Contracts MBE Questions

Under the terms of a written contract, a builder agreed to construct a garage for a homeowner for $10,000.  Nothing was stated in the parties' negotiations or in the contract about progress payments during the course of the work.

After completing 25 percent of the garage according to the homeowner's specifications, the builder demanded $2,000 as a reasonable progress payment.  The homeowner refused, and the builder abandoned the job.

If each party sues the other for breach of contract, which of the following will the court decide?

Answer: Only the builder is in breach and liable for the homeowner's damages, if any.

A party breaches a contract by failing to perform a contractual duty at the time performance is due.  Where only one party's performance requires a period of time to complete, that party's performance is due first unless the contract or the circumstances indicate otherwise.  If that party fails to complete performance or repudiates the contract, the nonbreaching party is entitled to withhold performance and recover damages.

Here, the builder needed a period of time to construct the garage, and the parties' contract did not provide for progress payments—ie, payments made at certain stages in the process.  As a result, the builder was required to complete construction before the homeowner was required to pay anything.  The builder then repudiated the contract by abandoning the job, so the homeowner was entitled to withhold payment.  Therefore, only the builder is in breach and liable for the homeowner's damages, if any (Choices A, C & D).

A buyer expressed interest in purchasing an industrial air-conditioning system manufactured by the seller.  The parties agreed orally on a price of $100,000 for the system, but continued to negotiate over several points.  When all matters regarding the air-conditioning system were finally settled, the parties signed a written agreement.  It provided that the price for the system, which would be delivered on June 1, would be $110,000.  The written agreement, a lengthy form contract, did not contain a merger clause.

The seller delivered the system on June 1, but the buyer refused to pay more than $100,000, citing the earlier oral agreement as to price.

The seller sued the buyer for the additional $10,000 under the written agreement.

Is the court likely to admit the evidence of the orally agreed price of $100,000?

Answer: No, because the oral price term would contradict an express term in the written agreement

Under the UCC parol evidence rule, evidence of any prior agreement (or contemporaneous oral agreement) cannot be used to contradict the terms of an integrated writing.  A writing is integrated if the parties intended for it to be a final expression of their agreement about some or all of the terms.

Here, the parties intended for the written contract to be the final expression of their agreement since they entered into the contract only after they had settled "all matters" regarding the purchase of the air-conditioning system.  As a result, the court is unlikely to admit evidence of the $100,000 oral price term because it contradicts the $110,000 price term expressed in the written contract.

A merger clause is strong but not definitive evidence that a contract is completely integrated.  But here, it does not matter whether the contract was completely or partially integrated; in either case, the parties cannot use parol evidence to contradict the written terms.

A general contractor about to bid on a construction job for an office building invited a carpenter and several others to bid on the carpentry work.  The carpenter agreed to bid if the general contractor would agree to give the carpenter the job provided that his bid was lowest and the general contractor was awarded the main contract.  The general contractor so agreed.  The carpenter, incurring time and expense in preparing his bid, submitted the lowest carpentry bid.  The general contractor used the carpenter's bid in calculating its own bid, which was successful.

Which of the following best supports the carpenter's position that the general contractor is obligated to award the carpentry subcontract to the carpenter?

Answer: The carpenter gave consideration for the general contractor's conditional promise to award the carpentry subcontract to the carpenter.

A contract is generally formed when an exchange of promises is supported by valuable consideration—ie, a bargained-for exchange of promises or performance.  However, performance under that agreement can be made contingent upon a condition.  There are two types of conditions:

• Condition precedent – where a party's duty to perform arises upon the occurrence or nonoccurrence of an uncertain future event (ie, the event creates the duty)

• Condition subsequent – where a party's duty to perform is released upon the occurrence or nonoccurrence of an uncertain future event (ie, the event extinguishes the duty)

Here, the carpenter offered to bid on the carpentry work in exchange for the contractor's promise to award the carpenter the subcontract.  This exchange of promises provided valuable consideration to form a binding agreement.  The contractor's performance of that agreement was contingent upon the carpenter submitting the lowest bid and the contractor receiving the main contract.  Since these conditions precedent occurred, the contractor was obligated to award the subcontract to the carpenter.

A man sent an email to a friend that stated: "Because you have been a great friend to me, I am going to give you a rare book that I own."  The friend replied by an email that said: "Thanks for the rare book.  I am going to give you my butterfly collection."  The rare book was worth $10,000; the butterfly collection was worth $100.  The friend delivered the butterfly collection to the man, but the man refused to deliver the book.

If the friend sues the man to recover the value of the book, how should the court rule?

Answer: For the man, because there was no bargained-for exchange to support his promise.

Formation of a contract generally requires a bargained-for exchange of promises or performance (ie, valuable consideration).  The bargained-for exchange requirement is not met unless each party's willingness to enter into the contract was induced by the other party's act or promise.  So if either of the parties intended to make a gift, this requirement cannot be met.

Here, the man promised to give a rare book to his friend.  The man clearly intended to make a gift since he did not ask for anything in exchange.  This means that the man's promise was not induced by the friend's promise to give him her butterfly collection, so there was no bargained-for exchange (ie, consideration) to support his promise.  Therefore, no contract arose between the parties, and the court should rule in favor of the man.

On April 1, the owner of a house and a real estate investor signed a writing in which the owner, "in consideration of $100 to be paid to the owner by the investor," offered the investor the right to purchase the house for $100,000 within 30 days.  The writing further provided, "This offer will become effective as an option only if and when the $100 consideration is in fact paid."

On April 20, the owner, having received no payment or other communication from the investor, sold and conveyed the house to the investor's business rival for $120,000.  On April 21, the owner received a letter from the investor enclosing a cashier's check for $100 payable to the owner and stating, "I am hereby exercising my option to purchase the house and am prepared to close whenever you're ready."

Which of the following, if proved, best supports the investor's suit against the owner for breach of contract?

Answer: The investor was unaware of the sale to his business rival when the owner received the letter and check from the investor on April 21.

An option is a contract in which the offeree gives consideration (e.g., money) in exchange for the offeror's promise to keep an outstanding offer open for a specified period of time.  An offer to form an option is revocable prior to acceptance of the option.  Revocation occurs when:

• the offeror directly communicates the revocation to the offeree or

• the offeree learns information from a reliable source that reasonably indicates the offer was revoked (e.g., house sold to another buyer).

Here, the owner offered the investor the option to purchase the house for $100,000 within 30 days.  The investor had to pay $100 to accept this option, which the owner received on April 21.*  Although the owner had already sold the house to someone else, he had not told the investor that the offer to form an option was revoked.  So if the investor was unaware of the other sale, there was no revocation prior to his acceptance and exercise of the option on April 21, and the owner breached the resulting sales contract.

An experienced rancher contracted to harvest his neighbor's wheat crop for $1,000 "when the crop [was] ripe."  In early September, the neighbor told the rancher that the crop was ripe.  The rancher delayed because he had other customers to attend to.  The neighbor was concerned that the delay might cause the crop to be lost, for hailstorms were common in that part of the country in the fall.  In fact, in early October, before the crop was harvested, it was destroyed by a hailstorm.

Is the rancher liable for the loss?

Answer: Yes, because at the time the contract was made, the rancher had reason to foresee the loss as a probable result of his breach.

The purpose of compensatory damages is to put the nonbreaching party in the same position as if the contract had been performed as agreed.  Compensatory damages include:

• expectation damages – the lost value of the breaching party's performance and

• consequential damages – losses that arise from the nonbreaching party's special circumstances that were reasonably foreseeable to the breaching party when the contract was made.

Here, the rancher delayed harvesting the neighbor's wheat crop because he had other customers to serve.  As a result of the delay, the crop was destroyed by a hailstorm before it could be harvested (special circumstances).  This loss was foreseeable when the rancher–neighbor contract was made, given the rancher's experience and the frequency of hailstorms in the fall.  Therefore, the rancher is liable for the loss of the crop.

A bank agreed to lend a merchant $10,000 for one year at 8% interest.  The loan proceeds were to be disbursed within two weeks.  The merchant intended to use the loan proceeds to purchase a specific shipment of carpets for resale at an expected profit of $5,000 but said nothing about these plans to the bank.

The bank failed to disburse the proceeds and refused to assure the merchant that it would do so.  The merchant was able to secure a loan from another lender at 10% interest for one year.  However, by the time the merchant started the application process for a substitute loan, it was too late to pursue the opportunity to buy the shipment of carpets.

In an action against the bank for breach of contract, which of the following amounts is the merchant likely to recover?

Answer: The difference in cost over time between a loan at 10% and a loan at 8%

The primary goal of contract damages is to place the nonbreaching party in the same position as if the contract had been fully performed.  This typically means that the nonbreaching party can recover:

• expectation damages – losses arising naturally and obviously from the breach, which can be measured by the difference between the contract price and the market price and/or

• consequential damages – losses arising from the nonbreaching party's special circumstances (eg, lost opportunities) that the breaching party could reasonably foresee when the contract was made.

The "contract price" of a loan is the interest costs incurred over the life of the loan.  This means that if a lender breaches a loan agreement, the borrower can recover the difference between the interest cost of the original loan (contract price) and the interest cost of a substitute loan (market price).  The merchant here can therefore recover expectation damages equal to the difference in cost over time between a loan at 10% and one at 8%.

A produce distributor contracted to provide a grocer with eight crates of lettuce at the distributor's listed price.  The distributor's shipping clerk mistakenly shipped only seven crates to the grocer.  The grocer accepted delivery of the seven crates but immediately notified the distributor that the delivery did not conform to the contract.  The distributor's listed price for seven crates of lettuce was 7/8 of its listed price for eight crates.  The distributor shipped no more lettuce to the grocer, and the grocer has not yet paid for any of the lettuce.

How much, if anything, is the distributor entitled to collect from the grocer?

Answer: The listed price for the seven crates of lettuce, minus the grocer's damages, if any, for the distributor's failure to deliver the full order.

The Uniform Commercial Code (UCC) governs contracts for the sale of goods (eg, lettuce).  Under the UCC, goods must conform perfectly to the contract.  Failure to provide such goods is a breach that, unless cured in the time remaining to perform, allows the buyer to reject or accept the goods in whole or in part.  When the buyer accepts the goods, the buyer must pay the seller the contract price of the accepted goods minus any damages incurred as a result of the breach—eg, damages incurred to cover (ie, purchase) substitute goods.

Here, the distributor contracted to provide the grocer with eight crates of lettuce.  The distributor then mistakenly shipped only seven crates of lettuce and did not cure this defect (breach).  The grocer accepted the seven crates, so the distributor is entitled to collect the listed contract price (not the reasonable value) for those crates (Choice D).  However, that price must be reduced by the grocer's damages, if any, resulting from the distributor's breach (Choice B).

An amateur computer whiz agreed in writing to build and deliver 50 new gaming laptops a year to a computer distributor over a five-year period.  The writing provided, in a clause separately signed by the computer whiz, that "[n]o modification shall be binding on the distributor unless made in writing and signed by the distributor's authorized representative."

Because of family problems, the computer whiz delivered and the distributor accepted only 30 gaming laptops a year for the first three years; but the laptops were popular with gamers and the distributor made no objection.  Accordingly, the computer whiz spent substantial sums on new laptop parts that would aid in speeding up future builds.  In the first quarter of the fourth year, however, the distributor terminated the contract on the ground that the computer whiz had breached the annual-quantity term.

In the computer whiz's suit against the distributor for damages, the jury found that the contract had been modified by conduct, and the trial court awarded the computer whiz substantial compensatory damages.

Is this result likely to be reversed on appeal?

Answer: No, because the distributor by its conduct waived the annual-quantity term and the computer whiz materially changed his position in reasonable reliance on that waiver.

Under the UCC, contract clauses that require modifications to be in writing (ie, no-oral-modification clauses) are generally enforceable against non-merchants who separately sign the clause.  But these clauses are waived if:

• the parties attempt to modify the contract orally or by their conduct (eg, tendering and accepting an alternate performance) and

• one party materially changes his/her position in reliance on that modification.

In that case, the attempted modification is valid.  And if either party breaches or terminates the modified contract, the other party is entitled to compensatory damages.

Here, the computer whiz agreed to deliver 50 gaming laptops a year over a five-year period but delivered only 30 laptops a year for the first three years.  By tendering and accepting this alternate performance, the parties attempted to waive the annual-quantity term.  And since the computer whiz relied on that modification and materially changed his position by spending substantial sums on new laptop parts, the no-oral-modification clause was waived.  Therefore, the computer whiz's compensatory damages will not be reversed on appeal.