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APPENDIX
III. CONTRACTS: HIGHLIGHTED RULES

A contract is a legally enforceable agreement or promise
between parties.
o
If a contract is breached, the law provides a remedy to the
non-breaching party.
▪
The UCC applies to contracts for the sale of goods.
▪
Common law applies to contracts for services or real
estate.

When evaluating whether there was a meeting of the minds
between the parties to a contract, the court applies an objective
theory (rather than looking to the subjective belief or intent of
a particular party to the contract).

An offer is an objective sign or expression of willingness to
enter into a contract by the offeror.
o


The offeror’s offer creates a power of acceptance for the
offeree.
An offer to enter into a contract requires intent and specific
terms.
o
Under common law, all essential terms must be included
in the offer (name of the parties, subject matter of the
contract, price, and quantity).
o
The UCC only requires quantity as an essential term.
Watch out for inquiries, advertisements, or invitations to deal!
o
Inquiries, advertisements, and invitations to deal are NOT
offers!

Language by an offeror that limits who can be the offeree—like
“first come, first served,”—can move an advertisement to an
offer.

An offer can be accepted by an offeree up and until the point
that the offer is terminated.
REVIEW OF HIGHLIGHTED RULES
o


There are five ways that an offer can be terminated: (1)
rejection; (2) revocation; (3) death of the offeror; (4) time
(lapse of); and (5) counteroffer.
Rejection occurs when the offeree says “no” to an offeror’s offer
or when the offeree extends a counteroffer.
o

659
Rejection is effective upon receipt (once the offeror receives
the rejection or once the rejection is communicated to the
offeror).
An offeror can revoke (or take back) her offer before the offeree
accepts the offer.
o
Direct revocation = Offeror directly telling the offeree that
she is taking the offer back.
o
Indirect revocation = Offeree learning from a third party
that the offeror has taken her offer back.
Watch out for revocation and option contracts!
o
An option contract is created when the offeror promises to
keep an offer open for a certain period of time. The option
contract prevents the offeror from revoking her offer before
the option period lapses.
▪
Under common law, the offeree usually pays
additional consideration to the offeror (this makes
common sense, since the offeree is limiting the
offeror’s ability to revoke her offer).
▪
An option contract can also occur when an offeree
starts performing under a unilateral contract. Once
the offeree begins performance, the contract becomes
an option contract, and the offeror can’t revoke the
offer for a certain period of time.

Under the UCC’s firm offer rule, the offeree does not have to
pay additional consideration to keep an offer open unless the
irrevocability period is more than three months.

An offer can be terminated when the offeror dies prior to
acceptance.

An offeror can specify when her offer will expire.
o
If the offeror does not specify when an offer expires, the
offer will terminate after a reasonable time.
660

APPENDIX
An offer can be terminated when an offeree extends a
counteroffer in response to an offeror’s offer.
o
The counteroffer acts as a rejection of the original offer and
as a new offer.
o
The counteroffer creates a power of acceptance in the
original offeror for the new offer.

Acceptance is an objective expression by the offeree that she
agrees to the offeror’s offer.

Watch out for situations where the offeree is not the party that
can actually accept the offer!
o
The offeree must have the capacity to accept the offer.
▪
Only the specific offeree identified by the offeror in the
offer can accept the offer.

A bilateral contract occurs when a promise is made by both the
offeror and offeree.

A unilateral contract occurs when the offeror makes a promise,
and the offeree performs an act as acceptance of the offeror’s
promise.

Acceptance is effective when it is communicated to the offeror.
o
Acceptance is also effective upon dispatch in the mail.
▪

Watch out for situations where an offeree sends a rejection and
an acceptance! In these situations, the first communication to
arrive at the offeror wins!
o

In situations where an offeree sends her acceptance
via the mail, the offeree is considered to have
communicated her acceptance to the offeror at the
moment she dropped her acceptance letter or note in
the mail.
In an exception to the mailbox rule, don’t worry about the
traditional rule that “acceptance is effective upon dispatch
in the mail.” When you have a rejection and an acceptance
from the offeree, whichever one arrives first at the offeror
controls.
Under the common law mirror image rule, the offeree’s
acceptance must mirror (or match up) with the offeror’s offer.
REVIEW OF HIGHLIGHTED RULES
o

Any changes or additions to the terms from the offeror’s
offer makes the offeree’s “acceptance” a counteroffer.
The UCC does not follow the mirror image rule.
o

661
The UCC allows for differences between the offeror’s offer
and the offeree’s acceptance.
In UCC world, if at least one of the parties to the contract is
not a merchant, then new or additional terms by the offeree
will not automatically be added to the contract.
o
The new or additional terms only get added to the contract
if the offeror specifically accepts them.

Under the UCC, differences between an offeror’s offer and an
offeree’s acceptance will not become part of the contract if the
differences are material, if the offeror objects to the differences
within a reasonable time, or if the offeror specifically limited
acceptance to the terms of her offer.

The seller normally has an obligation to perfectly tender
conforming goods to the buyer.

The buyer normally has the obligation to accept and pay for the
conforming goods.

In a shipment of goods fact pattern, the offeree (often the seller)
can accept the offeror’s offer by either promising to ship the
goods or by promptly shipping the goods to the offeror (often
the buyer).

Watch out for situations where the seller ships non-conforming
goods!
o
If an offeree (i.e., the seller) ships the wrong goods or not
enough of the goods, the offeree has accepted the offeror’s
offer and breached the contract.
▪
In this situation, the offeror (i.e., the buyer) can reject
the non-conforming goods, accept the non-conforming
goods, or accept some and reject some of the nonconforming goods.
•
The offeree will be liable for any damages that the
offeror sustained because of the shipment of nonconforming goods.
662

APPENDIX
Watch out for a seller shipping non-conforming goods as an
accommodation!
o

Substantial performance in a shipping contract is shipping
anything less than what perfectly matches what the buyer
asked to be shipped.
o

Substantial performance is often considered a breach
(except in installment contracts—the perfect tender rule
doesn’t apply to installment contracts).
An installment contract is a contract where the parties’
obligations are divided or separated into multiple parts.
o

If the seller ships non-conforming goods and acknowledges
that the goods were wrong, the shipment is merely a
counteroffer. The shipment does not act as acceptance of
the buyer’s original offer!
A party’s breach as to one part of the installment contract
does not normally affect the remaining parts of the
installment contract.
A buyer can reject a non-conforming shipment in an
installment contract when the non-conforming shipment
substantially impairs the value of that shipment, and the seller
cannot fix the mistake.
o
If the seller says that he can fix the mistake, the buyer
must accept the shipment.

A buyer can cancel the entire installment contract if a
shipment of non-conforming goods substantially impairs the
value of the entire contract.

Consideration is a bargained-for-exchange.
o
In MBE world, don’t worry about the adequacy of
consideration (or the value of what a party gave up).

Past/moral consideration, illusory promises, or promises to
make a gift do not count as consideration on the MBE.

A promise not to sue or a promise to pay a debt that is either
barred by the Statute of Limitations or discharged by
bankruptcy do count as consideration on the MBE.

Something that a party to a contract has already done is not
enforceable consideration because that party is not giving up
REVIEW OF HIGHLIGHTED RULES
663
something in exchange for the other party’s promise or
performance.

An illusory promise is a promise that is so vague or uncertain
that the one making the promise is not really giving up
anything.
o
An illusory promise is one that is “so loose” that the party
making the promise is not tying himself down to anything.

A promise to gift something to someone is generally not
consideration because there is no bargained-for-exchange
between the parties.

A promise to not sue is valid consideration when the promising
party actually had the right to sue.

A promise to pay a debt that is barred by the Statute of
Limitations is valid consideration.

Watch out for fact patterns where a party is simply promising
to pay something that he is already obligated to pay (and this
debt is not barred by the Statute of Limitations).
o
If a party is simply promising to pay a debt that he is
already obligated to pay (and the debt is not barred by the
Statute of Limitations), then there is no consideration
because the promising party is not giving up anything.
Rather, the promising party is already under a preexisting duty to pay the debt.
▪
A promise to perform a pre-existing duty is not valid
consideration because there is no bargained-forexchange.

A promise to pay a debt that has been discharged by
bankruptcy is valid consideration.

Watch out for detrimental reliance in promises to give a gift in
the future!

Promissory estoppel is a substitute for consideration.
o
Promissory estoppel occurs when the promising party (the
offeror) makes a promise that causes the offeree to rely to
the offeree’s detriment.
▪
An offeree detrimentally relies on an offeror’s promise
when the offeror’s promise induces the offeree to do
664
APPENDIX
something that the offeree would not normally do or
not do something that the offeree was legally capable
of doing.
o
If there is detrimental reliance, the offeror is “estopped”
from saying invalid contract for lack of consideration.
▪
Promissory estoppel steps in as a substitute for
consideration, and the contract is still valid.

Misunderstanding Defense = Where parties to the contract
attach different meanings to the same material term in a
contract.

Illegality Defense = Where the purpose for the contract or the
consideration given as part of the contract is illegal.

Fraud Defense = Where there is negligent or intentional
misrepresentation of a fact in the contract.

Unconscionability Defense = Where there is something in the
contract that is so unfair that it “shocks the conscience.”
o
THINK: “U” for Unconscionability = “U” for Unfair.

Duress Defense = Where a party to the contract is denied a
meaningful choice because of a wrongful physical or nonphysical threat.

Defense of Mistake = Where one or both parties to a contract
are mistaken about a material fact to the contract.

Watch out for unilateral mistakes (or fraud) in the sale of a
house!
o

Mutual mistake makes the contract voidable.
o

There is likely a successful unilateral mistake (or fraud)
defense to contract formation if the non-mistaken party
had a duty to disclose or failed to disclose some material
fact about the house.
A voidable contract is valid but either party can choose to
void (or cancel) the contract—that is, either party is “able”
to “void” the contract because of the mutual mistake.
Incapacity Defense = Where a party lacks capacity to enter into
a contract (usually because of age or mental illness).
REVIEW OF HIGHLIGHTED RULES

665
A contract with a mentally incompetent person is normally
void.
o
Void contracts cannot be enforced.

A contract with a minor is voidable at the option of the minor.

A contract with an intoxicated party is voidable at the option
of the intoxicated party if the party’s intoxication prevented
him from fully understanding the nature and consequences of
the contract and if the non-intoxicated party knew or had
reason to know that the other party was intoxicated.
o
Even if the intoxicated party voids the contract, the
intoxicated party will often be liable for the fair market
value of any goods or services extended to the intoxicated
party under the theory of a quasi-contract.
▪

A quasi-contract helps prevent unjust enrichment.
Statute of Frauds = Where certain types of contracts are
required to be in writing.
o
The “writing” must (1) include some signature or
indication from the party to whom enforcement is sought
and (2) contain the basic essential terms of the contract.

Contracts in consideration of marriage (i.e., a prenuptial
agreement) must be in writing to be valid.

Service contracts absolutely incapable of being completed
within one year must be in writing to be valid.

Contracts for the sale of interest in real property must be in
writing to be valid.
o
Exception: A writing is not required if a party did “PIP”—
Paid value for the property; Improved the property; or took
Possession of the property.
▪
The PIP helps show the existence of a contract, even
though the contract may not have been in writing.

Contracts to become executor of someone’s estate must be in
writing to be valid.

Contracts promising to guarantee the debt of some third party
must be in writing to be valid.
666
APPENDIX

Contracts for the sale of goods valued at more than $500 must
be in writing to be valid.

The parol evidence rule prevents a party to a written contract
from introducing evidence that, if introduced, would change or
contradict the terms of the written agreement.
o
If a written agreement between the parties is a total
integration (i.e., a complete understanding of the party’s
agreement), then the parol evidence rule prohibits any
extrinsic evidence of any prior conversations or
communications between the parties.
o
If a written agreement between the parties is a partial
integration (i.e., it is not a complete understanding of the
party’s agreement), then the parties may introduce
extrinsic
evidence
of
prior
conversations
or
communications between the parties if the prior
conversations or communications don’t contradict the
written agreement.

The parol evidence rule does not prohibit a party from
introducing evidence of prior conversations or communications
between the parties when such extrinsic evidence supports a
defense to contract formation.

A party’s performance under a contract may be expressly
conditioned on something happening or something not
happening.
o
A condition precedent must occur before a party is
obligated to perform under the contract.
▪
o
The parol evidence rule does not apply when a party
is trying to prove the existence of a condition
precedent.
A condition subsequent may discharge a party from having
to perform under the contract after the occurrence of some
event.

A third-party beneficiary contract occurs when an additional
party (i.e., a “third party”) receives some benefit from the two
contracting parties.

An incidental beneficiary is a party that incidentally benefits
from the contract.
REVIEW OF HIGHLIGHTED RULES
o

An intended beneficiary is specifically referenced (not
always by name) in the contract between the two
contracting parties.
A third-party beneficiary can sue under the contract when her
rights have vested.
o

There is no expressed intent to benefit an incidental
beneficiary.
An intended beneficiary is one that the contracting parties
intended to benefit because of the contract.
o

A third-party beneficiary’s rights vest when the third
party is told of her rights under the contract and justifiably
relies on those rights.
Watch out for incomplete MBE answer choices relating to
third-party beneficiaries!
o
This is an incomplete (and incorrect) MBE answer choice
because it says nothing about the third party’s rights
vesting: “Yes. The third party can sue because she was an
intended beneficiary.”
▪

A third-party beneficiary can sue under the contract
only after her rights have vested.
Watch out for assignments and delegations! They look like
third-party beneficiary questions, but they are not!
o
In an assignment or delegation, you will have two parties
to a contract and one party will transfer (i.e., “assign” or
“delegate”) his obligations under the contract to another
party after the contract is made.
▪

667
The party to whom the obligations are transferred to
does not have to receive notice of this assignment or
delegation.
In MBE world, assignments and delegations are generally
valid.
o
Assignments and delegations are only invalid if the
contract specifically says so, or when the transferring
party was hired under the contract because of her unique
skills, or when a party is at risk of not getting her end of
the bargain because of the assignment or delegation.
668
APPENDIX

Parties can mutually agree to rescind (or cancel) the contract.

A contract modification occurs when the parties agree to
substitute a new (i.e., “modified”) agreement in place of a prior
agreement.
o
Consideration is usually required
modification in non-UCC world.
▪
However, the non-transferring party cannot sue the
transferring party if the parties executed a novation.
Watch out for the new party trying to change the terms of the
contract!
o
A party to whom the rights were transferred to cannot
change the contract terms!
▪

Modifications of UCC contracts don’t require
consideration, but they may need to be in writing
if the sale of goods is over $500.
Normally, the non-transferring party to a contract can sue
the transferring party and the party to whom the rights
were transferred to for breach of contract.
▪

contract
A novation is a release of the transferring party from
obligations under the contract.
o

a
Consideration is not required when modification is
fair and needed because of some unforeseen
circumstances.
•

for
The party to whom the rights were transferred to only
gets the same rights as the transferring party had.
Parties can agree to accept an alternative performance than
what was originally agreed to in the contract in satisfaction of
the originally-agreed-to performance.
o
Accord occurs
performance.
when
parties
accept
a
different
o
Satisfaction occurs when the different performance is
completed.
Performance relates to a contracting party’s obligations under
the contract.
REVIEW OF HIGHLIGHTED RULES
o

If a party fails to perform his obligations under the
contract, the other party can sue for breach of contract.
Expectancy damages are the most common damages in
Contract Law.
o
Expectancy damages aim to place a non-breaching party
in the same position she would have been in had the
contract not been breached.
▪

Expectancy damages must be based on reasonable
certainty (they can’t be too speculative).
Watch out for punitive damages and a party’s duty to mitigate!
o
A party typically can’t recover punitive damages in a
breach of contract case (punitive damages may be awarded
to deter or punish a party for fraud).
o
A party can’t recover for damages that were avoidable.
▪

669
Parties have a duty to mitigate (or lessen) their
damages.
Reliance damages try to put the parties in the same position
they would have been in had there never been a contract.
o
Reliance damages are often applicable when a party’s
expectation damages are too speculative.

Incidental damages include reasonable expenses incurred by a
non-breaching party to a UCC contract, such as storing and
reselling the goods that were subject to the contract.

Consequential damages are losses that—at the time the
contract was formed—the breaching party had reason to know
the non-breaching party would suffer.
o

Consequential damages are losses that foreseeably result
from a breach (i.e., as a “consequence” of a breach).
A quasi-contract is not a contract—there is some deficiency in
the contract formation that makes the “contract”
unenforceable.
o
Restitution damages help prevent unjust enrichment in a
quasi-contract scenario.
▪
Restitution damages are based on the value of the
benefit conferred on the unjustly enriched party.
670

APPENDIX
Substantial performance can occur when a party does not fully
or perfectly perform his obligations under the contract, but still
performs.
o

Watch out for situations where a breaching party has not fully
performed but has still conferred some benefit on the nonbreaching party!
o

The party who has not fully performed may be able to
recover whatever benefit he may have bestowed on the
non-breaching party.
Specific performance occurs when a party is equitably entitled
to specifically whatever she contracted for in the contract.
o

Even though the substantially performing party did not
fully or perfectly perform, he may be able to recover
damages under the contract—typically, the difference
between the contract price and the amount that the other
party would have to pay to get the promised full
performance.
Specific performance may apply where damages are
difficult to prove, such as in contracts for the sale of land
or unique goods.
Watch out for reclamations!
o
An unpaid seller to a UCC contract can reclaim goods
shipped to a buyer who is unable to pay for the goods at
the time of delivery and who has not returned them.
▪

Contractual conditions control the order of the performance for
the parties to a contract.
o

The seller must demand the buyer return the goods
within 10 days of delivery.
If a condition is not met by one of the parties, then the
other party may be discharged from his obligations under
the contract.
A condition precedent is an event that must occur before a
contracting party has to perform her obligations under the
contract (or before the contracting parties have to perform
under the contract).
REVIEW OF HIGHLIGHTED RULES
671

A condition subsequent is an event that happens that might
allow a party to rescind the contract or discharge his
performance.

A party may be discharged from performing his obligations
under the contract when there is some unforeseen change in
the circumstances after the parties have entered into the
contract.
o

This change can make performance under the contract
impracticable or impossible.
Impracticability occurs when performance under the contract
is no longer practicable (or feasible) because of some
unexpected change of events.
o
The unexpected change in events has to be BIG, and the
party seeking discharge cannot have caused the change in
event.

Impossibility occurs when performance under the contract is
no longer possible—typically because the items to be sold under
the contract no longer exist or because performance under the
contract is now illegal.

Watch out for situations where the fire or catastrophic event
was actually expected!
o

In this situation, the defense of impossibility will likely fail
because the event was foreseen.
Watch out for temporary impossibility!
o
Temporary impossibility is not an effective defense
because the impossibility is only temporary (not
permanent).
▪

The party affected by the temporary impossibility can
likely perform after things are back to normal.
Both parties have corresponding obligations under a UCC
contract.
o
In UCC world, the seller is obligated to transfer and
deliver goods under the contract.
o
In UCC world, the buyer is obligated to accept and pay for
the goods under the contract.
672
APPENDIX

A seller has a right to cure (i.e., fix) the delivery of nonconforming goods with notice and a new delivery.

A party who would have benefited from a condition in the
contract can waive (or excuse) the condition.
o
The “waiving party” would not have had to perform his
obligations under the contract if the other party did not
comply with the condition.
▪

Watch out for situations where a party, whose obligations
under the contract are subject to a condition, wrongfully delays
or prevents the condition from happening!
o
Parties to a contract have a duty to act in good faith in
order to be protected by conditions.
▪

Failing to attempt to secure a loan for a home
purchase is often bad faith.
Anticipatory repudiation occurs when a party to a contract
anticipates the other party will breach the contract.
o

But, since the condition is excused, the “waiving
party” is now still obligated to perform under the
contract even though the other party has not complied
with the condition.
The party anticipates a breach because, prior to the time
when the other party is expected to perform under the
contract, the other party unequivocally states that he will
not be able to perform under the contract.
Watch out for “unsure” statements!
o
A statement by a party that he is “unsure” as to whether
he will be able to perform under the contract is not an
unequivocal statement that triggers an anticipatory
repudiation.
▪
The non-repudiating party can demand an
“assurance” from the potentially repudiating party as
to whether the party will be able to perform.
•
If the potentially repudiating party assures that
he will be able to perform under the contract,
then the non-repudiating party must wait until
performance is due under the contract.
REVIEW OF HIGHLIGHTED RULES

A repudiating party can take back his repudiation before the
non-repudiating party reacts to the repudiation.
o

A non-repudiation party reacts to a repudiation when she
has relied on the repudiation, accepted the repudiation, or
sued the repudiating party.
Risk of loss questions relate to which party bears the risk that
something bad happens to the goods before they are received
by the buyer.
o
When the risk of loss has passed from the seller to the
buyer, then the seller has performed and may demand
performance (i.e., payment) from the buyer.
▪

The risk of loss stays with the seller in a non-carrier case
up and until the point that the buyer takes possession of
the goods or when the seller makes the goods available to
the buyer.
In a shipment contract, the risk of loss shifts to the buyer when
the goods are placed with the carrier.
o

In carrier cases, risk of loss depends on whether the
contract between the buyer and seller is a “shipment” or
“destination” contract.
A non-carrier case is one where the seller is delivering the
goods directly to the buyer (i.e., without a carrier).
o

Risk of loss questions focus on two fact patterns: (1)
carrier cases; and (2) non-carrier cases.
A carrier case is one where the seller uses a carrier to deliver
the goods to the buyer, like a train, plane, or delivery service.
o

673
A shipment contract often says, “FOB Seller’s Place of
Business” or “Free on Board Seller.”
In a destination contract, the risk of loss remains with the
seller until the goods are delivered to the destination noted in
the contract.
o
A destination contract often says, “FOB Buyer’s Place of
Business” or “Free on Board Buyer.”