Contracts Exam Flashcards

Introduction

• This is a first-year contracts course. It aims to help students get a good grade on their contracts exam.

• The three main sources of contract law are:

  • Principal cases assigned by the professor.

  • Restatement (Second) of Contracts (Rest.) sections assigned by the professor.

  • Uniform Commercial Code Article 2 sections assigned by the professor.

Eight Questions to Address

1. Does Article 2 of the Uniform Commercial Code (UCC) Apply?

• Is the deal primarily a sale of goods?

  • Applies to all sales of goods, including sales from one consumer to another.

  • Goods are movable at the time of the transaction (e.g., bricks, not a brick building).

  • Mixed transactions (goods and services or goods and building) are generally all UCC or all common law, depending on whether goods are the more important part of the deal.

  • Special rules apply to merchants.

  • Significant overlap with common law.

  • Most professors emphasize these nine sections: 2-201, 2-202, 2-205, 2-207, 2-209, 2-302, 2-314, 2-315, 2-316.

2. Is There an Agreement? Is There a Mutual Manifestation of Assent?

• Objective test (Lucy v. Zehmer).

  • Offer as a manifestation of commitment by one party.

    • Content of communication:

      • Reasonable terms (compare Lucy v. Zehmer and Leonard v. Pepsico).

      • No unclear terms such as "fair" or "reasonable."

      • Missing material terms.

      • Further action may be required.

    • Context:

      • Advertisements are generally not offers.

      • Social settings are generally not offers (but cf. Lucy v. Zehmer).

  • Offer as a caterpillar and contract as a butterfly.

  • Termination of offers:

    • Death or incapacity of either party.

    • Lapse of time.

    • Revocation of offer:

      • By whom: offeror.

      • How: unambiguous words or conduct that the offeree is aware of.

      • When: before the offer has been accepted.

      • When not:

        • Options: paid-for promise not to revoke.

        • Firm offer rule: writing signed by a merchant that promises not to revoke an offer to buy or sell goods (3-month maximum).

        • Offer with a promise not to revoke that has been relied on – Restatement 87(2).

    • Rejection of offer:

      • Rejection as termination.

      • Counteroffer as rejection.

      • Conditional acceptance as rejection (e.g., I accept so long as).

      • Additional terms, different terms as rejection:

        • Common law mirror image rule.

        • Modern common law immaterial variation exception to the mirror image rule.

        • UCC 2-207:

          • Two communications, not identical because of additional or different terms in the later communication.

          • "Definite and seasonable expression of acceptance."

          • General rule in the first part of 2-207(1): contract.

          • Limited exception in the second part of 2-207(1) ("conditional on assent to"): no contract; acceptance is conditioned on agreeing to a specific term.

          • If 2-207(1) contract, then the general rule is no additional terms in the first sentence of 2-207(2).

          • Limited exception of additional terms if both parties are merchants in the second sentence of 2-207(2).

          • If no 2-207(1) contract, then possibly a contract based on conduct - buyer receiving and paying for goods as contract in first sentence of 2-207(3).

          • Terms of 2-207(3) contract in second sentence of 2-207(3). TWO KEYS TO 2-207: (1) LOOK TO STATUTORY LANGUAGE AND (2) TWO RELATED BY SEPARATE QUESTIONS OF IS THERE A CONTRACT AND IF SO WHAT ARE ITS TERMS

  • Acceptance:

    • Importance of acceptance - butterfly.

    • Who can accept.

    • How:

      • Look to offer which can (but usually does not) specify a particular form of acceptance (unilateral/bilateral).

      • Davis v. Jacoby ("if you can come" – unilateral?) ("let me hear from you" – bilateral).

      • Presumption that offer can be accepted by promise.

    • When effective ACCEPTANCE MUST OCCUR BEFORE REVOCATION OR OTHER TERMINATION:

      • If acceptance by performance, …

        • General rule – notification not required.

        • Limited exceptions.

      • If acceptance by promise:

        • Necessity of notification of offeror.

        • Mailbox rule.

3. Is There Consideration or a Consideration Substitute?

• Look to the defendant/promise breaker ("dpb") and ask: did dpb bargain for something? Or look to the plaintiff/promise enforcer ("ppe") and ask: did ppe detrimentally rely?

  • Formation of a contract requires consideration, Rest 17(1).

  • Consideration as "bargained for" "legal detriment."

Three steps in doing consideration

*   Identify the promise breaker.
*   What did the promise breaker bargain for, ask for in return.
*   Did the promise enforcer sustain a "legal detriment" (Hamer v. Sidway nephew Willie’s forbearance from drinking and gambling as legal detriment).

• Four forms of consideration:

  • Bargained-for performance.

  • Bargained-for forbearance.

  • Bargained-for promise to perform.

  • Bargained-for promise to forbear.

• Four most common consideration problems:

  • Illusory promise.

  • Past consideration.

  • Contract modification:

    • Common law and Alaska Packers and pre-existing legal duty.

    • Unanticipated circumstances and Angel v. Murray and Rest 89.

    • 2-209 and good faith.

  • Not bargained-for benefit or burden (e.g., landlord promises to renew lease and tenant paints apartment).

• Promissory estoppel as consideration substitute, Rest 90:

  • Elements:

    • Promise.

    • Reasonable reliance.

    • Avoid injustice.

  • State law variations (asked for/anticipated BY PROMISOR).

4. Is There a Defense That Makes the Agreement Unenforceable?

• Look for facts for (i) terms - what is in the agreement and (ii) agreement process - what happened up to the agreement.

  • Illegality:

    • Effect on actor.

    • Effect on contract.

  • Public policy:

    • Two most common:

      • Exculpatory.

      • Covenant not to compete:

        • FTC and employee.

        • Sale of business.

  • Uncertainty because of ambiguity:

    • Patent ambiguity and Varney v. Ditmars ('fair share of profit”).

    • Latent ambiguity and Raffles v. Wichelhaus (two ships “Peerless”).

  • Unconscionability: UCC 2-302 and common law:

    • "Matter of law."

    • "At the time of contract."

    • All or part.

    • Procedural and substantive:

      • Unfair surprise, adhesion.

      • Oppressive.

    • Arbitration and FAA and Concepcion.

  • Duress by person seeking to enforce (i.e., the plaintiff):

    • Physical.

    • Economic, Austin Instrument v. Loral:

      • Wrongful act by person seeking to enforce agreement.

      • No alternative for person asserting duress defense.

  • Capacity:

    • Defendant.

    • At the time of the contract.

  • Statute of Frauds:

    • When it applies ("within"):

      • Sale of goods 500.

      • Transfer of interest in real estate (other than a one-year lease).

      • Service contract not capable of being performed within 1 year of the time of contract.

      • Promise to answer for debts of another (guarantees).

    • What is required (satisfied):

      • Signed writing "satisfies" s/f:

        • Signed by the person asserting the s/f defense.

        • Content varies.

      • Satisfied without writing signed by person asserting s/f defense:

        • Part performance of real estate.

        • Part performance of the sale of goods to the extent of the part performance (e.g., B orally agrees to buy 500 widgets from S for 500; S delivers 100 widgets), 2-201(3)(c).

        • Part performance of custom-made goods, 2-201(3)(a).

        • Not part performance of services k.

        • Admissions by person asserting s/f - UCC and judicial admissions, 2-201(3)(b) - Common law.

        • Merchants failing to respond to merchant, 2-201(2).

• DON’T CONFUSE STATUTE OF FRAUDS WITH PAROL EVIDENCE RULE

• STATUTE OF FRAUDS IS MOST HEAVILY TESTED DEFENSE BUT NOT THE ONLY DEFENSE.

  • Misrepresentation:

    • False fact statement by person seeking to enforce the agreement.

    • Material.

    • Can be honest, innocent.

    • Reliance by person asserting misrepresentation defense.

  • Nondisclosure:

    • Generally no duty to disclose.

    • Exceptions:

      • Relationship.

      • Incomplete statement.

    • Nondisclosure different from concealment.

  • Mutual Mistake of Existing Fact:

    • Sherwood v Walker and “whole substance” not “mere quality”.

    • Restatement (Second):

      • Belief about existing facts not in accord with existing facts.

      • Material.

      • Person asserting mistake defense does not “bear the risk”.

  • Unilateral Mistake of Existing Fact (mistake about an existing fact by person asserting mistake defense (unilateral):

    • All of E(ii) above.

    • Plus either person seeking to enforce agreement knows of mistake or unconscionable.

• COURTS RELUNCTANT TO RESCIND BECAUSE OF MISTAKE OF FACT.

  • Mistake in Transmission:

    • Reformation or rescission.

    • Effect of negligence.

5. Is There an Excuse That Makes the Agreement Unenforceable?

• Some post-contract occurrences (or non-occurrences) excuse performance.

  • Nonoccurrence of a condition precedent:

    • Home sale contract example - “e.g., closing is conditioned on the buyer’s obtaining a mortgage at not more than 4%”. Not limited to home sales – e.g., Law firm agrees to hire you as a summer associate if you finish in the top 10% of class.

    • Requires contract language:

      • Promise modifier:

        • E.g., if, provided, so long as, on condition that.

        • Disfavored.

    • Strict compliance: not 4.1%, not top 11%.

    • Consequences of nonoccurrences (failure/not breach) of condition):

      • Excuse.

      • Not breach.

    • Compliance with condition is excused:

      • Waiver by person protected by the condition.

      • Avoidance of forfeiture by the court (e.g. insurance deadline).

  • Force majeure clauses:

    • E.g., “acts of God, government regulation.”

  • Impossibility:

    • I.e., Occurrence of assumed but unstated nonoccurrence that makes performance impracticable.

      • “Impracticable” more than more expensive.

    • Destruction of necessary:

      • E.g., Taylor v. Caldwell.

    • Death, incapacity of necessary.

    • Later governmental regulation that affects ability to perform violating later government regulation without.

      • Covid and suit by ticket holder who drove from Seattle for cancellation of Broadway play.

      • Covid and payment of rent by owner of theater.

  • Frustration of purpose:

    • Occurrence of assumed but unstated nonoccurrence that eliminated mutually understood purpose of contract e.g., Krell v. Henry (56A Pall Mall and coronation of King Edward VII).

  • Nonperformance (i.e., complete/total breach):

    • E.g., O contracts with P to paint O’s house white for 1,000. P does not paint and O pays T 1200 to paint. O is excused from paying P and can sue P for breach of k.

  • Material breach:

    • Every breach matters but only a material breach excuses.

      • E.g., P quits after painting 10% (quantity).

      • E.g., P paints house purple instead of white (quality).

    • Whether a breach is material is a question of fact.

    • Consequences of material breach:

      • Damages as with every breach.

      • Excuse which means.

    • Consequences of non-material breach:

      • E.g., Jacob & Youngs v. Kent (Reading pipe and Cohoe pipe).

  • UCC “Perfect tender rule” for breach by seller “fail in any respect to conform” Buyer can reject the goods which means…

  • Anticipatory repudiation:

    • Early, i.e., pre-performance, unambiguous words or conduct that is a material breach.

      • E.g., P ks to paint O’s house in July. In June, P tells O that P will not paint S ks to sell house to B. Prior to closing, S sells house to T.

    • Consequences:

      • Excuse.

      • Sue immediately for damages.

• WE HAVE CONSIDERED ALL GROUDS FOR NO LEGALLY ENFORCEABLE AGREEMENT. NOW LETS CONSIDER HOW COURTS ENFORCE AGREEMENTS THAT ARE ENFORCEABLE.

6. How Do Courts Enforce a Contract?

• Court’s putting nonbreaching party in some position as if no breach – i.e. compensation.

  • Specific performance as an equitable remedy:

    • History of courts of law and courts of equity.

    • Doctrine of adequate remedy at law.

    • Specific performance and land sales contracts.

    • Specific performance and sale of goods.

    • Specific performance/injunctive relief and services contract, Lumley v Wagner.

    • Maxims: plaintiff must have clean hands, he who seeks equity.

  • Expectation money damages as a legal remedy:

    • Objective of money damages – compensate the non-breaching party, not punish the breaching party. No punitive damages -- expectation damages.

Three steps in awarding expectation damages:

    *   Dollar consequence of no breach.
    *   Dollar consequence of breach.
    *   #1-#2.
*   Easy expectation damages problems:
    *   #1 P contracts to sell Greenacre to D for 100,000. D breaches. P is able to sell Greenacre to T for 70,000.
    *   #2 D contracts to work for P for 10,000 a month for 10 months. D beaches. P hires T to do the same work for 15,000 a month.
    *   #3 P contracts to buy a machine from D for 30,000. D breaches. T sells the same machine to P for 35,0000.
*   Hawkins v. McGee (“hairy hand” instead of promised 100% perfect hand).
*   Peevyhouse v. Garland Coal (29,000 cost of completion/300 loss of value).
*   Alternative to expectation damages:
    *   Reliance – nonbreaching party in same position as if no contract.
    *   Restitution – focus on gain by breaching party from nonbreaching.
*   Judicial limitations on damages:
    *   Reasonable certainty.
    *   Avoided costs.
    *   Avoidable damages and Rockingham County v. Luten Bridge (continuing to build bridge) and Parker v 20th Century Fox (refusing to perform “Bloomer Girl”/”Big Country/Big Man”).
    *   Foreseeability of consequential damages:
        *   Example of foreseeable consequential damages: D has a contract to fix a machine for P for 100. D knows P has a contract to sell repaired machine for 20,000 profit.
        *   Example of nonforeseeable consequential damages: Hadley v. Baxendale (mill’s lost profits from beach of contract to timely transport broken part).
*   Contract provisions on damages:
    *   On the exam, do first.
    *   3 different kinds of k provisions: liquidated damages provision:
        *   Difficult to predict the amount of damages at the time of contract.
        *   Reasonable (i.e., not too high) at the time of … limitation of remedies.
        *   Contract remedy additional or exclusive.
        *   E.g., return of money, repair or return.
        *   Fail of its essential purpose test elimination of consequential damages and unconscionability.

7. What Is the Agreement?

• Two similar but not identical questions of (i) what terms are part of the agreement and (ii) what do those terms mean.

  • Sources for terms:

    • Words in the written agreement (if there is a written agreement).

    • Prior agreements of the parties before the written contract as permitted by the parol evidence rule:

      • Parol evidence rule vocabulary:

        • Integrated (UCC 2-202 : final expression), parol evidence.

        • Complete integration (UCC 2-202: complete and exclusive statement), merger clause.

      • Facts that trigger the parol evidence rule.

      • PER 1: words that change the written agreement (first part of 2-202).

      • PER2: words that add to the written agreement and partial integration (2-202(b)).

    • Conduct of parties under this agreement (course of performance) that adds terms (2-202(a)).

    • Conduct of parties under prior, similar agreements (course of dealing) that adds terms, (2-202(a)).

    • Custom and usage if both parties aware.

    • Statutes (UCC):

      • 2-314? (merchantability).

      • 2-315? (fitness).

      • 2-316 (disclaimer).

    • Court supplied terms:

      • Wood v. Lucy-Lady Duff Gordon – exclusive agency and “reasonable efforts”.

      • Good faith and fair dealing.

  • Interpretation of ambiguous terms:

    • How – tools from Frigaliment other terms in contract, parol evidence, course of dealing, custom and usage.

    • When and ambiguity plain meaning rule and ambiguity in the four corners of the document in order to consider external evidence external evidence for limited purpose of determining whether there is an ambiguity always external evidence and Trident case.

8. What Are the Effects of Contract on Third Parties?

• When can T be a plaintiff or defendant in a lawsuit based on a contract between A and B.

  • Third party as an additional possible plaintiff, i.e., third party beneficiary law:

    • E.g., life insurance contract I buy life insurance policy from State Farm naming Sharon Stone as beneficiary.

    • Lawrence v. Fox Holly owed Lawrence. Holly made a loan to Fox who agreed to repay the loan to Lawrence. Fox breached k with Holly. Lawrence sued Fox for breach of Fox’s k with Holly.

    • Vocabulary of third-party beneficiary law:

      • Intended third party beneficiary.

      • Incidental third party beneficiary.

      • Promisor.

      • Promisee.

    • Rules:

      • Intended third-party beneficiary can recover from the promisor OR.

      • The promisee can recover from the promisor.

  • Third party as a substitute plaintiff, i.e., assignment:

    • E.g., X buys annuity from Y. X sells (assigns) that annuity to Z.

    • Vocabulary of assignment:

      • Assignor.

      • Assignee.

      • Obligor.

    • Rules:

      • The assignee can recover from the obligor.

      • The assignor cannot recover from the obligor.

      • Assignment cannot materially change the duty of the obligor:

        • Assignment of right to payment.

        • Assignment of right to services.

    • Comparison with a third-party beneficiary:

      • Factual difference.

      • Legal difference.

  • Third party as defendant, i.e., delegation:

    • E.g., P contracts to paint O’s house for 1,000. P pays T 900 to paint O’s house. T does not paint. O’s house. O can sue either P or T.

    • Vocabulary of delegation:

      • Delegator.

      • Delegatee.

      • Obligee.

    • Rules:

      • Generally, duties are delegable.

      • Duties not delegable if:

        • Contract provides.

        • “Personal” services.

      • The obligee can always recover from the delegator.

      • Obligee can recover from either deleagator or delegatee for consideration.

      • The obligee cannot recover from a delegatee who did not receive consideration.

Important Words/Phrases

• Goods

• Merchant

• Offer

• Manifestation of Assent

• Revocation of an Offer

• Option

• Firm Offer Rule

• Rejection of an Offer

• Counter Offer

• Conditional Acceptance

• Mirror Image Rule

• 2-207(1) Contract

• 2-207(3) Contract

• Acceptance

• Unilateral

• Bilateral

• Consideration

• Bargained For

• Legal Detriment

• Past Consideration

• Pre-Existing Legal Duty Rule

• Modification Agreement

• Promissory Estoppel

• Parol Evidence Rule

• Integration

• Complete Integration

• Partial Integration

• Merger Clause

• Plain Meaning/Four Corners

• Course of Performance

• Course of Dealing

• Custom and Usage A/K/A Trade Custom

• Implied Warranty of Merchantability

• Implied Warranty of Fitness

• Economic Duress

• Unconscionability

• Substantive Unconscionability

• Procedural Unconscionability

• Misrepresentation of Existing Fact

• Mistake of Existing Fact

• Bears the Risk of the Mistake

• Statute of Frauds

• Within the Statute

• Satisfying the Statute

• Material Breach

• Anticipatory Repudiation

• Condition

• Strict Compliance

• Force Majeure

• Impossibility/Impracticability

• Frustration of Purpose

• Nondisclosure

• Concealment

• Specific Performance

• Expectation Interest

• Reliance Interest

• Restitution Interest

• Consequential Damages

• Avoidable Damages

• Liquidated Damages

• Limitation of Remedies

• Third-Party Beneficiary

• Assignment

• Assignor

• Assignee

• Obligor

• Delegation

• Delegator

• Delegatee

• Obligee

Words to Avoid

• Clear/Clearly

• Obvious/Obviously

Your prof has the last word even if …