Contracts

Introduction
General Principles
Common Law vs. UCC
• Common Law
§ Governs if services or real estate
• UCC
§ Governs for goods
• Mixed (services + goods)
§ Indivisible Contracts can only be governed by one or the other
• Dependent upon predominant purpose
§ Divisible contracts can be divided and governed by both
• Goods and services can be separated into mini-contracts
Requirements to Form a Valid Contract
• Mutual Assent
§ Valid Offer
§ Valid Acceptance
• Consideration
• No defenses to formation

Formation of Contracts
Mutual Assent (Offer + Acceptance)
Offer
• Manifest objective willingness to enter agreement
§ Objective test
• Outward appearances of words and actions are determinative
• Subjective hidden intentions are irrelevant
• Create power of acceptance in the offeree
§ Specific Offeree
• Generally offer must be to a specific person
• Limited exception for contest offers and reward offers
• Advertisements are usually considered and invitation to deal rather than offer
• If very specific and leave nothing open to negotiation, may be considered an offer
Terms Required in the Offer
§ Common Law
• All essential terms must be specified. Generally includes:
• Parties
• Subject
• Quantity
• Price
§ UCC
• Law is willing to plug in gaps
• Price is not required
• Required terms
• Parties
• Subject
• Quantity
• Requirements and Output contracts
• Valid even though they do not specify exact quantity
• Requirements K - seller will sell as much as buyer requires
• Output K - seller will sell entire production
Terminating the Offer
§ If offer is terminated, it can no longer be accepted
§ Offer is terminated if this occurs before acceptance
• Offeror revokes offer expressly to offeree
• Constructive Revocation
 • Offeree learns offeror has done something absolutely inconsistent with a continuing ability to
contract
• Offeree rejects offer expressly to offeror
• Counteroffer from Offeree
• Offeror dies or becomes incapacitated
• Only terminates offer, not existing contracts
• Reasonable amount of time passes (usually requires weeks, not days)
• Subject matter of the offer is destroyed or becomes illegal
Irrevocable Offers
• 4 Types of Irrevocable Offers
§ Option contracts
• Consideration given in exchange for keeping an offer open
§ Firm offers
• UCC
• Merchant can may firm offer to buy or sell goods
• Lasts as long as stated or reasonable time up to 90 days
• Requirements
• In writing
• Contains explicit promise to not revoke
• Signed by merchant
§ Offeree has started performance
• Unilateral offer can't be revoked once offeree has started performance
• Offer where acceptance is by an action rather than a return promise
§ Detrimental Reliance
• Offeree has reasonably and detrimentally relied on the offer in a foreseeable manner
Acceptance
• Manifestation of willingness to enter into agreement by the offeree
• Must accept according to rules of the offer
§ Bilateral
• Acceptance = start of performance
§ Unilateral
• Acceptance = performance is completed
• Start of performance only makes offer irrevocable
• Objective Test
§ Outward appearance of words and actions are determinative
• Acceptance must be from person offer was directed to
Mailbox Rule
• Acceptance
§ Valid at time it is sent by mail, email, or fax, UNLESS
• Offeree uses wrong address or improper postage
• Offeror expressly said it's only valid upon receipt
• Option contract
• Offeree sends rejection/counteroffer BEFORE acceptance
• Whichever of the two is received first controls
• Offeror detrimentally relies on termination before receipt of acceptance
Counteroffer vs. Acceptance
• Counteroffer
§ Operates as rejection and formation of new offer
Mirror Image Rule
§ Common Law
§ Terms in acceptance must match terms in offer exactly
• Otherwise, it is a counteroffer
UCC 2-207 (Battle of the Forms)
§ Acceptance does NOT have to match the terms of the offer exactly
• Acceptance must be definite and seasonable expression or written confirmation
• Must be sent within reasonable amount of time
• Operates as acceptance even with different or additional terms
• UNLESS expressly made condition upon assent to those terms
§ Additional Terms
• Will govern contract if both parties are merchants UNLESS
• Offer expressly limited acceptance to its terms
• Additional terms materially alter the deal, or
• Offeror objects to them in reasonable amount of time
§ Knockout Rule
• Different Term
• Term that conflicts with terms of original offer
• Conflicting terms "knock each other out" and are replaced with UCC gap fillers
• Additional Term
• Does not conflict with terms of original offer
• Knockout rule does not apply
Consideration
Consideration
• Transfer of legal value in a bargained for exchange
§ Promisee incurs a legal detriment OR promisor receives legal benefit
• Promising something not previously obligated to do
• Refraining from exercising a legal right
• Promising not to sue is consideration
§ NOT consideration
• Gift promises
• Conditional gift promises
• Preexisting legal duties
• Past consideration
• Pretense of consideration
• E.g., paying $1 for a car
• Illusory promises
• Conditional, can be retracted
Contract Modification and the Preexisting Duty Rule
• Common Law
§ Contract modification MUST be supported by consideration
• Preexisting duty (whether by law or contract) does not count
• UCC
§ Modification does not require consideration
§ Modification is valid if it is in good faith
Consideration Substitutes (Alternative Theories of Enforcement)
Promissory Estoppel
• Promise without consideration may be enforced by promissory estoppel if
§ Promisor should reasonably expect promise to induce action from promisee
§ Promise does induce such action to promisee's detriment
§ Injustice only avoided by enforcement of promise
• Restatement Approach
§ Recovery limited to monetary value of loss incurred
§ Under Second restatement - binding without induced action
• Charitable donations
• Marriage settlement
Quasi-Contract
• Contracts without consideration may be enforced to avoid unfair results if
§ P confers measurable benefit to D
§ P reasonably expected to get paid
§ Unfair to let D keep benefit without paying
• Limited to restitution
§ Amount = economic benefit P conferred on D
Moral Obligation + Subsequent Promise
• A few jurisdictions do this
Defenses to Contract Formation
Incapacity
• Infancy
 § Contracts voidable when made as minor
§ Minor can either:
• Disaffirm
• Avoid liability
• Has to return anything received
• Affirm
• Enforce contract
• Expressly or implicitly (by not disaffirming)
• Mental Illness
§ Voidable if
• Unable to understand nature and consequences, or
• Unable to act in reasonable manner related to contract + other party knows or should know of
condition
§ Can disaffirm UNLESS
• Contract made on fair terms
• Other party didn't know of mental illness
• Intoxication
§ Voidable if other party knows or should know that due to intoxication
• Unable to understand
• Unable to act in reasonable manner
§ Must disaffirm promptly upon recovery and return any value received
• Necessaries Doctrine
§ Based on restitutionary recovery
§ When necessaries (food, shelter, clothing, healthcare, etc.) given to party who lacks capacity, they are liable for
reasonable value of the necessaries, not agreed-upon price
Mistake
• Mutual Mistake
§ Both parties mistaken as to basic assumption
§ Adversely affected party may rescind deal if
• Mistake of fact at time deal was made
• Relates to basic assumption of contract
• Has material impact
• Impacted party did not assume the risk of mistake
• Did not treat known limited knowledge as sufficient
• Did not allocate risk to self in agreement
• Unilateral Mistake
§ Mistake by one party that is unknown to other party
§ May rescind if
• Mistake of fact when deal was made
• Related to basic assumption of contract
• Material impact
• Would make contract unconscionable OR other side knew or should have known
Misrepresentation
• Intentional or accidental untrue statement at time of contracting
• Must show
§ Misrepresentation of present fact (not opinion)
§ Material OR fraudulent
§ Justifiable to have relied on the representation
Duress/Undue Influence
• Duress
§ Void if
• Physical duress
§ Voidable if
• Threat is a crime or tort
• Threat is criminal prosecution
• Threat of bad faith use of civil process
• Threat is breach of duty of good faith and fair dealing, or
• Resulting exchange is not on fair terms, and
 • Threatened act would harm recipient and not benefit threatener
• Prior unfair dealings make threat effective
• Use of power for illegitimate ends
• Undue Influence
§ Voidable if
• Due to affected party's susceptibility to pressure, and
• Other side applied excessive pressure
Illegality
• Void if illegal or contrary to public policy
• Discharged if legal when formed but becomes illegal
Unconscionability
• Shocks the conscience of the court
• Procedural
§ Defect in bargaining process
• Substantive
§ Terms are grossly unfair and one-sided
Statute of Frauds
Contracts Triggering the Statute of Frauds
• Contract subject to Statute of Frauds
§ Marriage
• Made in consideration of marriage
§ Suretyship
• Promising to guarantee debt of another
• Unless main purpose is guarantor's own economic advantage
§ One year
• Terms cannot be performed within one year
• Interpreted narrowly
• Must be no possible way
§ UCC
• Purchase or sale of goods for $500+
§ Real Estate
• Applies to modifications if modified contract falls within SoF
Satisfying the Statute of Frauds
• Writing will satisfy if
§ Signed by party trying to enforce against
§ Shows contract was formed, and
§ Includes requisite terms
• Parties
• Subject
• Quantity
• Price (if not UCC)
• Performance will satisfy if
§ Service Contracts under One-year Provision
• Full performance (not part performance)
§ Real Estate
• Seller fully performs (conveys land), or
• Buyer performs 2 out of 3:
• Takes possession
• Makes payment (part or full)
• Makes substantial improvements
§ UCC Goods $500+
• Performance
• For quantity of good paid for, or
• Quantity of goods received and accepted
• Admission in Court
• If party enforcing against admits contract was made
• Written confirmation between merchants
• Oral agreement between merchants
 • Either party sends signed, written confirmation
• Received by other merchant
• Other merchant does not object in writing within 10 days after receipt
• Specialty Manufactured goods
• Seller begins manufacture of custom goods for buyer
• Not suitable for sale to others

Performance
Parol Evidence and Interpretation
Parol Evidence Rule
• Written contract intending to embody final expression, writing is an integration
§ Complete integration
• Writing completely expresses all terms of parties' agreement
• All other statements prior or contemporaneously are inadmissible
• Merger clause
• States that it is the complete agreement
• Strong evidence of complete integration
§ Partial Integration
• Not all terms are in the writing
• Statements/expressions made prior or at same time are admissible to supplement writing
• As long as does not contradict written terms
• Does NOT apply to
§ Defenses to formation or enforcement of contract
§ Separate deals
• extrinsic evidence represents distinct and separate contract
§ Condition Precedents
• Oral agreement that written contract becomes effective only upon condition
§ Ambiguity and interpretation
• May be used to clarify ambiguity
§ Oral agreements after execution of contract
• These are treated as modifications
Warranties
Express Warranties
• UCC
§ Affirmation or promise made by seller to buyer related to goods that becomes part of basis of bargain
§ Description of goods that becomes part of basis of bargain
§ Sample or model that becomes part of basis of bargain
• Disclaimers that grossly conflict with express warranties are not enforceable
• Violation of express warranty = breach
Implied Warranty of Merchantability
• UCC
• Merchants make implied warranty that good are fit for ordinary commercial purposes
§ Can disclaim with conspicuous language
§ If buyer inspected or refused to inspect goods, warranty of merchantability does not apply to defects that
would have be revealed by inspection
• Violation of this = breach
Implied Warranty of Fitness for a Particular Purpose
• Implied when seller knows buyer has particular use and buyer relies upon seller's skill to select goods
§ Seller does NOT need to be merchant
§ Can be disclaimed with conspicuous written language
• Violation = breach
Conditions
Express Conditions
• Shift risk by stating obligations only kick in if future event takes place
• Makes performance conditional upon completion of condition
• Must be satisfied strictly unless waived
§ Receiving party waives with words or conduct, or
§ Receiving party wrongfully interferes or hinders condition
 • Good faith standard
Good Faith and Fair Dealing
• Implied obligation to act in good faith and deal fairly without
§ Breaking their word
§ Using deceptive means to avoid obligation
§ Denying what other party obviously understood
Substantial Performance (Performance Under Common Law)
• Performance satisfied as long as no material breach
Perfect Tender (Performance Under UCC)
• Seller must deliver conforming goods
§ Smallest nonconformity = breach
• Buyer may reject all or portion of goods
§ Exceptions
• Parties can contractually agree to substantial performance
• Installments contracts
• Buyer can reject specific installment when substantial impairment cannot be cured
• Do not have to satisfy perfect tender
• Chance to cure
• Buyer must give seller chance to cure if
• Time for performance has not expired, or
• Seller has reasonable grounds to believe buyer would accept replacement for
nonconformity
• Revocation of Acceptance
§ Buyer may revoke acceptance if
• Nonconformity substantially impairs value of goods
• Revocation occurs within reasonable time after discovering nonconformity, and
• And before change in condition not due to defects
• Buyer accepted goods
• On reasonable assumption it would be cured, but it has not been cured, or
• Without discovery of nonconformity if due to difficulty of discovery or seller's assurances
Excuses
Impossibility and Impracticability
• Performance is discharged if
§ Unforeseeable event occurs making it extremely and unreasonably difficult or impossible
§ Nonoccurrence of the event was basic assumption of contract
§ Party seeking discharge was not at fault
Frustration of Purpose
• Performance discharge if
§ Unexpected events destroy one party's purpose for the contract
• Even if performance is not impossible
• Doesn't need to be completely unforeseeable, just unexpected and not a realistic prospect
§ Event is not fault of frustrated party, and
§ Nonoccurrence of event was a basic assumption
Accord and Satisfaction
• Obligations excused if both:
§ Accord
• Parties agree to accept alternate performance to discharge preexisting duty
§ Satisfaction
• Subsequent performance of that accord
• If no satisfaction, other party can so for either original or accord
Novation
• Both parties agree that substitute party will take over contractual obligations
• Original promisor becomes excused from performance
Anticipatory Repudiation
Anticipatory Repudiation
• Common Law
§ Promisor clearly and unequivocally repudiates, by words or conduct, a promise before time for performance
• May be retracted until promisee
 • Acts in reliance on repudiation
• Signifies acceptance
• Commences action for breach
• UCC
§ Buyer or seller makes unequivocal refusal to perform OR there's reasonable grounds for insecurity about their
willingness or ability to perform
• May be retracted until other party cancels contract or materially changes position
• Non-repudiating party may
§ Treat it as breach and sue immediately for damages
• If date of performance hasn't passed and only performance remaining is payment
• Must wait until due before filing suit
• Ignore repudiation, urge performance, and see what happens
• Then continued performance by non-repudiating party must be suspended if performance
would increase damages

Remedies
Money Damages
Expectation Damages
• Goal is to put non-breaching party in same economic position as if contract had been performed as promised
§ Compare value of performance without breach to value with breach
• Limitations
§ Must be proven with reasonable certainty
§ Unforeseeable consequential damage are not recoverable, unless breaching party knew or should have known
of them
• General Damages
• Losses almost anyone would suffer from breach
• Consequential Damages
• Losses unique or special to plaintiff
Reliance Damages
• Put non-breaching party is same economic position as if contract had never been created
§ Restore losses incurred
• Cannot recover expectation and reliance damages
Restitution
• Prevent unjust enrichment
§ Amount equal to benefit that P has conferred on D
• Cannot recover expectation and restitution damages
Liquidated Damages
• Set forth in contract as amount due upon breach
• If punishing in nature:
§ Amount reasonable at time of contracting, and
§ Actual damages would be uncertain in amount and difficult to prove
Punitive Damages
• Punish defendant
• Rarely available for contract actions
• Second Restatement
§ Not recoverable unless breach is also a tort with punitive damages
Equitable Remedies
Specific Performance
• Only awarded when monetary damages are inadequate
• Available for real estate transactions
• Not available for personal service contracts
§ Injunctive relief is more common
Rescission
• Cancelling of contract to restore parties to prior positions
• Can occur for various reason
• Can be mutually agreed upon
Right of Reclamation (Replevin)
• UCC
 § Seller may reclaim goods for
• Insolvent Buyer
• Goods received on credit
• Seller learns buyer is insolvent
• Demand made within 10 days of buyer's receipt of goods
• Unless buyer misrepresented solvency within 3 month before delivery
• Then can be longer than 10 days
• Bad Checks
• Buyer pays with check that is subsequently dishonored
• Seller may reclaim following demand made within reasonable time
Mitigation of Damages
Duty to Mitigate
• P has duty to take reasonable steps to reduce losses
• If P fails to do so, total damages will be reduced by amount that could have been avoided

Third-Party Rights
Third-Party Beneficiaries
Third Party Beneficiary Contracts
• Intended Third-Party Beneficiary
§ Not party to contract but has right under contract
§ Both parties aware that performance intended to benefit identified third party
§ Has the right to sue for breach
• Incidental Third-Party Beneficiary
§ Not party to contract and benefits in way that was not intended to benefit them specifically
§ No legal rights because no intention to benefit them
§ No right to sue for breach
• Original parties can revoke or modify away third-party beneficiary rights to enforce contract until rights vest:
§ Third party detrimentally relied on contract
§ Third party accepted benefit, or
§ Third party brough suit to enforce contract
Assignment of Rights and Delegation of Duties
Assignment
• Party can assign rights and benefits, in whole or in part, to third party
§ Unless prohibited or invalidated by contract
• Prohibited
• Assignment = breach
• Assignment is still enforceable by assignee
• Invalidated
• Assignment is void
• Assignee cannot enforce assignment or recover
• Assignee can sue
§ Obligor for non performance
• Any defense to enforcement against assignor may be used against assignee
§ Assignor for wrongful revocation of assignment or breach of implied warranty
• Assignor may only sue an obligor if assignor did not receive consideration for the assignment
• Consideration is not required for assignment
§ Becomes irrevocable if there is consideration
• If assigns same right multiple times, first assignment for consideration will control
§ If assigned without consideration, last assignment controls
Delegation
• One party outsources duties to third party
• Acceptable as long as
§ Not prohibited by contract
§ No special interest in the specific party performing
• Delegatee not liable for breach unless receives consideration from the delegating party