Contracts and Sales

Governing Law

Article 2 governs transactions in goods, meaning movable tangible things identified to the contract. Common law governs services, real estate, and other transactions. For a mixed transaction, the predominant-purpose test asks whether the deal is primarily for goods or services; when a contract is divisible, the law may be applied separately to distinct components.

Offer

An offer is an objective manifestation of present intent to contract with definite and reasonably certain terms communicated to an identified offeree or class. An advertisement is ordinarily an invitation to negotiate unless it is specific, definite, and leaves nothing material open.

Termination of Offer

An offer terminates by rejection, counteroffer, lapse, revocation, death or incapacity of either party, or destruction or illegality of the subject matter. A revocation is effective when received, and may be indirect when the offeree learns from a reliable source that the offeror took definite action inconsistent with an intent to contract.

Option Contract

An option is a promise to keep an offer open supported by consideration. The offer cannot be revoked during the option period. Under common law, the offeree's acceptance of an option is effective when received, not when dispatched.

Merchant Firm Offer

A merchant's signed written assurance that an offer to buy or sell goods will be held open is irrevocable without consideration for the stated period or, if no period is stated, a reasonable time, but never longer than three months. A term supplied by the offeree must be separately signed by the offeror.

Acceptance and Mirror-Image Rule

At common law, acceptance must be an unequivocal mirror image of the offer. A response adding or changing terms is a counteroffer, although a mere inquiry or reluctant acceptance is not.

UCC Acceptance

Under Article 2, an offer may be accepted in any reasonable manner and by any reasonable medium. An order for prompt shipment may be accepted by a prompt promise to ship or by shipment. Shipment of nonconforming goods is both acceptance and breach unless the seller seasonably states that the shipment is offered only as an accommodation.

Unilateral Contracts

An offer seeking performance rather than a promise is accepted only by complete performance. Beginning invited performance creates an option that temporarily prevents revocation, but the offeree is not obligated to complete performance unless the offer provides otherwise.

Mailbox Rule

Unless the offer provides otherwise, an acceptance sent by an authorized means is effective upon dispatch. The rule does not apply to option contracts. If a rejection is sent first and an acceptance later, whichever arrives first generally controls; if an acceptance is sent first, a later rejection does not undo the contract but may create reliance consequences.

Definite Acceptance with Additional or Different Terms

A definite and seasonable expression of acceptance forms a contract even though it states additional or different terms, unless acceptance is expressly conditioned on assent to the new terms. Expressly conditional language must clearly communicate unwillingness to proceed without assent.

Additional Terms Between Merchants

Between merchants, additional terms become part of the contract unless the offer limits acceptance to its terms, the additional term materially alters the bargain, or the offeror objects within a reasonable time. If either party is not a merchant, additional terms are proposals requiring assent.

Different Terms and Contract by Conduct

Courts commonly treat different terms by applying the offer's terms, knocking out conflicting terms and supplying UCC defaults, or analyzing them as additional terms. If the writings do not form a contract but the parties perform, their conduct creates a contract consisting of terms on which the writings agree plus UCC gap-fillers.

Consideration

Consideration is a bargained-for exchange of legal value. A promise to perform a preexisting legal duty is not consideration unless the duty is honestly disputed, performance differs in a meaningful way, or an exception applies. Courts ordinarily do not inquire into adequacy of consideration.

Promissory Estoppel

A promise is enforceable without consideration when the promisor should reasonably expect it to induce action or forbearance, it does induce reasonable and detrimental reliance, and enforcement is necessary to avoid injustice. The remedy may be limited as justice requires.

Contract Modification

At common law, modification requires new consideration unless it is fair and equitable in light of unanticipated circumstances or another exception applies. Under Article 2, modification requires good faith but no consideration. A modification must satisfy the statute of frauds if the contract as modified falls within it.

Indefiniteness and Gap Fillers

Common-law terms must be sufficiently definite to identify breach and provide a remedy. Article 2 may enforce a contract despite open terms if the parties intended to contract and a reasonably certain remedy exists; the UCC supplies reasonable terms for price, time, place, and other omissions, but generally cannot supply quantity except for output or requirements contracts.

Capacity - Minors

A contract entered by a minor is generally voidable by the minor during minority or within a reasonable time after reaching majority. The minor may disaffirm but may be liable in restitution for necessities. After majority, the person may ratify expressly or by conduct.

Capacity - Mental Incapacity

A contract is voidable when, because of mental illness or defect, a person cannot understand the nature and consequences of the transaction or cannot act reasonably and the other party has reason to know. A contract may be void if a court had already adjudicated incapacity and appointed a guardian.

Duress

A contract is voidable when improper threat leaves the victim no reasonable alternative and induces assent. Economic pressure is duress only when the threat is wrongful and the victim lacks a practical alternative.

Undue Influence

A contract is voidable when excessive persuasion overcomes the will of a vulnerable person in a relationship of trust, confidence, domination, or dependence. Relevant facts include unusual timing, isolation, haste, and unfair terms.

Mutual Mistake

A contract is voidable for mutual mistake when both parties were mistaken about a basic assumption existing at formation, the mistake materially affects the agreed exchange, and the party seeking relief did not bear the risk.

Unilateral Mistake

A unilateral mistake generally does not permit avoidance unless the other party knew or should have known of the mistake, caused it, or enforcement would be unconscionable and avoidance would not substantially prejudice the other party. The mistaken party may not obtain relief if it assumed the risk.

Misunderstanding

When parties attach materially different meanings to a term and neither knows or has reason to know the other’s meaning, no contract forms as to that matter. If one party knows or should know and the other does not, the innocent party’s reasonable meaning controls.

Fraudulent Misrepresentation

A contract is voidable when assent is induced by a fraudulent material misrepresentation on which the recipient justifiably relies. Fraud exists when the speaker knows or believes the assertion is false, lacks confidence in its truth, or knows there is no basis for it.

Nondisclosure

Nondisclosure may be equivalent to an assertion when disclosure is needed to correct a prior statement, prevent a half-truth, correct the other party’s mistake about a basic assumption when good faith requires, correct a mistake about a writing, or satisfy a relationship of trust and confidence.

Illegality and Public Policy

A promise is unenforceable when legislation so provides or the interest in enforcement is clearly outweighed by a public policy against the term. Courts consider the parties’ justified expectations, forfeiture, seriousness of misconduct, directness of the connection, and whether denial will further the policy.

Unconscionability

A court may refuse to enforce a contract or clause that was unconscionable when made, enforce the remainder without it, or limit the clause to avoid an unconscionable result. Courts consider procedural unfairness in the bargaining process and substantive unfairness in the terms.

Statute of Frauds - Covered Contracts

A signed writing is generally required for a promise by an executor to pay estate debts personally, a suretyship promise, a promise made in consideration of marriage, a contract for transfer of an interest in land, a contract that cannot be performed within one year from formation, and a sale of goods for the statutory threshold or more.

Statute of Frauds - Writing

The writing must identify the parties, reasonably identify the subject matter, indicate that a contract was made, and state the essential terms with reasonable certainty. It must be signed by the party against whom enforcement is sought. Multiple writings may be read together when their connection is established.

One-Year Provision

The one-year provision applies only when performance is impossible, by the contract’s terms, within one year from formation. The mere possibility of early termination or breach does not count as performance, but full performance by one party may remove the agreement from the provision.

Land-Contract Exceptions

An oral land contract may be enforced when the buyer’s part performance unequivocally indicates the agreement, commonly through possession plus payment or valuable improvements. Promissory estoppel may also prevent reliance on the statute when injustice otherwise would result.

Goods Statute of Frauds

A contract for sale of goods at or above the statutory threshold generally requires a signed writing indicating a contract and stating quantity. Exceptions include specially manufactured goods, admission in court, payment made and accepted, goods received and accepted, and a merchant-confirmation not objected to within 10 days.

Suretyship and Main-Purpose Exception

A promise to answer for another’s debt is within the statute when the promise is collateral. It falls outside the statute when the promisor’s main purpose is to obtain a personal economic benefit, or when the promisor becomes primarily liable rather than merely guaranteeing another.

Parol Evidence Rule

When parties adopt a writing as a final expression, evidence of prior or contemporaneous agreements may not contradict the integrated terms. A complete integration also excludes consistent additional terms; a partial integration permits consistent additional terms.

Exceptions to the Parol Evidence Rule

Extrinsic evidence may be admitted to interpret ambiguity, establish a defense to formation or enforcement, show that the writing was subject to an oral condition precedent, prove a later modification, correct a clerical mistake, or establish a separate collateral agreement not ordinarily expected in the writing.

Article 2 Parol Evidence

A final written agreement for sale of goods may be explained or supplemented by course of performance, course of dealing, usage of trade, and consistent additional terms unless the writing was intended as a complete and exclusive statement. Express terms control inconsistent course or usage evidence.

Contract Interpretation

Courts seek the parties’ objective intent from the writing and circumstances. Specific and negotiated terms generally control general or standardized terms; express terms control course of performance, which controls course of dealing, which controls usage of trade. An interpretation giving lawful and effective meaning to all terms is preferred.

Implied Duty of Good Faith

Every contract imposes a duty of good faith and fair dealing in performance and enforcement. A party may not use contractual discretion to deprive the other party of the bargain’s expected benefit, but the duty does not create obligations inconsistent with express terms.

Express Conditions

An express condition is language making a party’s duty dependent on the occurrence of a stated event. Express conditions must generally be strictly satisfied unless excused; substantial performance ordinarily does not satisfy an unsatisfied express condition. Words such as “on condition that,” “provided that,” and “only if” commonly create conditions.

Constructive Conditions of Exchange

When performances are to be exchanged and the contract does not expressly state the sequence, the law may imply constructive conditions requiring one party’s substantial performance before the other party’s remaining duty becomes due.

Substantial Performance

A party who substantially performs under a common-law contract may recover the contract price reduced by damages for the defects. Substantial performance exists when the essential purpose has been accomplished and the defects are not material, were not willful, and can be remedied without unreasonable economic waste.

Material Breach

A material breach excuses the nonbreaching party’s remaining performance and permits immediate damages. Materiality depends on the extent to which the injured party receives the expected benefit, the adequacy of compensation, the likelihood of cure, the breaching party’s forfeiture, and good faith. A minor breach permits damages but ordinarily does not excuse counterperformance.

Anticipatory Repudiation

A party anticipatorily repudiates by making a clear and unequivocal statement or voluntary act indicating that the party will not perform when due. The nonbreaching party may treat the repudiation as an immediate total breach, suspend performance and await the due date, or urge performance without waiving rights. Repudiation generally applies only when material duties remain on both sides.

Retraction and Adequate Assurances

A repudiating party may retract before the other party materially changes position, indicates that the repudiation is final, or brings suit. When reasonable grounds for insecurity arise, a party may demand adequate assurances in writing under Article 2 and suspend performance if commercially reasonable; failure to provide adequate assurance within a reasonable time, not exceeding 30 days under Article 2, is a repudiation.

Perfect Tender

Under Article 2, a buyer may reject goods if the goods or tender fail in any respect to conform to the contract, subject to the seller’s right to cure, installment-contract rules, and limitations imposed by good faith and commercial reasonableness.

Seller’s Right to Cure

If the time for performance has not expired, a seller who seasonably notifies the buyer may cure a nonconforming tender within the contract time. After the time has expired, a seller may receive a further reasonable time to cure when the seller had reasonable grounds to believe the tender would be acceptable, with or without a price allowance.

Installment Contracts

A buyer may reject a nonconforming installment only if the nonconformity substantially impairs that installment and cannot be cured. The buyer may cancel the entire installment contract only if a nonconformity or default substantially impairs the value of the whole contract, unless the buyer reinstates the contract by accepting a nonconforming installment without seasonably canceling.

Acceptance of Goods

A buyer accepts goods by stating that they conform or will be retained despite nonconformity, failing to make an effective rejection after a reasonable opportunity to inspect, or acting inconsistently with the seller’s ownership. Acceptance obligates the buyer to pay but does not waive a properly preserved claim for damages.

Revocation of Acceptance

A buyer may revoke acceptance of goods whose nonconformity substantially impairs their value to the buyer if acceptance was reasonably induced by difficulty discovering the defect or by the seller’s assurance of cure. Revocation must occur within a reasonable time after discovery and before a substantial change in the goods not caused by the defect, and the buyer must notify the seller.

Express Warranty

An express warranty arises from an affirmation of fact, promise, description, sample, or model that becomes part of the basis of the bargain. Formal words of warranty and specific reliance are not required, but statements of opinion or puffery ordinarily do not create a warranty.

Implied Warranty of Merchantability

A merchant seller of goods of the kind warrants that the goods are fit for their ordinary purpose, are of fair average quality, are adequately packaged and labeled, and conform to promises on the container. A disclaimer must mention merchantability and, if written, be conspicuous, unless circumstances such as “as is” language or examination exclude the warranty.

Implied Warranty of Fitness for a Particular Purpose

A seller warrants that goods are fit for the buyer’s particular purpose when the seller has reason to know the purpose and that the buyer is relying on the seller’s skill or judgment, and the buyer actually relies. The seller need not be a merchant. A written disclaimer must be conspicuous.

Impossibility and Impracticability

A party’s duty may be discharged when, after formation and without the party’s fault, an unforeseen event makes performance objectively impossible or, under the governing rule, impracticable because of extreme and unreasonable difficulty, expense, injury, or loss. The event’s nonoccurrence must have been a basic assumption and the contract must not allocate the risk to the party seeking excuse.

Frustration of Purpose

A party’s remaining duties may be discharged when an unforeseen event substantially destroys the principal purpose of the contract, the other party knew or had reason to know that purpose, the event’s nonoccurrence was a basic assumption, and the party did not assume the risk. Mere reduction in profitability is insufficient.

Expectation Damages

Expectation damages place the injured party in the position the party would have occupied had the contract been performed. They generally equal loss in value plus incidental and consequential losses, minus costs and losses avoided. Damages must be proved with reasonable certainty and may not be speculative.

Foreseeability and Consequential Damages

Consequential damages are recoverable only if they were foreseeable as a probable result of breach when the contract was made because they arise ordinarily from the breach or from special circumstances the breaching party had reason to know.

Incidental Damages

Incidental damages are reasonable expenses incurred in responding to breach, such as inspection, transportation, care, custody, cover, resale, or other commercially reasonable efforts to avoid loss.

Mitigation

An injured party must take reasonable steps to avoid unnecessary loss and may not recover damages that could have been avoided without undue risk, burden, or humiliation. The breaching party bears the burden of proving avoidable loss. Reasonable but unsuccessful mitigation expenses are recoverable.

Liquidated Damages

A liquidated-damages clause is enforceable when actual damages were difficult to estimate at formation and the stated amount is a reasonable forecast of anticipated or actual loss. A clause designed primarily to punish breach is an unenforceable penalty.

Reliance Damages

Reliance damages reimburse expenditures made in reasonable reliance on the contract and place the injured party in the position occupied before the contract. The breaching party may reduce recovery by proving that full performance would have produced a loss.

Restitution

Restitution prevents unjust enrichment by requiring a party to return the value of benefits conferred. A nonbreaching party may elect restitution in appropriate cases, and a breaching party may sometimes recover the net benefit conferred minus the other party’s damages.

Specific Performance

Specific performance is available when a valid contract exists, the plaintiff has performed or is ready and able to perform, legal damages are inadequate, the terms are sufficiently definite, and enforcement is feasible and equitable. Land is presumed unique; goods may be unique in appropriate circumstances. Courts ordinarily will not order personal services but may enforce a valid negative covenant.

Buyer’s Article 2 Remedies

After seller breach, a buyer may cancel, cover in good faith and without unreasonable delay and recover the difference between cover price and contract price, recover market damages measured at the time the buyer learned of breach, obtain incidental and consequential damages, or in proper cases obtain specific performance or replevin. Failure to cover does not bar other available damages.

Seller’s Article 2 Remedies

After buyer breach, a seller may withhold delivery, stop delivery when permitted, resell in good faith and commercially reasonably and recover the difference between resale price and contract price, recover market damages, recover the price in limited cases, or recover lost profits when ordinary market damages are inadequate, plus incidental damages less expenses saved.

Excuse of Conditions

A condition may be excused by waiver, estoppel, prevention, disproportionate forfeiture, or breach by the party whose duty depends on it. A party may retract waiver of a nonmaterial condition with reasonable notice unless the other party materially relied.

Prevention of Condition

A party whose wrongful conduct prevents or substantially hinders a condition may not rely on the condition’s nonoccurrence. The condition is excused to the extent necessary to avoid rewarding the prevention.

Risk of Loss - No Breach

For identified goods when neither party is in breach, risk of loss passes according to the delivery terms. If the seller is a merchant and goods are to be picked up, risk ordinarily passes on the buyer’s receipt; if the seller is not a merchant, it passes on tender of delivery. Shipment and destination contracts follow their respective delivery obligations.

Risk of Loss - Breach

When a seller tenders nonconforming goods so that the buyer may reject, risk remains with the seller until cure or acceptance. When the buyer rightfully revokes acceptance, the buyer may treat risk as remaining with the seller to the extent of any insurance deficiency. A repudiating or breaching buyer may bear risk for commercially reasonable time to the extent of the seller’s insurance deficiency.

Identification and Insurable Interest

Goods are identified when designated as the goods to which the contract refers. Identification gives the buyer a special property and insurable interest; the seller retains an insurable interest while holding title or a security interest.

Notice of Breach

A buyer who accepts goods must notify the seller of breach within a reasonable time after discovery or when discovery should have occurred, or be barred from a remedy. A person injured by a consumer product must provide any notice required by governing law.

Accord and Satisfaction

An accord is an agreement to accept substitute performance in satisfaction of an existing duty. The original duty is suspended until performance of the accord; satisfaction discharges both. Breach of the accord permits enforcement of the original duty or the accord.

Substituted Contract and Novation

A substituted contract immediately discharges the original duty and replaces it with a new obligation. A novation is a substituted contract adding a new obligor or obligee and requires assent of all affected parties.

Rescission and Release

Mutual rescission discharges remaining contractual duties when each party gives up rights that still have value. A release discharges a claim and is enforceable according to contract rules; modern law may enforce a signed release without separate consideration when statute so provides.

Reformation

A court may reform a writing to conform it to the parties’ actual agreement when mutual mistake or qualifying unilateral mistake, fraud, or inequitable conduct caused the writing to misstate the agreement. Clear and convincing proof is generally required.

Limitation of Remedies

Parties may limit or alter remedies, including making repair or replacement exclusive, unless the limitation is unconscionable or fails of its essential purpose. Consequential damages may be limited unless unconscionable; limitation of personal-injury damages for consumer goods is presumptively unconscionable.

Third-Party Beneficiary

A third party may enforce a contract when recognition of a right is appropriate to effectuate the parties’ intent and the promised performance will satisfy an obligation to the beneficiary or the circumstances show intent to give the beneficiary the benefit of performance. An incidental beneficiary has no enforcement right.

Vesting of Beneficiary Rights

The original parties may modify or rescind a beneficiary’s rights until those rights vest. Rights generally vest when the beneficiary materially changes position in justified reliance, brings suit, or manifests assent at a party’s request, subject to any reservation of power in the contract.

Defenses Against Beneficiary

A promisor may assert against an intended beneficiary any defense arising from the contract that could be asserted against the promisee, unless the contract provides otherwise.

Assignment of Rights

A contractual right is generally assignable unless assignment would materially change the obligor’s duty or risk, materially impair the chance of return performance, is validly prohibited, or is barred by law or public policy. No consideration is required, but a gratuitous assignment may be revocable.

Effect of Assignment

An effective assignment transfers the assignor’s right to the assignee. The obligor may assert against the assignee defenses and claims arising before notice and may discharge the duty by paying the assignor until receiving notice.

Successive Assignments

A later assignee ordinarily loses to an earlier assignee. A later assignee for value may prevail under a limited rule when the later assignee lacks notice and first obtains payment, judgment, a novation, or an indicium of ownership.

Delegation of Duties

A contractual duty may be delegated unless the contract prohibits delegation, performance depends on the obligor’s special skill or reputation, or delegation would materially change the obligee’s expected performance. Delegation does not release the delegating party absent novation.

Assignment of “the Contract”

A transfer of “the contract” or of “all rights under the contract” is generally construed as both an assignment of rights and a delegation of unperformed duties. The transferee’s acceptance may imply a promise to perform the delegated duties.

Breaching Party Restitution

A party in breach may recover the value of benefits conferred beyond the loss caused by the breach, subject to an enforceable liquidated-damages provision and the other party’s right to full compensation. Willful breach may affect equitable relief but does not automatically eliminate all restitution.