Contract I

How do you know whether the UCC or Common Law Applies?

By determining whether the K is for a good or service

What if the service K dominates?

Use Common Law Code

UCC 2-105:

(1) "Goods" means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale . . .

(2) Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are "future" goods. . . .

UCC 2-102

Unless the context otherwise requires, this Article applies to transactions in goods

United Nations Convention on Contracts for the International Sale of Goods (CISG):

Governs sales of goods between businesses whose principle places of business are in different countries (noted in Article 1 of CISG). It achieves uniformity in the law of international sales.

What are the rules for goods?

Must be existing, identifiable and movable at time of sale; if not both existing and identified then theyre considered "future” ____; they are tangible; readily measurable; must be capable of severance without material harm to the realty; Standardized software is a ____.

Is software, put on a floppy disc or medium prior to sale, covered under the UCC?

Yes. It is a good because of the need for a broad meaning of good for uniformity across state lines, intellectual property implanted on a medium is tangible, moveable and available in the marketplace.

Advent Systems Limited v. Unisys Corp

Held that goods should be given an “extensive meaning” because the UCC is designed to simplify, clarify, and modernize the law governing commercial transactions. While a computer program is intellectual property not subject to the UCC, once it is “implanted in a medium” it becomes a good. Subjecting software sales to the UCC creates a uniform body of law governing software sales.

Is cable signal covered under the UCC?

No. It’s not a good because it is separate, identifiable, tangible or measurable. They are more like telephone services than gas/electricity/water.

Kenneth Kaplan v. Cablevision of PA:

Held that cable signals are not “goods” because 1) They are not separate, identifiable and tangible. They are more in the nature of broadcasting and transmission of services, like access to telephone services, rather than the sale of gas, water or electricity. 2) They are not identifiable as movables before the K is executed 3) The quantity of cable consumed is not readily measurable

Is downloadable software covered under the UCC?

Yes. It’s a good because it is generic standardized software. It is movable at the time of identification to the contract of sale because the consumer is able to download and install the software after one payment.

Rottner v Avg Technologies USA:

PC TuneUp (Downloadable Software) is a good because 1) It is generally standardized software 2) It is movable at the time of identification to the contract of sale. The consumer is able to download and install the software after one payment.

What if the K involves mixed goods or services?

Use the predominant purpose test to determine whether the K is mostly for goods, then apply UCC

Predominance purpose test

Is used to determine whether a contract can be interpreted as a services contract or a goods contract (there can be hybrid contracts): If service dominates Common Law Code; If goods dominate then UCC

Predominance Purpose test factors:

Language of K (identification of parties, title of K, substantive obligations of K); nature of seller’s business; Reason for K from buyer’s perspective (but caselaw can overcome); price breakdown/billing method; gravamen of action; installation Ks: installation means goods lose character, capable of severance without harm. LNRPGI

How many factors does the PPT have?

6 (LNRPGI)

PPT: 1st Element

K language: Courts look at the performance of the parties and words that describe the relationship between the parties. Contractual language refers to the transaction as a purchase, for example, or identifies the parties as a buyer and seller, indicating that it is a contract for goods rather than services.“Systems and Installation Contract.” (Implies a hybrid contract). “Purchaser”,“Buyer”, “Seller.” “Deliver and install equipment.”(Title of K, party identification, substantive obligations)

PPT: 2nd Element

Nature of seller’s business: a) Does the business promote the sales of one brand of product? b) Does it offer installation of the products it sells? c) Does the company only offer installation and not the products themselves. (1) Ex. AVA (stereo system company) Is the installation and service incidental to the overarching purpose of the business, which is to sell “smart home” components?

PPT: 3rd Element

Reason for contract (based on purchaser’s intention): a) Does purchase want the good itself or does the good need some sort of service provided with it? b) What did the purchaser sought to procure when entering into the contract? Is the ultimate goal to acquire a product? Is the ultimate goal to procure a service?

PPT: 4th Element

Relative cost of goods and services: Does it cost more to install the goods or do the goods cost more by themselves?

PPT: 5th Element

Gravamen of the action: What is the complaint on? the service? or the actual good?

PPT: 6th Element

Installation: lose character of goods and incapable of severance without material harm

What is Consideration?

A performance or a return promise that is bargained for. It is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise (you need both).

Type of consideration

Return promise: can be either a benefit to promisor or a detriment to promisee

When is there no consideration?

When there is a mere gratuitous promise or conditional gift

How to determine whether the promise was a gift?

Determine if it will be a benefit to the promisor; if it is no benefit, but for the purpose of enabling the promisee to receive a gift is not consideration. If, however, the promisee incurred a detriment on the faith of the promise, it may be consideration.

What is another way that a promise cannot be considered consideration?

Past consideration or actions: Consideration has to exist at the time of making the promise cannot base consideration on things that were considered in the past.(if person was already announcing what they were going to do before a promise was made then it is not consideration). The past actions were not induced by a promise. (If Moral consideration.

What doesnt matter when it comes to the value of the consideration for both parties?

Inadequacy of consideration doesn’t invalidate a contract (Sufficient meaning having some recognized legal value)

What is a type of detriment?

Giving up a legal right

Contracts implied in fact

Require consideration

Rest. 2d Contracts § 71: Consideration

(1) To constitute consideration, a performance or a return promise must be bargained for

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. The performance may consist of: An act other than a promise, or A forbearance, or The creation, modification, or destruction of a legal relation. The performance or return promise may be given to the promissory or to some other person. It may be given by the promisee or by some other person.

Rest. 2d Contracts § 71 Comments

"Bargained for." In the typical bargain … the consideration induces the making of the promise and the promise induces the furnishing of the consideration … But it is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise; both elements must be present, or there is no bargain. Moreover, a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. In such cases there is no consideration .

Rest. 2d Contracts § 89: Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or

UCC 2-209: Modification, Rescission and Waiver

(1) An agreement modifying a contract within this Article needs no consideration to be binding.Modifications made in good faith are enforceable. Good faith means observance of reasonable commercial standards of fair dealing in the trade.

UCC 2-209: Modification, Rescission and Waiver Comments

[Modifications] must meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a "modification" without legitimate commercial reason is ineffective as a violation of the duty of good faith. Nor can a mere technical consideration support a modification made in bad faith. The test of "good faith" between merchants or as against merchants includes "observance of reasonable commercial standards of fair dealing in the trade" (Section 2-103), and may in some situations require an objectively demonstrable reason for seeking a modification.

UCC 2-103: Definitions

(b) "Good faith" in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

UCC 1-201: General Definitions

(19) "Good faith" means honesty in fact in the conduct or transaction concerned.

Exception to adequacy of consideration

Exchanging a “nominal value” underlying a “sham” deal. Schnell was to pay 1 cents to promise to pay $200 to other guys. Since he listed all the other reasons why he was going to pay them $200, the 1 cents was merely nominal.Batsakis was promised to be paid $25 for $2,000. The court didn’t question the adequacy of consideration in this case because at the time of the war (CONTEXT)

When dealing with K modifications what do you do first?

Determine whether the UCC or common law applies, use predominance purpose test

What if the K was under the UCC?

Rule: Good faith and all factors

What if the modified K was under the common law?

Either Rest. 89 4 factors or Pre-existing Legal Duty Rule (PLDR)

What factors into good faith modifications?

1) Need legitimate commercial reason to seek modification, not merely playing hold up

game

2) Failure to protest when modification requested

3) Might modification have been given for extra-contractual benefits, e.g. to maintain long term relationship.

4) Are such modifications common in the industry

5) Availability of alternative relief

6) Dishonesty in Fact?

7) Secret Intention to not pay?

What is the Preexisting Legal Duty Rule?

When promisee renders the exact same services under a modified contract as under the original contract, the modification is not enforceable because it lacks consideration.

Rest. 2d Contracts § 89: Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made;

Rest. 2d Contracts § 89 Factors

1) Voluntarily agreed to

2) Promise to modify made before K fully performed on either side

3) The reason for the modification must rest in circumstances not anticipated

4) Modification fair and equitable

What is the “Hold up” Game under UCC Good faith modifications

A party cannot coerce a promise for increased compensation by refusing to perform an existing contract. (This case is an example of the “hold up game”; the primary purpose of the preexisting legal duty rule is to prevent this type of hold up game)

UCC 1-103: Construction of UCC

Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.

Rest. 2d Contracts § 89 (1) Factor Voluntary

Long term relationship; Are such modifications common in industry?; Between merchants; Is person agreeing to modification in a prone position and does other party know it?; Availability of alternative relief

What if promise made in bad faith?

A modification made in bad faith or through extortion without legitimate commercial reason is ineffective.

Rest. 2d Contracts § 86

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. (2) A promise is not binding under Subsection (1) (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or (b) to the extent that its value is disproportionate to the benefit.

Rest. 2d Contracts § 86 Comments

b … Facts such as the definite and substantial character of the benefit received, formality in the making of the promise, part performance of the promise, reliance on the promise or the probability of such reliance may be relevant to show that no imposition results from enforcement.

What is an exception to past consideration?

If the promise received was a material benefit on the promisor

What are the factor in the Material Benefit rule?

1) Is there a promise?

2) Is there a material beneft?

3) Does the performance or completion of a promise prevent injustice?

4) is the benefit conferred as a gift?

What goes into the material benefit element of the material benefit rule?

Whether the benefit was previously received by the promisor; whether it was definite and substantial; and whether it was direct or indirect

What goes into the injustice element of the material benefit rule?

the formality of the promise, epudiation/payment of promise, reliance by promisee, injury to promisee

What doesnt constitue consideration?

Bare moral obligations

Rest. 2d Contracts 90

(1)promise which the promisor should

(2)reasonably expect to induce action or forbearance on the part of the promisee or a third person

(3)and which does induce such action or forbearance

(4)is binding if injustice can be avoided only by enforcement of the promise.

(5)The remedy granted for breach may be limited as justice requires.

Rest. 2d Contracts 90 Bare Bones

(1)promise

(2)induces reliance

(3)that was expected (foreseeable v. intended)

(4)is binding if injustice can be avoided only by enforcement of the promise (did what was expected v. life accounting)

(5)The remedy granted for breach may be limited as justice requires.

Rest. 2d Contracts 90 b

Character of reliance protected. The principle of this Section is flexible. The promisor is affected only by reliance which he does or should foresee, and enforcement must be necessary to avoid injustice. Satisfaction of the latter requirement may depend on the reasonableness of the promisee's reliance, on its definite and substantial character in relation to the remedy sought, on the formality with which the promise is made, on the extent to which the evidentiary, cautionary, deterrent and channeling functions of form are met by the commercial setting or otherwise, and on the extent to which such other policies as the enforcement of bargains and the prevention of unjust enrichment are relevant.

Rest. 2d Contracts 90 illustration 1

A, knowing that B is going to college, promises B that A will give him $5,000 on completion of his course. B goes to college, and borrows and spends more than $5,000 for college expenses. When he has nearly completed his course, A notifies him of an intention to revoke the promise. A's promise is binding and B is entitled to payment on completion of the course without regard to whether his performance was “bargained for” under § 71.

Rest. 2d Contracts 90 illustration 2

A promises B not to foreclose, for a specified time, a mortgage which A holds on B's land. B thereafter makes improvements on the land. A's promise is binding and may be enforced by denial of foreclosure before the time has elapsed.