Contracts & Sales

Contract Question Steps

1) What law? Common law or UCC?

2) Contract = Mutual Assent (Offer + Acceptance) + Consideration - Absence of Defenses

3) Is the contract legally enforceable?

4) What does the contract mean and what are the terms?

5) Is the performance excused?

6) Was the contract breached?

7) What are the remedies? Non-monetary and monetary.

8) Are there third-party beneficiaries?

Contract

Legally enforceable agreement.

It is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes as a duty.

Express Contract

Formed by words, oral or written.

Implied Contract

Formed by conduct.

Quasi-Contract / Restitution

A restitution remedy that the courts use when applying contract law would yield an unjust result.

They are constructed by courts to avoid unjust enrichment, by permitting the plaintiff to bring an action to recover the amount of the benefit conferred on the defendant.

Bilateral Contract

An exchange of a promise for a promise.

Unilateral Contract

A contract wherein the offeror asks for performance rather than a promise. They promise to pay upon the completion of performance by the promisee.

Unilateral contracts tend to have the words "offer only by" as in "My offer can be accepted only by..."

Rewards are unilateral contracts.

Article 2 of the UCC

Contracts for the sale of goods.

Goods

Anything movable when identified to the contract.

Common Law

Contracts for services and real property.

Merchant

-One who regularly deals in goods of the kind sold or

-Holds themselves out as having special knowledge or skills as to practices or goods involved.

Mixed Contracts: Part Goods and Part Services

-Apply all common law or all of Article 2 of the UCC depending on the more important part of the transaction.

-If it divides payment between the goods and services, then Article 2 of the UCC applies to the goods and common law applies to the services.

Offer

A manifestation of intention to be bound. It creates a power of acceptance in the offeree and a corresponding liability in the offeror.

For a communication to be an offer, it must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract based on the offer terms.

Objective intent to enter into a contract (based off what a reasonable person would think).

Advertisements -- Offers

Advertisements are generally not offers. They are invitations to deal unless you see a quantity term. They are announcements of prices at which the seller is willing to receive offers.

They are normally addressed to the general public and cannot be enforced due to vagueness on quantity.

Exceptions when advertisements are offers if they include:

-Promise

-Certain/definite terms

-Offeree is identified.

Offers Usually Must Include...

Offers must be definite and include:

-Offeree's name.

-Offer's subject matter

-Price

Land Sale Offers

Land sale offers must include:

-Price

-Description with particularity, but a deed description is not required.

Sale of Goods Offers

-Offers must include the quantity term to be valid.

-It can be valid with just the quantity term and nothing else as UCC gap fillers will be used.

Requirements Contract

Buyer promises to buy from seller all goods buyer requires.

Output Contract

Seller promises to sell to buyer all goods seller produces.

Employment Contract

In contracts for employment, if the duration of the employment is not specified, the offer, if accepted, is construed as creating a contract terminable at will of either party.

Lapse of Time

Offer terminated if not accepted within reasonable time or state time period. Offers are not open forever.

Typically, a "reasonable time" to an offer is a month.

This also depends on what the product is. Fruits have a shorter offer time than steel rods.

Rejection

-Counteroffers count as rejections, but mere bargaining is not a rejection.

-Question marks indicate bargaining, while periods indicate counteroffers.

-Conditional acceptances count as rejections. They are rejections and a new offer.

Revocation

Offeror's retraction of offer.

-Revocations are effective upon receipt.

Indirect Revocation

Offer revoked indirectly if:

1) Offeree receives correct information

2) From reliable source

3) Of offeror's acts indicate revocation.

Limits on Offeror Revocation

1) Option Contract

2) Merchant's Firm Offer Rule Under Article 2 of the UCC

3) Foreseeable reliance

4) Starting to perform under a uniliteral contract offer

Option Contract

A limit on revocation.

It requires that the offeree give consideration for offeror to not revoke offer for period of time.

Merchant's Firm Offer Rule

A limit on revocation for sales of goods. Requires:

1) Merchant promises

2) In signed writing

3) To keep offer open for time stated or reasonable time.

Enforceable for up to 3 months.

Anyone operating any business can be treated as a merchant typically for this rule. "Signed" means anything that looks authenticated.

Foreseeable Reliance

A limit on revocation.

If it is foreseeable that they will rely on your offer, it acts a limit on offeror's revocation. For instance, subcontractors submitting bids to general contractors.

Starting Performance for Unilateral Offers

Beginning performance under a unilateral contract offer limits the offeror's revocation powers as the offeree has a reasonable time necessary to complete performance.

But, mere preparation to perform is not the start of performance. For example, beginning to paint the house versus ordering paint.

If there was foreseeable detrimental reliance, you might be able to argue that.

Death of Parties and Offers

Death of either party before acceptance terminates revocable offers.

But death not automatically terminate a contract and the obligation goes to the estate.

Acceptance

-Language of offer controls the manner of acceptance.

-A bilateral contract can be accepted in any reasonable manner, including beginning performance. Even improper shipments can count as an acceptance and breach.

-A unilateral contract requires complete performance to accept.

Objective Theory of Contracts -- Delaware

Delaware follows the objective theory of contracts. Under this theory a contract is formed if a reasonable person who believe that the conduct, words, and any writing exchanged by the parties was meant to be a contract.

A reasonable person looking at the conduct of Producer and Child Actor would believe that the parties intended to be bound by certain definite terms and the elements of contract formation have been met.

Silence and Acceptance

Silence is generally not an effective acceptance for offerees.

Previous Customs Among Partis

Previous customs among parties may indicate acceptance even if the offeree is silent.

Mirror Image Rule

Under common law, acceptance must mirror offer terms exactly.

The Mirror Image Rule is not applicable to Article 2 of the UCC. Offeree must make a seasonable expression of acceptance.

Offeree Addition Terms in Article 2

Offeree's additional terms are not part of contract unless:

1) Both parties are merchants.

2) It is not material and

3) Offeror doesn't object.

The Mirror Image Rule is not applicable to Article 2 of the UCC. Offeree must make a seasonable expression of acceptance.

Material Change

Material changes are those that cause hardship or a surprise to the offeror.

Terms that are "customary to an industry" are never material changes.

Mailbox Rule

Acceptance is effective when sent. Even if it does not arrive, that's irrelevant as it's effective when sent.

Exceptions where the Mailbox Rule does not apply:

1) If the offer states otherwise. Offerors can control the method and timing of acceptance.

2) Irrevocable offers such as option contracts.

3) If rejection is sent before acceptance, the mailbox rule does not apply. Instead, the outcome is determined by whether the acceptance or rejection get there first.

Consideration

A bargained for exchange.

Seal and Consideration -- Delaware

The existence of a seal precludes challenges to the validity of a contract on the grounds of lack of consideration.

Establishing an Instrument Under Seal -- Delaware

Although a contract under seal (also known as a specialty contract) may be established by language in the contract and extrinsic evidence showing the parties' intent to conclude a sealed contract, it also may be established simply by using the word "seal" next to each signature.

Statute of Limitations for Delaware Contracts

-Under Delaware law, there is no statute of limitations for a contract under seal.

-However, there is a presumption of satisfaction of the claim after 20 years. This has led courts to state that there is a 20-year statute of limitations for contracts under seal.

Past Consideration

An act occurred in the past that is now recognized with a gift promise. This is not consideration and is unenforceable.

Pre-Existing Legal Duty Rule and Modifications

You need new consideration to modify common law contact.

Under the common law, consideration is necessary for modification of contracts.

Exceptions:

-If the offeror adds to their duties, that is not a pre-existing legal duty.

-If the modification is "fair and reasonable" in light of unanticipated circumstances, then it is enforceable without new consideration.

-If a third-party provides consideration for the duty, there is no pre-existing legal duty as they did not owe them a duty previously.

Modifications of Article 2 UCC Contracts

No consideration is needed to modify sale of good contract. You just need good faith.

Partial Payment of a Debt Modifications

If there is partial payment of a debt that is due and undisputed, there is no consideration thus this is not an enforceable modification. The debt is a pasty duty.

However, if you agree to pay back the debt early, or there was good faith dispute over whether it was due, you can liquidate it for a reduce sum.

Promissory Estoppel

-Promissory estoppel is a promise plus performance.

-Foreseeable detrimental reliance can make the promisor's promise enforceable even if there is no consideration.

Elements:

Capacity -- Defense to Contracts

Defendants without capacity can disaffirm contract. These include:

-Minors under 18.

-Intoxicated people, including voluntarily intoxicated people if the other party knew and took advantage.

-Mentally incompetent people.

Minors and others can disaffirm but they do not have to disaffirm.

If they retain benefits after gaining capacity, this an Implied Affirmation of the contract.

Implied Affirmation after Gaining Capacity

If the defendant retains benefits after gaining capacity, this an Implied Affirmation of the contract. For example, a minor keeping an item after they turn 18.

You only have a reasonable time to disaffirm after regaining capacity.

Necessities and Incapacitated Parties

Incapacitated parties are still liable for necessaries (such as food, shelter, clothing, and medical care) but they are only obligated to pay the fair market value in restitution as it is not a contract obligation.

Duress -- Defense to Contracts

Economic Duress:

1) A party says they won't honor their side of the bargain unless a condition is met.

2) Vulnerable person gives into the improper wrongful threat because they have no other choice.

Ambiguity and Misunderstanding -- Defense to Contracts

1) If there is a material ambiguity that neither party knew about or had reason to know about, there is no meeting of the minds and thus no contract or remedy for either party.

2) If one party knew about the ambiguity or should have known about it, hold it against them.

Mutual Mistake -- Defense to Contracts

If there was a mutual mistake, the contract can be rescinded. The court will look to see whether subject matter they bargained over actually exists.

-If it is a mistake about the existence of the subject matter, grant the relief.

-If it is a mistake over the value of what was bargained over, the contract is enforced.

Unilateral Mistake -- Defense to Contracts

Courts are more reluctant to grant relief in unilateral mistake scenarios. Look to assumption of the risk.

The defendant will only be able to use this if the other contracting party knew of the unilateral mistake or should have known about it.

Thus, there is generally no relief unless it's a palpable, obvious mistake.

"Palpable, obvious mistakes" are typically examples like contractors bidding around $10,000 then someone bidding $1,000. It's obvious.

Unconscionability -- Defense to Contracts

Court may refuse to enforce all or part of the contract in the even of unconscionability.

Look for:

1) Unfair surprise and

2) oppressive terms

3) at the time of formation.

Fraudulent Misrepresentation (Fraud in the Inducement) -- Defense to Contracts

-A false assertion of fact.

-It is fraudulent if:

1) It is intended to induce a party to enter into a contract and

2) the maker knows or believes the assertion is false or knows that he does not have a basis for what he states or implies with the assertion.

-A fraudulent assertion can be inferred from conduct; i.e., concealment or sometimes even nondisclosure may be considered a misrepresentation.

-If a party induces another to enter into a contract by using fraudulent misrepresentation (e.g., by asserting information she knows is untrue), the contract is voidable by the innocent party if she justifiably relied on the fraudulent misrepresentation. This is a type of fraud in the inducement.

Material Misrepresentation -- Defense to Contracts

Whether or not a misrepresentation is fraudulent, the contract is voidable by the innocent party if the innocent party justifiably relied on the misrepresentation and the misrepresentation was material. A misrepresentation is material if:

1) it would induce a reasonable person to agree, or

2) the maker knows that for some special reason it is likely to induce the particular person to agree, even if a reasonable person would not.

Statute of Frauds -- Defense to Contracts

Asks when an oral contract is not enforceable as writing is needed to prove its existence.

Statute of Frauds Categories

"MY LEGS":

-Marriage

-Contracts for more than 1 Year.

-Land Sales

-Executors

-Goods for $500 or more

-Sureties

Marriage Contracts -- Statue of Frauds

-Contracts where marriage is consideration. For example, prenuptial contracts.

-Does not include promises to marry.

Contracts That Cannot be Completed in One Year -- Statue of Frauds

-Contract is impossible to completed in 1 year.

-Time of actual performance does not matter (for example, you should imagine they have superhuman abilities to finish it rapidly even if it is a huge job)

-Lifetime contracts can be completed in less than 1 year as you might die.

Land Sales -- Statue of Frauds

-Transfers of interests in real property fall within the Statute of Frauds and require a writing.

-Leases for more than 1 year are, while less than 1 year are not.

-Contracts that merely have to do with land, like construction services, are not land sales and do not necessarily fall within the Statute of Frauds.

Equal Dignity Rule / Authorizations to Enter Into Contracts on Behalf of Another -- Statue of Frauds

Authorizations to enter into contracts on behalf of another require the "Equal Dignity Rule" which says that writing is only required if the underlying deal was subject to the Statute of Frauds.

Executors -- Statue of Frauds

-Promises from executors to pay the estate's debts from some other source of funds not from the estate's liabilities or the estate's assets, such as the Executor's own assets, fall within the Statute of Frauds.

-As do executor promises from estate.

Sale of Goods for $500 or More -- Statue of Frauds

-Sales of goods for $500 or more require a writing.

-All sales of goods are subject to Article 2 of the UCC regardless.

Sureties -- Statue of Frauds

-Sureties are a promise to answer for (guarantee) the debts of another. It is not merely a promise to pay money.

-Basically, it's always "If X doesn't pay you, I will."

-Third-party beneficiary contracts are not sureties.

Modifications and the Statute of Frauds

-Modifications must be in writing only if modified contract is within Statute of Frauds.

-Look at the new contract with the modification to determine if it is subject to the Statute of Frauds.

-If the original contract falls within Article 2 and it prohibits oral modifications, then it must be in writing.

-If the original contract is governed by common law and it prohibits oral modifications, then it is not enforceable.

Land Sale Exceptions -- Statue of Frauds

1) If a lease is for one year or less, then it can be oral and is not subject to the Statute of Frauds.

2) Part performance of real estate contracts are excepted if two of the three are true:

-The party seeking oral contract enforcement has paid.

-The party seeking oral contract enforcement has taken possession.

-The party seeking oral contract enforcement has made improvement(s).

Full Performance of Service Contracts -- Statue of Frauds

-Full performance of a service contract satisfies as the necessary proof for the Statute of Frauds, so a writing is not required.

-There is no partial performance exception for service contracts.

Exceptions to $500 Sale of Goods -- Statue of Frauds

1) If there is partial payment or acceptance, there is no Statute of Fraud defense for what has already been paid for or accepted.

The exception only applies to:

-Goods accepted

-Goods paid for

But if it's for a deposit on a singular item, like $10,000 paid for a $50,000 boat, this exception does not apply as you cannot apportion the boat. Therefore a writing is still needed.

2) If there is substantial beginning on a contract for custom made goods, then this satisfies the proof require for the Statute of Frauds and no writing is required.

A substantial beginning requires that enough has been done to show:

-The goods are made to order

-The goods are custom made

-The seller cannot resell them to anybody else.

Judicial Admission Exceptions -- Statue of Frauds

Agreement admitted to under oath is enforceable without writing.

Merchant's Confirmatory Memo -- Statue of Frauds

Satisfies the Statute of Frauds without defendant's signature if:

-Both parties are merchants

-Both parties agree to contract

-One party sends signed writing containing quantity terms

-No objection by recipient within 10 days.

Satisfactory Writing for Statute of Frauds

Writings for contracts for sale of goods $500+ must have:

-Quantity term

-Defendant's signature

Writings for contracts for services must have:

-All material terms

-Defendant's signature

Parol Evidence Rule

-Excludes evidence of prior or contemporaneous agreements contradicting a final writing.

-Oral agreements do not trigger the parol evidence rule as you need a final writing.

-Parol evidence only looks backward at what happened before the writing.

Exceptions to Parol Evidence Rule

1) Partially integrated writings. Partial integration is a final statement of the terms included but not a complete statement as to the entire deal. You can bring in parol evidence to add to the deal as it does not contradict it or explain it but adds to it.

2) Defense against formation. Parties can bring in parol evidence to establish a defense against formation while not contradicting the writing.

3) Explain vague term.

4) Correct clerical error.

Merger Clause and Parol Evidence Rule

If a contract says something like "this contract is limited to the terms herein", it merges together all prior oral and written understands into the four corners of the document.

Course of Performance

Parties' conduct under prior installments of current contract. For example, with an installment contract to determine what was typical.

Order of analysis is:

1) Course of Performance then

2) Course of Dealing then

3) Trade Usage

Course of Dealing

Parties' conduct in prior contracts.

Order of analysis is:

1) Course of Performance then

2) Course of Dealing then

3) Trade Usage

Trade Usage

Industry norms parties are or should be aware of.

Order of analysis is:

1) Course of Performance then

2) Course of Dealing then

3) Trade Usage

Express Warranty

Any statement of fact or description of the goods is an express warranty.

"Puffing" is not an express warranty.

Implied Warranty of Merchantability

-Goods fit for ordinary, foreseeable purpose.

-You need to determine that they were a merchant regularly selling that kind of good to consumers.

Implied Warranty of Fitness for Particular Purpose

1) Buyer comes in with special purpose.

2) Seller knows of special purpose.

3) Seller picks out goods fit for buyer's special purpose.

The seller does not have to be a merchant here.

Disclaimers of Warranties

Sellers can disclaim implied warranties only. This is typically indicated by phrases like:

-"As is"

-"With all faults"

-"No Implied Warranties"

This serves to disclaim all implied warranties. Disclaimer must be conspicuous.

Limitations of Damages Clauses

Generally, a seller can limit buyer's remedies for breach of any warranty, even an express warranty, as long as it is not unconscionable.

You cannot limit damages in the event of personal injury as the limitation will be presumed unconscionable.

Risk of Loss and Sales of Goods

1) Goods must be identified to contract. Risk of loss cannot pass until the goods are identified. Seller has risk of loss at this point.

-Existing goods are identified when specific goods are named.

-Future goods are identified when born, planted, shipped, marked, or designated.

2) If goods are identified and damaged or destroyed and seller has risk of loss, seller must provide new goods to the buyer for no additional cost. If it passed to the buyer, the buyer must pay the contract price.

Determining Risk of Loss

Hierarchy to determine risk of loss:

1) If the agreement allocates risk, the agreement of all parties controls.

2) If a party is in breach, the breaching party is liable regardless.

3) If there is no common carrier, look to see if the seller was a merchant. Merchants bear risk of loss until buyer receives goods.

4) Buyer bears risk of loss once the nonmerchant seller tenders the goods. "Tendering" is effectively telling the buyer where it is and how to get it.

5) If there is a common carrier, a third-party in the shipping business, the risk of loss shifts to the buyer when the seller completes delivery obligation.

Shipping Contract -- Risk of Loss

A delivery obligation where:

1) Seller delivers goods to common carrier

2) Arranges for delivery, and

3) Notifies buyer

Risk of loss passes to buyer.

Assume it is a shipment contract unless contract states otherwise.

FOB ("Free on Board") + seller's city location means it is a Shipping Contract.

FOB + any other location, then risk of loss stays with seller longer.

Destination Contract -- Risk of Loss

A delivery obligation where the seller must deliver goods to buyer's location.

Seller keeps risk of loss.

Act of God -- Risk of Loss

If goods that were identified when the contract was made are destroyed without fault by either party and before the risk of loss passes to the buyer, the contract is voided and their sellers performance is excused.

Performance -- Common Law Contracts

1) Substantial performance is enough

-Meets contract's essential purpose

2) No material breach.

Perfect Tender Rule / Performance -- UCC

-Seller's delivery must be perfect. Seller must deliver perfect goods at the right place and at the right time.

-If their tender is not 100% perfect, buyer has the right to reject all the goods.

Installment Contracts / Performance -- UCC

Requires delivery of goods in separate installments over specified period.

Opportunity to Inspect Goods and Implied of Acceptance

-Under the UCC, you have a reasonable amount of time to inspect goods upon receipt.

-Paying for goods upfront is not acceptance. The time for reasonable inspection creates implied acceptance.

Buyer's Obligations / Method of Payment -- UCC

1) Cash is the default payment term unless otherwise agreed.

2) Checks are generally okay.

-Sellers can refuse checks, but it gives buyers a reasonable amount of time to provide cash.

-Even if you provide the check right at the deadline, you are afforded the time to bring cash.

Conditions

-Conditions limit obligations created by control language. They do not create their own obligation.

-Express conditions must be perfectly satisfied.

-If an express condition is not satisfied, it grants an excuse to the innocent party.

-There is no substantial performance rule for express conditions.

-You cannot sue because an express condition has not been satisfied. Example would be not buying a house unless it is appraised at $X amount. If it falls short, you can't sue and you don't have to buy it.

Satisfaction Clauses

-Satisfaction is measured by reasonable person standard.

-If the contract deals with art or personal taste, then it is measured by the recipient's subjective satisfaction.

Condition Precedent

Performance not due until the event occurs.

Condition Subsequent

Events after performance that could terminate duty to pay.

Excuse of Condition

Conditions maybe excused by action or inaction of person protected by condition.

Waiver of Condition

Voluntary giving up of condition's protection.