing this lecture, you will be able to:
1. Identify the sources of contract law.
2. Identify and analyze the essential elements of a legally enforceable contract- offer, acceptance, consideration.
3. Analyze substitutes and alternatives to consideration and legally valid contracts.0
4. Identify defenses to contract formation.
5. Analyze and evaluate performance issues.
6. Analyze the meaning and effect of breach of contract.
7. Identify and apply rules relating to legal damages and other remedies for breach of contract.
8. Evaluate third-party issues.
INTRODUCTION
A.
A Roadmap for the three Contracts lectures
1.
Day 1: Formation (offer/acceptance/consideration)
2.
Day 2: Statute of Frauds, Contract Interpretation, and questions of Contracts Performance
3.
Day 3: Defenses, Remedies/Damages, and Third-Party Issues
II. SOURCES OF CONTRACT LAW
A.
The Common Law of Contracts:
1.
B.
The common law of contracts:
The Uniform Commercial Code
1.
The UCC governs “sales of goods”
a.
Sales are:
(1) Sales are not leases or bailments or other transactions short of outright sales.
b.
Goods are broadly defined as:
(1) Examples of goods in the Code include:
(a)
(b)
(c)
(2) Goods do not include:
(a) Intangibles (e.g., the “good will” of a business)
(b) money (e.g., currency, stocks, bonds)
(c)
the assignment of a legal claim;
(d) services (e.g., construction projects, dry cleaning)
(e) real property
c.
In hybrid cases, which involve both the sale of goods and a services contract, the question arises as to which
source of contract law should apply.
EXAMPLE:
Bob purchases a car stereo, and the mechanic also installs it.
(1) Majority rule:
We determine which law applies by: _____________________________________________
EXAMPLE:
A purchase of a water heater where the merchant has it delivered and installed, is a sale of goods
and the service is incidental.
EXAMPLE:
A contract with an artist to paint a portrait is clearly a service.
(a) To determine the predominant purpose of a contract, the following factors are used:
1)
Factor #1:
2)
Factor #2:
3)
Factor #3:
(2) Minority rule:
d.
Besides the case of a hybrid transaction, another hard case involves computer software and other electronic
information.
(1) Majority Rule:
Computer software and other electronic information are: _____________________________
__________________________________________________________________________
(2) The Uniform Computer Information Transactions Act displaces the UCC in Maryland and Virginia in this
area.
C.
Interplay between Sources
1.
Common Law Filling in the Gaps of the UCC
a.
Even in a sale of goods, the common law will apply unless:
(1) Examples of common law filling in UCC gaps: fraud, duress, incapacity
(2) Examples of UCC displacing the common law: firm offers, and the “battle of the forms” (where UCC changes
the common law “mirror image” rule).
D.
Basic Definitions and Concepts of Contract Law
1.
Contractual Obligations
a.
There are three general categories of contractual obligations.
(1) Express contractual obligations are found where:
(2) Implied-in-fact contractual obligations are:
EXAMPLE:
Homeowner hires a plumber to fix a leak, but because of the urgency of the service, the parties do
not discuss the price of the work performed. Upon completion of the work, Homeowner has an
implied-in-fact obligation to pay the plumber the reasonable value of the services rendered.
(3) An implied-in-law contractual obligation arises where one party bestows a benefit on another and:
__________________________________________________________________________
EXAMPLE:
Emergency Services: A surgeon who performs emergency surgery on an unconscious patient
creates an implied-in-law obligation to the patient.
EXAMPLE:
Benefits Conferred by Mistake: A merchant who mistakenly delivers goods to the wrong party may
create an implied-in-law obligation on the wrong party.
b.
Quantum Meruit
(1) The traditional definition:
EXAMPLE:
The plumber who was hired to fix Homeowner’s leak without first discussing the price.
(2) But, importantly, the recent usage:
EXAMPLE:
The surgeon with a recalcitrant patient.
EXAMPLE:
The merchant who mistakenly delivers goods to the wrong party.
2.
Signed Writing Requirements
a.
A number of rules in contract law require a “signed writing” in order to create an enforceable legal obligation.
(1) Examples include:
(a) rules pertaining to a merchant’s “firm offers,” and
(b) statute of frauds requirements
b.
The contemporary problem of electronic contracting:
(1) The Signing Requirement
(a) Electronic signatures: _________________________________________________
(2) The Writing Requirement
(a) Likewise, email and the like: ____________________________________________
III.
A.
Problem That Offer and Acceptance Law Is Designed to Address
1.
B.
FORMATION
The “Volley”
a.
In many cases, parties to a would-be contract negotiate in advance of reaching agreement, engaging in a
communications “volley” where inquiries, proposals, and counter-proposals are exchanged.
b.
The key question to be answered: at what point do the parties have a legally enforceable contract?
The Offer
1.
In order to constitute an offer, a party’s communication must meet two requirements.
a.
First Requirement:
(1) The manifestation can be:
EXAMPLE:
A newspaper seller on the corner with a stack of newspapers and hands them to people who pay the
posted price.
(2) An offer is not about:
EXAMPLE:
A seemingly serious offer to sell real property made in secret jest is nonetheless an offer.
EXAMPLE:
A proposal to sell at a price that a reasonable person would regard as “much too good to be true”
(e.g., “new HDTVs for $8.99”) DOES NOT constitute an offer.
b.
Second Requirement:
EXAMPLE:
“I will sell you my car if you’ll pay me $5,000 cash.” This is an offer because it expresses a willingness to
conclude the deal if the other party pays the required $5,000.
EXAMPLE:
“Yes, I’d be willing to sell you my car, but what are you willing to pay for it?” This is NOT AN OFFER because the
communicating party is obviously reserving the right to decide whether she likes the price suggested by the other
party.
(1)
Communications that withhold the privilege of further assent fall short of constituting an offer.
(2) There are a couple of categories of communications that are not offers, that withhold the privilege of further
assent, and that will help you sort through these “volley” problems.
(a) Preliminary Negotiations
1) A generic term that applies to the give-and-take that occurs during bargaining
(b) Invitation for an Offer
1)
An advanced stage of preliminary negotiations where the communicating party is closing in on a
deal but wants the other party to commit first
EXAMPLE:
“So, how much are you willing to pay me for these goods?”
2.
The Problem of Multiple Offerees
a.
When a question involves a party’s communication proposing a deal to two or more persons at the same time, a
multiple offerees issue arises.
b.
There are three situations where this can occur:
(1) First situation:
(a) The American advertising rule:
(b) The reason for the rule is responses may exceed the available supply of goods or services.
EXCEPTION:
EXAMPLE:
Advertisements that say, “first come, first served” or “first 10 customers only” are construed as offers.
(2) Second Situation:
(a) Generally, reward offers are treated as:
(b) There are two types of reward offers.
1)
Self-limiting rewards:
EXAMPLE:
“Will pay $100 for finding my lost dog.”
2)
Open-field rewards:
EXAMPLE:
The Carbolic Smoke Ball case, where the purveyor of a medical preparation promised to pay $100
to anyone who used the preparation as directed and nonetheless came down with the flu.
EXCEPTION:
EXAMPLE:
“Free Joe Six-Pack Action Figure! Send us proof of purchase labels from six cases of your favorite
Anheuser-Busch product together with a self-addressed stamped envelope. Offer good while
supplies last!”
(3) Third Situation:
(a) The general rule:
EXCEPTION:
If the auction is held “without reserve,” then:
3.
The Legal Effect of an Offer
a.
An offer creates the power of acceptance in the offeree.
b.
Generally, there are four ways to terminate the power of acceptance: (1) lapse, (2) death/incapacity, (3)
revocation by offeror, and (4) rejection by offeree.
(1) Termination by Lapse of Time
(a) An offer lapses after:
(b) The reasonable time determination is based on the following factors:
(c)
1)
Factor #1:
2)
Factor #2:
Face-to-Face Conversation Rule:
An offer made in a face-to-face conversation: ______________________________
(2) Termination by Death or Incapacity of Either Party
(a) Death:
(b) Incapacity:
(3) Termination by Offeror’s Revocation
(a) The American rule of the free revocability of offers:
An offer may revoke an offer: ___________________________________________
1)
Requirement #1:
2)
Requirement #2:
a)
Direct revocation:
Occurs when the offeror: ________________________________________
b)
Indirect revocation:
i) Requirement #1:
The offeror takes some action: _________________________________
EXAMPLE:
While deciding whether to accept an offer to sell you a car, you learn from a friend that the
car was sold to someone else.
ii) Requirement #2:
HYPOTHETICAL
A offers to sell real property to B. While B is considering the offer, A sells the property to C. Oblivious to
the third-party sale, B sees A on the street and yells, “I accept your offer!” Is A now contractually bound
to sell the property to B?
(b) Revocation of an Offer Made to Multiple Offerees
1)
Functional Equivalents Rule:
Offeror revokes by communicating the revocation: ________________________
EXCEPTION:
If there is a better means to communicate the revocation that is reasonably available, then such
means must be used to revoke.
2)
(c)
Legal effect of functionally equivalent revocation:
Preventing Revocation: Option Contracts and Firm Offers
1)
American Rule of Free Revocability of Offers
a)
The rule of Dickinson v. Dodds:
The offeror can revoke even if: ___________________________________
2)
Under contemporary law, there are two ways to prevent revocation of an offer: (i) common law
option contract or (ii) firm offer under the UCC.
3)
Preventing Revocation by Means of a Common Law Option Contract
a)
First element:
b)
Second element:
i) “Sell by” date: Such a date in an offer may just be an express lapse date
d)
Third element:
e)
Consideration is the most common way to enforce the subsidiary promise.
EXAMPLE:
“I hereby offer to sell you Blackacre for $10,000, and in consideration for the $100 received, I
hereby grant you a 30-day option on the deal.”
4)
Nuances of Option Contracts
a)
Signed Writing with False Recital
i) Majority rule is:
ii) Minority rule is:
b)
Promissory estoppel:
Courts will sometimes enforce a subsidiary promise to keep an offer open: _
5)
Special Rule for Construction Contracts
a)
A problem occurs when a general contractor formulates a bid to an owner and relies on
subcontractors’ bids before he wants to accept them. The general contractor will have problem
if subcontractors revoke before owner awards bid.
b)
The majority rule is where a general contractor uses a particular subcontractor’s bid to
formulate his own, promissory estoppel applies to protect the general contractor:
____________________________________________________________
6)
Preventing Revocation by Means of a “Firm” Offer under the UCC
a)
Under the UCC Section 2-205, a merchant can make a firm offer (an irrevocable offer) to either
buy or sell goods without consideration so long as three conditions are met:
i) Condition #1:
ii) Condition #2:
iii) Condition #3:
b)
A firm offer that meets all of these requirements becomes irrevocable for:
c)
Under the UCC, the shelf life of a firm offer can be:
d)
Three-Month Rule:
If a firm offer is more than 3 months: _______________________________
e)
Offers for longer than three months need consideration to be binding as an option contract.
(4) Termination by Offeree’s Rejection
(a) The power of acceptance can also be terminated if the offeree refuses to accept the offer. There are
three ways that rejection can be effected:
1)
First way:
2)
Second way:
a)
A counteroffer constitutes:
EXAMPLE:
“I am not willing to pay $10,000 for the car, but I would happily buy your car for $9,000.”
b)
An exception or nuance—the Mere Inquiry Rule:
EXAMPLE:
“$10,000 isn’t out of the question, but it’s a little high, given the age of the car. Would you be
willing to consider a lower offer?”
3)
Third way:
a)
The Mirror Image Rule
i) Corollary to the notion that “the maker is the master of the offer.”
ii) The common law “mirror image” rule requires that acceptance must mirror the terms of the
offer, and: _________________________________________________
EXAMPLE:
X offers to buy goods from Y, Y says OK, and says he expects payment in 30 days. This
will be a violation of the mirror image rule, and thus a counteroffer.
c.
Revival of the Offer after Rejection or Lapse
(1) An offeror can revive a terminated offer by: _______________________________________
4.
Offer and Acceptance under Unilateral Contracts
a.
Distinguish between bilateral and unilateral contracts.
Bilateral Contracts
Unilateral Contracts
I make a promise and seek from you:
I make a promise and seek from you:
Once promises are exchanged:
The offeror is bound only when:
b.
Unless the terms of the offer state otherwise, the offeree can accept either by promising or performing. So, when
looking for a unilateral contract, one ought to carefully consider both the language and circumstances.
HYPOTHETICAL
A says to his old friend B, “I’ll sell you my car for $10,000, but due to your credit problem, you are going
to have to pay me the money or I will sell it to someone else.” Will a promissory acceptance from B form
a binding contract with A?
c.
Revocation of the Offer in a Unilateral Contract
(1) Under common law the offeror was free to revoke the unilateral offer up until the moment that the offeree
actually completed performance.
(2) Under the modern rule:
(a) Note: The modern rule is NOT the majority rule; courts are split.
(b) With the modern rule, there are two things that are unchanged from the common law
1)
The offeree of a unilateral contract is still:
2)
Acceptance of the offer is still:
(3) An important nuance:
(a) Beginning of performance vs. mere preparations:
EXAMPLE:
X offers Y $100 to “ride my horse Bronco for a minute,” and while Y is putting on his boots X revokes.
C.
Acceptance under Common Law
1.
There are only two general requirements to constitute effective acceptance.
a.
First requirement:
b.
Second requirement:
(1) If the offer stipulates a particular means of communicating acceptance:
(2) If the offer is silent as to the means of communication:
(a)
Unless the circumstances indicate otherwise, a means of transmission is reasonable if it is:
1)
the means used by the offeror;
2)
the means customarily used in similar transactions; or
3)
a means of communication that is equivalent in speed and reliability to the means used by the
offeror.
(3) There are three exceptions to the requirement that acceptance be communicated.
(a) The first exception to the requirement that acceptance be communicated:
1)
Default rule:
2)
The “acceptance by silence” exception is in play in the following situations:
a)
Situation #1:
where the offeree takes the benefit of the offeror’s services: ____________
EXAMPLE:
A father hires a golf pro to provide one of his sons a lesson. Father brings both of his sons to
the driving range. The golf pro provides the second son a lesson as well.
b)
Situation #2:
where the offeror has given the offeree reason to understand that acceptance may be
communicated by silence, _______________________________________
EXAMPLE:
An insurance company notifies A that her policy will be automatically renewed unless it hears
otherwise from her. A remains silent, intending to accept, and accordingly her acceptance is
effected by her silence.
EXAMPLE:
Same facts as above, except that A does not intend to accept. In these circumstances, her
silence will not operate as acceptance.
c)
Situation #3:
where because of previous dealings or other circumstances, ____________
EXAMPLE:
A newspaper sends a written notice that it will continue delivering the paper after the
subscription has expired unless it hears otherwise from A. When the subscription has
previously been renewed in this manner without incident, A’s silence in the face of notice
constitutes acceptance.
(b) The second exception to the requirement that acceptance be communicated:
1)
HYPOTHETICAL
In a unilateral contract setting, acceptance is effected only by completing performance;
communication is typically not required for formation unless the offer provides otherwise.
Professor A makes the following offer to her students: “For anyone who completes this series of
exercises by Friday, I’ll provide you with a free beverage from Starbucks.” Student B completes the
exercises by Friday but does not notify the Professor until Monday. Does B’s completion of the
exercises by Friday constitute acceptance of A’s offer? What if, on the same facts, the professor had
stipulated in her offer that the students had to not only complete the series by Friday but also had to
notify her that they had done so by Friday?
(c)
Third exception to the requirement that acceptance be communicated:
1)
Under the common law mailbox rule, acceptance by mail is effective upon: __
a) The mailbox rule applies only to acceptances and not to any other communication.
b)
Consequences of the rule:
i) The first consequence of the mailbox rule:
EXAMPLE:
While B was considering A’s offer, A had a change of heart and sent B a revocation, but B
dispatched his acceptance before receiving A’s revocation.
ii) The second consequence of the mailbox rule:
Once the offeree dispatches his acceptance: _____________________
iii) The third consequence of the mailbox rule:
The offeror is bound, even if: __________________________________
c)
A couple of nuances:
i) What of means of transmission other than USPS?
The “mail-box” rule applies to any means of transmission that involves a foreseeable delay
between dispatch and receipt. (Note: caselaw is split when it comes to email).
ii) Mailbox rule as a default rule:
HYPOTHETICAL
A’s offer to B stipulates that A “must hear from B by the close of business Thursday” in order for B’s
acceptance to be effective. B dispatches acceptance of the offer on Wednesday, but it doesn’t reach A
until Friday. Is B’s acceptance effective?
2)
In a situation where the parties simultaneously dispatch identical offers, offers are only effective to
create power of acceptance upon receipt. The dispatch of these offers is not legally relevant.
3)
The Mailbox Rule and Option Contracts
a)
4)
The Restatement/majority rule is that the mailbox rule is: _______________
Hard Case: What happens when an offeree dispatches two responses to an offer, the first purporting
to reject the offer and the second purporting to accept it?
a)
The mail-box rule does not govern:
b)
The parties’ obligations will depend on which of the offerees’ communications reaches the
offeror first.
i) If the acceptance reaches the offeror first:
ii) If the rejection reaches the offeror first:
D.
Acceptance and the UCC
1.
The UCC’s Rejection of Common Law: Case #1—Acceptance by Seller’s Shipment of Nonconforming Goods
a.
How might a seller accept a buyer’s offer?
(1) Under the UCC, a seller can accept a buyer’s offer to purchase goods for prompt or current shipment in one
of three ways:
(a) First way:
(b) Second way:
(c)
Third way:
EXCEPTION:
If the seller sends non-conforming shipment as: ____________________________
EXAMPLE:
Buyer orders 1,000 widgets from seller for immediate delivery. Seller responds by shipping 800 widgets
with an accompanying notice to the buyer explaining that the seller did not have adequate inventory to
ship 1,000 widgets and was thus shipping 800 widgets as an accommodation to the buyer in light of the
buyer’s urgent need.
1)
Paradoxically, absent accommodation language, the seller’s shipment of nonconforming goods
does two things at once:
a)
b)
2.
The UCC’s Rejection of Common Law: Case #2—The Battle of the Forms
a.
UCC Section 2-207 deals with the commercial setting in which parties transact business via the use of pre-printed
forms, and the difficulties created by application of the common law mirror image rule to such settings.
b.
A so-called “battle of the forms” may occur when the terms of the form used by the seller do not match the terms
of the form used by the buyer.
(1) Note: though it is typically the buyer who “offers” to buy goods, these rules apply regardless of whether
buyer or seller is the offeror.
c.
The ”battle of the forms” scenario problematically implicates two common law rules.
(1) The mirror image rule:
Under this common law rule, ____________________________________________
(2) The last shot doctrine:
Under this common law rule, ____________________________________________
d.
The UCC Solution to the “Battle of the Forms”
(1) Unless acceptance is expressly made conditional on assent to the additional or different terms (a
“conditional acceptance,” discussed later), the nonconforming acceptance will operate as an effective
acceptance of the offer, thus forming a contract.
EXAMPLE:
Buyer sends Seller a purchase order for 1,000 widgets at the advertised price of $10 each. Seller
sends Buyer an Acknowledgment of Order form that promises delivery of the widgets at the stated
price, but also contains boilerplate language that negates warranties and limits remedies in the
event of breach. Seller’s form will operate as acceptance of Buyer’s offer and create a binding
contract despite the presence of terms that vary from Buyer’s purchase order.
(a) “Dickered” Terms versus “Boilerplate” Terms
1)
“Dickered” Terms
a)
2)
Boilerplate” Terms
a)
e.
Does Nonconforming Acceptance Affect the Terms of the Contract?
(1) Critical factual consideration:
Everything turns here on the identity of the parties.
(2) Transaction Involving a Consumer
(a) Additional or different terms are: _________________________________________
(3) Transaction Where Both Parties Are Merchants
(a) Critical Distinction: “Additional” versus “Different” Terms
1)
“Additional” terms:
2)
“Different” terms:
(b) Effect of “additional” terms:
“Additional” terms automatically become part of the contract EXCEPT in three circumstances:
1)
Exception #1:
EXAMPLE:
“This order expressly limits acceptance to the terms stated herein.”
2)
Exception #2:
EXAMPLE:
This could be accomplished through language to the effect of: “We do not accept the binding
arbitration provision set forth in your Acknowledgment of Order.”
3)
Exception #3:
a)
Definition of “material alteration”:
Terms that would result in: _______________________________________
b)
Examples of clauses that would materially alter the contract include:
i) warranty disclaimers;
ii) clauses that materially shorten the deadline for raising complaints; and
iii) clauses that change usages of trade or past courses of dealing.
EXAMPLE:
Buyer sends Seller a purchase order for 1,000 widgets at the advertised price of $10 each.
Seller sends Buyer an Acknowledgment of Order that promises delivery of the widgets at
the stated price and includes boilerplate language that negates all warranties and requires
payment for the order to be complete within 30 days of delivery, which is standard in the
widget trade.
(c)
Effect of “Different” Terms
1)
Majority rule/“knockout rule”:
The “different” terms of each communication dealing with the same topic are: __
EXAMPLE:
Buyer’s purchase order contains a choice of law provision stating that California law will govern
disputes arising from the transaction, and Seller’s order acknowledgment states that New York law
will govern. Under the majority rule, neither provision is part of the parties’ contract, and if the
parties desire a choice of law provision, they will have to negotiate one from scratch.
2)
Minority rule:
The “different” terms of the acceptance will be treated as: __________________
EXAMPLE:
On the same facts as immediately above, but under the minority rule, the buyer’s California law
provision would govern the contract unless she expressly agreed to the seller’s contrary provision.
(4) Written Confirmations
(a) Parties sometimes contract orally and then send follow-up written confirmations, which may contain
terms that are additional or different than the original oral deal. As is the case for a contract formed by
an offer followed by a nonconforming acceptance, the treatment of the additional or different terms
depends on the identity of the parties.
1)
Transactions not between merchants:
Terms in the written confirmation that are additional or different are: __________
2)
In transactions between merchants:
a)
Additional terms are automatically part of the contract unless:
i)
ii)
f.
b)
Different terms are:
c)
If both parties send written confirmations containing conflicting terms, all courts agree that the
“knock out” rule applies, and neither term is in the contract
Conditional Acceptance
(1) Under the UCC, a definite and seasonable expression of acceptance will operate as an acceptance even
though it states additional or different terms unless acceptance is expressly made conditional on assent to
the additional or different terms” [§ 2-207(1)].
(2) In other words, if the acceptance is made expressly conditional on assent to the additional or different terms:
(a) In this situation, no contract is formed by the writings until the offeror expressly assents to the additional
or different terms.
(3) What Constitutes a Conditional Acceptance?
(a) Majority rule:
(b) Minority rule:
The response must clearly communicate that the offeree is unwilling to proceed unless and until the
offeror agrees to the new terms.
EXAMPLE:
Buyer sends Seller a purchase order for 1,000 widgets at the advertised price of $10 each. Seller
sends Buyer an Acknowledgment of Order form that promises delivery of the widgets at the stated
price, but also contains boilerplate language that negates warranties and limits remedies in the event of
breach. Seller’s form also contains the following language in large bold font: “Our acceptance of your
order is expressly conditional on your assent to the additional or different terms that appear in this
acknowledgment.” Under the majority rule, this exchange of forms does not create a contract; we have
an offer and a counter-offer. Under the minority rule, this exchange of forms would create a contract.
EXAMPLE:
Buyer sends Seller a purchase order for 1,000 widgets at the advertised price of $10 each. Seller
responds to Buyer’s order with an email saying, “We are in receipt of your order for 1,000 widgets at
the advertised price of $10 each, and we will be happy to fill it. However, before we can do so, we must
require you to agree to the following terms.” The message then sets forth terms negating warranties
and limiting remedies and concludes, “Upon receipt of your reply to this message stating your
agreement to these terms, we will immediately ship your order.” Under both the majority rule and
minority rule, this exchange of forms would not amount to a contract. Under both the majority rule and
minority rule, the Seller’s response would constitute a conditional acceptance.
g.
Other Situations Governed by the Battle of the Forms Rules
(1) Contracts Formed by Conduct
(a) The UCC provides that the parties’ conduct in recognizing the existence of a contract is sufficient to
establish a contract even though their writings do not otherwise establish a contract.
EXAMPLE:
Buyer sends order to Seller, Seller responds with a conditional acceptance containing a negation of
warranties, and the parties have no further communications. Seller nevertheless ships the ordered
goods, and Buyer accepts and pays for them. Although the parties’ writings do not form a contract—
because Seller sent a conditional acceptance—a binding contract is formed by their conduct.
(b) If a contract is established in this way, the terms of the contract will be:
1)
2)
together with:
a)
Note: The express terms in the parties’ communications which do not match or agree are
omitted.
(2) Transactions without Pre-Printed Forms
(a)
(3) Shrink-Wrap Contracts
(a) The courts are divided on whether the rules of Section 2-207 apply to so-called shrink-wrap contracts
(i.e., agreements that consumers find once they open the boxes or packaging containing the goods).
(b) Most courts apply 2-207 and say that in consumer transactions, these terms are mere proposals that
the consumer can accept or reject.
(c)
Other courts do not apply 2-207 and hold that if the consumer retains and uses the goods, they have
accepted the offer on the merchant’s terms.
BAR EXAM APPLICATION
Question 1
On January 1, Trump left a message on Writer’s answering machine offering to hire Writer to create a training workshop on
Real Estate for Trump. On January 5, after Writer had received Trump’s message but before he’d had the opportunity to
return his call, Trump notified Writer that it was giving the contract to Writer’s competitor. Trump terminated the offer to
Writer.
Does Writer have any legal recourse against Trump?
A) No, because no contract was formed.
B) No, because consideration was not specified.
C) No, because an answering machine message does not meet the form requirements for an offer.
D) Yes, as Trump’s action was against the spirit of fair dealing in the common law.
BAR EXAM APPLICATION
Question 2
The faculty of a privately run law school posted a notice in the student lounge area where it could be viewed by all students
in the law school. The notice announced that, in an effort to encourage scholarship, the faculty was offering an additional
$1,000 prize to any student of the school who entered and won the “International Law in a Changing World” contest. The
contest was run by an outside organization which had no affiliation with the law school or the faculty.
In October, Hudson, a student at the school, saw the notice. She went straight to work on her paper for the competition. She also
left a note on the main counter of the Dean’s office which said, “I, Susan Hudson, accept the offer of the faculty for an additional
$1,000 prize in the ‘International Law in a Changing World” contest. Hudson did not know it, but the note was accidentally placed in
her file in the academic advisor’s office.
In mid-January, the original faculty notice was removed and a new notice was posted announcing that the faculty was
regretfully withdrawing its offer. On February 1, Hudson submitted her paper to the Dean’s office, which in turn passed it on
to the contest examiners. On April 3, it was announced that Hudson’s paper had won first prize. When she requested the
faculty to pay the additional reward, they refused.
Was the offer effectively revoked as to Hudson?
A) It was effectively revoked when the faculty’s revocation notice was posted in mid-January.
B) It was effectively revoked only if Hudson was aware of the mid-January removal of the announcement and its
replacement by the new notice prior to submitting her paper.
C) It was not effectively revoked because she had relied on the offer prior to February 1st.
D) It was not effectively revoked since the offer became irrevocable after a reasonable passage of time.
IV.
A.
CONSIDERATION AND PROMISSORY ESTOPPEL
Consideration and Bargain
1.
2.
The Bargain Theory of Consideration
a.
The general rule in American contract law is:
b.
The promise has some value and must be exchanged for something else of value, such as:
One recurring consideration problem:
a.
Occurring often (though not exclusively) in family settings, the gratuitous promise is a promise to make a gift.
Such a promise lacks consideration and is generally unenforceable.
EXAMPLE:
A invites his newly widowed sister-in-law, who lives 60 miles from A’s farm, to come and live in his guest house
without charge so she’ll have a safe place to raise her family, explaining that he is eager to help her in her time of
dire need. Because the sister-in-law neither promised nor gave anything in return for A’s promise, A’s promise is
gratuitous and unenforceable.
3.
4.
Legal synonyms for “want of consideration”:
a.
“lack of consideration”
b.
“no consideration”
c.
“not supported by consideration”
d.
"insufficient consideration”
Distinguishing “Want of Consideration” from “Failure of Consideration”
a.
“Want of Consideration”:
b.
“Failure of consideration”:
EXAMPLE:
If A promises to deliver a horse to B in exchange for B’s promise of payment and A then fails to deliver the horse,
then there was a failure of consideration. However, we would not say that the consideration for B’s promise was
lacking, since A’s original promise of performance constituted consideration for B’s promise of payment.
5.
“Bargained-for” Consideration and the “Detriment” Test
a.
The majority/Restatement rule is that:
b.
Regardless of the jurisdiction, the question of whether a particular performance by the promisee constitutes a
“detriment” is answered by the application of the so-called legal detriment test.
(1) Under this test, the question is whether the promise is doing something he:
EXAMPLE:
Promoter promised musician $5,000 to play a concert at Carnegie Hall. Promoter then tried to back
out of the promise, claiming that “you would have done it for free.”
EXAMPLE:
Uncle promised nephew $5,000 if nephew would give up smoking and drinking. The uncle’s estate,
hoping to avoid this obligation, argued that the nephew didn’t incur a detriment because giving up
smoking and drinking was good for his health.
6.
Inadequacy of Consideration
a.
This refers to the situation where:
b.
The modern rule:
EXAMPLE:
If A promises his birthright for a mess of pottage from B, B has nonetheless provided consideration for the promised
birthright no matter how meager the value of the pottage. In other words, the supposed inadequacy of consideration
is no defense to a breach of contract claim.
EXCEPTION:
In some jurisdictions, an element of securing specific performance is showing that there was a fair, or adequate,
exchange. “You must do equity to secure equity.”
EXAMPLE:
If A promised to sell Blackacre to B for a meager sum and then refused to deliver, some courts would refuse to
grant B specific performance because of inadequate consideration and instead limit B’s remedy for breach to
money damages.
c.
Do not confuse “insufficient consideration” with “inadequate consideration.”
(1) Insufficient consideration:
There was no consideration for a particular promise and so no bargain.
EXAMPLE:
Where A promises his sister-in-law a place to raise her family and seeks nothing in return.
(2) Inadequate consideration:
d.
Modern courts do not police the fairness of bargains via the consideration doctrine.
(1) Instead, a party may be able to defeat the enforcement of an excessively one-sided bargain through the
defense of unconscionability.
7.
Illusory Promises
a.
Explanation and rule:
An illusory promise is a promise that leaves performance to: ___________________________
EXAMPLE:
Thus, if A says to B, “I’ll sell you as many widgets as you want to order within the next two weeks for $5 a piece,”
and B agrees to buy at that price as many widgets as he decides to order from A, B’s promise is illusory and will
not constitute consideration for A’s promise.
8.
Gratuitous Promises
a.
Defined:
b.
Executed Gifts distinguished:
EXAMPLE:
If I promise you a new car for your birthday, that would constitute a gratuitous promise and would be
unenforceable if I decline to follow through. However, if I give you a new car for your birthday, then the transfer
is legally binding, and I cannot later change my mind and take back the car.
(1) What does it take to “execute” a gift?
(a) intent to give a gift, and
(b) actual delivery or symbolic delivery
c.
Bargains Distinguished
(1) Recitals of Consideration
(a) The rule:
EXAMPLE:
A wants to make a binding promise to give his young granddaughter $10,000 on her 21st birthday and
accordingly gives her a note that reads: “For value received, I promise you $10,000 upon your 21st
birthday.” If no value was received in exchange for the promise, the recital would not satisfy the
consideration requirement and the promise would be unenforceable.
(b) A minority of courts recognize an exception to this rule where:
d.
The Problem of a Condition on a Gratuitous Promise
(1) What is a “condition on a gratuitous promise”?
A condition is something a promisee must do to: ___________________________________
EXAMPLE:
A invites his newly widowed sister-in-law, who lives 60 miles away from his farm, to come and live in
his guest house without charge so she’ll have a safe place to raise her family, explaining that he is
eager to help her in her time of need. The promisee here won’t be able to take advantage of A’s offer
unless she moves her family the 60 miles to A’s farm. However, the move is merely a condition of
the gratuitous promise, not consideration.
(2) Distinguishing a “Condition on a Gratuitous Promise” from “Consideration”
(a) Factor #1:
1)
Words suggesting benevolence rather than self-interest, such as “gift,” may indicate a gratuitous
promise.
(b) Factor #2:
1)
In the commercial context, gratuitous promises are rare. More common in the family and
charitable context.
(c) Factor #3:
1) Where the promisee’s detriment creates no benefit to the promisor, it more likely indicates a condition to a gift rather than consideration.
HYPOTHETICAL
Sprawlmart advertises a grand opening celebration for its 10,000th store, promising $500 gift certificates
to each of the first 10 customers on opening day. Is this a gratuitous promise or a bargain? If the latter,
what is the consideration?
B.
Alternatives in the Absence of Consideration
1.
Past or Moral Consideration
a.
A promise in exchange for something already given or performed is: _______________________
_________________________________________________________________________________
EXAMPLE:
In Mills v. Wyman [20 Mass (3 Pick.) 207 (1825)], the court refused to enforce the father’s after-the-fact promise
to compensate a Good Samaritan for nursing his dying son, and the case would likely come out the same way
today.
b.
The Exceptions to the “Past Consideration” Rule
(1) Exception #1:
A written promise to pay a debt __________________________________________
(2) Exception #2:
A written promise to pay a debt __________________________________________
c.
Enforcing an Unsupported Promise Using the “Material Benefit” Test
(1) This test is supported by the Second Restatement but is used in only a minority of jurisdictions. It provides
that a promise made in recognition of a past benefit conferred will be enforceable as long as:
(a)
(b)
EXAMPLE:
A sees that B is in grave danger and heroically intervenes to save the latter, injuring himself in the
process. B gratefully promises to compensate A for his efforts. These are the facts of Webb v. McGowin
[27 Ala. App. 82 (1935)], where the court enforced the promise because A’s efforts bestowed a material
benefit (the saving of a life) on B.
EXAMPLE:
Because the Good Samaritan in Mills v. Wyman bestowed the benefit of nursing services on the
promisor’s son rather than on the promisor, the promise would not be enforceable.
(2) An Exception or Limitation on the “Material Benefit” Test
(a) A promise made based on past benefits will not be enforceable if the benefits were previously contracted for by the promisor.
EXAMPLE:
Employer promises a retiring employee a pension worth half the latter’s salary in recognition of the latter’s
many years of hard and loyal work. Although the employee’s past work no doubt bestowed material
benefits on the employer, the work was done under contract (i.e., the employee was paid for it under the
terms of the employment agreement), and accordingly the employer’s promise is not enforceable.
NOTE: Remember, the material-benefit test is a minority rule and most courts would in these circumstances apply the “past consideration” doctrine and allow exceptions only for the statute of limitations and bankruptcy cases.
2.
Promissory Estoppel
a.
A promisee that reasonably relies to his detriment on a gratuitous promise may be able to enforce that promise,
even though consideration is lacking.
b.
There are four requirements that must be met in order for promissory estoppel to be available.
(1) Requirement #1:
EXAMPLE:
Statements like “I’d like to give you some money to help you with college” would be considered too
vague to be an actual promise. Alternately, “I’ll give $25,000 toward your tuition this fall” would be
specific enough to qualify as a promise.
(2) Requirement #2:
EXAMPLE:
The widow’s move to her brother-in-law’s farm on the faith of his promise would have been
reasonably foreseeable to the brother-in-law at the time he made her the promise. However, if the
widow had purchased a high-end SUV to facilitate the move, this would likely not have been
foreseeable.
(3) Requirement #3:
EXAMPLE:
If the widow had already decided to make the 60-mile move before her brother made her the promise,
then this would not be actual reliance.
(4) Requirement #4:
(a) There are several specific factors that courts use to analyze the “injustice” requirement in an exacting
way:
1)
the strength of proof of the other three requirements;
2)
the blameworthiness, or willfulness, of the breach;
3)
the relative position or equities of the parties;
4)
the extent to which the reliance was detrimental; and
5)
the availability of alternatives short of enforcing the promise.
HYPOTHETICAL
Uncle promises his nephew $8,000 to enable the latter to purchase a neighbor’s car for transportation to
school and an after-school job. In reliance on the promise, the nephew secures possession of the
vehicle and promises the neighbor the $8,000. If the uncle reneges on his promise to pay, is promissory
estoppel available if the neighbor is willing to accept the return of the car and release the nephew from
debt? What if the car has a market value far in excess of $8,000, enabling the nephew to sell the car,
cover the debt to his neighbor, and recoup any costs associated with the sale?
V.
A.
B.
STATUTE OF FRAUDS
Introduction
1.
In contract law, contracts generally need not be in writing; oral and written agreements are equally enforceable.
2.
The Statute of Frauds is an exception to this general rule.
The Statute of Frauds in Operation
1.
If a contract is governed by the Statute of Frauds, then the contract must be evidenced by a writing and signed by the
party against whom enforcement is sought.
2.
Who has a Statute of Frauds defense?
A party who does not sign a contract that is governed by the Statute of Frauds.
C.
Evaluating Statute of Frauds Issues
EXAMP TIP: To analyze Statute of Frauds issues, ask the following three questions in order.
1.
Does the Agreement Fall within the Statute of Frauds?
a.
The Statute of Frauds only governs certain categories of contracts agreements. For example:
contracts for the sale of land and guarantees.
b.
2.
If the agreement does not fall under the Statute of Frauds, then a signed writing is not required to enforce the
contract.
Is the Statute of Frauds Satisfied?
a.
If an agreement is within the Statute of Frauds, then the key question is whether the Statute’s writing requirement
is met.
(1) To satisfy the Statute of Frauds requires a writing signed by the party against whom enforcement is sought.
(2) If the Statute of Frauds is not satisfied , the party seeking enforcement will lose, UNLESS there is a workaround.
3.
Is Alternative Enforcement Available?
a.
D.
The party seeking to enforce the contract may be able to use another theory of enforcement to protect its interests, such as promissory estoppel or quasi-contract.
Analyzing Problems Under the Statute of Frauds
EXAM TIP: Remember the list of contracts that are within the Statute of Frauds: MY LEGS
1.
First Question: Is the Contract within the Statute of Frauds?
a.
In most states, six categories of agreements are governed by the Statute of Frauds:
(1)
(2)
(3)
(4)
(5)
(6)
b.
In the typical case, there is little difficulty in determining whether a particular contract falls under the Statute of
Frauds. However, some categories have specific limitations within them that narrow the reach of the Statute of
Frauds.
c.
Contracts Not to Be Performed within a Year
(1) The year at issue under the one-year provision is measured from:
EXAMPLE:
In June of her first year of law school, Law Student enters an oral agreement with Law Firm to work
for the firm during June, July, and August of her second summer. Although the duration of the
contemplated performance is only three months, the performance will not be complete until 14
months after the making of the agreement. Accordingly, the contract is governed by the one-year
provision and a signed writing is required in order to secure enforcement.
(2) The question of whether a particular contract is to be performed within one year of the making thereof is
answered by determining whether, at the point of formation, it is at all:
EXAMPLE:
It is highly unlikely that the construction of an oil-producing facility in a war-ravaged country would
be completed within a year. But because the performance is possible within that time—even if
exceedingly unlikely—the agreement is not governed by the one-year provision and no signed
writing is required.
EXAMPLE:
One of the parties to an oral construction agreement attempts to back out 14 months into the project
and raises the Statute of Frauds as a defense. Because the prospect of performance is measured
from the point of making the contract (when completion within a year was possible) rather than from
the time of the dispute (when completion within the first year is clearly no longer possible), the
agreement is not governed by the one-year provision and no signed writing is required.
EXAMPLE:
A three-year exclusive representation agreement between a professional athlete and his agent
cannot be performed within a year—no matter how diligently the agent works. Accordingly, the
agreement is governed by the one-year provision and a signed writing is required.
(3) Frequently Tested Situations
(a) Contracts that can be breached or excused within a year of its formation:
This is irrelevant. What matters is not whether the contract can be breached within
one year but whether: _________________________________________________
(b) A lifetime or permanent contract of employment is not governed by the one-year provision because:
d.
Land-Sale Contracts
(1) The land provision has been modified under some circumstances.
(2) The contract for future sale:
(a) The present conveyance of land promised for money is held to be outside the land provision of the
Statute of Frauds.
(b) Real estate brokerage agreements:
Although land is involved, these are: _____________________________________
1)
Some jurisdictions have resolved this by adding a separate category to their Statute of Frauds
specifically for brokerage agreements.
(3) Lease of real property:
(a) Other jurisdictions exclude short-term leases of a year or less from the Statute
of Frauds.
e.
Guaranty/Suretyship Agreements
(1)
There are two exceptions to the general rule that a promise to answer for the debt of a third party—a
suretyship, or guarantor agreement—is subject to the Statue of Frauds and must be in writing.
(a) Exception #1:
When the creditor discharges the original debtor from his obligation on the faith of a guarantee by a
third party to pay the debt, the guarantee agreement is not governed by the Statute of Frauds. This
protects the creditor, who knows the guarantor won’t have recourse to a Statute of Frauds defense.
(b) Exception #2:
The “Main Purpose” Doctrine: where the main purpose of the guarantor is: ________
HYPOTHETICAL
Joe Plumbing Co. secures a loan from Piggy Bank. N. Vestor, who owns a controlling interest in the plumbing
firm, makes an oral promise to the Bank to guarantee repayment of the loan. Is the guarantee within the Statute
of Frauds? What if Vestor is a shareholder in Joe Plumbing Co. but does not own a controlling interest in the
firm?
2.
Second Question: Is the Statute of Frauds Satisfied?
a.
If a contract falls within the Statute of Frauds, then the general rule is the contract is unenforceable unless
evidenced by a writing signed by the party against whom enforcement is sought.
b.
The Writing Requirement
(1) There is no requirement that the parties put their entire agreement in writing; rather, all that is necessary is
that the writing be: ___________________________________________________________
(2) Under the common law, the following memoranda have been held to satisfy the writing requirement:
(a)
(b)
(c)
EXAMPLE:
“Dear Tony, I regret to inform you that I cannot go through with the sale of my racehorse to you. Although the
$100,000 you agreed to pay is very generous, my accountant has advised me of the tax implications, which I
had not considered, and so I must regretfully bow out.”
(3)
The memorandum need not document the transaction in detail. Only the following terms are required:
(a)
(b)
(c)
(4) Required Description under the Land Provision
(a) Older case law suggests:
(b) More current decisions suggest:
c.
The Signature Requirement
(1)
The actual full signature of the party against whom enforcement is sought is not necessary.
(a) What is needed?
(b) Examples:
initials; a typed, stamped, or pre-printed signature; or letterhead.
d.
“Tacking Together” Multiple Documents
(1) The writing need not be a single document. A party may satisfy the Statute by tacking together several
documents which, once combined, satisfy all the necessary requirements for the Statute of Frauds.
(a) If all documents are signed, or if a signed document incorporates unsigned documents by reference:
(b) If unsigned documents are not incorporated by reference in a signed document, “tacking together” the
signed and unsigned documents to satisfy the Statute of Frauds is nevertheless permissible if:
1)
First requirement:
There is at least one signed writing: ___________________________________
2)
Second requirement:
The signed and unsigned documents: _________________________________
3)
Third requirement:
There is clear and convincing evidence of acquiescence to the unsigned documents by the party
against whom enforcement is sought.
EXAMPLE:
A new employee is sent a hiring letter, which makes no mention of a promise of job security.
However, the notes from the negotiations that preceded the sending of the hiring letter do say that
the company promised two years of job security. These notes, which were prepared by the
secretary, are not signed, whereas the hiring letter is signed. In this case, the notes can be tacked
on to the signed document.
e.
Performance
(1) The Statute of Frauds may be satisfied with respect to some of the categories of governed contracts via part
performance.
(2) Land Contracts
(a)
Part performance requires a showing of any combination, or all three, of the following:
1)
2)
3)
(3) One-Year Contracts
(a) If fully performed, then an oral contract not to be performed within one year:
(b) If only partially performed, then an oral contract not to be performed within one year:
(c)
Quantum Meruit
1) This is a possible work-around available to the partly performing party who is otherwise out of luck
(4) Sale of Goods Contracts
(a) The UCC’s Statute of Frauds may also be satisfied by part performance of a sale of goods contract –
covered later in the lecture.
3.
Third Question: Is there an Alternative Basis for Enforcement?
a.
If the contract is within the Statute of Frauds, but the Statute is not satisfied because the breaching party never
signed a written document, the aggrieved party may nevertheless be able to secure some protection for her
interests via an action for restitution or promissory estoppel.
(1) Recovery for Benefits Conferred
(a) Where one party bestows benefits upon another in connection with an oral contract, even if the enforcement of that contract is barred by the Statute of Frauds: __________________
(2) Promissory Estoppel
(a) This may be available for detrimental reliance, for loses suffered on the faith of an oral K that is unenforceable.
(b) Easy case:
Where a party to an oral contract within the Statute promises the other party he will create a signed
writing, and the party relies by not taking other steps to satisfy the statute, most courts will apply
promissory estoppel if the promising party does not create such a signed writing.
(c)
Hard Case:
Where no specific assurances of creating a signed writing are made, but the reliance is instead simply
on the underlying oral contract itself
EXAMPLE:
An employee who leaves his current job and moves across the country based on an oral two-year
employment contract, only to be dismissed before he starts his new job.
E.
1)
The slim majority of courts hold:
2)
A substantial minority of courts hold:
Analyzing Problems under the UCC Statute of Frauds (OL IV. E.)
1.
First Question: Is the Contract within the UCC Statute of Frauds?
a.
2.
The UCC Statute of Frauds is Section 2-201, which by its terms governs:
Second Question: Is the UCC Statute of Frauds Satisfied?
a.
There are five ways to satisfy the UCC Statute of Frauds:
(1) The first way:
(a) The easiest way to satisfy the UCC Statute of Frauds, a signed writing requires the following to be
satisfied:
1)
Requirement #1:
a)
What counts as a “writing” under the UCC?
i)
b)
Electronic communication:
i)
2)
A majority of courts have concluded that electronic documentation satisfies the writing
requirement of the UCC.
Requirement #2:
a)
What counts as a ”signature” under the UCC?
i)
b)
3)
Any intentional reduction to tangible form.
Any symbol executed or adopted by a party with present intention to authenticate a writing.
Most states have adopted the UETA (Uniform Electronic Transactions Act) under which
electronic signatures satisfy legal writing requirements.
Requirement #3:
a)
For this relaxed requirement, all that is needed is that the writing afford a basis for believing
that the offered oral evidence rests on a real transaction.
EXAMPLE:
A enters an oral agreement with B to sell the latter a speedboat for $10,000. B writes a check
that contains A’s name as the payee; B’s name as payor; $10,000 as the amount; and the
word “speedboat” in the notation space. Although the writing does not use the word
“agreement” or “contract,” it is clearly “sufficient to indicate that a contract of sale has been
made” between A and B and would, therefore, satisfy the writing requirement of the UCC
Statute of Frauds against B, the signing party.
(b) Required term:
1) If there is no quantity term, the contract is altogether unenforceable, subject to two exceptions:
a)
Exception #1:
b)
Exception #2:
c)
Apart from the quantity term, no other term is required in the writing. However, a writing can
have so few terms that it will no longer be “sufficient to indicate that a contract for sale has
been made between the parties.”
EXAMPLE:
A and B enter an oral agreement under the terms of which A is to sell B five tobacco barns for
a total of $5,000. After they shake hands, A takes out a piece of paper, writes “five barns,”
signs it, and gives it to B. If A subsequently backs out of the deal, he will have a successful
Statute of Frauds defense against B despite the fact he signed a writing with a quantity term,
because the writing, taken as a whole, is insufficient to indicate that a contract for sale has
been made between A and B.
(c)
Written Offers
1)
Under the UCC, a written offer does not satisfy the writing requirement because it is insufficient to
reveal that a K has been made (contrary to common law rule).
2)
But if the requirements of the UCC “Firm Offer” rule are met:
(2) The second way to satisfy the UCC Statute of Frauds:
(a)
The UCC Statute of Frauds may be satisfied when two merchants enter an oral agreement and one of
them sends the other a written confirmation of the agreement.
1)
In such a circumstance, the Statute is satisfied against the recipient merchant, if he fails to object
to the confirmation within the required time.
(b) Requirements for a valid merchant’s confirmation:
1)
First requirement:
a)
This is satisfied if the confirmation is signed and contains a quantity term.
2)
Second requirement:
3)
Third requirement:
a)
Confirmation must be sent within a reasonable time of formation.
4)
Fourth requirement:
a)
Confirmation must be based on a real agreement or discussion between the parties, and must be
actually received.
(c) Exception with the recipient’s objecting response:
The recipient must send a written notice of objection: ________________________
EXAMPLE:
A and B enter an oral agreement under the terms of which A is to sell B five tobacco barns for a total of
$5,000. The following day, B sends A a written confirmation of the agreement and two days later B
receives a signed reply that reads in pertinent part: “My understanding is that we don’t have a contract
between us, for as I mentioned I am still entertaining other offers for the barns. My apologies for any
confusion that may have been caused.” Because A’s reply objects to the confirmation’s contents, the
confirmation does not satisfy the UCC Statute of Frauds against A.
(d) The “nightmare” of the admitting memorandum:
An admitting memorandum satisfies the Statute of Frauds against the sender.
EXAMPLE:
A’s signed reply to B’s confirmation reads: “I regret that I can’t go through with the sale of my barns to
you. Although the $5,000 you agreed to pay is very generous, my accountant has advised me of tax
implications of the transaction that I hadn’t considered, and I must, therefore, bow out.” Because A’s
signed reply is itself sufficient to indicate that a contract for sale had been made between the parties—a
contract from which A is now seeking to escape—the reply satisfies the UCC Statute of Frauds against A.
(3) The third way to satisfy the UCC Statute of Frauds:
(a) A third means of satisfying the UCC Statute of Frauds occurs when:
1)
The contract is only enforceable:
(4) The fourth way to satisfy the UCC Statute of Frauds:
(a) Despite the absence of a signed writing, an otherwise valid contract is enforceable with respect to:
1)
Goods for which payment: __________________________________________
2)
Goods which have been: ___________________________________________
(b) Thus, the partial performance exception does not apply unless there are actions by both parties
indicating that a K exists.
(c) Divisible versus Indivisible Goods
1)
If the contract in question involves divisible goods:
2)
If the contract in question involves an indivisible good:
(5) The fifth way to satisfy the UCC Statute of Frauds:
(a) The problematic scenario:
Specially manufactured goods to specifications of a buyer who then backs out.
(b) Statute is satisfied where the following five elements are present:
1)
the goods are to be specially manufactured for the buyer;
2)
the goods are not suitable for sale to others in the ordinary course of seller’s business;
3) seller has substantially begun to manufacture, or made commitments to procure, the goods;
(c)
4)
the actions undertaken to begin to manufacture or procure occurred under circumstances which
reasonably indicate that the goods are for the buyer; and
5)
the actions undertaken to begin to manufacture or procure occurred before seller received notice of
buyer’s revocation.
Boiling those elements down to two critical concerns:
1)
2)
3.
Third Question: Is there an Alternative Basis for Enforcement?
a.
If a party has relied to its detriment on an oral contract whose enforcement is barred by the UCC Statute of Frauds,
the aggrieved party may be able to secure a remedy via promissory estoppel.
(1) Majority of courts hold that promissory estoppel:
(2) Minority of courts hold that the express language of the UCC Statute of Frauds:
(3) Construction contractors:
Virtually all courts have protected a general contractor via promissory estoppel even if the oral subcontract in
question is for goods at a price of $500 or more.
F.
Limitations on the Statute of Frauds (OL IV. H.)
1.
The only effect of a successful Statute of Frauds defense is to defeat enforcement of the contract against the nonsigning party. The contract may still be valid and enforceable for other purposes.
a.
The oral contract may provide evidence: __________________________________________
EXAMPLE:
A brings an action against C for tortious interference with A’s oral land contract with B. Although B would have a
successful Statute of Frauds defense in a breach of contract action brought by A, the Statute will be irrelevant in
A’s tortious interference claim against C.
b.
The oral contract may provide evidence: __________________________________________
EXAMPLE:
Under an oral contract for the sale of A’s land to B, B takes possession. A reneges and brings a trespass action
against B. Although A would have a successful Statute of Frauds defense in a breach of contract action brought
by B, the Statute would be irrelevant to the validity of B’s defense to A’s trespass claim.
c.
The oral contract may provide evidence: __________________________________________
EXAMPLE:
A spends three months working for B under an oral two-year employment contract. If B fires A and successfully
raises a Statute of Frauds defense against enforcement of the oral contract, A may nonetheless be able to
recover from B the reasonable value of the services rendered in quantum meruit. Moreover, he may offer the
price agreed to in the oral contract as evidence of the value of the services rendered.
VI.
A.
In General
1.
B.
GAP-FILLERS, INTERPRETATION, AND THE PAROL EVIDENCE RULE
Parties to a contract ordinarily reach explicit and unambiguous agreements on the essential issues of the contract,
such as quantity and price. However, there are two problems that arise.
a.
gaps in the agreement that leave certain issues unaddressed
b.
ambiguities in the agreement concerning issues that the parties tried to address
Filling in the Gaps with Default Provisions
1.
The metaphor of the “default rule”:
Judges use default rules to fill in gaps when the K doesn’t address the matter, but parties are free to set those default
rules aside by contracting otherwise. (analogy to MS Word defaults)
2.
UCC Default Rules for the Sales of Goods
a.
Implied Warranties
(1) Warranty of Title
(a) For the sale of all goods, there is an implied warranty of:
1)
2)
3)
(b) This warranty can only be excluded or modified by:
1)
2)
specific language; or
circumstances which give the buyer reason to know that the seller does not claim unencumbered
title.
(2) Warranty of Merchantability
(a) The warranty guarantees that the goods are fit for:
(b)
(c)
The warranty of merchantability will be displaced by:
1)
2)
specific mention of the word “merchantability” and conspicuousness if in writing; or
any other language or circumstances that would be reasonably understood by a buyer to exclude
that warranty (e.g., “as is” or patent defects).
(3) Warranty of Fitness for a Particular Purpose
(a) This warranty grants that the goods being sold are fit for:
(b) The warranty only applies where, at the time of contracting, the seller has good reason to know:
1)
2)
(c)
The warranty may be negated:
1)
when the disclaimer is in writing, clear and conspicuous; OR
2) when the goods have patent defects which were easily detectable.
b.
Express Warranties
(1) The UCC also provides that a contract can create express warranties. Express warranties by the seller that
the goods will conform to some standard arise whenever the seller expressly or impliedly makes them as
part of the basis of the bargain in the following ways:
(a)
(b)
(c)
(2) The seller need not use the words “warrant” or “guarantee” in order to create an express warranty.
(a) However, a mere affirmation of:
c.
Missing Terms
(1) Under the UCC, where there are pertinent terms missing, the following default rules will fill in those missing
terms:
(a) The default rule for a missing price term is:
(b) The default rule for missing time term (e.g., time/date of delivery or time/date for action taken under
the contract) is:
(c)
3.
The default rule for a missing place of delivery term is:
Common Law Default Rules for Service and Employment Contracts
a.
Missing Price Term
(1)
b.
If one party performs services at the request of another, but no price is discussed in advance, then the default
rule under common law will apply. The default rule for a missing price term is:
Missing Duration Term
(1) In practically every jurisdiction, the default rule for a missing duration term in an employment contract is the
employment-at-will rule, which is that the employer can fire and employee can quit at any time and for any
reason without advance notice.
(2) In a majority of jurisdictions, oral or written assurances of job security made to an individual employee, as
well as assurances contained in policy documents distributed to the workforce, may suffice to take the
contract out of the default rule.
EXAMPLE:
Statements made during a recruiting interview that make assurances of job security.
EXAMPLE:
Written assurances contained in a personnel handbook.
4.
The Obligation of Good Faith and Fair Dealing
a.
Another source of “gap-filling” is the obligation of good faith and fair dealing. Both the UCC and the Restatement
impose an obligation of good faith in the performance and enforcement of contract.
(1) In general, “good faith” is defined as:
(2) In the case of a merchant, “good faith” means honesty in fact and:
b.
The good-faith obligation will also operate to ensure good faith where the terms of the contract leave a critical
term, such as the price, satisfaction, or quantity, open to the determination of one party.
(1) Open Price Term:
(a) If a contract leaves the price to be fixed by one of the parties, then:
(2) Satisfaction Term
(a) If a contract contains a satisfaction clause or similar term, then the determination as to whether a
party’s performance obligation is complete must:
EXAMPLE:
A commercial developer and the seller of a piece of land enter into a contract. The developer places a
condition on his purchase of the land that the seller first acquires “satisfactory leases” for the future
occupancy of the land. The developer must determine in good faith whether or not the future leases are
“satisfactory.”
(3) Open Quantity Term
(a) This arises in two contexts.
1)
An output contract is a contract in which the buyer agrees to purchase: ______
2)
A requirements contract is a contract in which the seller agrees to supply: ___
(b) Under the UCC, the party entitled to determine the particular quantity of goods to be sold—either the
buyer demanding delivery of his requirements or the seller demanding purchase of her output—must
make that determination in good faith.
(c)
In addition to the good-faith requirement, the UCC prohibits any unreasonably disproportionate demand
or tender, if there was either:
1)
2)
EXAMPLE:
Seller and Buyer are parties to a three-year contract obligating Seller to supply Buyer with the
latter’s upsidasium bearing requirements for Buyer’s turbojet engine manufacturing plant. The
market price for upsidasium suddenly skyrockets, and Buyer greatly increases its demand for
bearings with the intention of selling them at great profit to third parties. Seller is not obligated to fill
the order because Buyer’s requirements demand was made in bad faith.
EXAMPLE:
The upsidasium market remains stable, but because of a decline in the commercial aviation industry, the
demand for Buyer’s engines declines precipitously and accordingly Buyer reduces its monthly demand for
bearings by 90% in comparison with the previous 24 months. Although Buyer’s reduced demand was
made in good faith, it is unreasonably disproportionate to its prior requirements and accordingly violates
Section 2-306.
C.
Interpreting Ambiguous Language
1.
The problem/issue:
The parties have addressed a topic in their contract but have done so ambiguously such that the resolution of the
matter has been left unclear.
2.
Objective Meaning versus Subjective Meaning
a.
The rule:
EXAMPLE:
Contractor and Homeowner enter a contract for renovations to Homeowner’s home. The contract incorporates by
reference “the specifications dated 1/11/07,” which had been prepared by Homeowner and were attached to the
contract before signing. Contractor mistakenly thinks that the specifications referenced were an earlier version
prepared by Contractor, and he signs the contract on that understanding. The specifications prepared by
Homeowner and referenced in the contract are binding on both parties.
b.
The rule is subject to two exceptions:
(1) Exception #1:
When one party has reason to know of the other party’s subjective understanding: _________
EXAMPLE:
The facts being otherwise as stated in the previous example, just before the parties sign the
contract, Homeowner overhears Contractor tell his business partner that he was glad Homeowner
had agreed to Contractor’s version of the specifications. Because Homeowner knew of Contractor’s
understanding of the contractual terms, that understanding controls.
(2) Exception #2:
When, at the time of contracting, both parties have the same subjective understanding—an understanding
that is at variance with the objective meaning of the contractual language—their subjective understanding
will control.
EXAMPLE:
General contractor is building a bridge. He hires a paving subcontractor to do work at a price to be
calculated in accord with the dimensions of the “concrete surface of the bridge deck.” At the time of
contracting, both of the parties understand that the concrete work included the sides and bottom as
well as the “surface” of the bridge deck, and accordingly that interpretation would be the controlling
interpretation.
3.
Contra Proferentem and the Doctrine of Reasonable Expectations
a.
The Rule of Contra Proferentem
(1) If an ambiguous term is included in the contract, then:
(2) Types of contracts subject to this rule of construction:
all contracts drafted by one of the parties, whether an adhesion contract or one between parties of equal
bargaining power.
b.
The Doctrine of Reasonable Expectations
(1) Even unambiguous terms may be interpreted against the drafting party if they conflict with the reasonable
expectations of the other party
(2) Types of contracts subject to this doctrine:
(3) Under the doctrine, courts make a distinction between the dickered terms and the boilerplate terms.
(4) The doctrine only applies to defeat the enforceability of:
EXAMPLE:
Fertilizer Co. purchased from Allied Insurance Co., an insurance policy covering burglary with fineprint boilerplate language defining “burglary” as requiring “visible marks on” or “physical damage
to” the exterior of the insured building. During the policy term, Fertilizer Co. was the victim of a theft
in which the perpetrators were able to force open a Plexiglas door without leaving marks or damage,
and Allied refused payment on the policy. Because the definition of “burglary” was a boilerplate
term inconsistent with the reasonable expectations of the insured, the court interpreted the policy to
cover the theft.
D.
Trade Usage, Course of Dealing, and Course of Performance
1.
Trade usage, course of dealing, and course of performance are extrinsic evidence that can be used to both fill gaps
and resolve ambiguities in contracts.
2.
Definitions under the UCC:
3.
a.
A usage of trade is any practice or method of dealing having such regularity of observance in a place or trade as
to justify an expectation that it will be observed with respect to the transaction in question.
b.
A course of dealing is a pattern of conduct concerning previous transactions between the parties that is fairly to
be regarded as establishing a common basis of understanding for interpreting their subsequent expressions and
other conduct.
c.
A course of performance is present when a particular contract involves repeated occasions for performance by
a party and the other party, with knowledge of the nature of the performance and opportunity for objection to it,
accepts the performance or acquiesces in it without objection.
Distinguishing admissible uses of such evidence from their inadmissible uses:
a.
Admissible uses:
(1)
(2)
4.
b.
Inadmissible uses:
c.
Note, however, that course of performance evidence is uniquely available to establish a waiver or modification of
express terms.
In the event of a conflict, course of performance prevails over course of dealing and usage of trade, and course of
dealing prevails over usage of trade.
EXAMPLE:
Trade Usage Can Fill in a Gap in the Terms of the Contract: A is one of many suppliers of upsidasium, and B is
one of A’s long-standing customers. A fills an order by B and demands immediate payment; B refuses. It is standard
practice in the upsidasium industry for purchasers to pay invoices upon delivery, and therefore B’s refusal to do so is
in violation of the parties’ contract.
EXAMPLE:
Course of Dealing Trumps Trade Usage: Same facts as the previous example except that in the past, A has regularly
given B 30 days to pay for deliveries. Because this course of dealing between the parties trumps the payment-upondelivery usage of trade, B has 30 days within which to make the required payment.
EXAMPLE:
Express Terms of the Contract Trump Both Course of Dealing and Trade Usage: Same facts as the previous
example except that, the parties’ contract contains a provision requiring payment within seven days of delivery.
Because the express terms of a contract override both course of dealing and usage of trade, B has seven days within
which to make payment despite the past practice of paying in 30 days and the industry practice of immediate
payment.
EXAMPLE:
Course of Performance Can Establish Waiver or Modification of Express Terms of the Contract: Same facts as
the previous example except that A and B are parties to an installment contract and B has paid 30 days after multiple
deliveries without objection by A. This evidence of the parties’ course of performance is admissible to establish that A
has waived its contractual right to payment within seven days of delivery and/or that the parties have mutually modified
that obligation.
E.
The Parol Evidence Rule
1.
Introduction
a.
Another source of evidence shedding light on the meaning of an agreement is the negotiations of the parties
leading up to the execution of the written contract. The parol evidence rule governs efforts to introduce such
evidence.
b.
The rule governs the admissibility of the following type of evidence:
both oral and documentary evidence of negotiations and other communications between the parties that took
place prior to, or contemporaneously with, the execution of the contract.
2.
Approaching a Parol Evidence Analysis
a.
When a party seeks to introduce parol evidence, the court will determine the admissibility of the evidence based
on two questions:
(1) What is the purpose for which the evidence is being introduced?
(2) Does the evidence relate to a term or contract which is integrated?
3.
Integration
a.
While the first step in the analysis is to determine the purpose for which the evidence is being introduced, the
effects of these different purposes will depend upon the level of integration in the contract.
b.
Partial versus Complete Integration
(1) When a particular contract is partially integrated, it means that the terms contained within the contract are
intended to be:
(2) On the other hand, when a contract is completely integrated, the parties intend the contract to represent a:
c.
Determining Partial Integration and Complete Integration
(1)
The question of whether the terms of a contract are partially integrated (i.e., final) and whether an integration is
complete (i.e., exhaustive) is for the judge, not the jury, to decide.
(2) In reaching decisions regarding the complete integration of a contract, the judge will rely on the following
evidence:
(a) Merger Clause
1)
The most important evidence that the parties intended their written agreement to represent an
exhaustive account of their contractual obligations is the presence in the contract of a merger
clause reciting:
(b) Other Evidence
1)
4.
Additional factors which are important for determining whether a contract as completely integrated
include the detail of the contract provisions, as well as the length of the agreement itself.
Purposes for Which Evidence Is Introduced
a.
The effect of the rule depends on the purpose for which the parol evidence is being introduced:
(1) To explain or interpret the terms of the written contract,
(2) To supplement the terms of the written contract, or
(3) To contradict the terms of the written contract.
b.
Purpose #1: To Explain or Interpret Terms of a Written Contract
(1) The majority rule:
EXAMPLE:
A and B have a written contract under the terms of which A agrees to sell B “all the uncut timber on
my property.” Evidence of conversations between the parties during a visit to the timber site is
admissible to explain that “property” means A’s country cottage and not A’s home in the suburbs.
c.
Purpose #2: To Supplement Terms of a Written Contract
(1) The general rule:
(2) A completely integrated contract is intended by the parties to represent a final as well as an exhaustive
account of the parties’ obligations.
EXAMPLE:
A and B had a written contract under the terms of which A agrees to sell B “all the uncut timber on my
property,” and the contract contained detailed terms with respect to the felling and transportation of the
timber as well as a merger clause stating that the contract was “a complete and exhaustive account of the
obligations between the parties.” Evidence of an oral agreement between the parties at the time of signing
the contract that A would pay to have the trees inspected for termites before cutting would be admissible to
supplement the agreement only if the court concluded that the contract was partially (rather than completely)
integrated. Some courts would consider the merger clause to be conclusive on the question of complete
integration and thus bar the evidence, but other courts would treat it as persuasive only, evaluate the
proffered evidence of the supplemental oral agreement, and admit it if they concluded that the parties did not
intend the previously drafted merger clause to bar it despite their subsequent signatures on the contract.
(3) UCC Distinction for Sale of Goods Cases
(a) In a UCC case, trade usage, course of dealings, and course of performance can: __
EXAMPLE:
Same facts as in the previous example, except A and B are logging companies and B offers evidence
that sellers doing business in the commercial lumber trade invariably pay to have the trees inspected
for termites before cutting. This evidence would be admissible even if the court concluded that the
contract was completely integrated because under the UCC uncut timber equals “goods” and usage of
trade evidence is admissible to supplement a written agreement.
d.
Purpose #3: To Contradict Terms of a Written Contract
(1) The general rule:
(2) Integrated terms are terms intended by the parties to represent their final agreement on the subjects in
question.
EXAMPLE:
A and B have a written contract under the terms of which A agrees to sell B “all the uncut timber on my
property.” Evidence of an exchange of letters between the parties in which they agreed that their agreement
would not include the shady trees in the immediate vicinity of A’s country cottage would contradict the written
expression—i.e., that A had agreed to sell B “all the uncut timber on my property”—and would therefore be
admissible only if the court concluded that the quoted provision not intended by the parties to be the final word
with respect to which timber would be cut (i.e., that the writing was not integrated). In making that
determination, the court is free to consider the exchange of letters and other extrinsic evidence.
5.
When the Parol Evidence Rule Will Not Apply
a.
The parol evidence rule will not apply to the following types of evidence:
(1) Subsequent Agreements
(a)
The parol evidence rule only applies to oral or written communications made prior to or contemporaneously with
the execution of a written agreement. This means that it will not apply to:
EXAMPLE:
Buyer and Seller enter into a written agreement for the sale of 1,000 widgets. Two months before delivery is
to be made, the parties orally agree to modify the agreement and specify the goods as nonstandard type-Y
widgets, with Buyer agreeing to pay an additional cost. Evidence of this modification would not fall within the
parol evidence rule, as it was made subsequent to the execution of the written agreement.
(2) Collateral Agreements
(a) The parol evidence rule will not affect agreements between the parties that are: ____
EXAMPLE:
A and B execute a detailed written contract, complete with a merger clause, by which A agrees to sell
A’s car to B. As part of the transaction, the parties orally agree that B may park the automobile in A’s
garage for one year, paying $25 per month. Despite the completely integrated writing, either A or B
may adduce evidence of the parking arrangement under the collateral agreement rule.
(3) Attack on the Validity of the Written Agreement
(a) The parol evidence rule only applies if there’s a valid written agreement. As a result, the parol evidence
rule will not bar efforts to prove:
(b) A party can assert such a claim in one of the following ways:
1)
Failure of an Oral Condition Precedent to the Agreement
a)
Evidence that the parties orally agreed to a condition precedent to: _______
EXAMPLE:
The parties to a written contract for the sale of artwork orally agree that the sale will not take
effect unless and until a certificate of authenticity is issued by a named art expert. Because
authentication is a condition precedent to the sale, the parol evidence rule will not bar proof of
the oral agreement.
2)
Absence of Consideration
a)
3)
Mistake or Duress
a)
4)
Evidence that a written agreement lacks consideration or: ______________
Evidence of mistake or duress: ___________________________________
Fraud
a)
The majority rule is:
b)
The minority rule is:
Parol evidence is admissible unless the contract provides that “the parties made no
representations and relied on no representations during the course of making this agreement.”
5)
Reformation
a)
The parol evidence rule is also inapplicable where a party to a written agreement alleges facts
entitling him to reformation of the agreement.
b)
For the plaintiff to obtain reformation, it must be shown:
i)
ii)
iii) that proof of these elements is established by clear and convincing evidence
VII.
A.
PERFORMANCE, MODIFICATION, AND EXCUSE
Obligations under the UCC
1.
2.
In General
a.
The seller’s obligation is to transfer and deliver the goods.
b.
The buyer’s obligation is to accept and pay for the good.
Carrier Cases versus Non-Carrier Cases
a.
Carrier cases are where the parties to a sales of goods contract agree to use a common carrier (trucking firm,
train, etc.).
b.
Non-carrier cases are where the parties to a sales of goods contract do not agree to use such a common carrier.
c.
In non-carrier cases, when does the risk of loss transfer?
(1) If seller is not a merchant:
(2) If seller is a merchant:
d.
In carrier cases, when does the risk of loss transfer?
(1) Critical distinction:
(a) Shipment contract:
A contract where the seller promises to turn the goods over to a carrier.
(b) Destination contract:
A contract where the seller promises to tender delivery at a particular destination point.
(2) The default rule:
(3) Regarding Risk of Loss
(a) Shipment contract:
The risk of loss passes to the buyer when: _________________________________
1)
Identified as “FOB Seller.”
(b) Destination contract:
The risk of loss passes to the buyer when: _________________________________
1)
Identified as “FOB Buyer.”
B.
Modification
1.
At common law, modification of an existing contract was difficult. Contemporary rules allowing for modification under
the UCC and the common law are more flexible.
2.
Modification at Common Law
a.
The Preexisting Duty Rule
(1) A promise to increase compensation for duties owed under an existing contract is: ________
EXAMPLE:
The captain of a fishing vessel promised to pay $100 to each of the sailors for their work on a fishing voyage.
Midway through the voyage, the sailors threatened to cease work unless they were promised an additional $50
each, and the captain reluctantly agreed. At the end of the voyage, the captain paid each of them the originally
promised $100 but refused to pay the $50 increase, so the sailors sued to recover the additional amount.
Because the sailors were already obliged to perform the work in question under the terms of their original
contract with the captain, his promise of an additional $50 is unenforceable under the pre-existing duty rule.
b.
Exceptions to the Preexisting Duty Rule
(1) Mutual Modification
(a) A promise to increase compensation under an existing contract is enforceable as a mutual modification
if:
1)
2)
the difference in performance is not a mere pretense of a newly formed bargain
EXAMPLE:
During the course of the fishing voyage, the ship’s cook takes ill, and the captain instructs the youngest
of the sailors to perform the cook’s duties in addition to his fishing duties. The sailor refuses to perform
the work unless the captain promises him an additional $50 in compensation, and the captain reluctantly
agrees. The promise of additional compensation is enforceable as a “mutual modification” of the original
contract.
(2) Unforeseen Circumstances
(a) The preexisting duty rule will not apply if a promise of increased compensation is given in exchange for
a promised performance that has been rendered: ___________________________
EXAMPLE:
The fishing nets provided by the captain turn out to be defective and thus increase the workload of the
sailors in a manner substantially in excess of what was reasonably contemplated under the original
contract. The sailors threaten to cease the fishing unless they are promised an additional $50 each, and
the captain reluctantly agrees. The promise is enforceable despite the pre-existing duty rule in view of
circumstances not reasonably anticipated by the parties at the time of contracting.
3.
Modification and the Sales of Goods under the UCC
a.
In this context, the UCC specifically displaces the common law.
(1) The UCC provides that an agreement modifying an existing contract for the sale of goods needs:
EXAMPLE:
A manufactures upsidaisium bearings and has a three-year contract to supply B with the bearings
the latter uses to make turbo-jet engines for commercial aircraft. Because of an unexpected world
shortage of upsidaisium, the price of the metal A uses to manufacture the bearings triples over a
short period, and A advises B that it can’t continue supplying the bearings unless B agrees to
increase the price to the point that A will break even on the supply contract. B reluctantly agrees. Is
the modification enforceable?
(2) Even when the modification is supported by consideration, the UCC provides that a bargained-for
modification is unenforceable if the appearance of the mutual bargain is merely a pretext to hide a bad-faith
change of terms.
EXAMPLE:
The facts being otherwise as stated in the previous example, A promises to ship the bearings to B in
blue cartons in exchange for B’s agreement to the higher price. Although the blue-box promise
might technically constitute consideration for B’s agreement to pay the new market price, the
modification is unenforceable for want of good faith.
C.
Excusing Performance due to Faulty Assumptions
1.
A party entering a contract makes many assumptions about the present and future. When such assumptions turn out
to be faulty, the parties may be excused under the doctrines of mistake, impossibility, impracticability, and frustration
of purpose.
2.
Faulty Assumptions regarding Present Facts: Mistake
a.
Requirement of materiality:
b.
Unilateral versus Mutual Mistake
(1) Unilateral Mistake
(a) Defined:
A single party operating under a faulty assumption about one or more material facts as they exist at the
time of contracting.
(b) The rule:
A single party mistaken about present material facts is: _______________________
1)
Exception #1:
EXAMPLE:
A agrees to sell B a cow, which A knows to be barren, and, as the parties are writing up and signing
the agreement, B asks A a series of questions about the care and feeding of pregnant cows.
Because A has reason to know that B is mistaken with respect to the cow’s capacity to bear calves,
B’s obligation to purchase the cow is excused on account of unilateral mistake.
2)
Exception #2:
a)
b)
This exception to the rule for unilateral mistake won’t apply if:
i)
the error was caused by extreme negligence on the part of the party making the error; or
ii)
the other party relied on the clerical error.
This exception is a minority rule (available principally to general contractors, who face a
peculiar dilemma that we’ve previously discussed.)
(2) Mutual Mistake
(a) Defined:
Both parties have labored under a common faulty assumption regarding the present facts.
(b) Under the rules of mutual mistake, the contract will be voidable by the disadvantaged party where three
requirements are met:
1)
2)
3)
the disadvantaged party did not: ______________________________________
EXAMPLE:
A agrees to sell B a cow at beef cow prices because at the time of contracting, both parties were
under the assumption that the cow was barren. A short time later, the cow was discovered to be
with calf, which greatly increased her resale value. The contract is voidable at the option of A.
EXAMPLE:
A agrees to sell B a cow at beef cow prices. At the time of contracting, both parties share the mistaken
impression that the cow is barren. B tells A that he is still going to try to breed the cow in any case. In
this case, A bears the risk of B’s efforts succeeding, because if B succeeds, it will prove the parties’
assumption that the cow was barren wrong. So A is accordingly bound by the contract even if the cow
turns out to be fertile.
3.
Faulty Assumptions regarding Future Facts: Impossibility, Impracticability, and Frustration of Purpose
a.
Impossibility
(1) The doctrine of impossibility excuses both parties from their obligations under a contract if the performance
has been rendered impossible by events occurring after the contract was formed.
(a) Requirement #1:
1)
Objective impossibility occurs when the performance becomes:
EXAMPLE:
X promises to sell Y his horse, but the horse dies before X can deliver the horse.
2)
Subjective impossibility occurs when the performance under the contract becomes impossible
because of some failure or fault on the part of the performing party.
EXAMPLE:
A party fails to have enough money to either make a promised payment or to obtain the
components required for the production of a promised product.
3)
In what circumstances are we likely to find objective impossibility?
a)
Circumstance #1:
EXAMPLE:
Buyer promises to buy Farmer’s 2009 wheat crop, the entirety of which is destroyed just before
harvest by wheat blight. The Farmer’s performance is excused on the basis of impossibility.
b)
Circumstance #2:
when there is a personal services contract and the performing party: ______
c)
Circumstance #3:
when supervening law or legal developments have: ___________________
(b) Requirement #2:
The contingency that creates the impossibility: ______________________________
1)
That is, the contingency arose after the making of the K and was not anticipated by the parties.
(2) Note: Impossibility, as an excuse to performance of a contractual obligation, is available under both the
Common Law and the UCC.
b.
Impracticability
(1) Courts are reluctant to excuse performance for any reason other than impossibility. However, under the
doctrine of impracticability, a promisor may be excused from performance where the following two
elements are proven:
(a)
(b)
(2) Parameters of Impracticability under the UCC
(a) Increased costs, and the rise or collapse of a market are viewed as business risks, the sorts of
contingencies that fixed-price contracts are expected to account for.
(b) UCC cases where impracticability has been found typically involve shortages caused by war or
embargo, local crop failure, or unforeseen shutdown of major sources of supply (e.g. natural disaster).
NOTE: Impracticability, as an excuse to performance of a contractual obligation, is available under both the
Common Law and the UCC.
c.
Frustration of Purpose
(1) Where a contingency occurs that dramatically reduces the value of performance to the receiving party, the
doctrine of frustration of purpose may be available to excuse the receiving party from its contractual
obligations.
EXAMPLE:
The doctrine of frustration of contractual purpose has as its source the famous case of Krell v. Henry, which
involved the owner of a London flat with a “ringside” view of the forthcoming coronation parade who agreed
to lease the flat at premium prices to a lessee eager to witness the festivities. The parade was canceled
when the King became ill, and the lessee’s contractual obligations to the owner were excused on the ground
that going through with the rental agreement in the absence of its raison d’être “cannot reasonably be said to
have been in the contemplation of the parties at the date of the contract.”
(2) The Modern Test
(a) The contemporary version of this rule will discharge a party’s contractual obligations when the following
three requirements are met:
1)
Requirement #1:
a)
2)
This means that the frustration of incidental or non-material purposes would not trigger the
excuse of frustration of purpose.
Requirement #2:
EXAMPLE:
In a variation on Krell v. Henry, where the King did not become ill and the parade was not
cancelled, the town erected bleachers that only partially obstruct the parade view from the
apartment.
3)
Requirement #3:
(3) Frustration of Purpose and the Contractual Allocation of Risk
(a)
Frustration of purpose (like mistake, impossibility and impracticability) operates as a default rule. If a contract
allocates the risk of the non-occurrence of an event that would frustrate a party’s purpose, the excuse of
frustration of purpose becomes unavailable.
EXAMPLE:
The facts otherwise being as they were in Krell v. Henry, assume that the parties’ written agreement contained
the following language: “The parties understand and agree that the flat owner will be arranging at great
expense to move himself and his family to the countryside in order to permit occupancy by lessee and
accordingly that lessee will be obligated under this agreement irrespective of whether the coronation parade
takes place during the lease period.” Since the contract allocated the risk of the contingency to the lessee, his
obligations under the contract were not excused for frustration of purpose when the parade was postponed.
EXAMPLE:
The facts otherwise being as they were in Krell v. Henry, assume that all of London was abuzz with news
of the new King’s possibly serious illness during the days before the parties entered into their agreement.
Because a postponement of the coronation parade was therefore foreseeable, the lessee’s failure to
secure language in the parties’ agreement discharging his duties in the event of postponement constitutes
evidence that the lessee bore that risk and remained fully obligated under the contract when it came to
fruition.
NOTE: Frustration of purpose, as an excuse to performance of a contractual obligation, is available under both
the Common Law and the UCC.
D.
Excusing Performance by Agreement of the Parties
1.
2.
Rescission
a.
Is permissible where:
b.
Note: The Statute of Frauds will not prevent an oral agreement of rescission that discharges unperformed duties
from being enforced unless rescission of a transfer of property is involved.
Accord and Satisfaction
a.
The parties may make an accord, which is a contract under which the oblige promises to accept:
EXAMPLE:
Purchaser has paid builder in full for the construction of a house. Because of difficulties that neither party to the
contract could foresee, the builder is only able to partially complete the construction project. Purchaser agrees to
a lesser performance in return for a partial re-payment. This agreement is an accord. Builder then completes the
agreed-to substituted performance. This performance amounts to satisfaction of the accord.
b.
Legal Effects
(1) Accord and satisfaction satisfies the obligor’s original obligation.
(2) the accord alone does not discharge the obligor’s duty; it only suspends the obligor’s duty.
c.
Validity of Accord—Consideration Required
(1) General contract law applies to accords, such that consideration is required.
(2) There may be sufficient consideration if:
(a) where the accord involves an agreement for partial or substituted performance:
(b) where the accord involves an agreement for partial payment:
E.
Anticipatory Repudiation
1.
2.
Anticipatory repudiation may be established by:
a.
a party’s definitive statement: ___________________________________________________
b.
a party’s voluntary act: _________________________________________________________
Adequate Assurance of Performance
a.
If anticipatory repudiation cannot be established but there are:
EXAMPLE:
After making a contract with a manufacturer. A wholesaler become aware that the manufacturer’s employees are
out on strike. This gives reasonable grounds to confirm with the manufacturer that the contract will be performed.
b.
Suspension of Performance by the Insecure Party
(1) Upon making a demand for assurances, a party with reasonable grounds for insecurity may suspend his
own performance so long as it is commercially reasonable to do so.
(2) The failure to respond with reasonable assurances constitutes a repudiation by the non-responding party.
This can occur where the other party:
(a)
(b)
3.
Rights of the Aggrieved Party upon Repudiation
a.
The aggrieved party’s rights upon this anticipatory breach:
(1)
(2) the party can bring an action for damages or specific performance; or
(3) the party can ignore the repudiation, and continue under the contract
4.
Retraction of an Repudiation
a.
A party who has made an anticipatory repudiation to the other party may retract the repudiation unless and until
the other party:
(1) acts in reliance on the repudiation
(2) accepts the repudiation by signaling this to the breaching party, or
(3) commences a suit for damages or specific performance
F.
Conditions (OL VI. C.)
1.
In General
a.
In some contracts, the obligation to perform is conditioned upon some event or action by the other party. Where
there are such conditions in a contract, obligations are triggered when that conditioning event or action occurs.
b.
The law regarding conditions deals with two contractual problems:
(1) the order of parties’ performances (who goes first?); and
(2) the remedies where conditions in the contract have failed? (i.e., what happens when a contractual
performance is conditioned upon an event and that event does not occur?)
2.
Terminology
a.
Promissory versus Pure Conditions
(1) Promissory conditions are those which condition the contract performance on:
EXAMPLE:
Consider a publication contract with the following language: “Publisher’s duty of payment is expressly
conditioned on Author’s timely delivery of the promised manuscript.” In this case, Author’s timely delivery of
the manuscript is a promissory condition on Publisher’s contractual obligation of payment.
(2) Pure conditions are those which condition contract performance on:
EXAMPLE:
Consider a contract in which Skyblasters, Inc., agrees to provide a fireworks display for a holiday celebration
sponsored by the Village of Remulak, where the contract contains a “weather permitting” provision. In this
case, good weather is a pure condition on Skyblasters’s performance obligation.
b.
Express versus Implied Conditions
(1) Express conditions:
(2) Implied conditions are:
3.
Rules Governing the Order of Performance
a.
4.
See outline.
Rules Governing the Failure of a Condition
a.
Failure of Condition under the Common Law
(1) The rights of the parties in the event of a failed condition depend on whether the condition is express or
implied.
(a) Failure of an Express Condition
1)
The Rule:
The failure of an express condition will: ________________________________
(b) Identifying Express Conditions
1)
Look for clear language of the parties.
EXAMPLE:
“The party’s duty to perform is expressly conditioned on the promised performance.”
EXAMPLE:
“There is no obligation to proceed unless and until the following steps are taken.”
EXAMPLE:
“Payment is due upon completion”
(c)
Excusing Failed Express Conditions
1)
There are three situations in which the failure of the condition may be excused such that the
performance obligation of the party who stood to benefit from the condition is not discharged.
a)
Situation #1:
i)
The party who has been discharged from performing by the failed condition may waive the
right to discharge and perform anyway.
NOTE: Some courts treat this as a mid-term modification, which in a common law case requires consideration.
b)
Situation #2:
When a party acts in bad-faith so as to prevent the condition, that party’s performance
obligation will not be discharged.
i)
EXAMPLE:
A landowner’s obligations to pay a contractor for the building of a structure are conditioned on the
issuance of a certificate of occupancy by the inspector of buildings. The landowner takes steps to
induce the inspector not to issue the certificate, the landowner is in bad faith interfering with the
condition and it will be excused. Landowner will owe the contractor even though the certificate has
not been issued.
EXAMPLE:
In a contract for the sale of real property, the contract is conditioned on the buyer securing
financing. If the buyer fails to apply for financing, this would be considered conduct in bad faith,
and the buyer would be obligated to pay.
e)
Situation #3:
i)
Courts will excuse a performance obligation so as to avoid a grossly disproportionate
loss to a party for a relatively minor infraction.
(d) Implied Conditions
1)
When the possibility of a breach is not addressed by an express condition, it is still a breach; however,
under the law of implied conditions, courts can treat that breach in one of two ways: either as a material
breach or as substantial performance.
2)
Material Breach versus Substantial Performance
a)
If the breach is serious enough, the court will treat the breach in the same way it would treat a
failure of an express condition. This is called:
b)
If the breach is less serious, the court will treat the party’s performance as “close enough,”
meaning that the party has rendered:
c)
The Restatement of Contracts lists five factors that can help to distinguish between material
breach and substantial performance:
d)
the extent to which the aggrieved party will be deprived of the benefit that she reasonably
expected to receive under the contract;
i) the extent to which the aggrieved party can adequately be compensated via damages for
the defective performance;
ii) the extent to which the breaching party will suffer forfeiture if a material breach is found;
iii) the likelihood that the breaching party will cure his failure; and
iv) the extent to which the breach was willful or in bad faith rather than merely negligent or
innocent.
HYPOTHETICAL
Contractor builds a house for Landowner, and—unbeknownst to Contractor—the plumbing
subcontractor installs a brand of pipe that differs from the brand specified in the contract but is in every
important respect the same quality. It would be an extremely expensive and burdensome task for
Contractor to remove and replace the pipe. Is this a case of substantial performance or material
breach?
HYPOTHETICAL
Contractor builds a house for the Yuppies, a young couple who are foodies and love to entertain, and
accordingly their plans include a spacious kitchen. The Yuppies spend the year in Paris while the house
is under construction, and in their absence and without prior consultation, Contractor decides to deviate
from the plans and build a smaller kitchen, thus enabling Contractor to save significant construction
costs. Is this a case of substantial performance or material breach?
(e) Failed Condition That Cannot Be Excused
1)
Where a condition has failed and cannot be excused, there are other methods of enforcement
available to mitigate the consequences for the breaching party.
2)
Divisibility of the Contract
a)
The breaching party may be able to argue that the contract is divisible and only a part of it has
been materially breached.
b)
The legal test for “divisibility” of the contract:
A contract is divisible where it is: __________________________________
EXAMPLE:
A one-year cleaning service contract would be divisible if the services were provided and paid for on a
monthly basis, as it would be easy to apportion the larger exchange into “pairs of part performance”
that are “properly regarded as agreed equivalents”—i.e., a month’s worth of cleaning in exchange for
a month’s pay. To put it another way, the one-year contract is merely the sum of the 12 monthly
exchanges.
EXAMPLE:
A enters into a contract to build a house for B for $100,000, with progress payments of $5,000 due in
monthly installments during construction and a balloon payment upon the architect’s certificate of
satisfactory completion. The contract is not divisible, for the performances and the progress payments
are not “agreed equivalents,” and the whole is greater than the sum of the parts, since no reasonable
person would enter a free-standing contract for a month of construction work.
EXAM TIP: If the whole is merely the sum of its parts, it is divisible. If the whole is greater than the sum of the
parts, it is not divisible.
3)
Quantum Meruit
a)
Where a party failed to fulfill an express condition or is in material breach, he may still be able
to recover in quantum meruit:
i)
ii) However, such recovery will be reduced by the damages caused by his breach of contract.
b.
Failure of Condition under the UCC
(1) Express and Implied Conditions in Relationship to the Perfect Tender Rule
(a) Under the perfect tender rule, the terms of a contract for the sale of goods are enforced exactly. Every
contract terms is thus treated as an express condition, and a breach by seller will relieve the payment
obligation of the buyer.
(b) The rule is that the seller is in breach:
(c)
If the seller fails to make perfect tender, the buyer has three courses of action available:
1)
2)
Reject the Goods
a)
For a buyer to reject the goods, the buyer must:
b)
Once a buyer rejects the goods, the buyer may bring an action for damages against the seller
on account of the imperfect tender, unless cure applies.
c)
If the buyer does not effectuate rejection in the manner specified above, then he has made a
failed rejection, which will be deemed to be an acceptance of the goods by the buyer.
Accept the Goods
a)
The buyer may accept the goods, despite the improper tender. Acceptance occurs when the
buyer has had a reasonable opportunity to inspect the goods and signifies acceptance either
through:
i) stating to the seller that the goods conform to the contract;
ii) taking the goods despite their non-conformance;
iii) failing to make an effective rejection; OR
iv) taking any action inconsistent with the seller’s ownership of the goods (like putting goods
on the showroom floor).
b)
What are the legal consequences of the buyer’s acceptance?
i) the buyer must:
ii) the buyer may also seek damages for any non-conformity so long as the seller has been
seasonably notified.
iii) The buyer can revoke the acceptance if there is a non-conformity that substantially impairs
the value of the goods and if (1) the reason for the acceptance was that the buyer was
unaware of the non-conformity or (2) the seller assured the buyer that a known nonconformity would be cured but the seller failed to do so.
3)
Accept Part and Reject Part
a)
The critical rule:
When accepting part and rejecting part, the buyer can only do so in terms of commercial units
of that good (the buyer, for example, can’t accept half of a loaf of bread and reject the other
half).
(d) Work-Arounds for Breaching Sellers
1)
The right to cure:
If a seller makes a non-conforming tender, but: __________________________
a)
Two requirements:
i) seller must give buyer seasonable notice of his intention to cure
ii) seller must make conforming delivery within the time specified in the contract.
2)
Reasonable Grounds to Believe Delivery Was Acceptable
a)
Two requirements:
i) seller must give buyer: _______________________________________
ii) seller must make conforming delivery within: ______________________
3)
Proof of Reasonable Grounds by Seller
a)
A seller may prove that he had reasonable grounds to believe that the buyer would accept
nonconformity if he has evidence of:
i) express assurances to that effect from the buyer; or
ii)
trade usage, course of dealing or course of performance evidence to that effect.
(e) Imperfect Tenders in the Context of an Installment Contract
1)
Under UCC, installment contracts are contracts that contemplate the delivery of goods in separate
lots to be separately accepted by the buyer.
2)
When a particular installment occasions a non-conforming tender, there are three possibilities that
the UCC deals with:
a)
If the non-conforming tender substantially impairs the value of the whole contract:
b)
If the non-conforming tender substantially impairs the value only of this particular installment:
c)
If the non-conforming tender does not even substantially impair the value of this particular
installment, buyer must allow seller opportunity to cure the non-conformity within reasonable
time.
BAR EXAM APPLICATION
Question 3
A woman hired her neighbor to clean up her pool before her big July 4th pool party. The neighbor agreed to do the work for
$50. The day before the party, the woman noticed that her neighbor still had not started the work. She asked her neighbor if
the pool would be clean in time for the party. The neighbor replied, “I thought about it and realized $50 is too low a price for
the work involved. I don’t think I’m going to clean the pool.” The woman responded, “If you can clean the pool by tomorrow
morning, I’ll pay you an additional $25. And I won’t sue you in small claims court for your failure to perform your promise.”
The neighbor then cleaned the pool that day, but the woman refused to pay to him anything more than $50.
In a suit by the neighbor to recover the additional $25 promised by the woman, the neighbor will:
A) win, because he performed his part of the bargain.
B) win, because the second contract for $75 superseded the original $50 contract.
C) lose, because the $75 contract did not supersede the $50 contract.
D) lose, because he had a preexisting duty to clean the pool for $50.
BAR EXAM APPLICATION
Question 4
In 1992, Daniel Gere saved the life of Charlene Mendenhall’s husband George, after he was involved in an accident. George
later rewrote his will to leave $5,000 to Gere for his actions. However, when George died in 1996, he left behind no property
except for an undivided interest in a piece of land held in tenancy by the entirety with Charlene. She had purchased the property
in 1983 with money she had inherited from her father’s will. After George died, Charlene signed and delivered to Gere a written
instrument which said, “In consideration of Daniel Gere’s having saved my husband George’s life and his agreement to make
no claims against my estate based on George’s will, I promise herewith to pay Daniel Gere the sum of $5,000.” Late last year,
Charlene Mendenhall died, and Gere filed a claim against her estate for $5,000. Hathaway, Charlene Mendenhall’s executor,
contested Gere’s claim, indicating that Gere’s instrument was not supported by sufficient consideration.
Gere’s strongest argument would be:
A) that Charlene benefited from Gere’s actions.
B) that Charlene is bound by promissory estoppel.
C) that Charlene and Gere had reached an enforceable compromise agreement.
D) that Charlene had executed a binding unilateral agreement.
VIII.
A.
DEFENSES
Introduction:
We will cover 6 defenses, all of which are available to a party in both common law and UCC cases.
B.
Incapacity
1.
Infancy/Minors
a.
Infancy is the time period before a person reaches the age of majority. An infant, commonly referred to as a
minor, is any person who is under the age of 18.
b.
The modern rule:
Minors may enter into a contract, but: _____________________________________________
(1) The special case of minors who are married or emancipated.
(a) The majority rule:
(b) The minority rule:
c.
Power of Avoidance (or Disaffirmance)
(1) Upon exercising the right to disaffirm a contract, the minor is obligated to return to the other party any goods
received under the contract.
(a) The majority rule is that the minor must return the goods if they are in his possession when he
disaffirms the contract, but he is not liable for:
(b) A contract between a minor and another party may be for something that cannot be returned, such as a
services contract or a lease. In such a case, the minor is under no further obligation:
(c)
d.
In a minority of jurisdictions, a minor can only disaffirm a contract by making the other party whole. In
these jurisdictions, the minor would be liable for depreciation, damages, as well as compensating the
other party for the services received.
Ratification
(1) Once minors turn 18, they may expressly or impliedly ratify contracts entered during minority and thus:
e.
Exceptions
(1) Necessaries
(a) A minor’s contract for necessaries is voidable, but the merchant has a:
1)
Necessaries are:
a)
Courts are split about whether education and automobiles constitute necessaries.
(2) Misrepresentation by Minor
(a) In a minority of jurisdictions, if a minor has misrepresented his age to the contracting party in order to
obtain the goods or services of the contract, he may be equitably estopped from:
2.
Mental Incompetence
a.
Under modern rules, a person lacks capacity to contract if he was mentally incompetent at the time of contracting.
b.
Requirements for Mental Incompetence
(1) If a party is adjudicated incompetent and a guardian is appointed, then this adjudication will be sufficient to
establish mental incompetence for contract cases.
(2) Absent prior adjudication of incompetence, then the defense will be available under the following
circumstances:
(a) Cognitive Defects
1)
A person will be deemed mentally incompetent if he is unable to:
EXAMPLE:
A person who is operating under the influence of delusions or hallucinations will be deemed
mentally incompetent based on cognitive defects.
(b) Volitional Defects
1)
In many jurisdictions, mental incompetence can be established if:
a)
b)
EXAMPLE:
A person who is a manic-depressive would be able to avoid a contract if he was in a manic
phase at the time of contract formation and if the other party had reason to know of that
person’s state based, for example, on his erratic behavior.
c.
Legal Consequences of the Mental Incompetence Defense
(1) The legal consequences of a successful mental incompetence defense depend on whether or not the party
exercising this defense has been adjudicated mentally incompetent or not.
(a) If there’s been an adjudication of mental incompetence:
(b) If there’s been no such adjudication:
(2) Possibility of Ratification
(a) A party who was mentally incompetent at the time of contract may expressly or impliedly ratify the contract if:
(3) The mentally incompetent party’s duty of restitution:
(a)
If the mentally incompetent person exercises his power of avoidance and has received some benefit
under the contract, then he is required to make the other party whole by paying the reasonable value of the
goods or services rendered.
EXCEPTION:
If the other party takes unfair advantage of the mentally incompetent person, being aware of that person’s
incompetence, then the other party is entitled only to a return of any benefits still in the possession of the
mentally incompetent party. The other party will have no right of recovery for services or benefits already
consumed.
(4) In the case of a contract for necessaries, the mentally incompetent can disaffirm the contract, but the
provider of the necessaries can recover:
(a) An addition to the list of necessaries:
legal representation in connection with incompetency proceedings
3.
C.
Incapacity defenses are available under both the common law and the UCC.
Misrepresentation
1.
Types of misrepresentation
a.
Fraudulent Misrepresentation
(1) Four elements:
(a) Element #1:
1)
The defendant must have made an assertion that: _______________________
2)
What would be sufficient to prove this element?
a)
b)
c)
EXAMPLE:
A seller of real estate undertakes efforts to hide termite damage.
3)
Misrepresentations are not:
a)
b)
4)
But there are exceptions:
a)
professional opinions are treated as a representation about the facts of the matter.
EXAMPLE:
An automobile dealer who tells a buyer that he thinks the car runs pretty well, even though he
knows that the car does not run well, would be disguising a fact as an opinion. This would
count as a misrepresentation to the buyer.
EXAMPLE:
A certified mechanic who tells a buyer that he thinks the car runs pretty well is likely speaking
as an expert. We presume that professionals and experts, when speaking in their areas of
expertise, base their views on underlying facts. This can also count as a misrepresentation to
the buyer.
(b) Element #2:
1)
The requirement of scienter is satisfied if the defendant made the assertion either:
a)
b)
knowing he had no idea whether it was true or false
EXAMPLE:
Auto dealer says, “this baby can go from zero to 70 in six seconds flat.” If he either knows that
the car can’t accelerate that quickly, or has no basis for knowing whether the car can
accelerate that quickly, scienter is present.
2) The “intent to mislead” requirement is satisfied if the defendant made the assertion either:
a)
b)
(c)
knowing there was a substantial likelihood that the aggrieved party would be misled
Element #3:
1)
Objective Materiality and Subjective Materiality
a)
Objective materiality explained:
a misrepresentation is objectively material where such an assertion: ______
EXAMPLE:
An assertion that a used car has been carefully inspected by an independent auto mechanic
would appeal to a reasonable person, and thus satisfy the objective materiality test.
b)
Subjective materiality explained:
a misrepresentation is subjectively material if the party making the assertion:
EXAMPLE:
An assertion that the car was owned by Salman Rushdie when he was living incognito in the
U.S. would be material if made to an individual whom the seller knew to be a Rushdie
enthusiast.
(d) Element #4:
1)
What would count as unreasonable reliance?
EXAMPLE:
Reliance would be unreasonable if the aggrieved party has independent knowledge or reason to
know that the statement in question is false.
EXAMPLE:
Reliance would be unreasonable if the aggrieved party has reason to believe that the statement in
question was made by a person who is unreliable.
EXAMPLE:
Reliance would be unreasonable if no reasonable person would have believed the assertion.
EXAMPLE:
Reliance would be unreasonable if the aggrieved party could have easily ascertained the truth by
cursory inspection of the goods.
b.
Non-Fraudulent Misrepresentation
(1) Two types:
(2) Four elements:
(a) Element #1: a misrepresentation
(b) Element #2: materiality of the misrepresentation
(c)
Element #3: reasonable reliance on the misrepresentation
(d) But the fourth element is different. We don’t need scienter or an intent to mislead.
c.
1)
The state of mind requirement for negligent misrepresentation is the defendant would have known
the assertion was false had:
2)
The state of mind requirement for innocent misrepresentation is:
Fraudulent Nondisclosure
(1) The fraud here consists of the defendant’s silence where there was a duty to disclose.
(2) Three elements:
(a) Element #1:
(b) Element #2:
(c)
Element #3:
(3) Although there is generally no duty of disclosure to trading partners, if a party is aware of material facts
that are unlikely to be discovered by the other party in the exercise of ordinary care and diligence, then
there will be a duty to disclose that information in these circumstances:
(a)
(b) where a party has made an assertion that was true at the time but: ______________
(c)
2.
Remedies for Misrepresentation
a.
What‘s available for all three types of misrepresentation?
(1) Use as a “shield” (avoidance):
All can be used as: __________________________________________________________
(2) Use as a “sword” (rescission and reliance damages):
All can be used in a tort action for: ______________________________________________
b.
What’s available to fraudulent and non-fraudulent misrepresentation but not fraudulent nondisclosure?
A party may live with the contract and sue for the benefit of the bargain.
c.
What’s available to fraudulent misrepresentation but not to the other two types of misrepresentation?
A party can seek punitive damages since it is an intentional tort.
3.
D.
Defenses are equally applicable under common law and the UCC.
Duress
1.
Under modern law, there are three elements to a defense of duress:
a.
Element #1:
(1) Defined:
EXAMPLE:
An example of conduct considered a threat is the scene in “The Godfather,” where the man wakes
up with a horse’s head in bed, which was placed there to induce him to sign the contract.
b.
Element #2:
(1) Three types or circumstances:
(a)
(b)
(c)
EXAMPLE:
Sailors on a fishing voyage cease their work midway through the voyage and refuse to resume their
duties unless the captain agrees to give them a raise.
1)
Distinguish a bad-faith threat of breach of contract from a good-faith demand:
If the demand is due to increased burden caused by unanticipated circumstances, there is no
duress.
EXAMPLE:
The sailors’ demand for additional compensation in response to an unanticipated expansion of their
workload due to faulty fishing nets would be a good-faith demand.
c.
Element #3:
(1) This is seldom an issue when what is threatened is a crime or a tort, a criminal prosecution, or a bad faith
civil suit, for risking the eventuality of any of those is scarcely a “reasonable” choice.
(2) Hard cases often arise in cases involving “economic duress” (i.e., threatened breach of contract) and
commonly arise in these three situations:
(a) Situation #1:
when there are no adequate and reasonably priced: _________________________
EXAMPLE:
The ship’s captain is not in a position to find replacement sailors when already at sea, so no adequate
substitutes would be available.
(b) Situation #2:
when the threatened breach would cause the aggrieved party: _________________
EXAMPLE:
A purchaser of upsidaisium bearings used in the manufacture of turbo -jet engines would, on
account of the breach, be forced to breach its contract with an aircraft manufacturer.
(c)
Situation #3:
when the alternative of acquiescing to the threat and then suing for damages is: ___
EXAMPLE:
where the threatened breach would cause the aggrieved party to renege on its own commitments and
thus harm its reputation and opportunities for future business, damages would be inadequate as a
remedy.
d.
2.
A minority of jurisdictions add another element to the requirements for “economic duress”. The aggrieved party
must protest the threatened breach rather than acquiesce without complaint to the wrongful threat.
Legal Consequences for Duress
a.
Avoidance:
b.
Restitution:
(1) The aggrieved party is also entitled to restitution of any benefits conferred on the other party so long as he
likewise returns any benefits received.
3.
E.
The common law defense of duress can be used in cases arising under the UCC as a supplementary provision.
Undue Influence
EXAMPLE:
After being arrested for sodomy, a school teacher was released and arrived at his home late at night. When he arrived there, he
found his superintendent and principal, who demanded his immediate resignation, threatening otherwise to commence
termination proceedings and noting the likely unwanted publicity that would follow.
1.
There are two elements to the defense of undue influence.
a.
Element #1:
(1) The test for this element involves a long list of factors:
(a) discussion of the transaction at an unusual or inappropriate time,
(b) consummation of the transaction at an unusual place,
(c)
insistent demands that the transaction or business be finished immediately,
(d) extreme emphasis on the untoward consequences of delaying the transaction,
(e) the use of multiple persuaders against the target of persuasion,
(f)
absence of third-party advisors to the target of persuasion,
(g) statements that there is no time to consult financial advisors or attorneys.
b.
Element #2:
(1) A vulnerable party can be established if one of the following circumstances exists:
(a) Circumstance #1:
(b) Circumstance #2:
(c)
2.
Circumstance #3:
Legal Consequences of Undue Influence
a.
b. The aggrieved party is entitled to restitution of any benefits conferred on the other party so long as he likewise
returns any benefits received.
3.
F.
Like the other defenses, the claim of common law undue influence is available in cases arising under the UCC as a
supplementary provision.
Unconscionability
1.
The Elements of the Unconscionability Defense
a.
Element #1:
(1) Defined:
The bargaining process created: ________________________________________________
(a)
(2) In what circumstances will this be found?
(a) Circumstance #1:
EXAMPLE:
A signatory is competent but, because of advanced age or language barriers, cannot understand the
terms of the contract and operates as if under mental incompetence or duress.
(b) Circumstance #2:
1)
Examples include:
(a) Standard-form contracts with “take it or leave it” provisions (i.e., contracts of adhesion) or a
party weakened by poverty or language barriers.
(c) Circumstance #3:
b.
Element #2:
(1) Defined:
when the contract terms are: ___________________________________________________
(2) In what circumstances will this be found?
(a) Circumstance #1:
EXAMPLE:
where a pay-over-time plan requires the consumer to pay a total sum that is many times the value of
the purchased goods; or where a bank charges an overdraft fee that is many times the bank’s actual
processing costs.
(b) Circumstance #2:
EXAMPLE:
An add-on clause, pursuant to which a merchant is entitled to repossess multiple household items,
including furniture, bedding, and a stereo, when a consumer missed a payment, despite the fact that
the consumer had already paid nearly 80% of the monies owed for the various purchases.
(c)
Circumstance #3:
EXAMPLE:
an arbitration provision in an employment contract requires the employee but not the employer to
arbitrate any disputes, or permits the employer but not the employee to amend the provisions of the
agreement at will.
(d) Circumstance #4:
EXAMPLE:
In Brower v. Gateway 2000, the court found unconscionable a binding arbitration clause that required
consumers pursuing disputes with a merchant to pay a non-refundable advance fee that exceeded the
purchase price of the goods, travel to a distant city for the proceeding; pay the merchant’s legal fees in
the event of a loss, and file all correspondence in a foreign country.
2.
Legal Consequences of a Finding of Unconscionability
a.
Upon a finding of unconscionability, the court may:
(1) refuse to enforce the contract;
(2) excise the offending clause and enforce the remainder of the contract; or
(3) limit the application of the offending clause so as to avoid any unconscionable result.
G. Public Policy
1. Public policy may be raised as a defense to the enforcement of a contract in the following four contexts:
a.
Context #1:
when the subject of the contract itself: ____________________________________________
EXAMPLE:
In most jurisdictions, a contract for prostitution, gambling, or bribery is illegal under the law and accordingly
unenforceable in court.
b.
Context #2:
where a contract is formed for the purpose of: ______________________________________
EXAMPLE:
A contract between an employer and a hired assassin would be a contract for the commission of a crime.
c.
Context #3:
where the contract performance would: ___________________________________________
EXAMPLE:
A publicist being hired for the express purpose of spreading a defamatory story about a private citizen would be a
contract for the commission of a tort.
d.
Context #4:
where the contract performance would: ___________________________________________
EXAMPLE:
A contract that prohibits one party from marrying for an extended period of time would violate the public policy of
promoting free and consent-based marriages.
2.
Sources of Public Policies
a.
Legislation
(1) is frequently the source of the policy invoked.
b.
Judicial Decisions
(1) Where the subject matter of the contract is not specifically prohibited under law, then judge-made public
policies may be invoked, which may include policies based on:
(a) moral and social values (e.g., policy against impairment of family relationships),
(b) economic considerations (e.g., policy against restraints in trade, such as judicial governance of noncompete agreements), or
(c)
protection of governmental processes and institutions.
EXAMPLE:
A contract under which a private citizen agrees to vote a certain way in exchange for a year’s supply of
beer would violate the public policy of free and unrestricted exercise of the right to vote.
3.
Operation of the Defense of Public Policy
a.
The public policy defense is almost invariably invoked as a defense in an action by one of the parties seeking
enforcement of a contract against the other, and when it is successful, the defendant wins, irrespective of
whether:
(1) The reason for this is that the courts will play no role in enforcing such a contract and will leave the parties
as they find them.
EXCEPTION:
(Not) In pari delicto exception:
Where one of the parties is much more egregiously “in the wrong” than the other party, it may be possible for
the more innocent party to secure restitution of benefits conferred on the guiltier party.
b.
4.
A contract that is subject to the defense of public policy is:
Likely Contexts for Public Policy Defenses
a.
Noncompete Agreements
(1) Many employment contracts as well as contracts for the sale of a business contain a provision that prevents
one party from competing for a certain period of time or in a certain area.
(a) Although generally enforceable, such contracts may be deemed contrary to the public policy of
promoting a citizen’s freedom to work.
(b) Consider the extent to which the non-compete provision imposes an unreasonable geographical barrier
or duration upon the employee
b.
Sales of Goods via Bribery
(1) If a contract for the sale of goods was based on bribery of one party by the other, then the victim of the bribe
has a public policy defense.
EXAMPLE:
Buyer sues seller for breach of contract when seller refuses to supply the specified quantity to buyer
at the agreed-upon price. Seller raises the defense of public policy, because after the fact Seller
learns that buyer bribed Seller’s agent with a car in order to secure the unreasonably favorable
contract terms.
c.
Sales of Goods intended for Unlawful Use
(1) If a contract is for the sale of goods that the seller knows the buyer intends for an unlawful use, then the
public policy defense is available to defeat either an action by the seller seeking payment or an action by the
buyer seeking delivery.
d.
Liability Limitation Provisions
(1) If the provisions of a contract would limit a party’s liability for tortious behavior by restricting the right of the
injured party to pursue claims against the reckless or intentional harms caused by the party, then such
provisions will not be upheld by a court because to do so would violate public policy.
(2) In contrast, provisions that limit liability for negligent tortious conduct are generally held to be
permissible.
e.
Unlicensed Goods or Services
(1) If a contract is for unlicensed goods or services, then the contract is voidable and may be rendered
unenforceable by a public policy defense.
BAR EXAM APPLICATION
Question 5
Abbott owns several acres of commercially zoned real estate. For several months, Costello has been trying to convince
Abbott to sell him a portion of the property for development as a shopping mall. One day during a golf game at the club,
Abbott orally agrees to sell Costello half of his land. On the back of his score card, Abbott scribbles in pencil the following
note: “June 1, 1999. I will sell to Costello one half of my property located at the corner of First Street and Grand Avenue.”
Abbott signs the note as well. Excited, Costello goes to see his bankers and obtains a promise of financing. Costello tenders
the purchase price to Abbott but Abbott rejects the money, saying that he has changed his mind. Costello brings an action for
specific performance. Abbott raised the defense of the Statute of Frauds, and Costello introduces the score card with
Abbott’s memorandum as evidence to support the contract. Abbott argues that the score card is an insufficient memorandum
of their agreement.
Which of the following statements best supports Abbott’s argument?
A) The memorandum was not signed by Costello.
B) The memorandum does not adequately identify the property to be sold.
C) The memorandum does not contain a covenant of title.
D) The memorandum did not set the date for performance.
BAR EXAM APPLICATION
Question 6
Darren was tall for his age. He was the only student in his 7th grade class over six feet tall. One day, while walking home from
school, Darren and his friend Chris entered an automobile dealership. It quickly became apparent that the salesman thought
Darren was an adult, and Darren did not correct him. The dealership was offering a zero down special. Darren found a car he
really liked, and agreed to make the required $800 a month payments. Darren and Chris drove off the lot with the new car. Chris
was afraid that Darren would get in trouble, so he called the dealership and spoke with the salesman who had sold Darren the
car, informing him of Darren’s age. An hour later, Darren was driving his new car when he was involved in an accident which
heavily damaged the front of the car. Darren used the car’s built in cell phone to call the dealership. He informed them that he
was actually 12 years old and wished to get out of the contract.
Under contract law, Darren is
A) responsible for damage to the car, because he must return the merchandise in the same condition in which he
received it.
B) responsible for damage to the car, because he willfully misrepresented his age.
C) not responsible for damage to the car, because Chris’s call notifying the dealership of Darren’s true age voided the
contract.
D) not responsible for damage to the car, because as a minor Darren can disaffirm the contract.
IX.
A.
REMEDIES
Remedies for Breach of Contract Generally
1.
Monetary Damages at Common Law
a.
A party aggrieved by a breach of contract may be able to recover damages calculated to protect that party’s
expectation interest, reliance interest, or restitutionary interest. A party may elect only one of these remedies.
b.
First type:
(1) This is the default award courts will grant aggrieved parties.
(2) An award of expectation damages means that the aggrieved party will be entitled to the amount that will
restore him to:
EXAMPLE:
A patient with a hand injury contracts with his doctor for hand surgery. The doctor promises him a
“100% perfect” hand, but instead the surgery makes the hand worse. The expectation interest of the
patient is measured by the difference between the value of the promised “100% perfect” hand and
the value of the hand worsened by surgery.
(3) Calculating the Monetary Award
(a) The formula:
Loss of value of the breaching party’s performance
+ any incidental and consequential costs generated by the breach
– any payments received from the breaching party
– any costs saved as a result of the breach
= Expectation Damages of the Aggrieved Party
EXAMPLE:
General contractor repudiates its contract with Subcontractor when Subcontractor is halfway finished
with its work under the subcontract. Subcontractor is entitled to seek from the breaching General
contractor an amount equal to the contract price or the unrealized value of General’s promised
performance, plus costs associated with storing, insuring, and/or returning materials and equipment
secured by Subcontractor in the course of contractual performance (i.e., incidental costs generated by
the breach) or the incidental costs generated by the breach; minus any progress payments already
made by General contractor; minus money Subcontractor may have saved on salaries and equipment
rental by not having to complete performance.
(4) Limitations on the Right to Recover Expectation Damages
(a) The aggrieved party may not be able to recover the full amount of expectation damages in the following
situations:
1)
Situation #1:
EXAMPLE:
In the infamous case of Peevyhouse v. Garland Coal & Mining Co., landowners entered into a
contract with a coal-mining firm permitting the latter to strip-mine their farmland but requiring the firm
to restore the land to its original state once the mining project was complete. When the firm breached
by refusing to do the restoration work, there were two ways to measure the resulting expectation
damages: the cost of performance (or the costs that would be incurred in an effort to restore the land
as promised in the contract), or the net increase in the market value of the property that would be
realized if the restorative work had been completed as promised. Because restoration would have
cost the mining firm $29,000 but increased the market value of the land by only $300, the court limited
the landowners’ recovery to the latter figure.
a)
2)
Situation #2:
a)
3)
Many courts would award cost of performance despite the disparity with market value on the
view that expectation damages should be calculated on the basis of the value of performance
to the injured party himself and not on its value to some hypothetical reasonable person or on
some market.
A recurring example of a case where uncertainty in awarding expectation damages exists is a
new business with no profit history.
Situation #3:
HYPOTHETICAL
Supplier agrees to deliver a quantity of window glass to Store for $1,000 on a certain date. Store needs
the glass to fill its depleted inventory. Supplier fails to deliver as promised because the market price of
the quantity of glass has risen to $1,200 and Supplier prefers to sell to a third party at the higher price.
Unbeknownst to Supplier, Store had, in the meantime, entered a contract to sell the entire quantity of
glass for $1,500 to a business services firm for use in the many properties it manages, and Store is
unable to deliver because of Supplier’s breach. To what general damages is Store entitled? Suppose
Store’s buyer explained at the time of contracting that it needed timely delivery of the glass in question
because it had already committed to selling the quantity in question to a third party. How would this
change the analysis? Suppose the buyer of the glass is not a store but a glazing contractor that needs
the glass in question to install windows in a new commercial building, and it will be required to pay
liquidated damages to the general contractor if it fails to perform in a timely fashion. How would this
change the analysis
4)
Situation #4:
EXAMPLE:
The liability of a breaching buyer of produce would be reduced if the seller permitted the produce to
rot after breach rather than selling it to third parties; but if the seller is forced by the breach into a
“fire sale” because of the short shelf life of the produce in question, then the breaching buyer will be
fully liable for expectation damages — that is, for any difference between what the seller nets from
the “fire sale” and what it stood to earn but for the broken contract.
EXAMPLE:
The liability of an employer is reduced if an employee dismissed in breach of contract takes an
extended vacation rather than seeking other work. But the aggrieved employee need only make
reasonable efforts to secure a position that is reasonably equivalent to the job lost, and accordingly
she need not accept substitute work when it: is in a different field; offers significantly lower pay or less
desirable terms and conditions of employment than those of the lost job; would entail more
burdensome responsibilities than those of the lost job; or would damage the aggrieved party’s career
prospects. (e.g., an A-list movie star would not be required to mitigate damages for a film producer’s
breach of contract by taking a lesser role in a B-grade film).
EXAMPLE:
The liability of a breaching landowner to a construction contractor hired to erect a structure on the
property is reduced where the contractor continues the building project after the landowner has
repudiated the contract. But the liability of a buyer of goods ordered for special manufacture would not
be reduced if the seller continues the manufacturing process after breach in order to finish the goods for
possible sale to third parties.
c.
Second type of Monetary Damages:
(1) This type of monetary award is designed to restore the aggrieved party to the position he was in prior to the
contract.
(2) The aggrieved party’s reliance interest is measured by:
(a)
(b) Less any loss which the breaching party can prove the aggrieved party would have suffered even if the
contract had been fully performed.
EXAMPLE:
A agrees to buy B’s car. On the faith of the promise, A pays B a $2,000 down payment for the car and
enters a 12 month lease agreement with C for a parking space for $2,400. The reliance interest of A
would be $4,400, the amount it would take to compensate A for what he’s lost on the faith of B’s
promise.
(3) Reliance damages may be available where expectation damages are not available, such as when they are
too uncertain or speculative.
EXAMPLE:
Inventor signs a contract with Railroad Co. for shipment of a new stove Inventor plans to display at a
manufacturers’ convention, and she pays fees to the convention hotel for a room and for display
space, as well as an exhibition fee to the convention sponsor. If Railroad Co. breaches the contract by
failing to deliver the stove until after the convention, Inventor will be unable to recover damages for
opportunities she may have lost due to her inability to showcase the stove, as calculating the
probability and value of those opportunities would be too speculative. However, Inventor would be
entitled to reliance damages (i.e., a return of the Railroad Co.’s fee, plus compensation for the amounts
she paid to the hotel and convention sponsor).
d.
Third type of Monetary Damages:
(1) The restitutionary damages interest is:
EXAMPLE:
Where the buyer of a car makes a $2,000 down payment to the seller and a $2,400 payment to the
lessor of a parking space, the buyer’s restitutionary interest is limited to a recovery of the $2,000
down payment because the parking space rental payment was made to a third party. Although both
of these “out of pocket” expenses are recoverable as reliance damages, only the down payment is
available as restitution.
(2) The aggrieved party’s restitutionary interest will be measured, in the court’s discretion and as justice
requires, by either:
(a)
(b) the extent to which the other party’s property has: ___________________________
EXAMPLE:
Contractor built a Turkish bathhouse on Homeowner’s property. The market value of the services is the
cost to Homeowner of hiring another contractor to do the work, which equals $30,000. The value added to
Homeowner’s property is the net increase in the home’s value from the addition of the bathhouse, which
equals $20,000. A court calculating Contractor’s restitutionary interest could award him either amount,
considering what relevant precedents permit and what justice requires.
(3) An aggrieved party is likely to elect to recover restitutionary recovery when it would exceed the amount
recoverable based on his expectation interest, and that is most likely to arise in the context of a “losing”
contract.
EXAMPLE:
General contractor breaches its contract with Subcontractor when Subcontractor is halfway finished
with its work under the subcontract. Subcontractor is entitled to seek from the breaching General
either expectation damages or the contract price less any amounts already paid and also less any
savings due to the shortened performance. Alternately, the party could seek restitutionary damages
or the market value of the services already rendered at the time of breach. Even if Subcontractor had
a “losing contract,” it is nevertheless entitled to recover its restitutionary interest.
(4) An important limitation:
Restitution is available in the case where the aggrieved party has partially performed but is NOT available:
EXAMPLE:
Subcontractor completes contractual performance and General Contractor refuses to pay.
Subcontractor has no right to seek restitutionary damages and is entitled to recovery of the contract
price only.
e.
Liquidated Damages Provisions
(1) Parties are free to include among the terms of their contract a liquidated damages clause, designed to
provide for damages:
(2) Such a provision is:
(a) enforceable if the court finds it to be a valid liquidated damages clause designed to
compensate for breach
(b) unenforceable if the court finds that it constitutes a penalty, designed to punish a breach
(3) The test for determining whether a clause in a particular contract is a valid liquidated damages provision has
three prongs:
(a) Prong #1:
Did the parties intend for the clause to operate as a liquidated damages clause or as a penalty?
1) Modern decisions downplay the importance of this prong, and emphasize the other two.
(b) Prong #2:
Was the clause reasonable: ____________________________________________
1)
The key question is whether there was an anticipated harm that would be difficult to prove.
EXAMPLE:
Repudiation of a commercial lease by an “anchor” tenant in a shopping mall is likely to cause reductions
in pedestrian traffic to other stores as well as harm to the mall’s reputation and attractiveness as a
shopping “destination.” Because the extent and monetary value of those harms would be difficult to
establish in court, a liquidated damages clause designed to award the mall owner a sum that represents
an inexact but reasonable forecast of those harms would be appropriate.
(c)
Prong #3:
Was the clause reasonable: ____________________________________________
EXAMPLE:
If the shopping mall tenant repudiates the contract shortly after entering it, and the mall owner is able to
secure a substitute “anchor” with minimal delay, a clause guaranteeing the owner significant liquidated
damages would be unreasonable in relation to the actual harms caused by the breach.
(4) Anticipated versus Actual Harm
(a) When a particular clause satisfies the second prong of the test (anticipated harm) but not the third
prong of the test (actual harm), there is a split as to whether courts will enforce the clause:
(5)
2.
1)
The majority rule:
2)
The minority rule:
When the court concludes that the liquidated damages clause is in fact a penalty, the clause is stricken from
the contract, and damages will be recoverable in accordance with all the default rules of remedies and
damages.
Monetary Damages under the UCC
a.
Most of the rules governing remedies under the UCC reflect the same underlying principles that apply in common
cases—in particular, the right of an aggrieved party to expectation damages and the duty of an aggrieved party to
mitigate—but they differ in their details because they are specifically designed for application to the sales of
goods context.
b.
Seller’s Remedies
(1) The seller’s right to recover depends on whether the goods have been delivered and accepted by the buyer.
(a) To the extent goods have been delivered to and accepted by the buyer:
(b) To the extent goods have not been delivered to and accepted by the buyer (because buyer has
wrongfully rejected them or repudiated), then the seller can recover damages and the measure
depends on whether seller has resold the goods to a third party.
1)
If the seller has re-sold, the damages are the difference between:
2)
If the seller has not re-sold, the damages are the difference between:
3)
Lost Volume Sellers
a)
A lost volume seller is one whose supply of goods exceeds the demand for the same. In such
case, the above differential formulas will not fully compensate for the seller’s damages.
b)
The UCC accordingly permits lost volume sellers to recover:
c)
To recover lost profits, the seller must be able to show:
i) that he could have made the sale to both the breaching buyer and
resale buyer;
ii) that it would have been profitable to make both sales; and
iii) that he probably would have made the additional sale even absent
the buyer’s breach.
(c) Incidental Damages
c.
1)
Whether or not the seller resells, he is also entitled to recover incidental damages, which are the
costs associated with:
2)
However, the seller’s damages will be reduced by an amount reflecting expenses avoided on
account of the breach (e.g., shipment costs may be less than expected if the resale was to a buyer
who was much closer than the original buyer).
Buyer’s Remedies
(1) The buyer’s right to recover depends on whether the buyer has covered – that is, purchased replacement
goods?
(a) If the buyer covers, the damages are the difference between: __________________
(b) If the buyer does not cover, the damages are the difference between: ___________
(c)
Additionally, the buyer is free to seek incidental and consequential damages.
1)
Incidental damages:
the costs associated with:___________________________________________
2)
Consequential damages:
the peculiar costs arising to the buyer because of: ________________________
3)
The buyer’s damages will be reduced by expenses avoided because of the breach (e.g., due to the
breach, the buyer may not need to immediately purchase insurance).
(2) Difference in Value Damages for Accepted Goods
(a) This measure is available if the buyer receives and accepts nonconforming goods from the seller.
(b) Under this measure, the buyer is entitled to recover the difference between:
1)
2)
3.
Equitable Remedies
a.
First type of Equitable Remedy:
(1) This is an extraordinary remedy by which a breaching party is ordered to perform.
(2) This remedy is only available to an aggrieved party when:
(3) Where Specific Performance Is Generally Available
(a) Money damages are generally presumed to be inadequate when a party is purchasing either:
1)
a)
For example: works of art and precious heirlooms.
2)
(b) Equity Considerations
1)
We are dealing with an equitable remedy and so the question is committed to the judge’s discretion. In
so deciding, courts are likely to consider the following factors:
a)
whether the aggrieved party has “clean hands;”
b)
whether the terms of the contract are fair;
c)
whether the terms of the contract in question are sufficiently definite;
d)
whether performance by the aggrieved party can be reasonably assured; and
e)
whether specific performance would be in the public interest.
(4) Where Specific Performance is not Available
(a)
(b)
(5) Specific Performance under the UCC
(a) The UCC liberalizes the rules governing the availability of specific performance for sales of goods in
two ways:
1)
Liberalizing the “uniqueness” requirement:
a)
Under the UCC, specific performance is allowed for a buyer who has adequately
searched but was unable to find reasonable substitutes, and so is unable to “cover” the
breach by seller.
2)
Liberalizing the “capable of immediate performance” requirement:
a)
Under the UCC, specific performance is allowed in cases like output Ks and
requirement Ks, which are classic long-term relationships that require cooperation of the
parties.
b.
The second type of Equitable Remedy:
(1) Negative injunctions are:
(2) The most common and important area for negative injunctions is the employment setting.
(3) The availability depends on whether the former employer is seeking mid-term or post-employment relief.
(a) Mid-Term Relief
1)
When an employee is under contract for a specified period of time and the employee breaches the
contract by departing before the end of that period, a negative injunction will be available to prevent
the employee from competing if:
EXAMPLE:
In the famous case of Lumley v. Wagner, an opera singer under contract to sing at Her Majesty’s
Theatre for a three-month period was persuaded to depart mid-contract to begin a concert series at a
competing venue. Because her services were unique and extraordinary, the court granted a negative
injunction barring her from performing at any competing venue for the duration of the contract term.
2)
Although the presence of a specific contractual provision establishing exclusive employment during
the period of time in question will aid the employer is securing a negative injunction, most courts
will imply such a term for the period of employment in the contract.
(b) Post-Employment Relief
1) Enforcement of employment contract provisions that prohibit post-employment competition
against the employer have become a common source of negative injunctions.
2)
The validity of such non-compete clauses will depend on three factors or considerations:
a)
Consideration #1:
EXAMPLE:
An employee with access to trade secrets and entrepreneurial knowledge.
B.
b)
Consideration #2:
c)
Consideration #3:
Other Possible Remedies
1.
Promissory Estoppel
a.
The type of interest a party may recover under a claim of promissory estoppel depends on the jurisdiction, as
some courts award:
(1)
(2)
(3) choose on a case-by-case basis and tailor the remedy to the injustice at issue
2.
Restitution and Unjust Enrichment
a.
Restitution is that alternative to expectation damages that a party can recover for a breach of contract.
b.
But there are contexts where restitution might be available to a party even when the other party has not breached
a contract:
(1) Benefits Conferred under a Failed Contract
(a) When a party bestows benefits on his trading partner in connection with what turns our to be a “failed”
contract (e.g., incapacity, fraud, duress):
(2) Benefits Conferred by a Breaching Party
(a) A party that breaches a contract may recover: ______________________________
EXAMPLE:
A works for B under a 12-month contract and, without advance notice, breaches the contract after 11
months in order to other accept other employment. A is entitled to restitution of the reasonable value of
the services rendered, subject to offset for B’s damages—that is, the cost of hiring a replacement for A
at the last minute.
(3) Emergency Benefits Conferred by a Health Care Professional
(a) The general rule is that a person who bestows benefits without request from the benefitting party is
considered an “officious intermeddler” who will not be entitled to any recovery since there was no
opportunity to decline.
(b) However, an exception applies to:
(4) Benefits Conferred by Mistake
(a)
A person who mistakenly confers benefits to another party may be entitled to restitution.
(b) In this situation, the following will be considered:
1)
the blameworthiness of the error,
2)
whether the recipient was aware of the error in time to prevent it, and
3)
whether the recipient availed himself of the benefits at issue.
EXAMPLE:
After a hurricane, Owner hires Contractor to perform repairs on his storm-damaged home. Because
of confusion caused by damage to street signs and mailboxes, Contractor performs the repairs on
the wrong house. Contractor is entitled to restitution from the benefiting homeowner if the latter was
aware of Contractor’s mistaken efforts and remained silent.
3.
Agreed-To Remedies
a.
Parties may also contract out of the legal and equitable remedies available under the law, by specifying agreed-to
remedies in the contract.
b.
These remedies typically take two forms:
(1) liquidated damages provisions; and
(2) provisions limiting or excluding damages.
c.
Provisions Limiting or Excluding Damages
(1) There are different types of exclusive remedies provisions, including:
(a)
EXAMPLE:
An exclusion of consequential damages.
(b)
(2) Such provisions are generally enforceable unless they:
(3) Limitation of consequential damages for personal injury:
BAR EXAM APPLICATION
Question 7
Marge Billings, owner of a gas station, entered into a written contract with Hudson Construction to build a store on her lot.
Under the terms of the contract, Billings was to supply detailed plans and specifications for the store, and Hudson would
build the store for $300,000. According to a provision in the contract, all changes to the contract had to be in writing.
Hudson Construction broke ground and worked quickly on the store. About half way through the project, Steve Hudson, owner
of Hudson Construction, realized that construction would cost more than he originally estimated as a result of delays in
receiving materials ordered and extreme shortages in construction materials due to a recent massive hurricane in the area.
Hudson explained the situation to Billings. He indicated he could not afford to take a big loss on the construction of the store and
estimated he could not complete the store for less than $450,000. Billings refused to pay more, and Hudson ceased
construction.
If sued for breach of contract, Hudson’s best defense is
A) duress, coercion, and impracticability.
B) impossibility of performance.
C) substantial performance.
D) commercial impracticability.
BAR EXAM APPLICATION
Question 8
A clause in a locker rental contract at a local health club reads, “Renters canceling their locker contract after using their locker
shall pay liquidated damages in the amount of $5.00 per day for the remainder or unexpired portion of the term of the locker
rental agreement.” Lockers rent for $50.00 per month or $500.00 per year. A renter with a year-long contract leaves 29 days
early and the health club demands payment.
If the club sues, the most likely outcome is that
A) because the renter willfully breached the contract, liquidated damages will be allowed.
B) because the renter has substantially performed on the contract, the club will not be entitled to damages.
C) because the contract remedy is disproportionate to the injury, it is unlikely the court will enforce the clause.
D) because the parties clearly agreed to a specific measure of damages, the court will acc ept that measure.
X.
A.
B.
THIRD-PARTY BENEFICIARIES
In General
1.
In a typical contract, the parties promise performances to each other. If one party refuses to perform, the other has
standing to bring a claim for breach because the parties are in contractual privity. In some contracts, however, one of
the parties promises a performance that will benefit a third party (a third party beneficiary).
2.
The critical issue in third-party beneficiary law is the circumstances under which the third-party beneficiary:
Classification of the Third-Party Beneficiary
1.
The right of an aggrieved third-party beneficiary to bring an action against a breaching promisor or promisee will
depend upon the classification of the beneficiary, which differs under the First and Second Restatements (although
the practical effect is largely the same).
2.
First Restatement
a.
The first Restatement placed third-party beneficiaries into one of three categories:
(1) Creditor beneficiary:
When a promisee seeks a performance from the promisor: ____________________________
(2) Donee beneficiary:
When a promisee seeks a performance from the promisor: ____________________________
(3) Incidental beneficiary:
Third parties who will benefit from a promisor’s performance as a practical matter, _________
3.
Second Restatement
a.
The Second Restatement eliminates the “creditor” and “donee” beneficiary terminology, and instead puts thirdparty beneficiaries into one of two possible categories:
(1)
(2)
(a) The key factor in determining whether a party is an intended beneficiary is:
(b) Incidental beneficiaries, similarly to the First Restatement, are third parties who will benefit from a
promisor’s performance as a practical matter, but are not intended beneficiaries.
EXAMPLE:
The residents who live in the neighborhood where Lawyer’s school is located will be benefited by the
mural, but none of them can sue if Artist does not deliver because they are incidental beneficiaries.
Only the school has a claim.
C.
Rights of Parties to Enforce the Contract
1.
Third-Party Beneficiary’s Rights
a.
Under both the First and Second Restatement, an incidental beneficiary does not enjoy:
b.
Third-Party’s Rights against the Promisor
(1) Any third-party beneficiary, other than an incidental beneficiary, has a right:
c.
Third-Party’s Rights against the Promisee
(1) A third-party beneficiary has no rights against the promisee in connection with the promised performance
under the new contract.
(2) Instead, a third-party beneficiary will only have rights against the promisee based on whether there is a:
d.
Vesting of the Right to Sue
(1) The parties to a contract are free to modify or rescind it by mutual consent, and they may modify or rescind a
third-party beneficiary provision without the beneficiary’s consent unless and until the beneficiary’s rights
under the contract have vested.
(2) Vesting occurs with regard to an intended beneficiary when:
(a) Situation #1:
(b) Situation #2:
EXAMPLE:
Landlord has had it with Artist and is ready to start eviction proceedings. The landlord then learns that
Artist has arranged that Lawyer’s payment for the mural be paid the landlord . In light of this, the
landlord decides not to continue with the conviction proceedings. At this point, because the
landlord/beneficiary has changed his position in justifiable reliance, the landlord/beneficiary’s rights
have vested.
(c)
Situation #3:
EXAMPLE:
Patron (the lawyer) speaks to representatives of her alma mater, informing them about the mural that
she has arranged to be painted for the school. The representatives gladly assent to the painting. Once
the school says it will accept the mural, it is too late to modify the contract with the artist.
(d) Situation #4:
The rights of the beneficiary have vested under the express terms of the contract.
EXAMPLE:
Under the terms of her life insurance policy with Hartford Insurance, A’s designations of beneficiaries
become irrevocable upon A’s demise or adjudication of incompetence. The rights of C, a designated
beneficiary, against Hartford Insurance will vest upon the occurrence of either event.
e.
Defenses Available to Promisor
(1)
Because a third-party beneficiary’s rights are entirely dependent on the underlying contract, any valid defenses
the promisor has against the promisee are also:
EXAMPLE:
If Lawyer and Artist enter into a contract in which Lawyer agrees to pay artist for the painting of a
wall mural, and Artist in fact does not paint that mural, there is a failure of consideration and
Lawyer’s obligation to pay is discharged. Moreover, Lawyer can raise that as a defense against
Artist’s landlord, if that landlord sues as a third-party beneficiary of the contract.
(2) The promisor may not assert defenses based on:
EXAMPLE:
Before Lawyer entered into a contract with Artist for the painting of the mural, Lawyer had loaned
Artist money. Artist has not repaid the loan as promised. In an action between Artist and Lawyer,
Lawyer has a right of setoff. But if Artist’s landlord sued as a third-party beneficiary to the contract
for the mural, Lawyer could not raise the setoff as a defense.
2.
Promisee’s Rights against the Promisor
a.
When the promisor does not perform, the promisee has a claim for breach of contract against the promisor.
b.
But if the promisor’s performance is intended to benefit a donee beneficiary, the promisee has not suffered any:
EXAMPLE:
Law school is the donee beneficiary of a contract between Lawyer and Artist, where Artist is the promisor (promising a
performance—the painting of a mural) and Lawyer is promisee. If Artist refuses to perform, the school can sue Artist.
However, a suit by Lawyer is problematic. As to what Lawyer’s remedy might be, Lawyer’s loss is not monetary and so
expectation damages will not be available. Further, since the underlying contract is one for personal services, specific
performance would not be available either.
c.
If the promisor’s performance is intended to benefit a creditor beneficiary, the promisee may secure specific
performance of the promisor’s obligation.
(1) A claim for money damages would, however, expose the promisor to the possibility of double liability, since
the promisor is also liable to the third-party beneficiary.
(2) Accordingly, some courts refuse to allow the promisee to recover damages against the promisor unless
the promisee has already made payment:
EXAMPLE:
Artist owes money to the landlord. Artist and Lawyer enter into a contract whereby Lawyer agrees to
pay artist’s landlord, who is then the creditor beneficiary of that contract. In this instance, the
Lawyer is the promisor (promising performance—the paying of Artist’s rent to the landlord). If
Lawyer refuses to pay, Artist could sue Lawyer for specific performance of Lawyer’s promise to pay
the creditor beneficiary. The court may require Artist to first pay Landlord before proceeding,
however.
XI.
A.
ASSIGNMENT OF RIGHTS AND DELEGATION OF DUTIES
Assignment of Rights
1.
An assignment is:
2.
To make an effective assignment of a contract right, the owner of that right must:
3.
a.
manifest an intention
b.
to make a present transfer of an existing right
Rights to Be Assigned
a.
The general rule is that all rights are assignable, subject to the following exceptions.
(1) Exception #1:
when the assignment would: ___________________________________________________
EXAMPLE:
A and B are parties to a requirements contract under the terms of which A is obligated to supply B
with B’s monthly requirements for widgets. B’s rights under the contract are not assignable to C if
C’s monthly requirements would greatly exceed B’s.
(2) Exception #2:
when the obligor has a: _______________________________________________________
EXAMPLE:
A student attempts to assign his right to a private tutor who is picky about his students. Because the
tutor has a personal interest in who he tutors, the contract is not assignable.
(3) Exception #3:
when it would violate: __________________________________________________
EXAMPLE:
A state statute prohibiting assignment of wages.
(4) Exception #4:
when assignment is: ______________________________________________________
(a)
However, most courts will treat an assignment in violation of contractual restriction as:
EXAMPLE:
If a bar course has a “no assignment of bar course rights” provision in its contract and one of its students
assigns the contract right to another student, the bar course has an action against the student who
breached the contract but must provide the bar course to the assignee.
4.
Assignment for Value Contrasted with Gratuitous Assignment
a.
Assignment for value:
is valid against the obligor and cannot be revoked by the assignor.
b.
A gratuitous assignment has the following legal effects:
(1) Between the assignee and the obligor, it is valid against the:
(2) Between the assignor and the assignee, under the law of gifts, an executory gift is revocable but an
executed gift is not. A gift is executed when there is intention coupled with actual or symbolic delivery.
EXAMPLE:
A recent graduate of law school has paid for a bar course but decides instead to join the clergy. As a
gesture of love, he transfers the right to the bar course to a friend not for value but as a gift.
5.
Rights and Obligations of the Parties after Assignment
a.
Rights of Assignee against the Obligor
(1) The basic rule is that:
(a) an assignee gets whatever: ____________________________________________
EXAMPLE:
If assignor paid for the full course, that is what the assignee is entitled to.
(b) an assignee takes subject to whatever: ____________________________________
EXAMPLE:
If assignor has not paid for the full course, the bar course can raise that as a defense against the
assignee.
(2) Payment to Assignor
(a) The obligor’s payment to the assignor is a defense unless the obligor:
b.
Rights of Assignee against Assignor
(1) Unless a contrary intention is manifested, one who assigns or purports to make an assignment for value
impliedly warrants two things to the assignee.
(a) that he will do nothing to defeat or impair the value of the assignment and has no knowledge of any fact
that would do so, AND
(b) that the right as assigned actually exists and is subject to no limitations or defenses good as against
the assignor.
EXAMPLE:
If the bar course is assigning accounts receivable to some creditor party knowing full well that it has
failed on its performance, it will violate this implied warranty.
NOTE: In and of itself, an assignment does not operate as a warranty to the assignee that the obligor is solvent
or that the obligor will perform his obligation.
B.
Delegation of Duties
1.
A delegation occurs when a third party agrees to satisfy a:
2.
Rights of the Obligee against the Delegator
a.
While an assignment of rights effectuates a transfer of those rights to a third party (upon assignment, the assignee and
not the assignor has rights under the original contract), a delegation of duties does not operate as a “transfer” of those
duties from the delegator to the delegatee.
(1)
3.
Liability of the Delegatee
a.
To the delegator (the Professor, in our example):
If the delegation was for consideration, ____________________________________________
b.
To the obligee (the bar course, in our example):
Again if the delegation was for consideration, _______________________________________
4.
Delegable Duties
a.
The general rule: all contractual duties are delegable.
b.
The exceptions:
(1) Exception #1:
EXAMPLE:
Nanny is under contract to provide child care services to B’s family. Her performance obligation
cannot be delegated to a third party.
(2) Exception #2:
when the contract prohibits delegation.
BAR EXAM APPLICATION
Question 9
At the beginning of March, George entered into an agreement with Pat, a local housepainter, whereby Pat would paint
George’s house by the end of December. The contract specified that Pat would use paint from Tom’s Hardware, as Tom’s
sells the highest quality paint available in the area.
After the contract was signed, Pat told Tom that he had another contract coming. Tom thanked Pat and ordered paint in
expectation of Pat’s needs. By November, a revolutionary new house paint came to market but was not available at Tom’s
Hardware. Pat and George agreed that Pat should use this new paint. Tom is upset at the loss of the sale, and wishes to
enforce his rights under the contract.
Will Tom be successful?
A) Yes, because he was a third-party beneficiary.
B) Yes, because he ordered paint in anticipation of Pat’s needs.
C) Yes, because Tom assented to the benefit of the contract.
D) No, because the reason for the contract was to paint George’s house.
BAR EXAM APPLICATION
Question 10
Josh, the owner of Josh’s Car Wash, was tired of customers assigning their right to a specialty car wash and detailing
package to others. To avoid this problem in the future, Josh had his contracts rewritten to specify the name of the customer
and to include the sentence, “Contract shall not be assigned.” One such contract called for Josh to wash and detail Al’s fourdoor sedan for $200. Al had an emergency at work the day he was to drop off his car at Josh’s Car Wash. On his way out the
door, Al executed a document assigning his rights under the contract to his neighbor, Bill. Bill paid Al $250 for the
assignment. Bill arrived at Josh’s Car Wash with the signed assignment and requested that his two-door sport coupe be
detailed and washed. Josh refused to honor the assignment.
Has Josh breached the contract?
A) No, because the original contact said assignments are prohibited.
B) No, because the name of the party is a material term.
C) Yes, because the assignment was in writing supported by consideration.
D) Yes, because a sports coupe is comparable to if not smaller than a four-door sedan.