Contracts Outline
I.
II.
III.
Applicable Law
a. Article II of the UCC applies to contracts for the sale of goods (tangible personal
property other than land)
b. Common law applies to all other contracts (service contracts and contracts for the
sale of land)
c. Mixed Deals (contracts involving both the sale of goods and services)
i. Entire contract is governed by Article II if the most important part of the
deal is the goods purchased
ii. Entire contract is governed by common law if the most important part of
the deal is the service.
iii. Exception: If the contract itself specifically divides the payment for the
goods and the services (e.g., $10.00 for a yo-yo and $399.99 for lessons),
then Article II applies to the provisions regarding the goods and common
law applies to the services portion
Contract (“agreement plus”)
a. Types of Contracts
i. Express Contract (agreement is found in the words)
ii. Implied Contract (requires conduct; can’t find agreement just from words)
iii. Quasi-Contract (equitable remedy)
1. Elements:
a. Plaintiff has conferred a benefit on the defendant;
b. Plaintiff reasonably expected to be paid; AND
c. Defendant would be unjustly enriched if plaintiff is not
compensated
2. Contract law does not apply, and the contract price is not the
measure of recovery (but it does set the ceiling if plaintiff is in
default or contract recovery is barred by the statute of frauds)
3. May apply anytime contract law produces an unfair result
iv. Bilateral Contract
1. Contract resulting from an offer that is open as to the method of
acceptance
v. Unilateral Contract
1. Contract resulting from an offer that expressly requires
performance as the only possible method of acceptance
2. Contracts resulting from the performance required to win rewards,
prizes, and/or contests
Contract Formation
a. Offer (“offer” used as a verb is not conclusive of an offer, but “offer” used as a
noun is conclusive that an offer has been made)
i. An offer is a manifestation of an intention to contract (first show of
commitment by a party). The basic test is whether a reasonable person in
the position of the offeree would believe that his assent creates a contract
ii. An offer is not required to contain all material terms
iii. Price Terms
1. Missing Price Terms (nothing is said about price in the offer)
a. Common law rule: an offer must include a price term
i. Example: If O sends a letter to A offering to sell
property to A, but nothing is said about price, this is
not an offer
b. Article II rule: An offer does not have to include a price
term
i. The parties may omit any specification of price,
agree to agree to price later, or link price to an
objective standard; and if price is omitted or cannot
be determined under the terms of the contract, the
price shall be a reasonable one at the time of
delivery (court may determine if necessary)
ii. The parties may also contract to leave the price term
to be fixed by the seller, but this requires the seller
to fix the price in good faith
1. If the seller acts in bad faith, the buyer may
himself set a reasonable price
2. Vague or Ambiguous Material Terms (e.g., where price is
described in the initial communication as “reasonable,” “fair,”
“appropriate”)
a. Common law/Article II: Offers containing ambiguous price
terms are not “offers”
iv. Requirement Contracts/Output Contracts
1. A contract for the sale of goods can state the quantity of goods to
be delivered under the contract in terms of the buyer’s
requirements (requirements contract) or the seller’s output (output
contract) or in terms of exclusivity
2. A buyer in a requirements contract can increase requirements as
long as the increase is in line with prior demands (a modest
increase; not unreasonably disproportionate)
v. Context
1. An advertisement or price quote is not an “offer,” but is an
invitation to offer
a. Exceptions:
i. A price quotation can be an “offer” if it is in
response to a specific inquiry
ii. An advertisement can be an “offer” if it is in the
nature of a reward (e.g., Smoke Ball Co. promises
$100 reward to anyone who catches the flu after
using its smoke ball as directed)
iii. An advertisement can be an “offer” if it is specific
as to quantity and expressly indicates who can
accept
vi. Terminating Offers (an offer cannot be accepted after termination; offer is
“dead”)
1. Lapse of time
a. Offer must be accepted within the contract’s stated time
frame; or
b. Within a reasonable time frame (within a month)
2. Revocation (words or conduct of offeror)
a. Unambiguous statement by the offeror to the offeree of
unwillingness or inability to contract; or
b. Unambiguous conduct by the offeror indicating an
unwillingness or inability to contract that the offeree is
aware of
i. Later conduct (e.g., selling the good to someone
else unbeknownst to the offeree) or later desire to
terminate the offer does not qualify as a valid
revocation unless communicated to the offeree
c. An “offer” made to more than one party is not a valid
revocation (as long as no party has accepted)
d. Timing of Revocation
i. Revocation of an offer sent through the mail is not
effective until received
ii. An offer cannot be revoked after acceptance
e. Offers that Cannot Be Revoked
i. Any offer cannot be revoked if the offeror has:
1. Promised to keep the offer open; AND
2. This promise is supported by consideration
(“option”)
a. A subsequent counteroffer by the
offeree does not terminate the offer
or option, unless the offeror changes
his position in reasonable reliance on
the counteroffer (e.g., the offeree
claims he won’t be able to accept the
offer unless the price comes down
and then the offeror relies on that
comment and sells the goods to
someone else)
ii. An offer for the sale of goods cannot be revoked for
the time specified or for a reasonable time ( up to
three months) if (Firm Offer Rule/Article II):
1. A merchant (person in business who deals
regularly in the kinds of goods offered);
2. Makes a written, signed offer to sell goods
and includes a promise to hold the offer
open
a. The offer must remain open for the
specified/reasonable time, even if the
offeree attempts to negotiate better
terms
b. If the written promise is to keep an
offer open for longer than three
months, there is no punishment, but
the offeror can revoke after three
months
c. Consideration is not required
iii. An offer cannot be revoked if the offeree has
detrimentally relied upon the offer and this reliance
was reasonably foreseeable
1. Examples: Subcontractor makes a bid that
the general contractor relies on; Buying
paint in reliance on an offer to paint
someone’s house
iv. An offer to enter into a unilateral contract is
irrevocable after performance (not mere
preparation) has begun (offeree, however, is not
obligated to complete performance)
1. Example: O offers P $1,000 to paint his
house and the offer states it can be accepted
only by performance. As soon as P starts to
paint (not merely buying paint) he has begun
performance and the offer cannot be
revoked.
3. Rejection (words or conduct of the offeree)
a. A counteroffer terminates the original offer (and becomes a
new offer) (e.g., “I will only pay $9,000”)
i. Mere bargaining is not a counteroffer (e.g., “Will
you take $9,000 instead of $10,000?”)
b. Conditional acceptance terminates the original offer (and
becomes a new offer)
i. Where the response to an offer is not simply “yes,”
but insists on some additional term (makes it a deal
breaker) (“if;” “provided that;” “so long as;” “on
condition that”)
1. If there is an offer with conditional
acceptance, but the parties continue to act
like there is a contract, it could be an
implied contract.
c. Adding Additional Terms
i. Common Law Contract (Mirror Image Rule)
1. An “acceptance” that adds new terms is
treated like a counteroffer rather than an
acceptance (can only respond “yes,” or “I
accept”)
ii. Contract for the Sale of Goods (Article 2 (§ 2-207))
1. An “acceptance” that adds new terms is
effective as long as the response does not
insist on the new terms (doesn’t make
acceptance conditional on the new terms)
(“seasonable expression of acceptance”)
2. If both parties are merchants, the additional
term becomes part of the contract, unless:
a. It materially changes the offer; or
b. The offeror objects to the change
3. If one of the parties is not a merchant, the
additional term will only become a part of
the contract if accepted by the offeror
d. Death/Incapacity of a Party Prior to Acceptance
i. Death or incapacity of either party before
acceptance terminates the offer, even if the
surviving party does not know of the
death/incapacity
1. Exceptions
a. When there is an option (promise to
keep the offer open made in
exchange for consideration)
b. When the offer is for a unilateral
contract and the offeree has already
performed (the contract survives the
decedent, and the right to receive
performance from the offeror passes
to the offeree’s estate)
b. Acceptance
i. Who Can Accept
1. An offer can be accepted only by:
a. A person who knows about the offer and who is the person
to whom it was made
i. Example: If a reward is offered for a missing dog
and someone returns the dog without knowledge of
the offer, he is not entitled to the reward
2. Offers cannot be assigned/transferred, but options can be
a. Example: If O offers to sell X a car, X cannot sell the offer
to Y so that Y can accept it; If O offers to sell X a car and
X pays O $10 for a ten-day option, X can sell the option to
Y so that Y can accept
ii. Methods of Acceptance
1. The agreement can state the method of acceptance;
2. Offeree Fully Performs
IV.
a. Advance notice of performance is required if the offeree
has reason to believe that the offeror will not learn of the
acceptance (e.g., if in different locations)
i. Exception: No advance notice is required if there is
a reward or contest and the rules do not require it
3. Offeree Starts to Perform
a. Start of performance is acceptance of an offer to enter into
a bilateral contract, but not a unilateral contract
(acceptance requires full performance)
4. Offeree Promises to Perform
a. A promise to perform is acceptance of an offer to enter into
a bilateral contract, but not a unilateral contract (e.g.,
sending a note promising to ship goods)
5. Offeror and Offeree Are at Different Places and There Are
Conflicting Communications
a. If an offeree is “invited” to accept by mail, acceptance is
effective when post marked (when sent) (Mail Box Rule)
i. B (offeree) receives a letter from A (the offeror)
offering to sell him his car. On January 10th, B
(offeree) mails his letter of acceptance (effective
when mailed). On January 11th, B (offeree)
receives a letter from A (the offeror) revoking. The
acceptance controls and a contract is formed
ii. Exception: Where a rejection to an offer is mailed
first and then an acceptance is mailed, whichever
document is received first controls
6. Seller of Goods Sends the “Wrong” Goods
a. Sending the wrong item in response to an order creates a
contract and then breaches that contract
i. Accommodation Exception:
1. When the seller sends the wrong goods with
an explanation, a contract is not created, and
it is merely a counteroffer
7. Silence is not acceptance
a. Exception: If the offeree, by words or conduct, agrees that
silence is acceptance
i. Example: A offers to sell B his car. B replies, “If
you don’t hear from me by Friday, I accept.”
Legal Reasons for Not Enforcing a Contract
a. Lack of Consideration (or a consideration substitute)
i. Definition of Consideration (each party to the transaction is motivated to
make a promise or complete a performance by the prospect of receiving a
promise or performance from the other party)
1. Elements:
a. “Bargained-for exchange”; and
i. What is being exchanged between the parties
(promises or acts)
b. Legal Value
i. The parties incur a legal detriment (majority rule)
1. Example: Jeff contracted with Kristen to sell
her his TV for $100. The detriment to Jeff
is the transfer of ownership of the television,
and the detriment to Kristen is the payment
of $100 to Jeff; OR
ii. A legal benefit is conferred on the parties (minority
rule)
ii. Forms of Valid Consideration
1. Promises to perform or forbear
a. Exception: An illusory promise is not valid consideration
i. “Illusory Promise”: Words of promise where
essentially there is no detriment or commitment at
all (e.g., “I promise I will buy your car, unless I
change my mind”)
2. Performance (i.e., doing something not legally obligated to do)
3. Forbearance (i.e., not doing something legally entitled to do)
a. Modern courts uphold as legally sufficient condsideration
the promise not to pursue a claim which is either
reasonable or objectively unreasonable but held in good
faith
4. A mere peppercorn is sufficient to be consideration
iii. Modification of Contract
1. Common Law Contracts
a. There must be new consideration to change or modify a
contract (does not have to be written unless modification
brings contract within statute of frauds)
2. Article II Contracts
a. No consideration is required for modification, as long as
there is good faith (must be written only if modification
brings it into the statute of frauds or contract provisions
requires modifications to be in writing)
iv. Past Consideration Doctrine
1. Things that happen before the promise is made cannot serve as
valid consideration
a. Example: A saves B’s life. B’s mother is so happy that she
promises to pay A. If B’s mother changes her mind later,
the promise is not enforceable because it was based on past
consideration (B’s mother didn’t bargain for A to save B’s
life and A didn’t save B’s life based on any promise by B’s
mother)
b. Exception:
i. If someone expressly requests some conduct and the
other party has an expectation of payment, a later
promise to pay is valid consideration
1. Example: B’s mother sees B in danger and
asks A to save him, knowing that A would
expect to be paid. After A saves B, B’s
mother promises to pay A. This promise is
legally enforceable.
v. Pre-Existing Contractual or Statutory Duty Rule
1. Common Law Contracts
a. There must be new consideration to change or modify a
contract
b. Doing what you are already legally obligated to do is not
valid consideration for a promise to pay you more money
for merely doing it
i. Example: A contracts to perform at Town Hall for
$15,000. He later refuses to sing unless he is paid
$20,000. The promoter promises to pay the
additional money and A performs. The promoter
then only pays A $15,000. The promise to pay the
additional $5,000 is not enforceable.
ii. Exceptions:
1. If the performance is changed or added to in
any way, then the new performance is valid
consideration for a promise to pay more
money for that performance
2. If there is an unforeseen difficulty that is so
severe as to excuse performance, then
performance can be valid consideration for
paying more money for the performance
(minority rule only)
3. A third party’s promise to pay additional
money for a performance is valid
consideration for that performance
a. Example: C, not the promoter,
promises to pay the additional
$5,000. C’s promise to pay the
additional $5,000 is enforceable.
2. Article II Contracts
a. There is no pre-existing legal duty rule and you don’t need
consideration to modify or change a contract, so long as
there is good faith
i. Example: S contracts to sell grits to B for $1000. S
subsequently tells B that he cannot deliver them for
less than $1300. B promises to pay the additional
$300 and S delivers. There is valid consideration
and B must pay the additional $300.
vi. Part Payment as Consideration for Release (i.e., promise to forgive a
balance of debt)
1. If debt is due and undisputed, part payment is not valid
consideration for release from the debt (there can be no accord and
satisfaction)
a. Example: D owes C $3,000 (undisputed and due). C agrees
to take $2,000 in full satisfaction of the debt, and D pays
the $2,000. C did not receive valid consideration for his
promise to release the balance of the debt, and C can now
sue for the remaining $1,000, even though he agreed he
would not
i. This is true because D suffered no detriment (he
owes $3,000 already)
2. If a debt is not yet due or is in dispute, part payment is valid
consideration for a release from the debt (there can be an accord
and satisfaction)
a. This is so because paying earlier than legally required is a
detriment
b. Most courts treat a “full payment” statement on a check for
less than the disputed amount as an accord; if the payee
cashes the check, she is held to have agree to accept the
lesser payment in satisfaction of her contractual rights and
cannot thereafter seek to enforce the full contract price
vii. Valid Consideration Substitutes
1. A written promise to pay a debt for which there is a legal defense
(i.e., statute of limitations) is enforceable without consideration
a. Example: D owes C $1,000. Legal action to collect this
debt is barred by the statute of limitations. D writes C, “I
know that I owe you $1,000, but I will pay you $600.” C
can collect $600.
2. A written release of all or part of a claim for breach of a sale of
goods contract is enforceable without consideration
3. Promissory Estoppel (Detrimental Reliance)
a. Applies when parties promise to do something they were
never asked to do (there is no consideration at all) and there
is reliance on the promise
b. Elements
i. A Promise;
ii. Reliance on that promise that is reasonable,
detrimental, and foreseeable; AND
iii. Enforcement is necessary to avoid injustice
c. Example: After a car accident, one party promises to pay
the other party’s bills. The promising party was not asked
to do this, there was no threat to sue, and the car accident
occurred before the promise was made.
b. Lack of Capacity (of the Person Who Made the Promise – The Defendant)
i. Those Who Lack Capacity
1. Infancy (under age 18)
2. Mental incompetence (lacks ability to understand agreement)
3. Intoxicated persons if the other party has reason to know
ii. Consequences of Incapacity
1. Person without capacity has a right to disaffirm the contract
(contract is voidable at his election)
a. Example: A hires B, a minor, to give a lecture. If B refuses
to do the lecture, A cannot sue B for breach, even if he
didn’t know that B was a minor.
2. Implied Affirmation By Retaining Benefits After Gaining Capacity
a. When an agreement is made at a time when one party does
not have capacity, but the person eventually comes to have
capacity and then continues to keep the benefits of the
contract, there will be contract liability through implied
affirmation
i. Example: S sells B a car on credit, but B is only 17.
B refuses to pay S but retains the car until he turns
18. If B continues to keep the car without
complaint or objection, S can now enforce the
agreement.
3. Liability for Necessaries
a. A person who does not have capacity is legally obligated to
pay for necessaries furnished to them (food, clothing,
medical care, or shelter), but that liability is based on quasicontract law, not contract law.
c. Statute of Frauds Defense
i. Seven Contracts That Are “Within the Statute of Frauds” (and, therefore,
oral agreements by themselves are not sufficient to create an enforceable
contract)
1. Promises made “in consideration of” marriage (i.e., pre-nuptial
agreements, anti-nuptial agreements);
a. Does not include promises to marry
2. Promises by an executor to pay expenses/obligations of an estate
“from his own funds”
a. Does not include promises to pay made by the estate
3. Promises to answer for the debts of another (to guarantee the debt)
a. A promise to pay another’s debt by itself is not within the
statue of frauds (can be oral), but a promise to pay
another’s debt if he does not pay is a guarantee and is
within the statute of frauds
i. Main Purpose Exception
1. If someone guarantees to pay the debt of
another, but the main purpose for the
underlying contract is to benefit the
guaranteeing party, then the promise does
not have to be in writing
a. Example: S sells P paint on credit. S
claims that O promised to pay for the
paint if P did not. P’s purpose for
buying the paint was to paint O’s
house. This promise by O is not
within the statute of frauds and can
be oral
4. Services contracts that are not capable of being performed within a
year from the time of entering into the contract (e.g., employment
contracts to work for three years)
a. The possibility for early termination is irrelevant (it is
irrelevant if the contract can be terminated before a year is
up)
b. A contract that is made for someone to perform on a date
over a year later is within the statue of frauds and must be
in writing (actual time it will take for performance is
irrelevant)
c. Contracts for tasks (where nothing is said about timeframe)
are not within the statue of frauds because any task could
theoretically be completed within a year with unlimited
resources (even something ridiculous like moving pyramids
from Egypt to America)
i. This is true even if it does actually take the person
longer than a year to complete
d. Life time deals are not within the statute of frauds because
one of the parties could die within a year
5. Contracts transferring interests in real estate of a term of more than
a year (sales, easements, etc.)
6. Contracts for the sale of goods for $500 or more
7. Leases of goods with the payments totaling $1,000 or more
ii. “Satisfying” the statute of frauds (if the statute is not satisfied, party being
sued can raise the statute of frauds as a defense to contract liability; may
still be liable under quasi-contract principles though)
1. Written Agreement
a. For all agreements other than those for the sale of goods for
$500 or more or leases of goods with the payments totaling
$1,000 or more:
i. Writing must contain (“all material terms test”):
1. Who (every party involved); AND
2. What (what the contract is for)
ii. Writing must be signed by the person you are trying
to sue
b. For contracts for the sale of goods for $500 or more
(Article II):
i. Writing must contain:
1. How many (quantity being sold)
ii. Writing must be signed by the person you are trying
to sue
1. Exception: If both parties are merchants and
the party being sued received a signed
writing containing a quantity term and failed
to respond within 10 days of receipt, the
writing is sufficient and does not have to be
signed by the person you are trying to sue
c. Leases of goods with payments totaling $1,000 or more:
i. Writing must:
1. Indicate that it is a lease;
2. Describe what is being leased; And
3. State the duration of the lease
2. Oral agreement + _______:
a. Full performance by either party to a services contract
b. Part performance of a contract for the sale of ordinary
goods (however, this satisfies the statute of frauds only to
the extent of the part performance)
i. If the lawsuit is regarding goods that have already
been delivered, there is no statute of frauds defense
(i.e., seller can prevail in a suit for payment for the
goods that were delivered)
ii. If the lawsuit is regarding goods that have not yet
been delivered, there is a statute of frauds defense
(i.e., when buyer sues seller for the goods that were
not delivered, seller can raise a statute of frauds
defense)
c. “Substantial beginning” of making or obtaining specially
manufactured or custom goods in a contract for the sale of
specially manufactured/custom goods
d. Full or partial payment, possession, and/or improvements
(at least 2 of the 3) for a contract involving real estate
transfers
3. Judicial Admission
a. If the party sought to be charged admits in his pleadings
(answer to a complaint), testimony (transcripts of
direct/cross examination), or responses to discovery
(depositions, etc.) that a contract was formed, the statute of
frauds does not apply (at least to the extent of the
admission)
iii. Two Theories Related to the Statute of Frauds
1. Written Authorization to Enter Into a Contract for Another
a. The authorization must be in writing if the contract to be
signed is within the statute of frauds (i.e., the authorization
must be of “equal dignity”)
i. Example: A wants an apartment so she arranges for
B to sign the lease for her. If the lease is for two
months, there doesn’t have to be written
authorization. But, if the lease is for two years, B
would need written authorization to sign for A.
2. Contract Modification
a. Modification of a contract
i. Must be in writing when the deal with the alleged
change would be within the statute of frauds
ii. If a contract expressly states that any modification
must be made in writing:
1. Under common law, these provisions are
ignored, and an oral modification may be
valid if the contract with the alleged change
would not be within the statute of frauds.
2. Under Article II, these provisions are
effective and enforced, unless they are
waived
a. The mere fact that there is a later oral
modification is not sufficient to
constitute a waiver.
d. Existing Laws That Prohibit Performance of the Agreement (Illegality)
i. If the contract’s subject matter is illegal, the agreement is void
1. Example: A pays B to cause physical injury to X. Subject matter is
to injure X and it is against the law to injure people. Illegal subject
matter and so the agreement is void (no one can sue anyone under
the contract)
ii. If the subject matter is legal, but the purpose is illegal, the agreement is
enforceable only by the person who did not know of the illegal purpose
1. Example: A buys a ticket from B to fly from Minnesota to
Colorado. This is legal. The reason he is buying the ticket is to go
and kill X. B can sue A if he refuses to pay, so long as he didn’t
know of A’s illegal purpose
e. Misrepresentation
i. A false assertion of fact (e.g., S tells B that the house has no termites when
it does) or concealment of facts (e.g., S puts carpet over termite damage)
ii. When there is a fraudulent misrepresentation, or an innocent
misrepresentation as to the material terms of a contract (e.g., S tells B the
house has “no termites”), the contract is voidable (other party can rescind)
if the misrepresentation induced the other party to enter into the contract.
f.
g.
h.
i.
iii. When there is misrepresentation as to the nature of a contract (e.g., S tells
B “this is just a lease agreement” when it is really a purchase agreement),
the contract is void
Duress
i. Elements:
1. “Bad guy” who improperly threats the other party; and
2. “Vulnerable guy” who is given no reasonable alternative
ii. Examples: Physical duress (gun to the head) or economic duress (an
obvious bad guy who improperly threatens someone with breaching an
existing contract unless he is paid more and a vulnerable guy who has no
other source of supply)
Unconscionability
i. A court is empowered to refuse to enforce all or part of any agreement
when there is:
1. Unfair surprise and/or oppressive terms as of the time the
agreement was made; or
2. A consumer lease that was enforced or induced through
unconscionable conduct (even if no provision of the lease is
unconscionable)
Ambiguity in the Words of the Agreement
i. There will be no contract if:
1. Parties use a material term that is open to at least two reasonable
interpretations;
2. Each party attaches different meaning to the term; and
3. Neither party knows, or has reason to know, the term is open to at
least two reasonable interpretations
a. If one party knows of the ambiguity, the agreement will be
legally enforceable with the terms as understood by the
other innocent party
ii. Example: B and S contract for cotton to be delivered on the Peerless. B
intends the October Peerless; S intends the December Peerless. Neither B
nor S knows that there are two ships named Peerless. No contract.
Mistake of Fact
i. Mutual Mistake
1. There will be no contract if:
a. Both parties are mistaken;
b. As to a basic assumption of fact;
c. That materially affects the agreed upon exchange
2. If the mistake is about what something is, this is material and basic
a. Example: S contracts to sell B a painting for $50,000. Both
believe that it is a genuine Warhol, but it is not.
3. If the mistake is about what something is worth, this is not material
and basic
a. Example: The painting is a Warhol but is really worth only
$1,000, not the $50,000 that both S and B believed
ii. Unilateral Mistakes (mistakes by only one party)
V.
1. Courts are reluctant to allow a party to avoid a contract for a
mistake made by only one party
a. Exceptions:
i. If a unilateral mistake is palpable (obvious to the
other party), then the contract may be avoided by
the mistaken party
ii. If a unilateral mistake is discovered before there has
been significant reliance by the other party, the
contract may be avoided
Parties’ Words and the Parol Evidence Rule
a. Vocabulary
i. Integration
1. Written agreement that the court has found to be final agreement
between the parties (triggers the parol evidence rule)
ii. Partial Integration
1. The agreement is written and final, but not complete (does not
cover everything contained in the agreement)
iii. Complete Integration
1. The written agreement is final and complete (contains everything
contained in the agreement)
iv. Merger Clause
1. Contract clause stating that this writing is the complete and final
agreement (strengthens the presumption that a writing is complete
and final)
b. Parol Evidence Rule Is Triggered When:
i. There is a written contract that the court finds is the final agreement; and
ii. A party wants to introduce either an oral statement made at the time the
contract was signed (contemporaneous) or earlier oral or written
statements by the parties
1. Does not apply to exclude evidence of subsequent agreements or
changes
c. Four Possible Fact Patterns
i. A Party Wants to Prove What Was Meant By Terms Used in the Writing
1. Regardless of whether the writing is a complete or partial
integration, a party can always introduce parol evidence to explain
the words or terms used in the writing
ii. A Party Wants to Prove an Agreement Is Not Enforceable (or wants to
establish a defense to the contract)
1. Regardless of whether the writing is a complete or partial
integration, the parol evidence rule never prohibits the court from
considering evidence of a defense to the enforceability of an
agreement (whether a contract was validly formed)
iii. A Party Wants to Change the Written Agreement
1. Regardless of whether the writing is a complete or partial
integration, the parol evidence rule prohibits a court from
considering earlier agreements as a source of terms that are
inconsistent with the terms in the written contract
a. A court may, however, consider evidence of such terms for
the limited purpose of determining whether there was a
mistake in integration (i.e., a clerical error or mistake in
reducing the agreement to writing)
iv. A Party Wants to Add to a Written Agreement (claims the writing left
something out) (only fact pattern where type of integration matters)
1. If a writing is a partial integration, the court can consider earlier
agreements as a source of consistent, additional terms
2. If a writing is a complete integration, court can only consider parol
evidence if it regards something that would naturally and normally
not be included in the integrated writing (a “collateral” agreement)
a. Example: S contracts in writing to sell chickens to B. The
contract makes no mention of advertising. S claims that
there was an earlier oral agreement that B would mention S
in its advertising. The court can consider evidence of the
earlier agreement relating to the advertising
d. Admissible Evidence of the Terms of an Agreement (if parol evidence is
allowed) (in order of preference)
i. Words of the parties;
ii. Course of Performance (what the parties have already done under the
existing agreement)
iii. Course of Dealing (what the parties have done under other similar
agreements in the past)
iv. Custom or Usage (what other similar people have done in similar
agreements)
e. Terms of an Agreement under Article II
i. Delivery Obligation of a Seller of Goods
1. No Place of Delivery Has Been Agreed On
a. Absent an agreement as to place of delivery, then the place
of delivery is the seller’s place of business, unless both
parties know that the goods are some place else, in which
case that place is the place of delivery.
2. Place of Delivery By a Common Carrier Has Been Agreed Upon
a. “Shipment Contract”
i. Seller completes his delivery obligation when:
1. He delivers the goods to a common carrier
(a third party in the business of transporting
goods);
2. He makes reasonable arrangements for
delivery; and
3. He notifies the buyer
ii. “Free of Board (FOB) (city where seller is located)”
= shipment contract
b. “Destination Contract”
i. Seller does not complete his delivery obligation
until the goods are actually delivered to the buyer
ii. “Free of Board (FOB) (city where buyer is located)”
= destination contract
ii. Risk of Loss
1. Where after the contract has been formed, but before the buyer
receives the goods, the goods are damaged or destroyed and
neither the buyer nor the seller is to blame
2. Five Rules (in order of preference):
a. Agreement of the party controls;
b. If there is a breach, the breaching party is liable for any
uninsured loss, even if the breach is unrelated to the
problem or loss;
c. If there is no controlling agreement or breach, but there is a
common carrier involved:
i. If you have a shipment contract where the seller has
met his delivery obligation, the buyer assumes the
risk of loss.
ii. If you have a destination contract, the seller
assumes the risk of loss until the goods are
delivered to the buyer
d. If there is no controlling agreement, breach, or common
carrier (the buyer is picking up the goods himself):
i. If the seller is a merchant, he assumes the risk of
loss until the buyer takes receipt (actual physical
possession) of the goods
ii. If the seller is not a merchant, he assumes the risk
of loss until he “tenders” the goods to the buyer
(e.g., tells buyer he can pick up the goods; tells
buyer the keys are behind the front bumper; etc.)
iii. Warranties of Quality (words/conduct that promise something or factually
describe the goods, not opinion/sales talk)
1. Express Warranty (by conduct or words)
a. Use of a sample or model creates a warranty that the goods
the buyer receives will be like the sample or model
2. Implied Warranty (based on statute)
a. Implied Warranty of Merchantability
i. When any person buys goods from a merchant who
regularly sells goods of this kind, a term is
automatically added to the contract, by operation of
law, that the goods are fit for the ordinary purpose
for which such goods are used
b. Implied Warranty of Fitness for a Particular Purpose
i. When a buyer has a particular purpose of which the
seller is aware and relies on the seller to select
VI.
suitable goods for that purpose, the goods must be
fit for that particular purpose
3. Contractual Limitations of Warranty Liability
a. Disclaimers (provisions that attempt to eliminate
warranties)
i. Can be used to eliminate implied warranties, but not
express warranties
ii. Can take the form of “as is,” “with all faults,” or
conspicuous language of disclaimer mentioning
merchantability (e.g., different size type, bold
letters, etc.)
b. Limitations of Remedies Clauses (provisions that limit the
remedies available to the buyer in case of a breach of
warranty)
i. Remedies can be limited for express or implied
warranties, as long as the limitations are not
unconscionable (at the time the contract was
entered into)
1. It is prima facie unconscionable if a breach
of warranty on consumer goods causes
personal injury
Performance (rules apply when one party did not do what they were supposed to do
under the contract)
a. Sale of Goods (Article II)
i. Perfect Tender
1. The seller is obligated to deliver perfect goods
ii. Cure
1. A seller who fails to make a perfect tender will be given a second
chance to cure when:
a. When there is a delivery deadline and the wrong goods are
delivered early (time for performance has not yet expired);
b. When the seller had reasonable grounds for believing that
an improper tender would be acceptable, perhaps with a
money allowance (possible reduction in price) (e.g., if the
buyer had accepted substitutes in the past)
iii. Acceptance of the Goods (once a buyer has accepted the goods, he cannot
later reject them)
1. Express Acceptance
a. If a contract requires for payment on delivery, payment for
goods without an opportunity for inspection neither
constitutes acceptance of the goods nor affects the buyer’s
right to inspect and reject them, if appropriate (buyer has a
reasonable time to inspect, which would include
performing tests)
i. However, if the buyer unreasonably exercises his
right to test (e.g., conducts a test and realizes the
product does not conform to the needs expressed in
the contract, but then continues to use the product
anyway), it will constitute an acceptance of the
product used unreasonably (and buyer will have to
pay for the amounts used in excess of reasonable
testing)
2. Implied Acceptance
a. When the buyer keeps the goods after an opportunity for
inspection without objection (when buyer keeps goods for a
month without objecting).
iv. Rejection of the Goods
1. If the goods delivered are rejected after an acceptance has
occurred, the contract has been breached and the seller can sue
(once the goods have been accepted, the buyer cannot then reject
them)
a. Exceptions: Buyer Can Reject Goods Without Being in
Breach When:
i. Rejection occurs before acceptance of the goods;
ii. The goods are less than perfect, unless it is an
installment sales contract
1. Installment Sales Contract
a. A contract requiring or authorizing
delivery in separate lots to be
separately accepted
b. If there is an installment sales
contract, the buyer has a right to
reject an installment only where
there is a substantial impairment in
the installment that cannot be cured
2. A buyer who rejects nonconforming goods
is entitled to:
a. Recover any payment he already
made for the rejected goods;
b. Resell any nonconforming accepted
goods under his duty to mitigate
damages and then apply the proceeds
toward the amount owed to him by
the seller for the nonconformity
2. If the buyer properly rejects goods, he must seasonably notify the
seller, hold any unaccepted/rejected goods for the seller, and
follow reasonable seller instructions
3. An aggrieved buyer may also recover (in addition to any refund of
payments made by him) incidental damages resulting from a
seller’s breach (e.g., expenses reasonably occurred in the
inspection, receipt, transportation, and care/custody of the goods
that have been rightfully rejected)
VII.
v. Revocation of Acceptance of the Goods
1. A buyer can effect a cancellation of the contract by revoking its
acceptance of the goods if:
a. There is a nonconformity that substantially impairs the
value of the goods;
b. There is an excusable ignorance of the grounds for
revocation or reasonable reliance on the seller’s assurance
of satisfaction (some valid reason for delayed action); and
c. Revocation is made within a reasonable time after
discovery of the nonconformity
2. If the buyer properly revokes acceptance, he must seasonably
notify the seller, hold the goods for the seller, and follow
reasonable seller instructions
vi. Payment
1. Cash or check must be used, unless the parties agree otherwise
a. If a buyer pays by check, the seller does not have to accept
the check; however, if the seller does not accept the check,
the buyer is given additional reasonable time to pay
Conditions of Performance (a mutually agreed upon promise modifier)
a. Forms of Conditions
i. True Condition
1. An event beyond the control of either of the parties to the contract
that affects the duty to perform
ii. Condition Coupled With a Covenant
1. An event that is to some extent within the influence of one of the
parties to the contract that affects the duty to perform
a. If the conditioning event is subject to the influence of one
of the contracting parties, that party has an implied
obligation to use reasonable efforts to meet the condition
b. Express Conditions
i. Language that limits obligations already created. Only words such as “if;”
“provided that;” “so long as;” “subject to;” “in the event that;” “until;” and
“on condition that.”
ii. Express conditions must be strictly complied with
1. Exception: A condition that is based on approval of one of the
contracting parties is treated as satisfied if a reasonable person
would approve, unless the subject is art or other matters that are
inherently discretionary
a. Example: A contracts with B for B to paint A’s house. The
contract provides that A will pay $4,000 subject to A’s
approval of the work. Even though expert painters
compliment B’s work, A does not approve. The condition
has been satisfied
iii. If the condition is not met, there is no breach of contract and the parties
can back out of the agreement
VIII.
1. Example: B contracts to buy a painting from A “if” a gallery
verifies it is authentic. Verification limits the obligation to buy/sell
because if the gallery claims it is not authentic, B does not have to
buy. B cannot sue A for breach of contract, however, because
there was no promise the painting was authentic.
iv. How an Express Condition Can Be Excused (not satisfied)
1. Estoppel
a. When the person protected by, or benefiting from, the
condition makes a statement changing their position
BEFORE the conditioning event was to occur (e.g., he
claims he won’t require the condition to be fulfilled or will
excuse the condition)
2. Waiver
a. When the person protected by, or benefiting from, the
condition makes a statement excusing the condition
AFTER the conditioning event was supposed to occur (e.g.,
after the fact, the person excuses the condition)
c. Constructive Conditions
i. Where there is no express language of condition, but one party must do
some work, the other party is to pay for, and nothing is said about when
payment is due (silent as to time payment). Doing the work is a
constructive condition precedent to the obligation to pay.
ii. Satisfaction of Constructive Conditions
1. Constructive conditions only have to be substantially performed.
Once there has been any substantial performance, the other party is
obligated to pay for the work that has been done.
a. If the constructive condition has not been substantially
performed, there is no contract law right to recover for the
work that was done (may be able to recover under quasicontract, though)
2. Divisible Contract
a. If the contract itself divides the performance of each party
into the same number of parts, with each part performance
by one party serving as consideration for the corresponding
part performance by the other, then the contract is a
divisible contract and the substantial performance test is
applied to each divisible part of the contract
i. Example: P contracts to paint 20 apartments for
$500 each. If there is substantial performance on
any divisible part, then performance has occurred
sufficient to create a contract law right to recovery
for the work that has been done.
Excuse of Non-Performance (performance is excused because of something that
happens after the agreement is made)
a. A party may suspend his own performance under a contract where the other party
acts to prevent that performance (e.g., interferes)
b.
c.
d.
e.
i. However, the aggrieved party must give the wrongdoer/interferer time to
cure or correct the interference
Excuse by Reason of Other Party’s Breach
i. Sale of Imperfect Goods (Article II)
1. In a sale of goods contract, the buyer can reject the goods and
withhold payment if the tender is less than perfect
ii. “Material Breach” in Common Law Contracts (any breach gives rise for a
claim of damages, but only a material breach excuses performance)
1. Example: P contracts to paint O’s house white for $1,000, but
paints it purple instead. This is a material breach that excuses O
from performing (paying).
Excuse by Reason of the Other Party’s Anticipatory Repudiation
i. An unambiguous statement that the repudiating party will not perform that
is made prior to the time that performance was due
ii. Anticipatory repudiation by one party excuses the other party’s duty to
perform and generally gives rise to an immediate claim for damages for
breach, unless the non-repudiator has already finished her performance
(i.e., if non-repudiating party has already completed performance when the
other party repudiates, the non-repudiation party may not sue until the
time for the other’s performance has passed with no performance)
1. Example: P contracts to paint O’s house for $1,000 with payment
to be made on April 5. On March 13, before P has finished
painting the house, O tells P that she is doing a great job, but that
O is not going to pay. P stops painting. O cannot sue P for breach,
but P can sue O for breach.
iii. Retraction
1. Anticipatory repudiations can effectively be reversed or “retracted”
if:
a. It is done so in a timely manner; and
b. There has been no material change by the non-repudiating
party made in reliance on the repudiation (e.g., retracted
before the non-repudiating party removes all of their
supplies and/or takes a new job).
2. If a timely retraction is made, the other party’s duty to perform is
re-imposed, but the other party can delay the start of performance
until he is sure that the repudiating party will actually follow
through this time.
Excuse by the Other Party’s Inability to Perform
i. When someone agrees to do something in exchange for something other
than money (e.g., property), but prior to completion of performance the
item is sold or is no longer in the hands of the original owner, the owner
becomes unable to perform. The other party’s performance is excused.
Excuse by Reason of a Later Contract
i. Rescission (cancellation)
1. Available if some performance remains for each of the parties
involved (if any party has already fully performed, it is too late to
rescind and suits can be brought for breach of the contract).
2. Once there is rescission, the contract no longer exists and you
cannot sue under contract law for the part performance that has
occurred (quasi-contract rules may apply though)
ii. Accord and Satisfaction (substituted performance)
1. Definitions
a. Accord
i. An agreement by the parties to an already existing
obligation to accept a different performance in
satisfaction of the existing obligation
1. The accord suspends legal enforcement of
the original obligation to provide time to
perform the accord
b. Satisfaction
i. Performance of the newly agreed upon performance
ii. If the accord is not performed, then the other party
can sue on either the original obligation or the
accord
iii. Modification (substituted agreement)
1. An agreement by the parties to an existing obligation to accept a
different agreement in satisfaction of the existing obligation
iv. Novation (substituted person)
1. An agreement between both parties to an existing contract to the
substitution of a new third party (i.e., same performance, different
party)
a. If one party is not in agreement or is not aware of the
substitution, this is a delegation, not a novation (in
delegations, the party being replaced remains liable)
2. Novation excuses the party who is replaced from further obligation
f. Excuse of Performance by Reason of a Later, Unforeseen Event (impracticality,
impossibility)
i. Performance of contractual duties (other than a contractual duty to pay
money) can be excused under impossibility or impracticality or frustration
of purpose if:
1. Something happens after contract formation, but before the
completion of contract performance;
2. That was unforeseen; and
3. That makes performance objectively impossible (can’t be done) or
subjectively commercially impracticable (can only be done with
extreme and unreasonable difficulty and expense) or frustrates the
purpose of the performance
a. Performance is objectively impossible so as to discharge the
promisor from performance only when no one could render
performance
b. Subjective impossibility (i.e., this particular promisor is
unable to perform, but someone else may be able to
perform), however, does not operate as a discharge of the
promisor’s duty to perform (e.g., the promisor can delegate
the work to someone else)
ii. Examples:
1. Damage or destruction of the subject matter of the contract
a. P contracts to paint O’s house. During the job, O’s house
burns down. P can then be released and take on a new job
because it is impossible for P to continue to paint the house
(O cannot sue P for non-performance)
b. P contracts to build a house for O. During the building, it
burns down. This doesn’t excuse P because performance is
still possible—he can still build a house.
c. A contracts to sell B his car for $300. After the contract,
but before the risk of loss has passed to B, the car is
destroyed by an unseasonable flood. A’s performance is
excused.
i. If the flood occurred after the risk of loss had
passed to B, however, B’s performance will never
be excused by impracticality because he can always
pay for the item, even if it is washed away
2. Death
a. If a party to the contract who is special person dies prior to
performance, then the deceased’s party’s performance is
excused
i. Example: O contracts with F (a special, famous
architect) to design his house. If F dies before
designing it, F is excused
ii. Example: O contracts for P to paint his house for
$3,000. If P dies during performance, P is not
excused from performance because he wasn’t
special and P’s estate would have to find another
painter and charge O only $3,000
3. Subsequent Law or Regulation
a. A later law makes performance of the contract illegal
(excuse by impossibility)
i. Example: A contracts with the Gold Club to be the
featured dancer in the club’s Naked Review. After
the contract, but before performance, the town
passes a law outlawing nude dancing. Gold Club
and/or A are excused from performing
b. A later law makes the mutually understood purpose of the
contract illegal (excuse by frustration of purpose)
i. Example: A tells his plastic surgeon that he needs
plastic surgery so he can be a “lean, mean nude
IX.
dancer.” The plastic surgeon and A agree that A
will pay the surgeon for liposuction. After the
agreement, but before the surgery, the town passes a
law outlawing nude dancing. A and/or the surgeon
are excused from performing the surgery contract
Breach Remedies for an Unexcused Non-Performance
a. General Measure of Money Damages for All Contracts (no punitive damages are
recoverable in contract law)
i. Expectation Interest (to protect the plaintiff’s interest)
1. Injured party is entitled to recover an amount that would put him in
as good a position as if the contract has been performed (if there
had been no breach)
a. Examples: P contracts to paint O’s house for $1,000 and
then P breaches. O hires another painter for $1,400. O can
recover the additional $400 he had to pay to hire another
painter. If, instead, P started to paint and spent $100 when
O breached, P can recover costs actually incurred ($100)
plus the lost profits he was expecting to receive.
ii. Plus Incidental Damages (always recoverable)
1. Recovery of the cost of finding a replacement (employment agency
fees for hiring a replacement, re-advertising costs, etc.).
iii. Plus Consequential Damages (special damages)
1. Damages that are unique to the particular plaintiff involved (not
damages everyone would suffer under the circumstances)
2. Only recoverable if in the reasonable contemplation of each party
at the time the contract was formed (foreseeable by the breaching
party)
iv. Minus Avoidable Damages
1. No recovery is available for loss that could have been avoided by
appropriate steps (burden of proof of avoidability is on the
defendant)
a. Example: L Law School wrongfully dismisses Professor P
with one year remaining in his $100,000 per year contract.
P sues L. If L shows that P turned down an offer to teach at
X Law School (a school in the same city) for $80,000 per
year, P will only be able to recover $20,000.
i. However, P would only have to accept a
comparable job (law school professor) in the same
city. He wouldn’t have to accept a completely
different position or a position that is far away from
his residence.
v. Restitution
1. Restitution by the Non-Breaching Party
a. Where the non-breaching party to a contract has conferred
a benefit on the breaching party, the aggrieved party is
entitled to restitution of the benefit conferred
2. Restitution by the Breaching Party
a. Majority Rule
i. A willful breachor cannot recover anything in
restitution
b. Minority Rule
i. A breaching party may seek restitution and recover
the reasonable value of his services from the
aggrieved party to prevent unjust enrichment
b. Four Specific Article II Rules for Contracts Involving the Sale of Goods
i. Seller Breaches (doesn’t make a perfect tender) and Buyer Keeps the
Goods
1. Buyer receives fair market value at a perfect tender minus market
value of what was actually delivered
ii. Seller Breaches and Seller Keeps Goods
1. Buyer receives market value at time of discovery of the breach
minus contract price (or what it would cost to replace the goods
minus contract price)
iii. Buyer Breaches and Buyer Keeps the Goods
1. Seller receives contract price
iv. Buyer Breaches and Seller Keeps the Goods
1. Seller receives the contract price minus market value at time and
place of delivery (or contract price minus resale price if he was
able to resell the item)
a. Additionally, a volume/retail seller can recover provable
lost profits (retail/contract price minus the cost the
company had to pay to get the item, from the factory for
example), even if the seller has already sold the item to
another party, because he could have made two separate
sales if the purchaser had not breached (applies whenever
there is a breach of a contract to sell regular inventory and
the breach is followed by a resale to a third party at exactly
the same price).
c. Liquidated Damages Provisions
i. Contracts can validly stipulate damages or a method of fixing damages if:
1. The amount of possible damages from any later breach of contract
is difficult to determine; and
2. The contract provision is a reasonable forecast of possible damages
ii. Liquidated damages provisions cannot provide for a penalty
iii. Strategy: A provision that provides for a single number/lump sum for any
breach (whether the breaching party is a day late or a year late) is invalid;
A provision that provides for fluctuating damages depending on the
magnitude of the breach is valid
d. Non-Monetary Recovery (quasi-contract remedies)
i. Specific Performance (on multi-state almost always the wrong answer)
1. Historically, this remedy is in equity, so it is available only if
money damages are inadequate.
ii.
iii.
iv.
v.
a. Exceptions:
i. A non-breaching party can get special performance
in contracts for the sale of real estate (because land
is unique)
ii. In CA, there are recent reported cases that suggest a
greater flexibility in judicial discretion in deciding
whether specific performance is appropriate, even if
monetary damages are adequate.
2. Under Article II, you can get specific performance for contracts
involving goods that are unique, but goods are only unique if they
are:
a. “Antiques”;
b. “Works of Art”; or
c. “Custom made”
3. Services/Employment Contracts
a. No specific performance is available for breach of a
services contract (cannot force people to work)
i. However, sometimes you can get an injunction
barring the breaching party from working for a
competitor (negative specific performance)
Reformation
1. A party to a contract can seek a judicial changing (reforming) of a
written contract when:
a. There was a clerical mistake or omission in writing down
the contract; or
b. There was a fraudulent (not innocent) misrepresentation
(you don’t want out of the deal, you want the deal to be
changed to include what you were told)
Adequate Assurance of Future Performance
1. When one party to the contract learns something troublesome after
making the contract that gives him reasonable grounds for
insecurity about the other party’s performance, he can stop
performance and submit to that party a written demand for
adequate assurance
Reclamation
1. An unpaid seller can get his goods back when:
a. The buyer is insolvent at the time he received the goods;
b. The seller demands return of the goods within 10 days of
receipt (or within a “reasonable” time if before delivery the
buyer made an express representation of solvency); and
c. The buyer still has the goods when the seller demands
return
Rights of a Good Faith Purchaser in Entrustment
1. If an owner of goods leaves her goods with a person who sells
goods of that kind (for repair or service) and that person
wrongfully sells the goods to a third party bona fide purchaser for
X.
value, then such a good faith purchaser cuts off the rights of the
original owner/entruster
a. Original owner could sue in tort for conversion though
Third Party Problems
a. Third Party Beneficiaries
i. A third party beneficiary problem arises when:
1. A (promisee) contracts with B (promisor) for B to render some
performance or benefit to C (third party beneficiary) (e.g., life
insurance policies (contract between the holder and the insurance
company, with a designated beneficiary); contracting with a bagel
shop to deliver bagels to a third party)
ii. An intended third party beneficiary (i.e., a named beneficiary, a
beneficiary receiving performance directly from the promisor, or a
beneficiary with a relationship to the promisee) can sue the original parties
to the contract if the contract is not performed, even though he was not a
party to the original contract (third party beneficiaries have contract rights)
1. Intended Beneficiaries Are Either Donees or Creditors:
a. Donee Beneficiary
i. A third party the promisee intends to benefit
gratuitously
b. Creditor Beneficiary
i. A person to whom a debt is owed by the promisee
(promisee owes some obligation to the third party
beneficiary)
iii. Efforts to Cancel or Modify the Contract
1. A third party beneficiary’s rights vest when he:
a. Learns about the contract and assents to it in a manner
invited or requested by the parties;
b. Materially changes his position in justified reliance on the
contract; or
c. Brings suit to enforce the promise
2. Once a beneficiary’s rights have vested, the contract cannot be
canceled or modified without his consent (unless the contract
otherwise provides, like provides that the promisee may change
beneficiaries)
iv. Who Can Sue Who
1. An intended third party beneficiary can sue the promisor to enforce
the agreement
a. Exception: Creditor beneficiaries can sue the promisee on
the pre-existing obligation (but not on the new contract)
2. Promisee can sue the promisor to enforce the contract
v. Defenses
1. If the third party beneficiary sues the promisor (one who was
supposed to perform for the third party’s benefit), the promisor can
assert any defenses he (the promisor) would have been able to
raise if he had been sued by the promisee (the other party to the
original contract)
a. However, where the third party beneficiary is a creditor
beneficiary (is a creditor of the promisee), and the
promisor’s duty is to pay money to the beneficiary, the
promisor, when sued, may not raise any defenses that the
promisee could have raised against the third party
beneficiary had she sued him for the money owed under the
debt (e.g., that the statute of limitations had run on the debt
owed by the promisee to the third party beneficiary)
b. Assignment of Rights
i. A contract between only two parties (assignor and obligor) (which does
not mention a third party), where one of the parties (assignor) later
transfers their rights under that contract to a third party (assignee) (occurs
in two steps)
ii. Requirements for Making An Assignment
1. Assigning language must be in present form (“I assign,” not “I will
assign” or “I promise to assign”)
2. Consideration is not required
iii. Limitations on Assignments
1. Contract Provisions
a. Invalidation Provisions
i. Takes away both the right to assign and the power
to assign so that there is a breach by the would-be
assignor and no rights in the assignee
1. “All assignments are void,” “Assignments
have no legal effect,” “Assignments have no
force and effect”
b. Prohibition Provisions
i. Takes away the right to assign, but not the power to
assign, which means that the assignor is liable for
breach of contract, but an assignee who does not
know of the prohibition can still enforce the
assignment
1. “Rights cannot be assigned,” “Do not assign
rights”
2. Even if a contract does not limit the right to assign, common law
bars an assignment if it “substantially changes the duties of the
obligor”
a. An assignment of a right to a money payment is never a
problem
b. Assigning a right to a performance (someone’s services)
will substantially change the obligor’s duties and will be
invalid
iv. Rights that Come from an Assignment
1. Assignee can sue the obligor (even though assignee wasn’t a party
to the original contract)
2. Obligor has the same defenses against the assignee as he would
have in a suit by the assignor.
3. Payment by the obligor to the assignor is effective until the obligor
knows of the assignment
4. Modification agreements between the obligor and the assignor are
effective if the obligor does not know of the assignment
v. Multiple Assignments
1. Gratuitous Assignments (without consideration; can be revoked)
a. The assignment made last in time controls (most recent
assignment controls)
i. Exception: A gratuitous assignment cannot be
revoked or reassigned if it is the subject matter of a
writing delivered to the assignee, the assignee has
received some sort of indicia of ownership, or the
assignee has relied on the assignment in a way that
is reasonable, foreseeable, and detrimental
1. If the assignment is not revocable, it will
take priority over a later assignment
2. Assignments for Consideration
a. The assignment made first in time for consideration
controls (earliest assignment controls)
i. Example: A “promise to assign” made in exchange
for valid consideration is valid consideration
1. Example: Batman promises to assign his
rights under the contract with Gotham to
Anne for $100.
b. Very Limited Exception
i. A later assignee takes priority over an earlier
assignee for value only if he both:
1. Does not know of the earlier assignment;
and
2. Is the first to actually obtain payment, a
judgment, a novation, or an indicia of
ownership
c. Multiple Assignments for Consideration as Breach of
Warranty
i. Anytime there is an assignment for consideration,
the assignor makes an implied warranty that the
rights assigned are assignable and enforceable
(which means that even though the assignee may
not be able to collect from the obligor because he is
not first in time, he can sue the assignor for breach
of this warranty)
c. Delegation
i. When a party to a contract later transfers a duty or work under that
contract to a third party
1. Example: P contracts to paint O’s house for $1,000. P (delegating
party) and X (delegate) agree that X will paint O’s (obligee) house
ii. All duties are delegable (even over an objection by the obligee), unless:
1. The contract prohibits delegations;
2. The contract prohibits assignments;
3. The contract calls for very special skills; or
4. The person originally to perform the contract has a very special
reputation; or
5. Delegation would change the obligee’s expectancy (e.g.,
requirements and output contracts)
iii. Consequences of Delegation
1. The delegating party always remains liable on the contract (if the
delegate fails to do the work, for example)
2. The delegate (new party) is liable only if there has been an
assumption (i.e., she promises to perform and this promise is
supported by consideration from the delegating party)
a. This promise by the delegate creates a contract between the
delegate and the delegating party in which the obligee is a
third-party beneficiary
3. The obligor must still pay the original party to the contract (the
delegating party), unless there has been an assignment as well