contracts and sales.doc

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Contracts & Sales

Approximately 60% of the contracts questions for each MBE will be based on the topicsFormation of contracts, Conditions, and Remedies, and approximately 40% will bebased on the remaining topics. All of the major topics will be represented in each

examination, but not necessarily all of the subtopics. Approximately 25% of thecontracts questions for each MBE will be based on provisions of the UniformCommercial Code, Articles 1 and 2.

Contracts and Sales Overview


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I. Applicable Lawa) Common Lawb) Article 2 of UCC2:

i) Article 2 applies when(1) Type of transaction is sale (not a gift)(2) Subject matter of transaction is goods (not services, e.g. tangible, personal

property).(3) If subject matter is mixed such as labor and products, then common law

applies because general rule is all or nothing.(4) Unless the product is far more important than the service, such as sale of a

watch that comes with warranty, UCC2 applies.II. Formation of Contracts: Contract is an agreement that is legally enforceable.

a) Offer:i) General test: An offer is a manifestation of an intention to contract. The basic

test is whether a reasonable person in the position of the offer would believethat his assent creates a contract.

ii) Specific Problems to Watch for(1) Content:

(a) Generally, offer is not required to contain all material terms, however,some terms are necessary.

(b) Sale of real estate: Common Law requires price and description.

Contracts and Sales: Formation of Contracts


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(c) Sale of goods: UCC2 has no price requirement.(d) Vague or ambiguous material terms are not an offer under either Common

Law or UCC2 (e.g. A offers to sell his car to B for a fair price is not a realoffer because offer is too vague).

(e) Production contract/output contract/requirements contract: A contract forthe sale of goods can state the quantity of goods to be delivered underthe contract in terms of the buyers requirements or Sellers output.(i) Valid example: B agrees to buy oats from S for 5 years. There is not a

specific quantity term in the agreement; instead it provides that B shalpurchase all of its oats from S. (e.g. exclusive sale to buyer)

(ii) Not unreasonably disproportionate limitation on increases: Buyer canincrease requirements so long as the increase is in line with priordemands (10% or less increase is ok for bar purposes) (e.g. It isunreasonable for B to buy 1000 pounds per year for 3 years thensuddenly ask for 6000 pounds the 4th year).

(2) Context:(a) Generally, advertisement or price quotations are not offers (they are

invitations for others to make offers).

(b) Exception:(i) 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 specific as to quantity and

indicates who can accept. (e.g. 1 black clock, worth $139 dollars)(iii)The first girl that comes in the store is an offer because it is specific

as to quantity and indicates who can accept.(c) Termination of Offers (4 methods) an offer cannot be accepted if it has

terminated.(i) Lapse of Time: Stated expiration date or reasonable time (30 days is

usually the reasonable time).(ii) Revocation (words or conduct of Offeror):

1. How: Unambiguous statement by Offeror to Offeree of unwillingness

or inability to contract or that Offeree is aware of (A offers B, then Aoffers C. A did not say anything to B but B heard As offer to C.Because B is aware of As unwillingness to sell, revocation iseffective).

2. When:a. Revocation of an offer sent through the mail is not effective until

received.b. An offer cannot be revoked after it has been accepted.c. Generally offers can be freely revoked by the Offeror except

when the Offeror promised to keep the offer open (option) andthis promise is supported by consideration.

d. An offer cannot be revoked for up to 3 months if

i. Contract is for sale of goodsii. A signed, written promise specifically to keep the offer openfor 3 months is the ceiling even if the written contract says 6months, and

iii. Party is a merchant.



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e. Merchant: An individual who deals in the type of goods involvedin a transaction or holds themselves out as having specialknowledge in the goods.i. An offer cannot be revoked if there has been a detrimental

reliance by the Offeree that is reasonably foreseeable.ii. The start of performance pursuant to an offer to enter into a

unilateral contract makes that offer irrevocable for areasonable time to complete performance.

f. Unilateral: (e.g. Offeror offers Purchaser $1,000 if Purchaserpaints the house, Purchaser starts painting. Offeror cannotrevoke.)

g. Performance, not mere preparation: (e.g. If Purchaser onlyorders paint and has not started, then Offeror can still revoke.)

(iii)Rejection (words conduct of the Offeree):1. Counteroffer: Counteroffer terminates the offer and becomes a new

offer. (Bargaining does not terminate the offer, e.g. will you take$400? = bargaining but offer I will only take $400 =counteroffer)

2. Conditional acceptance: A conditional acceptance terminates theoffer and becomes a new offer.3. Indirect Rejection: Additional terms4. Common law: Mirror image rule, an acceptance that adds new

terms is treated like a counteroffer rather than an acceptance.5. UCC2-207: Still acceptance with seasonal expression of acceptance.

A fact pattern in which there is 1) an offer to sell goods and 2) aresponse with additional terms raises 2 separate questions:a. Is there a contract: Generally yes, because a response to offer

that adds new terms is generally treated as an acceptance witha seasonal expression of acceptance

b. Is the additional term a part of the contract:

c. If both parties are merchants, general rule is that the additionalterm is a part of the contract except 1) the additional term is nota part of the contract if he materially changes the offer or 2) ifOfferor objects to the change.

d. If one or both parties are not a merchant, the additional term ismerely a proposal that is to be separately accepted or rejected.

(iv) Death of a party prior to acceptance: Generally, death orincapacity of either party terminates offer except1. When the offer is about an option (express promise to keep an offer

open with consideration) or2. There was a part performance of offer to enter into a unilateral

contract (results from an offer that expressly requires performance

as the only possible method of acceptance).b) Acceptance of an Offeri) Who can accept: Generally, an offer can be accepted only by

(1) A person who knows about the offer: (e.g. I post a reward for whoever findsmy lost dog. You find and return my lost dog, not knowing of the reward,there is no acceptance.)

(2) Who is the person to whom offer was made? Offers cannot be assigned;options can be assigned.(a) I offer to sell you my car for $300, you tell a third party of the offer, he

cannot accept because the offer is not assignable



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(1) Common law:(a) Generally, performance of preexisting contractual or legal duty is not a

consideration(b) Except

(i) When there is unforeseen difficulty so severe as to excuseperformance

(ii) When a third party makes the promise because third party wouldnthave the preexisting contractual/legal duty

(2) UCC2: Does not have a pre-existing legal duty rule; good faith is the test forchanges in an existing sale of goods contract.

vi) Partial payment as consideration for promise to give balance of debt:(1) Due and undisputed: If payment is due and undisputed, then part payment is

not consideration for release (Foakes v. Beer)(2) Not yet due or disputed: Agree to take payment when it is not yet due, or

when he has disputed, may constitute a consideration for release.vii)Illusory promises (usually the wrong answer)

(1) Generally, an illusory promise (a promise in which the Promisor has notcommitted herself in any manner) is not a consideration. No detriment.

(2) Except what appears to be illusion creates a new obligation (e.g. A agrees tosell B a car unless he gives a notice that he changed his mind by December1; while changed his mind by itself could be an illusory promise, by addingthe giving notice by December 1 adds a new illusion).

viii) Consideration Substitute(1) Written promise to pay debt barred by technical defense such as statute of

limitations as consideration substitute:(a) Rule: A written promise to satisfy an obligation for which there is a legal

defense is enforceable without consideration.(b) E.g. D owes C $1000. Legal action to collect this debt is barred by the

statute of limitations. D writes C, I know that I owe you $1000. I will payyou $600. C can collect the new $600 because 1) written promise 2) to

satisfy an obligation 3) for which there is a legal defense, so 4) new deal isenforceable without consideration.(2) Written release of claim for breach of sale of goods contract: Under 1-107, a

written release of all or part of a claim for breach of a contract for sale ofgoods is enforceable without consideration.

(3) Seal is not a consideration substitute: Majority rule is that seal is not aconsideration substitute

(4) Promissory Estoppel (detrimental reliance): Common consideration substitute(a) Element

(i) Promise(ii) Reliance that is reasonable, detrimental and foreseeable(iii)Enforcement necessary to avoid injustice

(b) Comparison of consideration and promissory estoppels(i) When nothing is in exchange, but statement is relied on and isreasonable and foreseeable.

(ii) E.g. M promises D that M will not foreclose Ds mortgage. D then paintshis house. Is Ds painting the house consideration for Ms promise: Notconsideration issue because Ms promise is not in exchange foranything from D.



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d) Defenses:i) Capacity to contract:

(1) Who lacks capacity to contract(a) Infant, under 18(b) Mental incompetents, lack ability to understand agreement(c) Intoxicated persons if other party has reason to know

(2) Consequences of incapacity(a) Right to disaffirm by person without capacity (party over 18 is bound by

contract but party under 18 is not)(b) Implied affirmation: 1) person made agreement when under 18 2) person

has gained capacity (turns 18) and 3) person continues to get benefit fromprior agreement; then 4) implied affirmation makes the contractenforceable against the person who was under 18.

(c) Liability for necessity: 1) even person without capacity is obliged to payfor necessities (rent and utilities) 2) legal base is on quorum meruit notcontract law 3) measure of promise is not based on contract but the valueof the promise.

ii) Statute of Frauds (SOF): Very important

(1) When does a contract need to be in writing? SOF is a defense to enforcementof an agreement within the statute and the statute is not satisfied.(2) Is the contract a type of contract that is within the SOF?

(a) If so, ask if the SOF is satisfied.(b) If SOF is not satisfied, ask if there is a SOF defense.

(3) SOF applies when there is 1) marriage 2) promise by an executor to payobligation of the decedents estate 3) guarantee 4) service that cannot beperformed within one-year 5) estates interest transfer that is more than ayear 6) sale of goods for more than $500. (Need writing)(a) Common Law

(i) Promise in consideration of marriage (e.g. pre-nuptial)1. Not a mere promise to marry: Void anyway under Domestic

Relations Law (DRL), in writing or not.(ii) Promise by an executor/administrator to pay obligation of thedecedents estate out of the executor/administrators own funds1. Not a promise that the money would come out of Ds estate

(iii)Promises to answer for the debts of another [Guarantee]1. Not merely a promise to pay, but rather a promise to pay if

someone else does not: A guarantee2. Exception: If the purpose of the underlying obligation is to benefit

the guarantor, then this is outside the SOF (SOF rules do not apply):Ex: A (guarantor) promises to pay X-paint-seller for paint if B doesnot pay, but the purpose of Bs obligation to pay was to paint Ashouse.

(iv) A service contract not capable of being performed within oneyear from the time of contracting (comes up in 5 fact patterns)1. Specific time period, more than a year; SOF Applies

a. (Orally) agree to employ X for 3 yearsb. (Orally) agree to employ X for 3 years, terminable on 30 days

notice: Note that the termination right is irrelevant (key is abilityto perform in one year, not termination for the SOF)

2. Time of performance (date of start: Assume can be done in 1 day) ismore than one year from the date of contracting: SOF applies sinceperformance cannot be finished in 1 year



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3. Employment for one year, but start after date of contracting: SOFapplies

4. No time stated, just agree over a particular task: SOF does notapply, regardless of how long he actually takes to complete thetask, with unlimited resources any task can be completed withinone year.

5. Lifetime deal: SOF does not apply(v) Transfer of an interest in real estate for a term of more than 1 year

1. Includes: Permanent (or anything greater than 1 year) sales of land,easements, and leases.

2. Does not include: Houses, fixtures on land.(b) UCC2: SOF applies to sales of goods for $500 or more

(4) If SOF is applied, is it satisfied?(a) Satisfied, here, means there is no defense on the basis of the SOF,

because the agreement is enforceable on the following satisfaction of theSOF: E.g. via performance or a writing in the following circumstances

(b) 3 Methods for satisfying the SOF (eliminating SOF defenses):(i) Performance: Rules vary depending on the type of contract

1. Services contractsa. Full performance by either party satisfies the SOFb. Part performance does not satisfy the SOF (there still exists a

SOF defense against enforcing the contract).2. Sales of Ordinary Goods: Part performance of a contract for sale of

goods satisfies the SOF, but only as to the extent of the partperformance (can sue for payment for what was actually delivered,but not on the undelivered remainder of the contract -- still a SOFdefense to that).

3. Sales of Specialized Goods: As an exception to the above rule, if thecontract is for goods that are specially manufactured then theSOF is satisfied as soon as the seller makes a substantial

beginning in making or obtaining the goods4. Real Estate Contacts: Need 2 out of following 3 to satisfy the SOFon performance grounds (completion of just 1 is not enough: Still adefense on SOF grounds):a. Payment of (at least part) of purchase priceb. Transfer of possessionc. Making improvements to the land

(ii) A Written Instrument (e.g. a writing) that meets the following willsatisfy the SOF (will eliminate any SOF defense):1. For any contract other than for UCC2 goods

a. Look to the writing(s) and see if all the material terms areidentified:

i. Who are the parties to be boundii. What is the extent of their obligationb. The party to be charged (the D) signed the writing even if the

other party (P) did not sign2. For a UCC2 2 (goods) contract

a. Writing must contain the quantity termb. Party to be charged (D) must have signed the writing



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i. Exception: If both parties are merchants, and one receives asigned writing (by the P) with a quantity term that claimsthere is a contract, the party to be charged must respondwithin 10 days of receipt: If not, the SOF defense for the Dwill be lost (contract enforceable)

c. Judicial Admission of Sale of Goods Agreement: This isessentially an admission (by the party to be charged) that therewas an agreement: Comes through pleadings, discovery

iii) SOF related Issue(1) Authorization to enter into contract for someone else: When does a person

need a written authorization in order to execute a contract for someone else?The authorization must be in writing if the contract to be signed is within theSOF. E.g. the authorization must be of equal dignity.

(2) Contract Modification: When does a modification of a contract have to be inwriting? If the contract, with the modification, is within the SOF, themodification must be in writing.

(3) Contract Provisions: Under Common Law, contract provisions requiring thatall modifications be in writing are ignored; under the UCC2, such provisions

control unless waived.e) Illegality, Misrepresentation, Duressi) Illegal Subject Matter/Illegal Purpose: If the subject matter is illegal, the

agreement is void. If the subject matter is legal but the purpose is illegal, theagreement is enforceable only by the person who did not know of the illegalpurpose.

ii) Misrepresentation:(1) Misrepresentation is a false assertion of fact, or concealment of facts.(2) Misrepresentation as to terms of contract is voidable. (A says house does not

have termites when it does); Misrepresentation as to nature of contract isvoid (A tells B this is a lease agreement when it is a purchase agreement:Void)

(3) Common Issues:(a) Fraudulent or Material: Seller truly believes house has no termites, thenhe has just material but not fraudulent.

(b) Reliance: Relied on inspector and not the sellers statement, then sellerdoes not have misrepresentation.

(c) Duress: Elements include one party (D) with improper threat and oneparty (P) with no reasonable alternative (in a vulnerable situation), andthe 2 parties entered into an agreement. Then he has a defense tocontract.

iii) Unconscionability:(1) This doctrine, originally only applicable to sales of goods but now a part of

contracts law generally empowers a court to refuse to enforce all or part of

an agreement.(2) The 2 basic test, unfair surprise and oppressive terms, are tested as of thetime the agreement was made (if he was fair at the time he has made, evenif he becomes unfair later, he has deemed fair) by the court.

iv) Ambiguity: There will be no contract if(1) Parties use a material term that is open to at least 2 reasonable

interpretations, and(2) Each party attaches different meaning to the term, and(3) Neither party knows, or has reason to know meaning attached by other. (If

one party knows, then there is a contract with the interpretation of the



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ignorant party.)



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v) Mistake of Fact:(1) Mutual mistakes of material fact; no contract if

(a) Both parties mistaken(b) And basic assumption of fact materially affects the agreed exchange (e.g.

as to what he is = unenforceable; as to what he has worth = enforceable)(c) No mistake of fact if both parties assumed the risk

(2) Unilateral Mistake of Material Fact:(a) Generally, courts have been reluctant to allow a party to avoid a contract

for a mistake made by only one party(b) Except, when there is

(i) Palpable mistakes: If the other party knows or should have known themistake, courts grant relief to the mistaken party

(ii) Mistakes discovered before significant reliance by the other. (can getout of contract)



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III. Terms of Contract (Parol Evidence Rule and Interpretation)a) Parol Evidence Rule:

i) General Rules:(1) Written contract as the source of contract terms has an exclusionary effect

on earlier or contemporaneous agreements as a possible source of terms ofthe contract.

(2) Written agreement that court finds is the final agreement, oral statement

made at the time the contract was signed, or earlier (not later) oral or writtenstatements by the parties to the contract trigger the Parol evidence rule.

ii) Terms:(1) Partial integration: Written and final, but not complete(2) Complete integration: Written and final and complete(3) Merger clause: Contract clause such as This is the complete and final

agreementiii) Interpretation:

(1) Despite Parol Evidence Rule, earlier agreements can be considered to resolveambiguities in the written contract.

(2) The Parol evidence rule prevents a court from considering earlier agreementsas a source of consistent, additional terms unless the court finds that the

written agreement was only a partial integration.(3) Even if the writing is a complete integration, a court can still consider

evidence of earlier agreements for terms that would naturally and normallybe in a separate agreement. (sale of goods contract mentioning ads, becauseads are usually in a separate contract)

(4) Regardless of whether the writing is a complete or partial integration, theParol evidence rule prevents a court from considering earlier agreements as asource of terms that are inconsistent with the terms in the written contract. Acourt, may, however, consider evidence of such terms for the limited purposeof determining whether there was a mistake in integration, e.g. a mistake inreducing the agreement to writing.

b) Other Sources of Terms

i) Other than words of parties, other sources of contract terms include:(1) Course of performance: Same people, same contract (in the beginning of the

contract did something, can use that to establish same performance in theend should not be complained.)

(2) Course of dealing: Same people, different contract (dealt in another contractbefore)

(3) Custom and usage: What is accepted in the industry? E.g. Time is ordinarilynot of the essence in a land-sale contract, so delay in delivery is not breach

c) UCC2 Terms Interpretation:i) Delivery Obligations of Seller of Goods:

(1) Absent an agreement as to place of delivery then the place of delivery is thesellers place of business unless both parties know that the goods are

somewhere else in which case that place is the place of delivery.(2) If an agreement as to place of delivery is there, then the question is what

does the seller have to do to complete its delivery obligation?(a) Shipment contract:

(i) FOB (free on board city) FOB followed by city where the seller is meansshipment contract.

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(ii) Seller completes its delivery obligation when he1. Gets the good to a common carrier2. Makes reasonable arrangement for delivery3. Notifies the buyer

(b) Destination contract(i) FOB followed by city where the buyer is means destination contract.(ii) Seller does not complete its delivery until the goods arrive where the

buyer is.ii) Risk of loss

(1) Issues arise when:(a) After contract has been formed, but before the buyer receives the goods(b) The goods are damaged or destroyed and(c) Neither the buyer nor the seller is to blame

(2) 4 ROL rules:(a) Agreement: Agreement of the parties controls.(b) Breach: Breaching party is liable for any uninsured loss even though

breach is unrelated to problem.(c) Delivery by common carrier (not seller): Risk of loss shifts from seller to

buyer at the time that the seller completes its delivery obligations.

(d) No agreement, no breach, no delivery by a carrier(i) Key Issue: Is seller (not buyer) a merchant.

1. Seller-Merchant: ROL shifts on buyers receipt of the goods.2. Non-Merchant-Seller: ROL shifts to buyer when he tenders the

goods (makes the goods available).(3) Warranties of Quality: Watch for Parol evidence issues in warranty questions.

(a) Express:(i) Words: Looks for words that promise, describe or state facts (not

simply puffing, like opinions) (e.g. machine is made of steel vs.machine is well-made)

(ii) Samples or models: Use of sample or model creates a warranty thatthe goods the buyer receives will be like the sample or model.

(b) Implied warranty of merchantability: When buying from a merchant, aterm is automatically added to the contract by operation of law: That thegoods are fit for the ordinary purpose for which such goods are used.(i) Triggering fact: Seller is a merchant who deals in goods of that kind.(ii) Warranty: Goods are fit for ordinary purposes.

(4) Implied warranty of fitness:(a) Triggering fact: Buyer has particular purpose; buyer is relying on seller to

select suitable goods, seller has reason to know of purpose and reliance.(b) Warrant: Goods fit for particular purpose.

(5) Contractual Limitations on Warranty Liability(a) Disclaimer: May eliminate implied warranties (so if sold sample, signed

contract with disclaimer, the warranties came with sample cannot be

disclaimed)(i) Express warranties: Cannot be disclaimed(ii) Implied warranties of merchantability and fitness:

1. as is or with all faults or2. Conspicuous language of disclaimer, mentioning merchantability



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(b) Limitation of remedies: (e.g. warranty liability shall be limited to) does noteliminate warranty, simply limits or sets recovery for any breach ofwarranty: Possible to limit remedies even for express warranties.(i) Test: Generally, the limit cannot be unconscionable (court standard)(ii) Prima facie unconscionable: If breach of warranty on consumer goods

causes personal injury.



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IV. Conditions and Performancea) Conditions of Performance:

i) A condition is a part of the contract, agreed to by both parties. A conditionalacceptance is a part of the response to the offer, agreed to only by the Offeree.

ii) Vocabulary of performance conditions(1) True condition: An event beyond the influence of either of the parties to the

contract that affects the duty to perform. Condition coupled with a covenant:

An event that is to some extent within the influence of one of the parties tothe contract that affects the duty to perform.

(2) Condition Precedent: Must occur precedes performance. ConditionSubsequent: Must not occur during performance.

(3) Express Condition: Created by language of contract. (words like if,provided that, so long as, subject to

(4) Constructive Condition: Created by operation of law, are keyed to order ofperformance.

iii) What is the standard for satisfying a condition?(1) Express conditions: Strict compliance with express conditions.(2) Constructive Conditions: Substantial performance standard.

(a) Substantial performance standard example: Writing says all pipes must

be gold, but Seller installs silver pipe. Although the words must be areincluded in writing, they are no magic words for express condition.

Therefore, upon installation, it is substantial performance. For constructiveconditions, Buyer will pay the damages.

(b) Divisible contract and the substantial performance rule: If the contractitself divides the performance of each party into the same number of partswith each part performance by one party serving as consideration for thecorresponding part performance by the other, then the contract is adivisible contract and the substantial performance test is applied to eachdivisible part of the contract.

iv) How can an express condition be excused? Identify 1) who benefits from thecondition? 2) Statement is made by the person giving up the benefit.

(1) Estoppel or waiver:(a) Estoppel is based on a statement by the person protected by the condition

before the conditioning event was to occur and requires a change ofposition.

(b) Waiver: Based on a statement by the person protected by the conditionafter the conditioning event was to occur and does not require a changeof position.

(2) Failure to cooperate under a condition coupled with a covenant: (S contractsto sell his house to B for $10; contract provides that the sale needs B to havemortgage, B made no effort to obtain a mortgage. S can sue B if B refuses tobuy the house)

b) UCC2: Sale of Goods Performance Concept

i) Perfect tender: Generally, the seller is obligated to deliver perfect goods.ii) Cure: Seller who fails to make a perfect tender will be given a second chance,

an option of curing, when(1) Time for performance has not yet expired(2) Time for performance has expired: The statutory test is whether the seller

has a reasonable ground for believing that the improper tender would beacceptable, perhaps with a money allowance. (looks info about prior deals)

(3) Rejection of the goods: Rejection of the goods must occur before acceptanceof the goods (no contract). If the goods are less than perfect, the buyer hasthe option to reject unless it is an installment sales contract.

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(4) Installment sales of contract: An installment sales contract requires orauthorizes 1) delivery in separate lots 2) to be separately accepted;generally, the buyer has the right to reject an installment only where there isa substantial impairment in that installment that cannot be cured.

(5) Acceptance of the goods:(a) 3 scenarios

(i) Express of acceptance is acceptance

(ii) Payment without inspection is not acceptance(iii)Implied acceptance-retention after inspection without objection. (30

days or more usually is the magic number that if the buyer kept thegood without objection)

(b) Effect of acceptance: If the buyer accepts the goods, he cannot laterreject them.

(6) Revocation of acceptance of the goods: Generally, if a buyer accepts thegoods, buyer cannot later reject them. In limited circumstances, a buyer caneffect a cancellation of the contract by revoking his acceptance of the goods.(a) Nonconformity substantially impairs the value of the goods, and(b) Excusable ignorance of grounds for revocation or reasonable reliance on

sellers assurance of satisfaction, and

(c) Revocation within a reasonable time after discovery of nonconformity.(7) Other Requirements and Consequence of rejection of the goods and

revocation of acceptance of the goods:(a) Requirements

(i) Reasonably notify seller(ii) Hold the goods for seller(iii)Follow reasonable seller instructions

(b) Consequences(i) Goods back to seller(ii) No buyer payment obligation

(8) Buyers payment obligation:(a) Generally, buyer needs to pay cash unless otherwise agreed

(b) Buyer can pay by check and(c) Seller does not have to take the check but that gives the buyer an

additional reasonable time.

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V. Excuse of Nonperformance (Discharge of Contractual Duties)a) Failure of Condition: If a partys duty to perform is conditional, failure of the

condition excuses the duty to perform.b) Other Partys Breach:

i) Excuse in sales of goods UCC2perfect tender: If the tender is less than perfect,the buyer can reject the goods and withhold paymentthe buyer is excusedfrom paying.

ii) Excuse in common law: Generally, Common Law requires only substantialperformance. If one party to a contract substantially performs, the other party isrequired to perform. A minor breach, however, will not excuse performance bythe other party. Therefore, only material breach is an excuse for the other party.

iii) Excuse by anticipatory repudiation or inability to perform:(1) Anticipatory Repudiation (AR) is a statement that 1) the repudiating party will

not perform 2) made prior to the time that performance was due. AR by oneparty excuses the other partys duty to perform.

(2) It also generally gives rise to an immediate claim for damages for breach.(a) AR can be reversed or retracted so long as there has not been a material

change in position by the other party.(b) If the repudiation is timely retracted, the duty to perform is reimposed but

performance can be delayed until adequate assurance is provided.iv) Excuse by Reason of a Later contract:

(1) Rescission (cancellation) the key is whether performance is still remainingfrom each of the contract parties. (Usually too late if one party has alreadycompleted the work)

(2) Accord and Satisfaction:(a) Accord is an agreement by the parties to an already existing contract that

the same parties will do something different that will extinguish orsatisfy that existing obligation

(b) Satisfaction is performance of the accord.(c) Effect of Accord and Satisfaction: The accord suspends legal enforcement

of the original obligation so to provide time to perform the accord.

(d) Effect of no satisfaction: If the accord is not performed, then the otherparty can sue on either the original obligation or the accord.

(3) Novation:(a) Novation is an agreement between both parties to an existing contract to

the substitution of a new party. E.g. same performance, different parties.(b) Novation excuses the contracted for performance of the party who is

substituted for or replaced.(c) Novation requires the agreement of both parties to the original contract

and excuses the person replaced from any liability for nonperformance.Delegation does not require the agreement of both parties and does notexcuse.

v) Excuse of performance by reason of a later, unforeseen event

(1) Performance/Contractual duties (other than a contractual duty to pay money)can be excused under impossibility / impracticability or frustration ofpurpose.(a) Something that happens after contract formation but before the

completion of contract performance.(b) That was unforeseen(c) That makes performance impossible or commercially impracticable or

frustrates the purpose of the performance.

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(2) Common fact patterns(a) Common Law: Death of a party(b) UCC2: Damage or destruction of subject matter of contract (a house that

one party should paint was burned down)(c) Subsequent law or regulation (e.g. something after contract formation was

ruled illegal)

Contracts and Sales: Excuse of Nonperformance


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VI. Remedies

a) Punitive Damages: Punitive damages are not generally recoverable for breach ofcontract.

b) Liquidated Damages:i) Contract can stipulate damages or method of fixing damages. A contract cannot

provide for penalty.ii) 2 general tests for determining whether a contract provision is a valid liquidated

damages clause or an invalid penalty provision(1) At time of contract, the amount of possible damages from any later breach of

contract is difficult to determine and(2) At time of contract, the contract provision is a reasonable forecast of possible

damages.c) Damages Rules for Ordinary Contracts (Common Law):

i) Generally, the injured party is entitled to recover an amount that would put himin as good a position as if the contract had been performed.

ii) Additions and Limitations:(1) Plus foreseeable consequential damages: The injured party can also recover

for consequential or special damages that were in reasonable contemplationof both parties at the time of the contract.

(2) Plus incidental damages: The injured party can also recover costs he incurs indealing with the breach.

(3) Minus avoidable damages: No recovery for loss that could have been avoidedby appropriate steps. Burden of Proof of avoidability is on the defendant.

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d) Damages Rules for Sales of Goods (UCC2):

i) When Seller breaches, and buyer keeps the goods: Buyer gets fair market valueif perfect - fair market value as delivered. (E.g. S sells B an antique car for$30,000, the car is defective. B keeps the car and sues for breach of contract.

The jury finds the car as delivered, although defective, still worth $20,000dollars. Had the car been delivered as it should, it would have been worth$34,000. B can recover $34,000 (if perfect deliver): $20,000 (actual delivered) =$14,000)

ii) When Seller breaches, and seller keeps the goods: Buyer gets the market priceat time of discovery of the breach: contract price or replacement price -contractprice.

iii) When Buyer breaches and buyer has the goods: Seller can get the contractprice.

iv) When Buyer breaches and seller has the goods: Seller can get (contract price-market price at time and place of delivery) or (contract price-resale price) and, insome situations, provable lost profits.

e) Quasi-Contract and Reliance:i) Unjust enrichment: Not based on contract law. A party should pay for the benefit

and value of service and materials received. A promised gift does not countunless injustice can be avoided only by such enforcement.

ii) Reliance damage: Reliance damages are valued by a party's reliance interest forthe foreseeable amount. It puts the injured party in the same dollar position as ifthe contract never happened.

f) Nonmonetary Remedies: When remedy at law is inadequate



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i) Specific Performance/Injunction: Equitable remedy. Unclean hands, adequacy ofremedy at law, etc.(1) Contracts for sale of real estate(2) Contract for sales of unique goods like 1) antiques, 2)art, 3)custom-made

(e.g. So car for example, would usually not qualify for specific performancebecause it is not unique)

(3) Contract for services: No specific performance, possible injunctive relief.ii) Adequate Assurance of Future Performance; look for:

(1) One party to contract learning something after the contract that gives himreasonable grounds for insecurity about the other partys performance, and

(2) A written demand for adequate assurance.iii) Reclamation: Right of an unpaid seller to get its goods back. Key elements:

(1) The buyer must have been insolvent at the time that he received the goods,and

(2) That seller demand return goods within 10 days of receipt(3) Buyer still has goods at time of demand

iv) Stopping Goods in Transit or Recovering Goods in Storage if Buyer is Insolventv) Rights of good faith purchaser in entrustment:

(1) If the owner leaves his goods with a person who sells goods of that kind(2) And that person wrongfully sells the goods to a third party

(3) Then such a good faith purchaser from dealer cuts off rights of the originalowner/entruster.



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VII. Third Party Beneficiary Problemsa) Steps to approaching Third Party Beneficiary Problems:

i) Identify a problem as a third party beneficiary problemii) Use the vocabulary of third party beneficiary lawiii) Deal with efforts to cancel or modify a third party beneficiary contractiv) Figure out who can sue whom andv) Assert any available defenses.

b) Third Party Beneficiaries:i) Identify third party beneficiary problem: Look for 2 parties contracting with the

intent of benefiting a third party. (e.g. insurance and distributor contract)ii) Vocabulary on exam:

(1) Third party beneficiary: Not a party to the contract. Able to enforce contractothers made for his benefit.

(2) Promisor: Look for person who is making the promise that benefits the thirdparty.

(3) Promisee: Look for person who obtains the promise that benefits the thirdparty

(4) Intended/Incidental: Only intended third party beneficiary has rights.

Intended third party beneficiary will be named in the contract.(5) Creditor/Donee: Intended beneficiaries are either Donees, or creditors.Usually Donees. Look at whether beneficiary was a creditor of the Promisee.(a) For creditors: Need prove on debt of promise to creditor beneficiary.(b) For Donee: Need a named beneficiary.

iii) Dealing with Efforts to Cancel or Modify: The test is whether the third partyknows of and assents to the contract. If the third party beneficiary has assentedto or relied on the contract, his rights have vested and the contract cannot becanceled or modified without his consent unless the contract otherwise provides.(1) Who can sue whom:

(a) Beneficiary can sue Promisor: If pass the assents and knows test(b) Promisee can sue Promisor: Third party beneficiaries are not replacement

beneficiary, first 2 parties are still there.(c) Donee beneficiary cannot sue promise but creditor beneficiary can:iv) Defenses: If the third party sues the Promisor, the Promisor can assert any

defense that he would have had if sued by the Promisee. (So any defensebetween the 2 parties can be used by Promisor when sued by third partybeneficiary.)

c) Assignments of Rights:i) Assignment is: Look for

(1) Contract between only 2 parties(2) One of the parties later transfers of rights (not duty) under that contract to a

third party.(3) Vocabulary:

(a) Assignor: Party who transfers right to another(b) Assignee: Not a party to the contract. Able to enforce the contractbecause of the assignment.

(c) Obligor: Other party to the contract.ii) Limitations on Assignment:

(1) Contract Provision: Determine whether contract(a) Prohibits assignments or: Language of prohibition (e.g. rights are

hereunder not assignable) takes away the right to assignment but not thepower to assign which means that the assignor is liable for breach ofcontract but an assignee who does not know of the prohibition can still

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enforce the assignment.(b) Invalidates assignments: Language of invalidation (e.g. all assignments

are void) takes away both the right to assign and the power to assign sothat there is a breach by the assignor and no rights in the assignee.

(2) Common Law: Even if a contract does not in any way limit the right to assign.Common law bars an assignment that substantially changes the duties of theobligor.(a) Assignment of right to payment: Permitted

(3) Assignments of other performance rights:(a) Not permitted(b) Example: A assigns his right to security services to B so that C will now

provide security services to B is not permitted.(4) Requirements for Assignment:

(a) Language has to be present: I assign, cannot be I will or I promise toassign

(b) Consideration, generally, is not required(5) Right of Assignee:

(a) Assignee can sue the obligor

(b) Obligor has same defenses against assignee as he would have againstassignor.(c) Payment by obligor to assignor is effective until obligor knows of the

assignment.(d) Modification agreement between obligor and assignor is effective if obligor

did not know of assignment.(6) Multiple Assignments:

(a) Gratuitous assignment: Generally, last assignee wins; however, such a giftassignment can be freely revoked. Revocation can be accomplisheddirectly or indirectly by bankruptcy, death, the assignor takingperformance directly from the obligor, or the making of anotherassignment. Since the later gift assignment revokes an earlier gift

assignment, without consideration, last in time rule applies and lastassignee wins.(b) Assignment for Consideration: Generally, first assignee for consideration

wins, except(i) A subsequent assignee takes priority over an earlier assignee for value

only if he both1. Does not know of the earlier assignment and2. Is the first to obtain payment, a judgment, a novation, or indicia of

ownership?(ii) Multiple assignments for consideration as breach of warranty: In an

assignment for consideration, the assignor makes a warranty that therights assigned are assignable and enforceable.

d) Delegation of Duties:i) Delegation is: Party to a contract transferring work (not right) under thatcontract to third party. (e.g. P contracts to paint Os house for $1000, then P hasa duty to paint and a right to payment and O has a duty to pay and a right to thepainting of his house)

ii) Which Duties Are Delegable:(1) Generally, contractual duties are delegable.(2) Limitations are 1) contract prohibits delegations or prohibits assignments or

2) contract calls for very special skills or 3) person to perform contract has avery special reputation (e.g. Mariah Carey cannot just delegate her duty to



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sing at Emmys to me).



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iii) Requirements for delegation: Essentially none.(1) Consideration not required, but no legal obligation on Delegatee unless there

is consideration.(2) Consent of other party to the original contract not required for delegation.

iv) What are the Consequences of Delegation:(1) Delegating party remains liable(2) Delegatee liable to Obligee only if he receives consideration from delegating

party.

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