Contracts - Bar Exam

Requirements to form a valid contract

Mutual assent, consideration, no defenses that would invalidate the contract

Bilateral contract

exchange of mutual promises

Unilateral contract

offer requires performance as the manner of acceptance

quasi-contract

not a contract, but rather a restitution remedy designed to prevent unjust enrichment

offer

An objective manifestation of a present intent to contract

UCC offers

quantity must be certain or capable of being made certain

Termination of offer by an act of a party

Revocation by offeror, rejection by offeree, Lapse in time

Offer terminated by operation of law

Death or insanity of either party, Destruction of proposed K’s subject matter, Supervening illegality

Limits on revocation of offers

1) Revocation is only effective upon receipt by offeree, 2) offer cannot be revoked once it has been accepted, 3) in unilateral contracts, start of performance makes the offer irrevocable for a reasonable time to complete performance

An offer is irrevocable if:

a) option K, b) UCC firm offers, c) Detrimental reliance by offeree

UCC Firm offers

A merchant’s offer made in a signed writing that assures the offer will be held open is irrevocable for the time stated; no consideration is required (if no time stated - irrevocable for up to 3 months)

Option contract

promise to keep an offer open. (Consideration required)

Methods of revoking an offer

1) Unambiguous statement by the offeror to the offeree, 2) Offeree becomes aware of offeror’s unambiguous conduct or statement indicating an unwillingness or inability to contract

Methods of rejecting an offer

1) Express rejection, 2) Counteroffer, 3) Conditional acceptance, 4) Acceptance with additional terms

What happens when there’s an acceptance with additional terms in a UCC contract involving non-merchant?

Terms of the offer govern; K is formed but additional terms are excluded and considered mere proposals to modify the K

What happens when there’s an acceptance with additional terms in a UCC contract when both parties are merchants?

K is formed with additional terms unless either: a) additional terms materially change the offer, b) offer expressly limits acceptance to the offer’s terms, or c) offeror objects within a reasonable time

Acceptance with additional terms - Common Law contracts

acceptance must mirror the offer; acceptance with additional terms creates a rejection and counteroffer

Conditional Acceptance

Terminates the original offer and becomes a new offer; Exception: A condition that would be included anyway does not terminate the original offer

Acceptance

manifestation of assent to the terms of the offer

Mirror Image rule (common law)

acceptance must mirror the offer’s terms, it cannot add/omit/change terms of the offer

UCC Acceptance by shipment

a merchant may accept an offer to buy goods by either: a) providing a promise to ship goods (usually by written confirmation), or b) Promptly shipping goods

Mailbox rule for offers + rejections + counteroffers

effective upon receipt

Mailbox rule for acceptance

effective upon dispatch

Mailbox rule limitation: If the offer stipulates acceptance is not effective until received,

the offer controls

Mailbox rule: if offeree sends both a rejection and acceptance,

the first to arrive controls

Mailbox rule limitations - Option Contracts

Acceptance is effective upon receipt

Mailbox rule - Revocation

Effective only upon receipt (mailbox rule doesn’t apply)

Unilateral Contracts - Acceptance by Performance

Complete performance required but offer may become irrevocable upon the start of performance until completion

Unilateral K’s - Notice only required upon completion

offerree is not required to give notice upon start of performance, but must notify offeror within a reasonable time upon completion

Acceptance by performance - bilateral contracts

partial performance gives rise to acceptance, offeree must make offeror aware of acceptance

Consideration

bargained-for exchange of legal value between parties

pre-existing duty

a promise to perform a pre-existing duty or obligation generally does not constitute consideration. Exception: new or different consideration promised

Illusory promises

a promise where there is no obligation to perform

promissory estoppel - courts may enforce a promise if:

1) Promisor should reasonably expect to induce action or forbearance by promisee;

2) promisee acts or refrains from acting in detrimental reliance; and

3) injustice will occur without enforcement of the promise

Defenses to Contract Formation or Enforcement

Incapacity, Statute of Frauds, Illegality, Misrepresentation/Fraud, Duress, Unconscionability, Misunderstanding, Mistake

Incapacity

Infants (minors) and mentally incompetent persons lack capacity to contract. Intoxicated persons may lack capacity if the other party has reason to know of intoxication

Right to disaffirm

person who lacked capacity to contract may disaffirm the K, which renders it void

Infancy exceptions - K’s invovling minors may be enforced or otherwise recognized where:

a) Affirmance/Ratification (they gain capacity and affirm the K either expressly or by conduct), or

b) Infant Liability for necessities (infants are legally obligated to pay for necessities - but liability is based on quasi-contract, so can’t be sued for breach)

Unconscionability

Court may refuse to enforce all or part of a K that is unfair or oppressive to one party based on bargaining or terms

Mutual mistake

both parties are mistaken about an underlying factual assumption at the time of K formation

Unilateral mistake

one party makes a mistake concerning facts of an agreement. Will not prevent K formation. Exception: mistaken party may void K if mistake is material and non-mistaken party knew/should have known of mistake

Misunderstanding

Ambiguity concerning terms of the K

Misunderstanding where neither party was aware of the ambiguity

No K formed unless both parties intended the same meaning

Misunderstanding where one party was aware of the ambiguity

K formed and enforced according to the intention of the unaware party

Misunderstanding where both parties were aware of the ambiguity

No K formed unless both parties intended the same meaning

Mutual mistake - K is voidable by an adversely affected party if:

1) both parties are mistaken concerning a basic assumption of fact;

2) mistake materially affects the agreed-upon exchange; and

3) adversely affected party did not assume risk of the mistake

Parol Evidence Rule

evidence that is extrinsic to a written K is inadmissible to supplement or contradict the written K. Applies if K is a complete integration.

Parol Evidence Rule bars evidence of

prior or contemporaneous expressions (written or oral) that contradict later written K

Exceptions to parol evidence rule - Extrinsic evidence may be allowed if either

a) K was only partially integrated, or b) additional terms would ordinarily be in a separate agreement

Parol evidence rule allows evidence of:

a) mistake in the process of reducing an agreement to writing,

b) misrepresentation, fraud, duress, or illegality,

c) condition precedent to agreement becoming effective,

d) modifications made after the writing,

e) meaning parties intended to give particular items in writing,

f) UCC - a written K’s terms may be explained or supplemented by evidence of a course of dealing, performance, or trade

Shipment K’s

seller only obligated to ship goods to buyer

Shipment K’s - risk of loss passes to

buyer when seller delivers good to carrier

If K is otherwise silent on shipment terms,

Shipment K is presumed if K requires shipment by a third-party carrier

Destination K’s

seller obligated to ensure goods reach buyer

Destination Ks - risk of loss passes to

buyer only when buyer takes delivery

If goods are destroyed before risk of law passes,

K is avoided if no party at fault

Merchant seller - risk of loss

passes to buyer when he takes physical possession

Non-merchant seller - risk of loss

passes to buyer upon tender of delivery

“FOB [location]”

seller bears risk and expense of getting goods to the named location, at which point risk passes to buyer

Breach and risk of loss

If buyer rejects defective goods or revokes acceptance, risk of loss does not pass to buyer until defects are cured or she accepts

Express warranty

Promise about the quality or feature of a product. Breached if the product falls short of seller’s promise or description

Implied warranty of merchantability

merchant seller automatically warrants goods are fit for their ordinary purpose

Implied warranty of fitness for a particular purpose

Seller (whether or not a merchant) warrants that goods are fit for buyer’s purpose if:

1) Buyer has a particular purpose,

2) Buyer relies on seller to select suitable goods, and

3) Seller has reason to know of buyer’s purpose and reliance on seller

Disclaimer

limits liability for implied warranties, but will not limit for express warranties

Remedy limitation

limits recovery upon breach of warranty, generally valid for all warranties

Damages for breach of warranty

Generally amounts to the difference between current value and value as warranted by seller

Under a common law K, if one party has substantially performed,

the other party is obligated to perform and complete performance

Material breach

occurs when one party’s failure to perform under the K substantially deprives the other party of the benefit they bargained for

C/L Materiality of breach is a question of

fact

C/L Material breach by one party

excuses performance by the other

Damages for C/L material breach

recoverable for any breach to the extent they are foreseeable as a probable result of the breach

Failure to perform by the time stated in a K

not a material breach if performance is rendered within a reasonable time after the time stated (exception: time is of the essence clause)

Condition vs promise

Failure of a promise leads to breach, failure of a condition relieves a party’s performance obligation

A party protected or benefitted by a condition

may waive or estop the condition from being enforced

Insecurity

arises when a party to a K has reasonable grounds to believe that the other party will be unwilling or unable to perform under the K

Demand from adequate assurances

must be made in writing based on reasonable and justified grounds for insecurity

A justifiably insecure party

may suspend performance until adequate assurances are provided

Adequate assurances

commercially reasonable commitment from a party that it will perform under the K

Insecurity vs. Anticipatory Repudiation

insecurity involves uncertainty regarding the other party’s performance whereas anticipatory repudiation involves a clear indication that the other party will not perform

Anticipatory Repudiation

arises when one party to a K makes it clear that he will not perform under the K

Requirements for anticipatory repudiation - one party to a K:

1) makes an unambiguous statement or conduct,

2) prior to the time performance is due,

3) indicating non-performance

repudiation can be withdrawn UNLESS other party has either:

a) materially changed position in reliance on the repudiation,

b) Cancelled the K in response to the repudiation, or

c) Indicated they consider the repudiation to be final

Non-repudiating party’s options - she may either:

a) Treat the anticipatory repudiation as a total repudiation and sue,

b) Suspend performance until performance date is due and wait to sue,

c) Treat repudiation as an offer to rescind and treat K as discharged, or

d) Ignore repudiation and urge promisor to perform

Impossibility and Impracticability

If an unforeseen event occurs after K formation but before performance is complete, performance may be excused as impossible or impracticable

Frustration of purpose

A party’s duty to perform under a K may be discharged if an unforeseen event occurs that undermines one or both party’s principal purpose for entering into the K

Frustration of Purpose Requirements - a K may be discharged if:

1) an unexpected event destroys one or both party’s purpose for entering into the K;

2) the unforeseen event is not the fault of the frustrated party; and

3) the non-occurrence of the event was a basic assumption of the K

Rescission of a K serves to

discharge duties under the K

Modfication

when parties change terms of the original K

Novation

parties agree to substitute a new party to perform

Requirements for Novation

1) A previous valid K,

2) all parties, including new party, agree to a new K,

3) new K extinguishes K duties between original parties, and

4) a new valid and enforceable K

Accord

new agreement to accept alternative performance in lieu of the original performance obligation (consideration generally required)

Satisfaction

Performance of the accord agreement, discharges the original K and the accord

Effect of breach on accord

A party may sue under either the original obligation or the accord if there has been no satisfaction

Vesting of third party beneficiary rights - occurs when

a) beneficiary assents, b) beneficiary sues to enforce, or c) beneficiary detrimentally relies on the K

Delegation

occurs when one party to a K delegates the duties she owes to another party to the K to a third party

Duties are non-delegable if:

1) Duties involve personal judgment and skill, 2) delegation materially changes the obligee’s expectancy under the K, 3) the K prohibits delegation, or 4) prohibited by statute or public policy