Contracts & Sales

Armadillos From Texas Play Rap, Eating Tacos

A—Applicable Law
F—Formation of contracts
T—Terms of Contract
P—Performance
R—Remedies for Unexcused Performance
E—Excuse of Nonperformance
T—Third-Party Problems

Vocabulary
Vocabulary
“Contract” → legally enforceable agreement

“Quasi-Contract” → equitable remedy—means UNJUST ENRICHMENT

 Anytime the law produces an unfair result, look here
 Elements:
o Π has conferred a benefit on Δ, and
o Π reasonably expected to be paid, and
o Δ will be unjustly enriched if Π is not compensated
 Measure of Recovery → value of the benefit conferred (NOT K price…K price is the ceiling)

“Bilateral Contract” → results from an offer that is open as to the method of acceptance

“Unilateral Contract” → results from an offer that expressly requires performance as the only possible
method of acceptance (e.g., reward, prize, contest; “$100 if you find my dog”)
 E.g., “I will sell my car if you come up w/ 12K w/in 10 days”

I. Applicable Law
Common Law UCC Art. 2
 Mostly common law  Mostly statutory
 Applies to everything BUT the sale of  Applies to Ks that are primarily for the sale
goods, e.g., of goods (i.e., tangible, personal property,
o Services Ks including things like animals, racehorses)
o Real estate Ks
 Apply general rules of K law

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Mixed Deals → combination of goods AND services
 Rule → All or Nothing/Most Important Part

o Either apply Art. 2 to the WHOLE deal or not at all

o Look at which part of the deal is most important (goods or the services)
 Exception → if K divides payment (i.e., pay $10 for goods and $90 for services)
o Then apply K law to part and Art. 2 to part

II. Formation of a Contract

FIRST STEP → look for an AGREEMENT
1. Offer → initial communication
2. Termination of offer → what happens after the initial communication
3. Acceptance → who responds and how

(1) Offer
GENERAL TEST → Manifestation of Commitment
 Manifestation of an intention to contract → words or conduct showing commitment
 Reasonable person → test is whether a reasonable person in the position of the offeree would
believe that if he assented, a K would be formed

Content
 Missing Price Term
o Common Law → NO OFFER
o UCC Art. 2 → no price requirement, there’s an offer if the parties intended one
 If no price specified—reasonable price at delivery will be supplied by court
 Vague/Ambiguous Material Term
o NO OFFER
 Note → if the term was missing entirely, it would still be an offer
 Requirements Contract → VALID for K to state quantity of goods to be delivered in terms of
how much buyer needs, how much seller’s made, or in terms of exclusivity—so long as amount
can be OBJECTIVELY DETERMINED
o i.e., “all” “only” “exclusively” “solely”
o Not unreasonably disproportionate → buyer can increase requirements so long as the
increase is in line w/ prior demands
 ~10% increase is ok
 ~50% increase is NOT ok
o Consideration → make sure both sides have given consideration!!! (e.g., NOT “I promise
to order as many as I want to”)
o NON-ASSIGNABLE → requirements Ks are not assignable UNLESS
 Assignee acts in good faith not to alter terms of K
o If requirements contract fails to qualify as a contract → consider whether it might still
qualify as an OFFER (e.g., by seller)
 If so, as long as offer remains open, each time buyer places an order, this creates

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 a separate K—valid so long as not rejected by seller
 i.e., continuing offer

Advertisements → generally are NOT offers, just an invitation for an offer

 Exception
o Ads that are rewards
o Ads that are (1) specific as to quantity, (2) expressly indicate who can accept (e.g., “one
fur coat for $10, first come first served”)

(2) Termination of Offer

DEAD OFFER → an offer CANNOT be accepted once it has been terminated

4 Methods of Termination
1. Lapse of Time
2. Revocation
3. Rejection
4. Death of a Party Prior to Acceptance

(1) Lapse of Time

 Time stated in K, OR
 Reasonable time

(2) Revocation → thru words/conduct of offeror

Unambiguous STATEMENT to offeree Unambiguous CONDUCT by offeror

of unwillingness/inability to K indicating unwillingness/inability to K
that offeree is aware of

 Note → multiple offers is NOT a  If offeror sells car to someone

revocation (it’s ok to offer to sell else, offeree can still accept if he
your car to mult. persons) doesn’t know about it

TIMING → use of the mail

 Revocation sent thru mail → not effective until received

IRREVOCABLE OFFERS → generally offers can be revoked, but there are 4 exceptions

(a) Option → if offeree has (i) promised not to revoke AND (ii) this promise is supported by
payment or consideration

(b) UCC Art. 2: “Firm Offer Rule” → offer can’t be revoked for up to 3 months IF:
(i) Offer to buy/sell goods
(ii) Signed, WRITTEN promise to keep the offer open
 No consideration requirement

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 (iii) offeror is a merchant

TIME LIMIT → cannot exceed 3 months (if longer, only good up to 3 months)
 No time period stated? → for commercially reasonable time, set by
court (up to 3 months)

NOTE → once the option is expired, the original offer, if not revoked
after expiration of the option could STILL be accepted by (e.g.) payment

(c) Detrimental reliance by offeree that is reasonably foreseeable

o i.e., construction subcontractor bid

(d) Unilateral contract → start of performance pursuant to offer to enter into UNILATERAL
contract makes the offer irrevocable for a reasonable time to complete performance
o PERFORMANCE BEGUN → no revocation allowed
o MERE PREPARATION → offeror can still revoke (but consider detrimental reliance)

(3) Rejection → thru words/conduct of offeree

(a) Counteroffer
o Counteroffer constitutes a NEW offer, and kills the old one
o Different from bargaining
 Bargaining will be a question (i.e., “Will you take $9,000?”)
 Counteroffer will be a statement (i.e., “I will only pay $10,000.”)

(b) Conditional Acceptance

o Conditional acceptance constitutes a NEW offer, and kills the old one
o i.e., “if” “only if” “provided” “so long as” “but” “on condition that”

(c) Additional Terms—Common Law

o “Mirror Image” Rule → an “acceptance” that adds new terms is really a counteroffer

(d) Additional Terms—UCC Art. 2

o “Seasonable Expression of Acceptance” → additional terms still constitute acceptance

as long as it’s not a conditional acceptance (i.e., acceptance provided terms are accepted)
 Recall → conditional acceptance kills the offer

o Add’l Terms Part of K?

 If both parties are merchants → additional terms are part of the K, UNLESS
(i) The original offer expressly limited acceptance to terms of the offer
(ii) The additional term MATERIALLY changes the K
 E.g., arbitration clause or other liability limitation
(iii) Or the offeror objects to the change
~ If any of the above, K IS formed but does NOT include new terms
 If one party is NOT a merchant → the new term is just a proposal, to be
accepted/rejected separately

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(4) Death of a Party Prior to Acceptance
 Rule → death/incapacity of either party after the offer kills the offer, UNLESS
o Option → if decedent gave an option, other party can still exercise it w/in time
o Part performance of offer to enter unilateral K → can still accept by completing
performance

(3) Acceptance
Once offer has been accepted → it can no longer be revoked!!!

WHO CAN ACCEPT?

 Offer must be accepted by:
(i) Person to whom it is made
(ii) Person who knows of the offer (e.g., person who returns dog not knowing of award can’t
accept)
 Assignment → offers CANNOT be assigned
 Options → CAN be assigned, unless otherwise provided
o E.g., you can assign the option so that assignee can now accept the offer

METHODS OF ACCEPTANCE

1. Words or Conduct
o OBJECTIVE STANDARD → if reasonable person would think statement or conduct was
an acceptance
o E.g., A calls B and says “I’ll find a buyer for you if you give me 10%”, B finds buyer, A
asks for buyer’s phone number—this is acceptance
 NOTE → look to prior dealings or trade practices
- E.g., if silence constituted assent in the past, then not rejecting an offer in
time may be considered an acceptance here
o Implied-in-fact K → K formed by manifestations of assent OTHER than oral/written;
e.g., watching someone do something and not protesting, knowing they are going to
charge you

2. Offeree Fully Performs

o Full performance is always acceptance
o Notice Requirement → if offer requires notice of acceptance, or if offeree has reason to
believe that offeror will not learn of acceptance…offeree must give offeror notice of
acceptance
 E.g., A offers 1K to B to paint house in another state; if B fully performs but A
can’t know about it and then A offers 1K to C to paint it—there IS a K between
A and B…but A is excused from any duty

3. Offeree Starts to Perform

o Bilateral K → start of performance IS acceptance AND implied promise to finish

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 o Unilateral K → start of performance is NOT acceptance, must be completion to accept
 Note → so once performance has begun on uni-K, offeror cannot revoke offer,
but offeree can still walk away!

4. Offeree Promises to Perform

o Most offers can be accepted by a promise to perform
o Exception → unilateral Ks

5. Mailbox Rules
o Revocation of offer → effective when RECEIVED
o Acceptance of offer → effective when SENT
 Exceptions:
- Acceptance under option K → acceptance effective upon receipt
- Offer stipulates that acceptance is not effective until received
o Rejection then Acceptance of offer → effective when RECEIVED (whichever first)
 Acceptance then rejection → acceptance effective when sent!!

6. Seller of Goods sends Wrong Goods

o Counts as ACCEPTANCE of K and BREACH
Accommodation (Explanation) Exception → if wrong stuff is sent w/ an
explanation, counts as a COUNTEROFFER (no K) and NO BREACH
~ Buyer can accept this counteroffer by keeping goods

SECOND STEP → even if there’s an agreement, have to consider…

1. Consideration
2. Capacity
3. Statute of Frauds
4. Illegality
5. Public Policy
6. Misrepresentations
7. Duress
8. Unconscionability
9. Misunderstanding
10. Mistake

Consideration
Consideration → bargained-for legal detriment
 Promisor → must be asking for detriment in exchange (if no request → promissory estoppel?)
 Promisee → incurs some sort of legal detriment

Forms of Consideration (AMOUNT of consideration is irrelevant on exam!!)

 Performance
 Forebearance (not doing something you are legally entitled to do)
 Promise to perform Illusory Promise → “I promise to do this, but I can pull out at ANY time for ANY
REASON.”—NOT consideration; Must have some LIMIT on the right to cancel (e.g.,
notice)

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  Promise to forbear
 “Best Efforts”
o K for someone to be exclusive distributor → courts will IMPLY promise on part of
distributor to use “best efforts to sell”—this is the consideration given

Past Performance → NOT consideration (i.e., promise to pay in gratitude for saving life)
Exception → expressly requested and expectation of payment

Pre-existing Contractual Duty and/or Modification

 Common Law
o Doing what you are already legally obligated to do is NOT new consideration for a new
promise to pay you more to keep doing what you’re doing—must have NEW
consideration to make or modify K (e.g., B was going to perform at concert, then said he
wouldn’t do it unless paid 5K more…afterward, promise to pay 5K more is not
enforceable)
o Exceptions:
 Addition to or change in performance
 Unforeseen difficulty so severe as to excuse performance (reaching level of
impracticability— e.g., sound system inoperative, NOT increased construction
costs)
 3d party promise to pay
o Modern trend → pre-existing duty rule does NOT apply where the duty is owed to a 3d
person
 Duty is pre-existing only if owed to promisor
 E.g., Babe Ruth owes his team best efforts to do well, but can K w/ dad of sick
boy to hit homer for 5K

 UCC Art. 2 → good faith test—change w/out new consideration is enforceable if good faith

Partial-Payment as Consideration for RELEASE (i.e., promise to forgive balance of debt)

 If debt is DUE and DISPUTED → partial payment is NOT consideration for a release
o Agreement is not enforceable
 If debt is NOT DUE and DISPUTED → there is consideration (recipient gets earlier payment)
o Release must be IN WRITING → must be deliberately intended as a release (not just
signing check for lesser amount)

Consideration SUBSTITUTES → no consideration necessary!

 WRITTEN promise to pay debt barred by technical defense

o Such a promise is enforceable w/out consideration → court finds moral consideration
o E.g., A owes B 1K, but B can’t collect due to statute of limitations—if A gives written
promise to pay anyway (e.g., pay a lesser amount), this is enforceable

 Promissory estoppel—detrimental reliance

o Elements:
 Promise
 Reliance that is REASONABLE, DETRIMENTAL and FORESEEABLE
 Enforcement necessary to avoid INJUSTICE
Consider this when party does something they weren’t asked to do

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Capacity
Who Lacks Capacity
 Infants under 18
 Mental incompetents—lack ability to understand agreement
 Intoxicated persons—if other party has reason to know they’re intoxicated

Consequences of Incapacity
 Incapacitated Person’s Right to Disaffirm
o IP can enforce the contract
o Non-IP cannot
 Ratification
o If IP retains the benefits of the agreement after gaining capacity—implied affirmation
o Requirements:
(1) Agreement made when party lacked capacity (e.g., under 18)
(2) Party gains capacity (e.g., turns 18)
(3) Party retains benefits of K w/out objection
 Quasi-K liability for necessaries
o IP is legally obligated to pay for things that are NECESSARY (e.g., food, clothing,
medical care, or shelter)
o Quasi-K → this liability is based on quasi-K law, not K law
 E.g., X is an IP, enters into agreement to pay $400/mo for rent when everyone
else is paying $300—X is legally obligated to pay, but only $300
 Measured by quasi-K (i.e., equity), NOT K

Statute of Frauds (SOF)

SOF → designed to prevent fraudulent claims, make it harder to falsely claim a K existed
 3 Issues → (i) Is K w/in SOF?
(ii) Is SOF satisfied? Or is there a SOF defense?
(iii) Related Issues

(i) Ks that fall “within” the SOF → look in fact pattern for mention of “oral agreement”

1. Promise in Consideration of Marriage

o Promise to do (or refrain from doing) something if we marry
 NOT mere promise to marry (“I’ll marry you if you marry me—these are not
w/in SOF)
o Basically protecting prenups and postnups (“if we marry, I’ll do this”)

2. Promise by Executor/Administrator to Pay Debt of Decedent Personally

o Promise to personally pay off debts of decedent

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 3. Promise to Creditors to Answer For or Guarantee (back-up) Another’s Debts
o Not merely a promise to pay—promise to pay if someone else does not
o Main Purpose Exception → does NOT fall w/in SOF if K benefits person who promised
the guarantee
 E.g., A buys paint from store on credit alleging that B promised to pay for paint if
A didn’t and paint was for B’s house

4. Service Contract of More than a year

o Ignore what ACTUALLY happens → SOF only cares if it’s capable of being performed in
a year or less
 E.g., K formed on Jan. 1, 2003 w/ date of performance set for Jan. 2, 2004 → this
is w/in SOF
o Tasks—Assume unlimited resources → any “task” is assumed to be completable w/in 1
year
o Lifetime deal → SOF does not apply (party could die next day)

5. Land (or land interest) Transfers

o Includes all interests in land → e.g., easements
o Exception → lease for 1 year or less (you just did it for all yours due to good business
practice)

6. Sale of Goods for $500 or more

o Note → if less than $400, other UCC Art. 2 rules still apply, just not SOF

(ii) Has SOF been satisfied? (i.e., NO SOF defense)

(1) Performance

o Performance & services Ks—SOF satisfied by:

 FULL performance by either party (PART performance not enough)

o UCC Art. 2 (sale of goods)—SOF satisfied by:

 PART performance…but only to the extent of the part performance (e.g., oral
agreement for two deliveries—if only first was made, only first can be enforced)
 Look to see if question is about:
- Delivered goods → SOF satisfied
- Undelivered goods → SOF not satisfied
Exception → special manufactured goods (CUSTOM MADE)
 If K for goods to be specially manufactured (i.e., custom made) →
SOF satisfied when seller makes substantial beginning (i.e., seller
has done enough work that we know it’s custom made)

o Performance & transfers of interest of real estate —SOF satisfied by:

 PART performance, i.e., any TWO of the following:
(1) full or part payment
(2) possession, and/or
(3) improvements

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 (2) Writing—must be SUFFICIENT
(a) All Material Terms Test → writing must include WHO and WHAT (was agreed upon)
(i) ID of party sought to be charged
(ii) ID of K’s subject matter
(iii) terms/conditions → INCLUDING PRICE
(iv) recital of consideration
(b) Signature → must be signed by person asserting SOF defense
 UCC Art. 2 “Failure to Respond” Rule
- If BOTH parties are merchants
- If person asserting SOF defense receives signed writing w/ quantity term
from other party and fails to respond w/in 10 days → SOF defense gone
(c) UCC Art. 2—Quantity Term → must include quantity of items (price NOT required)

(3) Judicial Admission of Sale of Goods Agreement

o Person asserting SOF defense ADMITS that there was an agreement
o Via judicial pleadings, in-court testimony, response to discovery, etc.

(iii) Related Issues

(1) Authorization to enter into K for someone else → must be IN WRITING (“equal dignity”)

(2) Contract Modification

o Ask → is deal w/ alleged change one that would be w/in SOF?
 i.e., changed deal (new deal)
o If yes → must be writing AS A MATTER OF LAW
o Note → assignments are NOT considered to be modifications
o K requiring that all modifications be in writing
 Common law → ignore this language, not effective
 UCC Art. 2 → effective unless waived

Illegality
Illegality

 Illegal SUBJECT MATTER → K not enforceable

o E.g., K w/ hitman to kill hubby

 Illegal PURPOSE → agreement is enforceable, but only by person who didn’t know of illegal
purpose
o E.g., agreement to sell plane ticket to hitman (airline could enforce)

Public Policy
Public Policy
 Courts CAN refuse to enforce agreement due to public policy
 LOOK FOR:

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 o Exculpatory agreement → e.g., exempting reckless or intentional conduct
o Covenant not to compete w/out reasonable need or reasonable time/place limits

Misrepresentation
Misrepresentation (Fraudulent Concealment, Nondisclosure)
 Distinguish from torts context
o Torts → recover damages
o K law → rescind the agreement
 Fraudulent misrepresentation → voidable, party can rescind
 Nonfraudulent misrepresentation → voidable if goes to material issue (i.e., info would induce a
reasonable person to agree and misrepresenting party knows this)
o Note → the misrepresentation could be an honest mistake!

Duress
Duress (physical or economic)
 Elements:
(1) BAD GUY → makes improper threat
(2) VULNERABLE GUY → no reasonable alternative

Unconscionability
Unconscionability
 Two basic tests:
o Unfair Surprise (procedural)
o Oppressive Terms (substantive)
 Both tested at time agreement was made
 Court can refuse to enforce all/part of an agreement

Misunderstanding—Ambiguity in K Terms
Misunderstanding → no K IF:
(1) Parties used MATERIAL TERM that is open to at least TWO REASONABLE
INTERPRETATIONS, and
(2) Each party attaches a DIFFERENT MEANING to the term, and
(3) Neither party knows or has reason to know that the term is open to another reasonable
interpretation
o If one party KNOWS of another reasonable interpretation → K is understood re: terms of
unknowing party

E.g., Peerless case

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Mistake
MUTUAL mistake of material fact → no K IF: e.g., mistake re: barren cow
(1) BOTH parties mistaken
o Both made mistaken on their own
(2) Basic assumption of fact
o Re: subject matter (what something IS) → K not legally enforceable
 E.g., both believe painting is a genuine Picasso
o Re: value (what something is worth) → K is legally enforceable
 UNLESS both parties relied on the conclusion of an appraiser and value was a
material term of the K
(3) MATERIALY affects agreed exchange
(4) Not a risk that either party bears

UNILATERAL mistake of material fact → generally courts have been reluctant to excuse these
 Exceptions:
(1) “Palpable” mistakes → other party knew/should have known of mistake
(2) Mistakes discovered before significant reliance by the other party

III. Terms of the Contract

Parol Evidence Rule → consideration of EARLIER WORDS
Parol Evidence Rule → EVIDENCE QUESTION: (1) can court consider the evidence, (2) for what
purpose?

Vocabulary
 Integration → (1) written agreement that (2) court finds is the final agreement Answers w/ these
words in it will
o Triggers PER probably be
 Partial integration → written and final, but NOT complete wrong (e.g., “so
long as not partial
 Complete integration → written, final, and complete integration”)
 Merger clause → K clause such as “this is the complete & final agreement”
o Such clauses are highly persuasive but not conclusive
 Parol evidence
o Words of party (NOT conduct, non-parties, trade usage, etc.)
o Before integration (before agreement in written form)
o Oral OR written
 Reformation → equitable action to modify written K to reflect actual agreement
o Legal action that triggers PER

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PER Fact Patterns → when can outside info come in to vary the terms of a writing?

 Contradicting Written Deal

o NO PE → as source of terms that contradict current terms
o YES PE → limited purpose of determining whether there is a mistake in integration
(“clerical error”)

 Getting Out Of Written Deal (i.e., rescission)

o YES PE → limited purpose of determining whether there is defense to enforcement (e.g.,
duress, misrepresentation, fraud, FAILURE OF CONDITION PRECEDENT)

 Explaining Term in Written Deal

o YES PE → court can consider earlier agreements to resolve ambiguities in a written K
o UCC does not require that there be an ambiguity before allowing PE to explain

 Adding to Written Deal → ONLY place where partial v. complete integration matters
o NO PE UNLESS → (1) court finds partial integration, or
(2) the additional terms would ordinarily be in a separate agrmt

NOTE → LATENT AMBIGUITY

 Latent ambiguity → occurs where meaning is clear at time K is formed, but due to subsequently
revealed facts, it could be reasonably interpreted two ways
o SUBJECTIVE TEST → court will look only to subjective intention of parties re: whether
an ambiguity existed

NOTE → MISSING PRICE TERM

 If agreement already formed and the parties have evidenced an intent to enter into a K
 Reasonable price will be supplied by the court

After words…courts will also consider (in order):

(2) Course of performance
 Behavior of SAME people re: SAME K
(3) Course of dealing
 Behavior of SAME people, re: DIFFERENT but SIMILAR K
(4) Custom & usage
 Behavior of DIFFERENT but SIMILAR people, DIFFERENT but SIMILAR K

UCC Art. 2 (sale of goods)—“Default” Terms

Delivery OBLIGATIONS of Seller

 When no place of delivery agreed upon

o Place of delivery is seller’s place of business, UNLESS
o Both parties know that goods are elsewhere, in which case…there

 If delivery by common carrier

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 o “Shipment Contract” → seller’s obligation complete when:
(i) Goods given to common carrier
(ii) Seller makes reasonable arrangements for delivery, and
(iii) Seller notifies buyer
o “Destination Contract” → seller’s obligation not complete until goods arrive w/ buyer

How to distinguish?—FOB-free on board (city)

 City = where seller is or where goods are → shipment K
 City = any other city (doesn’t have to be buyer’s) → destination K
Basically—FOB (“city”) means that seller is obligated (risk-wise and shipment price-
wise) to get the goods to that city, buyer responsible from there

Risk of Loss (WILL be on exam!!) → where (i) K formed but buyer has not yet received goods, (ii)
goods damaged/destroyed, (iii) no one to blame

 Apply rules in the following order…

(1) Agreement → if agreement specifies who carries risk, it controls

(2) Breach → if anyone breached in any way, they are liable only for any uninsured loss
(3) If Delivery by Common Carrier → risk shifts from seller to buyer as soon as seller
completes his delivery obligations
(4) If no agreement, breach OR delivery by CC—ask if SELLER is a merchant
 Merchant seller → risk shifts to buyer when buyer receives the goods
- Receipt = physical possession
 Non-merchant seller → risk shifts to buyer when seller tenders the goods
- Tender = make available

Warranties of Quality → when buyer has received goods but says they’re not good enough

(1) Express Warranty → look for words that:

o PROMISE (e.g., “guaranteed to last 2 years”)
o DESCRIBE
o STATE FACTS (e.g., “all steel”)
o USE SAMPLE/MODEL (e.g., show buyer a model, express warranty that it’ll be alike)
Distinguish from mere sales talk (more general, opinionated) (e.g., “top quality”)

(2) Implied Warranty of Merchantability—automatic, by operation of law

o If merchant DEALS IN GOODS OF THAT KIND
o Warranty → goods are fit for the ordinary purpose for which such goods are used

(3) Implied Warranty of Fitness for Particular Purpose

o If: (a) Buyer has particular purpose
(b) Buyer is relying on seller to select suitable goods, and
(c) Seller has reason to know of purpose and reliance
e.g., tell shoe clerk that you need shoes for job interviews
o Warranty → goods are fit for that particular purpose

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Contractual Limits on Warranty Liability

(1) Disclaimers (e.g., “there are no warranties”)

o Eliminates all IMPLIED warranties (not EXPRESS)
 Phrases used (know these!) → “as is” or “with all faults”
o Conspicuous language!!! → language of disclaimer has to stand out from page

(2) Limitation of Remedies

o CAN limit recovery amount for express warranties
o Unconscionability test
 Limitation is prima facie unconscionable if it limits personal injury damages

Risk of Loss in non-UCC (e.g., services K)

Risk of Loss → risk of loss during construction (absent contrary provisions in K) lie WITH THE
BUILDER
 Consistent w/ UCC rule that if seller is merchant—merchant has risk until buyer has goods (same
idea)

IV. Performance
Common Law
Performance Requirements → look to terms of contract (no real exam question possible here)
 Neither party may commit a MATERIAL BREACH (see below)

UCC Art. 2 (sale of goods)

6 Concepts: (1) Perfect Tender
(2) Rejection of the Goods
(3) Cure
(4) Installment Sales Ks
(5) Acceptance of the Goods
(6) Revocation of Acceptance of the Goods

(1) Perfect Tender

 Seller is obligated to deliver PERFECT goods (subject to limited exceptions)

(2) Rejection of the Goods by Buyer

 Must occur BEFORE acceptance of goods
 If goods are less than perfect, buyer can:
o Retain goods and sue for damages

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 o Reject all/part and sue for damages
 Within reasonable time → rejecting party must SEASONABLY NOTIFY seller
of rejection (can’t just send check for less—partial payment ≠ notice)
 Specify the defect → if rejection doesn’t specify the defect, seller can still cure
by supplying conforming goods (if deadline hasn’t passed)
 Rejection is LIMITED by (3) cure, (4) installment Ks, and (5) Acceptance

(3) Cure → i.e., fix the mistake; situation where UCC gives seller 2d chance

 Cure ONLY allowed when:

(a) Seller had reasonable grounds to believe that an improper tender would be ok (even if
deadline has passed)
 E.g., buyer accepted less-than-perfect in the past
(b) Time for performance has not yet expired
 E.g., seller delivers wrong thing early

(4) Installment Sales K

 These Ks REQUIRE or AUTHORIZE
(i) Delivery in separate lots
(ii) To be separately accepted
 Buyer has right to reject ONLY when there has been a substantial impairment in the installment
that can’t be cured (i.e., something really bad wrong)
o E.g., can’t reject if installment was supposed to be for 10 kegs and seller sends 9 once

(5) Acceptance of Goods by Buyer

 If buyer accepts → CANNOT reject later
 Payment w/out opportunity to inspect is NOT acceptance
 Implied acceptance → retention after opportunity for inspection

(6) Revocation of Acceptance of Goods → limited circs where buyer can revoke acceptance
 Requirements:
(i) Nonconformity substantially impairs value of goods, and
(ii) Excusable ignorance of grounds for revocation or reasonable reliance on seller’s
assurance of satisfaction
(iii) Revocation w/in reasonable time after discovery of nonconformity

Rejection v. Revocation
Rejection Revocation
Timing Early, before acceptance Later, after acceptance
Standard Generally perfect tender Substantial impairment
Other Requirements 1. Seasonably notify seller
2. Hold goods for seller
3. Follow reasonable seller instructions
Consequences 1. Goods back to seller

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 2. No buyer payment option

V. Remedies for Unexcused Performance

Specific Performance
Specific Performance → generally won’t be awarded because money will usually suffice

 EXCEPTIONS
(a) Sale of real estate (“all land is unique”)
 But note → if seller breaches by selling to another BFP, buyer can no longer get
SP

(b) UCC Art. 2—Sale of UNIQUE goods

 E.g., antiques, art, custom-made goods

 Contract for services → NEVER get SP (can’t force someone to work)

o Possible “negative specific performance → (i.e., injunctive relief—prevent them from
working elsewhere) → in court’s discretion

Reclamation
Reclamation → limited right of seller to get goods back
 Seller can reclaim goods IF:
(i) Buyer is INSOLVENT at time goods received
(ii) Seller demands return of goods:
 Within 10 days of receipt, OR
 Within reasonable time if buyer expressly represented that he was solvent before
delivery
(iii) Buyer still has goods at time of demand (i.e., hasn’t sold them to a BFP)

Rights of Good Faith Purchaser in Entrustment

Entrustment → if owner leaves goods w/ person who sells goods of that kind, and person wrongfully
sells to BFP…BFP wins
 E.g., A brings watch to jeweler for repair and jeweler sells to B—B wins

Theft → if goods are stolen from owner and sold, owner can always recover (later takers have no better
rights than the thief) (subject to exceptions in PERSONAL PROPERTY outline)

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 MONEY DAMAGES
Measure of Damages
General Rule: Expectation Damages → want to put Π back in same dollar position as if K was
performed w/out breach
 Expectation → (i) determine amt. Π would have gotten w/out breach, (ii) compare w/ what Π
actually got (consider FMV, not K price!)

Other Possibilities → use only if exam question specifies

 Reliance → put Π in same dollar position as if K never happened
 Restitution → put Δ in same dollar position as if K had never happened
o Measurement focuses on DEFENDANT—no unjust enrichment

UCC Art. 2 (sale of goods)—Damages

Art. 2 Damages → TWO relevant facts: (1) who breached, (2) who has goods now

 4 Fact Patterns:

(1) Seller Breach—Buyer has goods

 Buyer’s damages = (FMV if perfect) – (FMV as delivered)

(2) Seller Breach—Seller has goods

 Buyer’s damages = (market price at time breach discovered) – (K price), OR
(replacement price) – (K price)

(3) Buyer Breach—Buyer has goods

 Seller’s damages = (K price) … doesn’t matter what current FMV is

(4) Buyer Breach—Seller has goods

 Seller’s damages = (K price) – (market price at time/place of delivery), OR
(K price) – (resale price), OR
(provable lost profits)
 If goods are from regular inventory (“off the rack”)—as opposed to unique
- Seller can also get provable lost profits (i.e.,, seller would have made TWO
sales if not for breach)
- Example → A breaches K to buy $50 of corn from B; B sells to C instead; if
B can prove 20% profit margin, B gets $10 provable lost profits

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Additions/Limitations re: Damages
ADD Incidental Damages
 Costs of finding a replacement → ALWAYS recoverable

ADD Foreseeable Consequential Damages

 Damages arising from Π’s special circumstances → recoverable only if Δ had reason to know of
them at time of K
o Exam question will give you special facts re: Π

SUBTRACT Avoidable Damages

 No recovery for damages that could have been avoided without undue burden on Π
o BOP on Δ
 Note → Π has no DUTY to mitigate, just might not recover as much (wrong answer: “duty”)

Reasonable Certainty LIMITATION

 Damages must be proven to a reasonable certainty
 Look for fact patterns involving new business or business activity (harder to predict what would
have happened w/out breach) → fallback is restitution

Liquidated Damages Provision

Liquidated Damages → K provision fixing amount of damages
 VALID IF:
(i) Damages were difficult to forecast at time K was made, and
(ii) Provision is a reasonable forecast

Provisions w/ range or formula that varies re: severity of breach → presumptively VALID
Provisions that have a simple set amount → presumptively INVALID

VI. Excuse of Nonperformance Due to

Something that Happened After K Made
Excuse—Other Party’s Improper Performance
COMMON LAW—“Material Breach” Rule

(1) Damages recoverable for any breach

o Any breach, however small can get damages
o Just a question of whether breach is big enough that you can also pull out!

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 (2) Only MATERIAL BREACH excuses performance
o Material breach = major screw-up; look to:
(a) Amount of benefit non-breacher received
(b) Adequacy of damages remedy
(c) Extent of part-performance of breacher
(d) Hardship to breacher
(e) Whether breacher was negligent or willful
(f) Likelihood of breacher completing performance
o Quasi-K for breacher → possible where benefit is conferred on non-breacher that would
result in unjust enrichment
o If there is SUBSTANTIAL PERFORMANCE (i.e., no material breach) → can’t back out
entirely, must pay K price minus damages for breach
o Special fact pattern → where party is supposed to do a series of things for one lump sum
 Less than ½ = material breach (i.e., if B only paints 3 of 8 rooms, CANNOT
recover in K law! …but maybe in quasi-K)
 Divisible K exception → if K provides that B is paid (e.g.) $100 per room
(i) Performance of each party divided into 2 + parts
(ii) Number of parts due from each party is same
(iii) Performance of each party is EQUIVALENT to each other’s performance
(i.e., not progress payments)

UCC Art. 2—Perfect Tender Rule (again)

 NO material breach requirement
 Destruction of goods → if a K requires for its performance particular goods IDed when K is
made, and, before risk of loss passes to buyer, goods are destroyed w/out fault of either party—K
is AVOIDED

Excuse—Non-Occurrence of a Condition
What is a Condition → mutually agreed-upon promise modifier
 Language in K that limits obligations created by other language in K
o Words → “if” “only if” “provided that” “so long as” “ subject to” “in the event that”
“unless” “when” “until” “on condition that”…KNOW THESE!!!
Note → not “when”
 E.g., S and B enter into agreement stating that B will buy S’s house for 100K if it
is appraised at 100K
 The following is NOT a condition → “I’ll pay you when he pays me”; unless
promisee has control of the condition, promisee does not assume the risk of its
non-occurence
o Condition precedent → non-occurrence excuses performance
o Condition subsequent → occurrence excuses performance

 If condition DOES NOT OCCUR:

o Π is excused, can back out
o Π CANNOT sue for damages (Δ made no promises)

Distinguish from conditional acceptance (e.g., “I’ll buy house if it’s appraised at 100K”)

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When is express condition satisfied?
 General rule → strict compliance (even small variation is an excuse)
o Non-occurrence of express condition precedent is an excuse
o Occurrence of condition subsequent is an excuse

Excuse of a condition
 ID person who would BENEFIT from the condition → if they are giving up the benefit, ok
o Estoppel
 Person to be benefited gives up protection BEFORE condition occurs, and other
party relies, changes position
o Waiver
 Person to be benefited gives up protection AFTER condition occurs

Excuse—Other Party’s Anticipatory Repudiation

Anticipatory Repudiation → unambiguous statement or conduct indicating:
(i) That repudiating party WILL NOT PERFORM
 i.e., must express more than mere doubt re: ability to perform
(ii) Made PRIOR TO time when performance is due

Consequences of AR:
 If other party has fully performed → may sue ARer if he does not perform by required date
 If other party has NOT yet fully performed → excused from further performance and may sue
immediately for breach (don’t have to wait until required date)

Retraction of an AR:
 Timely retraction → retraction of AR permitted so long as there has been NO MATERIAL
CHANGE IN POSITION by other party
o Duty to perform is reimposed on other party
o BUT performance can be delayed until adequate assurance provided

Excuse—Insecurity (Adequate Assurance)

Insecurity → if words or conduct of one party give REASONABLE GROUNDS for insecurity:
(i) Other party can suspend performance, until
(ii) Receiving adequate assurance
(iii) Must be commercially reasonable to suspend performance

Excuse—Due to Later Agreement

Rescission → both parties mutually agree to rescind the K
 If a party has not yet fully performed → CANNOT recover for work done, all further
performance is excused

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  If a party has FULLY PERFORMED → Rescission is INVALID; it’s too late, other party can
recover under K law

Accord & Satisfaction (substituted performance)

 Definitions:
o “accord” → agreement by parties to already-existing obligation to accept DIFFERENT
PERFORMANCE (i.e., not just to pay less $$)
 E.g., “IF Δ delivers 20 widgets by end of month, THEN $$ debt excused”
o “satisfaction” → the different performance
 EFFECT
o If accord is satisfied → performance of original obligation is excused
o If accord is NOT satisfied → then other party can sue on EITHER original obligation OR
accord (but not both)
 i.e., original debt is suspended until accord is satisfied
 note → once accord is made, parties are bound to it—can sue on either agreement
if accord is breached (e.g., one party refuses to accept the accord)

NOTE → A&S generally may be accomplished by tender & acceptance of a check marked “payment in
full” where there is a bona fide dispute as to amount owed

Modification
 Substituted agreement → agreement by parties to accept DIFFERENT AGREEMENT in
satisfaction of existing obligation
 Performance on original agreement is excused
o E.g., “Δ will deliver 20 widgets by end of month, rather than paying $$ debt”

Note → if modified agreement is not satisfied, can ONLY sue on modified, not original
o Modified agreement replaces old one

Novation → agreement between BOTH parties to subbing in a new party (same performance)
 Party who is replaced is excused from performance
 If obligor ASSENTS to an assignment & delegation, this is probably a novation

DISTINGUISH → from “delegation” (see below)

Delegation → NO agreement between both parties

 Party who is replaced is NOT excused, remains liable as surety if no performance given

Excuse—Due to Later, Unforeseen Event

Impossibility…Impracticability…Frustration of Purpose
(1) Something happens AFTER K-formation but BEFORE complete performance

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 (2) Unforeseen
(3) Makes performance impossible, impracticable, frustrated purpose
o Impossible → objective: can’t be done (i.e., party was in car accident, sick, etc.)
 SUSPENSION → duties are suspended until no longer impossible
 If impossible to ever complete—performer could recover reasonable value of
performance under quasi-K

o Commercially impracticable → subjective: extreme/unreasonable difficulty or expense

 Condition’s non-occurrence must have been an assumption upon which K was
made (e.g., crop failure, embargo, social upheaval, currency devaluation, war,
labor strike, or any other unforeseen cost increase)
 Must be EXTREME—not just more difficult or more expensive than anticipated
(i.e., parties assume the risk of things like change in demand, higher costs, etc.)

IMPORTANT → must know what the performance obligation is to know if (3) applies!!!
e.g., K to sell car and car damaged—impossible; but K to sell grits and grits damaged—
not impossible because can always get more grits

Possible Fact Patterns

 Damage/Destruction of Subject Matter of K
o Make sure to understand obligation → delivery may be impossible, but payment is not!
 Death after K
o Generally, death does not excuse K obligations (money or performance)—estate steps in
to pay obligation or expectation damages
o “Special Party” Exception → if decedent was a SPECIAL PARTY (e.g., famous
person), performance is excused
 Subsequent Law/Regulation
o Later law makes performance illegal → excuse by impossibility
 E.g., K for nude dancing; dancing later outlawed
o Later law makes mutually understood purpose of K illegal → excuse by frustration of
purpose
 E.g., K for plastic surgery that both know to be for nude dancing; dancing
outlawed

VII. Third-Party Problems

3d Party Beneficiary
3d-Party Beneficiary → two parties contracting w/ intent to benefit 3d party (e.g., life insurance policy)
 Vocabulary (important!)
o 3d Party Beneficiary → NOT party to K; able to enforce K
o Promisor → person making promise benefiting 3d party (e.g., insurance co.)
o Promisee → person obtaining promise benefiting 3d party
o Intended/Incidental Beneficiary → only intended beneficiary has K-law rights
 One exam—intended will always be named in K
o Creditor/Donee → intended beneficiary is always one of these

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  Donee → most common
 Creditor → promise already owed 3d party beneficiary beforehand

Cancellation/Modification of K that Benefits 3d Party

 MODIFICATION → did 3d party RELY on it? (just knowing of it is not enough)
o If yes → 3PB’s rights have vested
 K cannot be modified w/out her consent unless K otherwise provides

oVested rights, if:

 3PB manifests assent to the promise in manner invited by parties
 3PB brings suit to enforce the promise
 3PB materially changes position in justifiable reliance
o BUT—promisor and promisee may SPECIFY when 3PB’s rights vest by agreement!!!
 E.g., “unqualified right to change the beneficiary at any time”
 Means that 3PB’s rights won’t vest—try promissory estoppel instead
 REVOCATION—If 3PB relied
o Promisor revoked → 3PB can enforce against promisor (so can promisee!)
o Promisee revoked → donee 3PB—cannot recover from promisee
Creditor 3PB—CAN recover from promisee

Liability
 Recovery from promisor → available to BOTH 3PB and promisee
o Promisor’s defenses → any defense that he could have asserted against promisee (e.g.,
excuse, fraud, duress, etc.)
 Recovery from promisee
o Available to creditor 3PB → can recover on pre-existing debt
o NOT available to donee 3PB (e.g., if promisee revokes K)

ONE step v. TWO steps

Assignment of Rights
Assignment of Rights → (1) two parties form K, (2) one party later transfers RIGHTS/BENEFITS
under K to 3d party
NOTE → an assignment is barred if it will substantially change the obligor’s duty

 Vocabulary (important!)
o Assignor → party to contract who later transfers rights under K to another
o Assignee → NOT party to K; able to enforce K due to assignment
o Obligor → other party to K

 Freely revocable → thru bankruptcy, death, multiple assignments, acceptance of performance

from obligor, etc.
o Exception—NOT revocable IF:
(a) Assignment is the subject matter of a writing delivered to
assignee
(b) Assignee receives some indicia of ownership
(c) Assignee has relied on assignment in reasonable, foreseeable and
detrimental way
(d) Assignment was for value

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  Consideration → NOT required
o If consideration given by assignee → warranties of assignor apply (see below)

 DISTINGUISH → from Promise to Collect or Promise to assign (e.g., “A promises to collect

money from obligor”—this is NOT an assignment)

Effect of Assignment
 Assignor can receive NO FURTHER BENEFIT
 Recovery from obligor
o Assignee can recover
o Assignor cannot recover
 Obligor’s defenses
o Same defenses against assignee as against assignor
o May NOT assert assignor’s defenses against assignee (e.g., if assignor wouldn’t have had
to pay assignee for some debt, obligor can’t claim that defense)
 If obligor doesn’t know of assignment
o Payment to assignor is effective until obligor learns of assignment
o Modification agreements between obligor and assignor are effective
If obligor DOES know of assignment → bound to render performance to assignee
 Warranties of assignor → if ASSIGNMENT FOR VALUE
o In assignment for consideration → assignor warrants:
 Right assigned actually exists
 Assignor will do nothing to impair the value of the assignment (i.e., can’t revoke)
o NO warranty re: what obligor will do

Limitations on Assignment
 Contract provisions → either PROHIBIT or INVALIDATE assignments
o Prohibition → takes away right but not power to assign (e.g., “rights are not assignable”)
 Assignor is liable for breach of K
 Assignee who doesn’t know of prohibition can still enforce K
 NOTE → prohibition on assignments also prohibits delegations (see below)
o Invalidation → takes away right AND power to assign (e.g., “all assignments are void” or
“have no force and effect”)
 Assignor is liable for breach of K
 Assignee has no rights

 Common law → even if no K provision, common law bars assignments that substantially
change duties of obligor
o Assignment of right to payment → always ok
o Assignment of ANY OTHER PERFORMANCE RIGHT → never ok

Multiple Assignments
 Gratuitous Assignments: Last in time rule → last assignee wins (counterintuitive to everything
else we’ve learned)
o Exception → when assignment is not freely revocable (see above), first assignment wins
 Assignments for Consideration: First in time rule → first assignee for consideration (any

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 amount) wins
o Exception → later assignee for value wins if he both:
(i) Does not know of the earlier assignment, and
(ii) Is the first to obtain— payment from obligor
a judgment NOTE → first to notify obligor
a novation, or is NOT on the list

indicia of ownership

Delegation of Duties
Delegation → party to a K transferring DUTY under that K to a 3d party

 Vocabulary
o Delegating party
o Delegatee → person to whom work is transferred
o Obligee → party to original K for whom work is to be done

 Delegable Duties
o Contractual duties are delegable
o Limitations (novation required)
(1) If K prohibits delegations OR ASSIGNMENTS
(2) K calls for someone w/ VERY SPECIAL SKILLS (e.g., surgery)
(3) Person to perform K has VERY SPECIAL REPUTATION (e.g., celeb)

 Liability (WILL be on exam)

o Of delegating party → ALWAYS remains liable if delegatee doesn’t perform as a
SURETY
o Of delegatee → liable to delegating party or obligor for failure to perform only if she
received consideration from delegating party (otherwise, it’s just like a favor, not
binding)
 If consideration given → obligor becomes a 3PB!!!
 If this happens—obligor can go after either delegating party OR delegatee,
doesn’t have to go after delegatee first!
o Of obligor → liable for payment to delegating party (who still has BENEFIT)

NOTE → sometimes bar examiners will use the term “assignment” to refer to both
assignment AND delegation, or sometimes to just a delegation!!
 Often, there will be BOTH a delegation and assignment (i.e., 3d party gets both duty and right)

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