Contracts

Applicable law

• Sale of goods » UCC

  • Goods = movable, tangible property

• Everything else » Common Law

• If contract is partially for goods, partially for other things, use predominance test

Rules for construction contracts

• Breach by owner

  • Before construction starts = profits

  • During construction = contract price - cost of completion

  • After construction finishes = contract price + interest

• Breach by builder

  • Before construction starts = cost of completion

  • During construction = cost of completion + reasonable compensation for delay

  • Breach by late performance = lost use value if certain else interest

Warranties

• UCC only

  • Implied warranties of merchantability and fitness for a particular purpose may be disclaimed by either specific disclaimers (using conspicuous language) or general methods of disclaiming (“as is” language, when buyer inspects of has option to inspect and refuses, etc.)

Fact pattern heuristics/gotchas

• If damages or remedies are involved…

  • First determine what governs: UCC or CL

  • Then, if CL, follow the CL framework

    • Be sure to press on certainty. If expectation damages are uncertain, then fall back to reliance damages

    • If legal remedies are not adequate—because sums are uncertain—then also consider specific performance

• If debt is involved and one party is accepting late payment in exchange not to sue, press on whether both parties have given something up.

  • Note that in general a creditor’s allowing a debtor to pay late or to satisfy the full debt for less than the original amount is unenforceable for lack of consideration from the debtor

Formation

1. Offer

   • Requires intent to enter into a contract with definite and certain terms

   • Can be revoked prior to acceptance

   • No irrevocable offers under CL

     • Exception: options contracts

       • Offer + promise to keep offer open + promise is supported by additional consideration

   • Irrevocable offers (“firm offers”) allowed under UCC provided:

     • Made by a merchant

     • Signed in writing

     • Contains language to the effect that it will stay open

     • Time limit on irrevocability: 3 months

   • Partial irrevocability…

     • Unilateral contracts: once performance has begun

     • Bilateral contracts: if party has made preparations to perform and justice requires irrevocability—i.e., detrimental reliance

2. Acceptance

   • Unilateral: one party makes a promise to perform

   • Bilateral: both parties make promises to perform

   • Mailbox rule:

     • Acceptance is effect upon proper dispatch (where sender no longer has control over the medium where they accepted). Exceptions:

       • Unless contract provides otherwise

       • Options contracts are effective upon receipt

       • When both an acceptance and rejection are sent

         • If rejection is sent first, rejection is effective unless it arrives acceptance arrives

         • If acceptance is sent first, normal rule applies, i.e., it’s accepted

   • Offer to buy goods may be accepted by shipping goods

     • Shipment is of conforming goods

       • Regular acceptance

     • Shipment is of non-conforming goods

       • Seller does not acknowledge non-conformity = offer accepted and breached at same time

       • Seller does acknowledge non-conformity = accommodation to buyer and is not an acceptance; instead, is a counteroffer which buyer is free to accept or reject

3. Consideration

   • Illusory promises are no good, but requirements and outputs contracts are not illusory promises

     • Courts will try very hard to avoid finding a promise illusory

     • If there’s any reasonable limitation on someone’s freedom of action, then probably their promise won’t be illusory

     • What is illusory is if a contract reserves the right to cancel with no language that limits that right by reference to objective standards

       • So, e.g., a bare: “reserves right to cancel at any time” is illusory

   • When dealing with sureties…

     • If the contract between the guarantor and the creditor is made after the creditor has already delivered value to the debtor, then there will be no enforceable contract, since there will be no consideration

   • Note on promissory estoppel: a promise that reasonably induces reliance and is actually relied upon may be enforceable even without consideration, to prevent injustice

Differing terms between offer and acceptance

Common Law = mirror image rule

• Differing terms = rejection and counteroffer

UCC

• Additional terms = Battle of the Forms

  • If one party is not a merchant, additional terms are proposals and not part of the contract

  • If both parties are merchants, additional terms become part of contract automatically unless:

    • Offer limits acceptance to its term

    • The alteration is material

    • The offeror objects within a reasonable amount of time

• Different terms = knock-out rule

  • Conflicting terms cancel each other and neither enters the contract

  • Court thereafter would supply terms as needed, with some default gap fillers

    • Price is reasonable price

    • Place of delivery = buyer picks goods up from seller

    • Time for shipment is reasonable time

    • Payment due upon receipt

• Conditional acceptance = rejection

  • The new offer must be accepted by express assent and cannot be accepted by performance. This means that if the parties ship or accept goods, their conduct forms a contract but the terms of that contract are the terms of the original writing.

Defenses

SOF

• Statute of frauds (see separate card on this)

  • A writing was required, but no writing exists

Fraud and unconscionability

• Misrepresentation

  • Need not be intentional; sufficient if a party knew that their actions would be likely to prevent another from learning a fact

  • Must be as to a material fact

  • Must be justifiable to rely on the representation and party must in fact rely on it

  • Party must suffer damages

• Fraud

  • Like misrepresentation but requires intent

• Unconscionability

  • Substantive: based on price alone

  • Procedural: where a party is induced to enter into a contract without meaningful choice, e.g., if stronger party knows that weaker party can’t reasonably protect his interests

External events

• Impossibility

  • Neither party must have assumed the risk of the unforeseen event and performance must be literally impossible

• Impracticability

  • Events make performance extremely and unreasonably difficult

  • Event must concern a basic assumption of the contract, and the parties must not have allocated the risk of the event

• Frustration of purpose

  • Both parties must know the purpose

  • The event must not be reasonably foreseeable

  • Frustration must be total

Mechanical issues

• Mistake

  • Mutual—requires

    • As to a basic assumption

    • Having a material effect, and

    • Affected party must not have assumed the risk of the mistake

      • If a party is aware at the time the contract is made that he has only a limited knowledge with respect to the facts related to the mistake but treats his knowledge as sufficient, he will be held to have assumed the risk—e.g., a construction company that doesn’t test whether there’s granite in an area it is excavating to 25 feet will assume the risk of running into an impenetrable surface before it gets down to 25 feet

  • Unilateral

    • Three factors above, AND

    • That the non-mistaken party knew or should have known of the mistake

      • If the non-mistaken party did not know or have reason to know of the mistake, then the contract will have been formed as stated/written

• Conditions precedent not met

• Lack of consideration

• Lack of mutual assent

• Lack of capacity

Statute of Frauds

Five categories covered, and exceptions:

• Contracts made upon consideration of marriage (e.g., prenups)

  • Except: mutual promises to marry

• Real property (land)

  • Except where:

    • Conveyance has been made, or

    • Performance in part (payments, improvements, possession—need any two of the three)

• Promises to pay debt’s of another, when the promise is made to someone besides the debtor

  • Except: if main purpose is the promisor’s own economic interest

• Sale of goods over $500

  • Except if:

    • Goods are accepted or paid for, even if payment is partial

    • Admission in a pleading or testimony

    • The contract is for specially manufactured goods and the seller makes a substantial beginning on performance

• Contract incapable of being performed fully within a single year (performance in under a year must be literally impossible)

  • Full performance by either party

Requirements as to writings:

• Essential terms must be in a writing signed by the party to be charged

  • “Party to be charged” = the person against whom the contract will be enforced

• Exceptions:

  • Merchant’s confirming memo may be enforced against seller and buyer if:

    • Between two merchants

    • One party receives signed confirmation and has reason to know its contents

    • Does not object within 10 days

  • Judicial admission in pleading or testimony that there was an agreement

Conditions

• May be express or constructive

• Express conditions require strict compliance

• Constructive conditions require substantial performance

• Waiver

  • The party that gets the benefit of the condition can waive it expressly or by failing to insist on compliance

  • The waiver will be irrevocable if it occurs after the non-occurrence of the condition and the other party relies on it

• Doctrine of prevention

  • Requires that parties refrain from conduct that prevents or hinders the occurrence of a condition

Parole evidence rule

• Partial integration

  • PER not allowed to contradict written terms

  • PER is allowed to add additional terms

• Total integration

  • PER is allowed neither to contradict written terms nor to add terms

  • A merger clause is (strongly) persuasive rather than conclusive evidence of complete integration

Exceptions:

• Does not apply to post-formation discussions, meaning that parole evidence can be use to show subsequent modifications

• Does not apply to formation or enforcement defenses

• Does not apply to conditions precedent to the contract’s effectiveness

• PER does not apply to ambiguous terms—i.e., parole evidence always available to inform ambiguous term. Priority of parole evidence is:

  • Course of performance

  • Course of dealing

  • Usage of trade

• UCC quirk » course of performance, course of dealing, and usage of trade may be brought in to explain or supplement terms, even if there are no ambiguities, so long as they do not contradict written terms

Note: where one party knows or has reason to know that the other party understands a term differently, the “innocent” party’s meaning controls. See card on ambiguities.

Modifications

• For both common law and UCC:

  • PER does not apply, so parole evidence admissible to show subsequent oral modifications

  • If the modification puts the contract within SOF, then the modification must be in writing

• Common law: mutual assent and consideration required

  • Clauses that prohibit oral modifications (i.e., that require modifications to be in writing) are not enforced

  • Pre-existing duty rule: promising to do something you were already legally obligated to do does not suffice for consideration

    • Traditional position was that this applied even if pre-existing duty was owed to a third-party

    • Modern rule is that the pre-existing duty to a third-party does not ruin consideration and so will suffice

  • Exception to the requirement of consideration

    • If the modification is due to circumstances that none of the parties anticipated when they entered into the contract, the new consideration is not required

• UCC: mutual assent and good faith required, but no need for new consideration

  • Clauses that prohibit oral modification are enforceable, unlike at common law, but oral modifications may operate as waivers once the other party relies on them

Third-party beneficiaries

• These are parties that are not parties to the contract but that the contracting parties have a common intent to benefit

• Two types of intended beneficiaries:

  • Creditor beneficiary: promisor intends to benefit these because he owes them money

  • Donee beneficiary: everyone else

• Vesting… The K can’t be cancelled or modified without the beneficiary’s consent once beneficiary knows of and has relied upon the contract (unless K provides otherwise)

• Definitions

  • There is the promisor, which is the person who is going to be conferring a benefit on the third party

  • There is the promisee, which is the other party

• Who can sue who

  • Beneficiary can sue promisor, but cannot sue promisee

    • Except that a credit TPB can sue promisee on pre-existing debt

  • Promisee can sue promisor

    • Typically this just results in the promisee getting specific performance

• Only intended TPBs have rights under the contract. Intent is determined by:

  • Overall objective of the parties

  • Whether the benefit runs directly to the third party or instead from promisor to promisee and only indirectly to third-party

  • Whether beneficiary would have reasonably relied on fact that contract was supposed to confer a right on him

Assignment and delegation

• Assignment = a transfer of rights under the contract to a third party

  • All rights assignable

    • If contract purports to prevent assignment, the assignment will likely remain in force, but the assigning party will be in breach

  • No consideration required

  • Writing not required unless wage assignment or assignment of interest in land

  • Gratuitous assignments (gifts) permitted

  • Assignee stands “in the shoes” of assignor and takes all defenses, setoffs, counterclaims, etc.

  • Only real limitations are:

    • Assignment can’t materially change the duty/risk

    • For personal services contracts where the services involve the personality or personal characteristics of the obligor—e.g., likely doctors and lawyers, and likely not construction contractors

  • Revocability

    • Assignments for value are irrevocable

    • Assignments that are gratuitous are revocable unless obligor has already performed

  • Warranties

    • Assignors impliedly warrant that they have the right to make the assignment (and some other small details)

• Delegation = delegation of duties to a third party

  • Duties can be delegated, unless their performance involves a special skill or judgment

  • Novation = obligee expressly agrees to accept performance from delegatee; has effect of releasing delegator from liability

Breach - anticipatory repudiation

• When one party unequivocally tells the other party, before performance is due, that they will not perform. Other party has four options:

  • Sue immediately for breach (unless you’ve completed performance fully already; then, you have to wait until performance is due from the other side)

  • Suspend your performance and wait to sue until performance is due

  • Treat the contract as discharged and the repudiation as an offer to rescind

  • Urge performance and sue, when performance is due from counterparty, if urging ends up being futile

• If one party gives reasonable grounds for insecurity to the other party, the other party has a right to demand adequate assurances

  • Must be done in writing

  • Party making the demand may suspend its performance until it receives adequate assurances

  • If no response in 30 days, then the contract is deemed repudiated

• Retracting repudiation

  • A party that has repudiated a contract may retract his repudiation unless the non-repudiating party has already relied on the repudiation

Breach - material brach under CL

• Material breach = breach where there was not substantial performance

• Factors to consider

  • Whether party received substantial benefit of the bargain

  • Extent of any part or full performance

  • Willfulness of breach or presence of negligence

  • Hardship to breaching party

  • Time is not of the essence unless specifically agreed to

    • But… even if specifically agreed to, modern courts will consider all of the circumstances to determine whether time really is of the essence

  • In divisible contracts, each section operates as its own contract

Breach - material brach under UCC

• Perfect tender rule for single deliveries

  • If goods fail to conform in any respect, buyer may:

    • Reject the whole, within a reasonable amount of time

      • The right to reject is typically cut off once the buyer accepts—inspects and indicates goods conform; inspects and indicates buyer will keep even if they don’t conform; fails to reject in reasonable time or fails to notify seller of rejection

      • If in rejecting goods, buyer doesn’t alert seller as to nature of defect, buyer can’t rely on defect if:

        • Seller could have cured had they been told about the defect

        • Both parties are merchants and seller has asked for accounting of defects

    • Accept the whole

      • Buyer may revoke acceptance if:

        • Goods accepted with reasonable belief that defect would be cured and defect has not been cured

        • Goods accepted because finding defects is hard or seller assured goods conformed

    • Accept any commercial unit and reject the rest

• Installment contracts

  • Buyer may reject an installment if there is a substantial impairment in that installment and that impairment cannot be cured

• Seller’s right to cure

  • Seller may cure defect any time before performance is due provided

    • They give notice, and

    • Make a new tender within the time for performance

Breach - minor vs. material

• Material breach = other party excused from performance

• Minor breach = non-breaching party may recover damages, but is not excused from performance

Accord and satisfaction

• Accord

  • Agreement where one party promises substitute performance and the other party promises to accept the substitute performance in discharge of first party’s existing duty

  • Requires consideration

    • A compromise on a claim, where there is a good faith dispute about the amount owed, suffices for consideration, despite the general rule that partial payment of liquidated debt is invalid for lack of consideration.

• Satisfaction

  • A performance of the accord

  • This discharges the obligation under the original agreement

  • If there is no satisfaction, the original contract remains enforceable

Compare accord-satisfaction to modification:

• A modification changes the terms of the agreement

• An accord retains the terms of the original agreement but allows for different performance to satisfy the original obligation

Note: under UCC, you can accomplish and accord and satisfaction by a good faith tender and acceptance of a check when that check conspicuously states that it is tendered in full satisfaction of the debt.

Remedies — limitations on damages

• Damages must be foreseeable by a reasonable person at time of contracting, or if unusual, D needs notice of their possibility

• There is a duty to mitigate loss

• Damages must be capable of calculation with certainty

• Damages must be caused by the breach

Remedies — types of damages

• UCC damages formulas

  • See card on this

• Expectation damages

  • Put P into position he would have been in had K been performed

• Consequential damages (steam shaft case)

  • Compensate for damages that are a direct and foreseeable consequence of non-performance (e.g., lost profits)

• Incidental damages

  • Compensation for expenses reasonably incurred as a direct result of the breach—e.g., cost of storing goods, shipping goods, inspecting goods, reselling goods, etc.

• Reliance damanes

  • Put P into position he would have been in had K never been made

• Liquidated damages

  • Allowable when damages are difficult to calculate and the amount is a reasonable approximation of anticipated loss from breach

  • Critically, these cannot be punitive

• Nominal

  • Awarded where there’s been breach without financial loss

• Punitive damages

  • Not generally available

Remedies — restitutionary remedies

• Quasi-contract

  • This is when there is no enforceable contract, but a contract is implied at law to avoid an unfair result

• Equitable

  • Reformation = there was a meeting of the minds, but the contract has the wrong words; contract can be rewritten to reflect meeting of the minds

  • Rescission = undo the contract where no meeting of minds

  • For both, allowed where fraud, duress, misrepresentation, or mistake

• TROs

• Specific performance

  • Legal remedy must be inadequate, e.g., because damages uncertain or property in question is unique

    • Real property is always unique, and traditionally courts give specific performance even if the breaching party is the buyer

  • Order must be feasible for court to enforce

    • Personal services contracts should be done via enforcement rather than specific performance

  • Payments of money may qualify for specific performance if it’s not possible to calculate exact damages—e.g., if you are obligated to make monthly payments until event X, and it’s not known how much time will pass until X occurs

  • No applicable defenses

    • Laches

    • Unclean hands

Shipment vs. destination contracts

If K requires delivery by common carrier, how does the seller satisfy its delivery obligation?

• Shipment contract—seller completes delivery by:

  • Getting goods to common carrier

  • Making reasonable arrangements for delivery

  • Notifying buyer

• Destination contract—seller does not complete delivery obligation until goods arrive at destination

When a contract is silent, a shipment contract is presumed where it requires shipment by a third-party carrier.

Default rules for allocating risk of loss in Ks for sales of goods

1. If K provides for risk allocation, that governs

2. If either party breached, that party bears the risk, even if breach unrelated to loss

3. If delivery was to be by common carrier risk shifts from seller to buyer when seller completes delivery obligation

   • What it means to complete a delivery obligation differs depending on whether the K is a shipment or destination contract

   • See separate card for shipment vs. destination

4. If seller is a merchant

   • Risk of loss shifts to buyer once buyer is in receipt

5. If seller was not a merchant

   • Risk of loss shifts to buyer once seller tenders (makes the goods available)

What kinds of damages, when (common law framework)

A simple framework:

1. Is there an enforceable contract? If no, see bullets below.

   • If bargain existed but contract was defective, then look to restitution (or quantum meruit for services) under quasi-contract

     • Note that restitution remedies unjust enrichment

   • If there was never consideration, but there was a promise + detrimental reliance, then look to promissory estoppel (which uses reliance damages)

2. Is the plaintiff the one that breached?

   • If yes, then the only option is restitution

     • Restitution = reasonable value of benefit conferred, less any damages the non-breaching party suffered due to the breach, capped at pro-rata share of contract price

   • Note: if the breach was intentional and unjustified, courts may disallow restitution

3. Otherwise, expectation is the default, displaced only when…

   • Liquidated damages clause » controls and displaces other damages

   • Expectation is too speculative » fall back to reliance

   • It’s a losing contract and restitution gives more » P can elect restitution (unless P has fully performed and the only thing outstanding is a money payment; then, limited to contract price)

What kind of damages, when (UCC)

• Buyer’s damages—buyer has goods and seller is in breach

  • Difference b/w value of conforming goods and value of goods as tendered

• Buyer’s damages—seller has goods and seller is in breach

  • If buyer covered: difference b/w contract price and cover price

  • If buyer didn’t cover: difference b/w contract price and market price at time buyer learned of the breach

  • Buyer can also recover consequential and incident damages

• Seller’s damages—buyer has goods and buyer is in breach

  • Full contract price

• Seller’s damages—seller has goods and buyer is in breach

  • If seller is a lost-volume seller: lost profits

    • Must have a large enough supply to make both contracted sale and resale

    • Would likely have made both sales

    • Would have made a profit on both sales

  • If seller resold: difference b/w contract price and resale price

  • If seller did not resell: difference b/w contract price and market price (as of time delivery was supposed to occur)

  • Seller can recover for incidental but not consequential damages

UCC default rules

• Price is reasonable price

• Place of delivery = buyer picks goods up from seller

• Time for shipment is reasonable time

• Payment due at time and place where buyer is to receive the goods

Note that bullets can combine—e.g., could be silent on both place of delivery and time of payment.

Non-monetary remedies under UCC

Buyer’s remedies

• Cancel the contract

• Replevy the goods

  • Prepayment: if buyer has made a part payment, and goods have been identified, buyer can replevy the goods in two cases—in both, must tender any unpaid amount:

    • Seller becomes insolvent within 10 days of buyer’s first payment

    • Goods purchased for personal, household, or family purposes

  • Inability to cover: if goods are identified, buyer can replevy if after reasonable effort buyer is unable to secure substitute goods

Seller’s remedies

• Recover from buyer on insolvency

  • Various rules in the weeds

• Recover shipped or stored goods from a bailee

Effect of ambiguity on formation

• Neither party aware of ambiguity » no contract, because no meeting of the minds

• Both parties aware of ambiguity » no contract, because no meeting of the mind

• One party aware of ambiguity » contract, with meaning determined by what the meaning the party that didn’t think there was an ambiguity assigned to the term

Contracts with minors

• Age of majority is typically 18

• The contract is binding on the adult

• But it is voidable by the minor—i.e., the minor may chose either to disaffirm the contract before they reach majority, voiding it, or to affirm it within a reasonable time of reaching majority, allowing the contract to become binding on the minor (nor not-minor)

UCC statute of limitations

• Sales contracts have a statute of limitations of 4 years

• Parties may agree to a shorter period