CONTRACTS AND SALES

IntroductionThere are three key questions in contract law:1. Has an enforceable contract been formed?2. Has the contract been performed (or, has the performance been excused)?3. What are the remedies for breach?

What is a contract? A contract is a legally enforceable agreement.

How is a binding contract formed? A binding contract is created through the process of mutual assent (i.e., offer and acceptance) and consideration, and when no valid defenses to contract exist.

Offer An offer is a manifestation of willingness to enter into an agreement (by the offeror) that creates a power of acceptance in the offeree A statement is an offer only if a person to whom its communicated could reasonably interpret it as an offer Note that an offeree must know of offer in order to accept The key question is whether an offeror displays an objectively serious intent to be bound NOTE: watch out for situations involving anger or humor the offeror may not be displaying a serious intent to be bound For a valid offer there must be:1) Manifestation of intention to contract2) Certainty and definiteness of terms3) Communication to an intended offeree

Manifestation of intention to contract Words or conduct that show intent to commit Test would a reasonable person in the position of the offeree believe that his assent creates a contract NOTE: the real intent of the parties is irrelevant May look to parties prior relationships or the custom in the industry Advertisement general rule is that an advertisement is not an offer Exceptions Offer for reward Can be offer if specific as to quantity and expressly indicates who can accept

Certainty and definiteness of terms Offer is NOT required to contain all material terms; however, the terms must be certain and definite1) Vague or ambiguous material terms NOT an offer under either common law or UCC2) Common law all essential terms must be covered in the agreement. This typically means the parties, subject, price, and quantity.3) UCC the law is more willing to plug gaps here generally you only need the parties, subject, and quantity.a. NOTE: price does NOT need to be statedb. Requirements/outputs contracts specific enough under the UCC, even though they dont state an exact quantity term (they state a formula for calculation)4) Employment contracts the duration of employment must be stated

Communication to an intended offeree that creates power of acceptance Offer must be targeted to a specific person or number of people who could actually accept You cant accept an offer unless it is directed at you A valid offer MUST give the power of acceptance to the other side TWO COMMON FACT PATTERNS TESTING THIS CONCEPT:1) Invitations to deal Preliminary communications that still reserve a final round of approval with the speaker That is, they do NOT confer a power of acceptance to the other side. Invitations to deal are NOT offers.2) Advertisements Usually understood as invitations to deal Exceptions Reward advertisements Advertisements that are very specific and leave nothing open to negotiation, including how acceptance can occur

Terminating the offer

SEVEN RECURRING FACT PATTERNS ON MBE

1) The offeror can revoke the offer by express communication to the offeree. Note: if offer was made in a publication, revocation may be made in a compatible means of publication (revocation effective when published)

2) The offeree learns that the offeror has taken an action that is absolutely inconsistent with a continuing ability to contract. This is known as constructive revocation.

3) The offeree rejects the offer. Offeree clearly conveys to offeror that offeree no longer intends to accept offer. Under mailbox rule, a rejection is usually effective upon receipt.4) The offeree makes a counteroffer. Note: be careful to distinguish a counteroffer from a mere counter-inquiry or indecision. A counteroffer is both a rejection and a new offer. Exception: Option holder has right to make counteroffers during the option period without terminating the original offer.

5) Offeror dies or becomes mentally incapacitated. Note: offer terminates unless offer for option K

6) Offers subject matter is destroyed or becomes illegal.

7) A reasonable amount of time passes. Specified termination date or reasonable period if none stated.

Revocation In general, an offer can be revoked by the offeror at any time prior to acceptance, even if the offer states that it will remain open for a specific amount of time. A revocation may be made in any reasonable manner and by any reasonable means, and is not effective until communicated. A revocation sent by mail is NOT effective until received. If the offeree acquires reliable information that the offeror has taken definite action inconsistent with the offer, the offer is automatically revoked.

Limitations on revocation

1) Option K An option K is an independent promise to keep an offer open for a specific period of time that is supported by additional consideration. The offeree must generally give separate consideration for the option to be enforceable. NOTE: If the option is within an existing contract, no separate consideration is required. In UCC Ks, a merchants promise to keep an offer open need not be supported by consideration if it is in writing and signed2) Firm offer A merchant in the UCC universe can make a firm offer to buy or sell goods. Merchant someone who regularly deals in the type of good at issue (in other words, a businessman). NOTE: for purposes of the UCC merchant rule, a merchant not only includes a person who regularly deals in the type of goods involved in the transaction, but also any business person when the transaction is of a commercial nature. A firm offer must be: Written Contain an explicit promise not to revoke Be signed by the merchant A firm offer lasts either as long as stated in the offer OR for a reasonable time not to exceed 90 days During this time, the offer to buy or sell goods is irrevocable pursuant to 2-2053) Detrimental reliance An offer cannot be revoked if the offeree reasonably and detrimentally relies on the offer in a foreseeable manner NOTE: Look for this especially in the general contractor/subcontractor context The offeror is liable to the extent necessary to avoid injustice, which may result in holding the offeror to the offer, reimbursement of the costs incurred by the offeree, or restitution of the benefits conferred4) Offeree has started performance A unilateral offer to K cannot be revoked by the offeror if the offeree has started performance Unilateral K arises from a promise that requests acceptance by an action of the promisee Because a unilateral K can be accepted only by performance, the law gives the promisee the right to finish Once performance has begun, the offeree will have a reasonable amount of time to complete performance but CANNOT be required to complete the performance NOTE: Mere preparation is insufficientmust start to perform.

Revival A terminated offer may be revived by the offeror. As with any open offer, the revived offer can be accepted by the offeree. (EXP) A offers to paint Bs house for $500. B rejects the offer. A can revive the offer by stating that the offer remains open. B can change her mind and accept.

Acceptance An objective manifestation by the offeree to be bound by the terms of the offer. RULES1) The offer must be specific to the person trying to accept it; you cant accept an offer directed elsewhere.2) Even with an open-to-all offer you must know about that offer in order to accept ita. (EXP) Reward offers3) You must generally communicate your acceptance to the other party in order for it to become effective4) Mailbox rule acceptance sent by mail is valid when letter is sent.a. EXCEPTIONS MB rule does NOT apply:i. If the offeree sends something else first (e.g. rejection, counteroffer)ii. To other types of communication (e.g., revocations, rejections)iii. To option contractsiv. It is unclear whether this applies to other media (fax, email, etc.)b. EXAM NOTE: Keep in mind that the mailbox rule applies only to acceptance, and therefore it almost exclusively applies to bilateral contracts (when there is one promise in exchange for another promise), because unilateral contracts require action as acceptance.5) Acceptance without communication (by silence) there are some exceptions to the requirement that you must communicate an acceptance to the offeror. Look for the following:a. Unilateral reward offers or contestsb. Unilateral offers in which the parties are geographically close (such that the offeror will just see that performance has occurred)c. A course of past dealings of silence serving as acceptance such that the offeree should reasonably notify the offeror if she does not acceptd. The offeror says that acceptance must come via silence, and the offeree intends to accept the offer by silence6) Implied-in-fact contracts you can communicate an acceptance without writing or speaking (rather, by gestures/actions).7) Acceptance by performancea. Commencement of performance of a bilateral contract operates as a promise to render complete performance.b. On other hand, unilateral contracts are satisfied only by full performancei. Merely starting performance is NOT enough to accept a unilateral contract, which requires complete performance of the act, but it will make the offer irrevocable for a reasonable period of time to allow for complete performance.

COUNTEROFFERS

Common law approach to counteroffers Mirror-image rule Acceptance must match the terms of the offer EXACTLY. Any modification of the terms of the offer, or addition of another term not found in the offer, acts as a rejection of the original offer and as a new counteroffer. Mere suggestions or inquiries, including requests for clarification or statements of intent, made in response by the offeree do NOT constitute a counteroffer. A conditional acceptance terminates the offer and acts as a new offer from the original offeree.

UCC approach to counteroffers 2-207 A purported acceptance that does not match the terms of the offer exactly CAN still count as a legal acceptance in many circumstances much more forgiving standard. Exception Acceptance expressly conditioned on assent to the additional or different terms here, the acceptance IS a counteroffer. 2-207(1): a definite and seasonable expression of acceptance [or a written confirmation] which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional upon assent to the additional or different terms. 2-207(2): a new term in the purported acceptance may control, but only if all of the following are true: Both parties are merchants The new term does NOT materially alter the deal The initial offer did NOT expressly limit acceptance to its terms; AND The offeror does NOT object within a reasonable time to the new term. If there is not a real contract but the parties still act as if there is an agreement (for example, by exchanging goods for money) only the terms that both writings agree upon become part of the contract, with other terms supplied by the UCC acting as default rules. 2-207 also governs the situation in which two parties have a contract (often a verbal agreement), and one party sends over a confirming memo with additional terms that go further than the earlier agreement. Express text of 2-207: a definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional upon assent to the additional or different terms. EXAM NOTE: Battle of the forms - if you see this fact pattern (early pattern + written confirmation with new terms), work through the steps for 2-207(2). But recognize that the new terms will rarely come in.

Last-shot rule (reiteration of 2-207(2)) An additional term in the acceptance is automatically included in the contract when both parties are merchants, unless:1) The term materially alters the original contract;2) The offer expressly limits acceptance to the terms of the offer; OR3) The offeror has already objected to the additional terms, or objects within a reasonable time after notice of them was received If ANY ONE of these three exceptions is met, a contract is formed, BUT the offerors original terms are controlling. Examples of terms that materially alter the K: Warranty disclaimers Clause that flies in the face of trade usage with regard to quality Requirement that complaints be made in an unreasonably short time period Terms that surprise or create hardship without express awareness by the other party Example of terms that usually DO NOT materially alter the K: Fixing reasonable times for bringing a complaint Setting reasonable interest for overdue invoices Reasonably limiting remedies

Knock-out rule What happens when different terms are included in the merchant offerees acceptance? Minority of jurisdictions treat the different terms the same as additional terms and apply the last shot rule. Majority of jurisdictions say that different terms in the offer and acceptance nullify each other and are knocked out of the contract. When there are gaps in the contract, the court will use Article 2s gap-filling provisions to patch the holes.

Auction contracts Goods auctioned in lots If goods in an auction sale are offered in lots, each lot represents a separate sale Completion of sale An auction sale is complete when the auctioneer announces its end, such as by the fall of the auctioneers hammer or in any other customary way. When a bid is made contemporaneously with the falling of the hammer, the auctioneer may, at his discretion, treat the bid as: 1) continuing the bidding process; or, 2) declare the sale completed at the fall of the hammer. Reserve and no-reserve auctions In a reserve auction, the auctioneer may withdraw the goods at any time before she announces the completion of the sale. An auction is with reserve unless specifically announced as a no-reserve auction. In a no-reserve auction, after the auctioneer calls for bids on the goods, the goods CANNOT be withdrawn unless no bid is received within a reasonable period. In both reserve and no-reserve auctions: Bid retraction bidder may retract his bid until the auctioneer announces the completion of sale Note: a retraction does NOT revive earlier bids When the seller bids When an auctioneer knowingly accepts a bid by the seller or on his behalf, or procures such a bid to drive up the price of the goods, the winning bidder MAY avoid the sale OR, at her option, take the goods at the price of the last good-faith bid prior to the end of the auction. Exceptions:a. A seller may bid at a forced sale Forced sale sale by a debtor because of financial hardship or a creditors action; or sale by government official of a debtors propertyb. A seller may bid if he specifically gives notice that he reserves the right to bid

CONSIDERATION Defined - a deal in which the parties exchange promises involving a legal detriment or benefit. EXAM NOTE: The MBE likes to test situations in which bargained-for consideration is MISSING. Evaluate by asking the following questions:1) Who is making the promise that needs to be supported by law? (That person is the promisor; other party is the promisee).2) Is there a benefit to the promisor OR a detriment to the promisee? NOTE: you just need one of these, not both.3) Was this bargained for? (in other words, did the parties think they were making a deal when they exchanged promises?) KEY: not doing something you are legally entitled to do IS a legal detriment. Consideration can take the form of: A return promise to do something; A return promise to refrain from doing something legally permitted; The actual performance of some act; or Refraining from doing some act. Possible MBE issues: Gift promises and conditional gifts distinguished Gift promises (every year for Christmas, Mickey gives me a tie, and I give her a sweater. Mickey cannot sue me this year if I refuse to give her a present because we are just exchanging gifts we are not bargaining) and conditional gifts (exp - I promise to give you my Jeep if you come to my house to pick it up) Gifts do not involve bargained-for consideration and are therefore unenforceable. TEST: the test to distinguish a gift from valid consideration is whether the offeree could have reasonably believed that the intent of the offeror was to induce the action. If yes, there is consideration, and the promise is enforceable. Illusory promises essentially pledges nothing because it is vague or because the promisor can choose whether to honor it. Such a promise is not legally binding. A promisor must clearly commit to the deal or there is no consideration (exp you promise to sell me all the cars I want) KEY: there must be a way for the promisor to breach Things that are NOT illusory: Satisfaction Ks (I promise to pay Mickey $500 if she paints a portrait of my family that meets my satisfaction. She says ok. There is bargained-for consideration here, as there is a way to breach the K). A promise that is based on the occurrence of condition within the control of the promisor may be illusory, but courts often find that the promisor has also promised to use her best efforts to bring about the condition. On a related note, a promise to purchase goods upon the promisors satisfaction with the goods is not illusory because the promisor is required to act in good faith. 1-304. Past consideration something given in the past is typically not adequate consideration because it could not have been bargained for, nor could it have been done in reliance upon a promise (EXP) A is drowning, and B dives in and saves A. Grateful to have been saved, A promises B $500. Under the common-law approach, there is no consideration, and the promise is therefore unenforceable. It is based on a mere moral obligation arising out of past conduct. NOTE: There is a modern trend toward enforcing such promises when necessary to prevent injustice, unless the promisee intended his act to be a gift, OR otherwise did not expect compensation. Furthermore, courts will enforce a promise only to the extent that the value of the promise is proportional to the previous benefit conferred by the promisee.

CONTRACT MODIFICATION AND THE PREEXISTING DUTY RULE

Contract modification - common law approach At common law, modification of an existing contract must be supported by consideration. Nevertheless, agreements to modify a contract may still be enforced if:1) There is a rescission of the existing contract by tearing it up or by some other outward sign, and then the entering into of a new contract, whereby one of the parties must perform more than she was to perform under the original contract;2) There are unforeseen difficulties, and one of the parties agrees to compensate the other when the difficulties are discovered if those difficulties would make performance impracticable3) There are new obligations on both sides. Pre-existing legal duty at common law, a promise to perform a pre-existing legal duty does NOT qualify as consideration because the promisor is already bound to perform (i.e., there is NO legal detriment). NOTE: if the promisor gives something in addition to what is already owed or varies the preexisting duty in some way most courts find that consideration exists EXCEPTION: A third party offers a promise contingent upon performance of a contractual obligation by a party. In this scenario, the third partys promise is sufficient consideration. (EXP) C contracts with P for P to install plumbing in a house being built by C for H. Thereafter, C becomes insolvent and walks away from the project. So, H contracts with P and promises to pay P the same amount P would have received from C if P installs the plumbing. Ps completion of the job constitutes consideration for the promise by H, even though P was already contractually obligated to C to do the work. This makes sense. P was only connected to H though C. Because C was no longer involved, the nexus between P and H dissolves. Its a new agreement between P and H now, although Ps obligations under this agreement are the same as before. Partial payment for release from a debt obligation The key is to ask whether that debt is currently due and undisputed. If the debt is NOT yet due or disputed, there is valid consideration.

Contract modification - UCC approach NOTE: UCC does NOT have a pre-existing duty rule. Simply ask whether modification is made in good faith. If so, it is binding even in absence of new consideration. Thus, if one party is attempting to extort a modification, it will be ineffective under the UCC. Good faith requires honesty in fact and, in the case of a merchant, fair dealing in accordance with reasonable commercial standards.

EXAM NOTE: The MBE frequently tests the different common-law and UCC rules regarding contract modification. At common law, modifications require consideration; under the UCC, they require only good faith.

CONSIDERATION SUBSTITUTES

Promissory estoppel (or reliance) Reliance can arise when one party makes a promise, and the other party relies on that promise to take some action. Three key elements for a claim under reliance:1) A promise is made that would be reasonably expected to induce reliance;2) The promisee does indeed take detrimental action in reliance on the promise; AND,3) Injustice can be avoided only by enforcement of the promise. NOTE: charities do NOT need to prove detrimental reliance when pursuing a reliance theory to collect on a charitable-gift promise.Quasi-contract - AKA Implied-in-Law Contracts Situation in which you would have made a K if you could have, but you could not. Or a situation in which one party conferred a benefit on another party, and it would be fair to pay for that benefit. Three key elements for a claim under quasi-K:1) Plaintiff confers a measurable benefit on defendant;2) Plaintiff reasonably expected to get paid (acted without gratuitous intent); AND,3) It would be unfair to let the defendant keep the benefit without paying because either (a) the defendant had an opportunity to decline the benefit but knowingly accepted it, OR (b) the plaintiff had a reasonable excuse for not giving the defendant such opportunity (e.g., because of an emergency). NOTE: quasi-K damages are often limited, as justice requires, to the FMV of the benefit conferred More generally, whenever you see a situation that does not satisfy the normal requirements for a contract but still strikes you as unfair, ask whether quasi-contract applies When a plaintiff confers a benefit on a defendant and the plaintiff has a reasonable expectation of compensation, allowing the defendant to retain the benefit without compensating the plaintiff would be unjust. In this case, the court can permit the plaintiff to recover the value of the benefit in order to prevent the unjust enrichment. This type of quantum meruit recovery does NOT depend on the existence of a contract.

Moral obligation plus subsequent promise (the half theory) A few jurisdictions have some case law suggesting that a moral obligation plus a subsequent promise to pay can be binding. Normally, this would be past consideration and thus nonbinding. (EXP) you are trying to win a race to Alcatraz when sharks start to circle. I swing my boat over to pick you up. You are grateful and promise to pay me $500 for the rescue. Although there is NOT bargained-for consideration, I might argue that there is moral obligation plus a subsequent promise to pay.

The seal The seal on a document NOT considered a substitute for consideration in most jurisdictions (common wrong answer on MBE).

DEFENSES

DEFENSES TO K FORMATION

A person who is asserted to be in breach of contract can defend the action by showing that there has not been a valid offer and acceptance OR that valid consideration was not exchanged (and no consideration substitute exists).

The agreement will also NOT be enforced if a party can show that there was no meeting of the minds due to a mistake or misunderstanding, misrepresentation or fraud, undue influence or duress, or the partys own lack of capacity.

Misunderstanding A misunderstanding occurs when both parties believe that they are agreeing to the same material terms, but in fact they agree to different terms. Look for situations where each party attaches different meanings to the same words. You must show:1) The parties use a material term that is open to two or more reasonable interpretations;2) Each side attaches a different meaning to the term;3) Neither party knows, or should know, of the confusion. When neither party knows or should know of the misunderstanding: If the misunderstanding involves a material term, and neither party knows or should know that there is a misunderstanding, then there is no contract. One party knows or should know of the misunderstanding: If a material term in the offer and acceptance is ambiguous, AND one party knows OR should know that the other party has a different understanding of the meaning of the ambiguous term, then there will be a contract formed based on the meaning of the term as understood by the unknowing party.

Mistake A mistake is a belief that is not in accord with a present fact. NOTE: risks with regard to changing facts (future events) are governed by the doctrines of impracticability and frustration of purpose. NOTE: distinguish from misunderstanding, which focuses on words in the K, and misrepresentation, which focuses on words before the K. Mutual mistake Occurs when both parties are mistaken as to an essential element of the K. In such a situation, there must be a substantial difference between the deal as it was contemplated and the actual deal, with no intent by the parties to take a risk on that element of the transaction. The K will generally be voidable by the party that was adversely affected by the mistake if the mistake materially affects the bargain between the parties. NOTE: When reformation of the contract is available to cure a mistake, neither party can avoid the contract. To summarize: mutual mistake lets the adversely affected party rescind if:1) There is a mistake of fact, existing at the time that the deal is made;2) The mistake relates to a basic assumption of the contract and has a material impact on the deal; AND,3) The impacted party did NOT assume the risk of the mistake. Unilateral mistake Adversely affected party can rescind if: She can prove all the elements of mutual mistake (mistake of present fact relating to a basic assumption of K that has a material impact on deal and she didnt assume the risk of the mistake), PLUS: The mistake would make the K unconscionable The other side knew of, had reason to know of, or caused the mistake.

Fraud, Misrepresentation, and Nondisclosure A misrepresentation is a statement at the time of contracting that is not true. It can be intentional (fraudulent) or accidental. To assert this defense, the party must show:1) A misrepresentation of a present fact (not opinion);2) That is material or fraudulent3) That is made under circumstances in which it is justifiable to rely on the representation. Fraud in the factum Occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction. In such a case, no K is formed, and the K contract is void (i.e., not enforceable against either party), unless reasonable diligence would have revealed the true terms of the contract. This is a situation where you trick someone into signing something that he doesnt even know is a K Fraud in the inducement Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another to enter into a contract. Such a K is voidable by the adversely affected party if he justifiably relied on the misrepresentation in entering into the agreement. Nondisclosure Nondisclosure of a known fact is tantamount to an assertion that the fact does not exist, if the party not disclosing the fact knows that:1) Disclosure is necessary to prevent a previous assertion from being a misrepresentation or fraudulent;2) Disclosure would correct a mistake of the other party as to a basic assumption of the K, and the failure to disclose would constitute lack of good faith and fair dealing;3) Disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or4) The other party is entitled to know the fact because of a confidential or fiduciary relationship. Cure of a misrepresentation If, following a misrepresentation but before the deceived party has avoided the K, the facts are cured so as to be in accord w/ the facts that were previously misrepresented, then the K will no longer be voidable by the deceived party.

Duress Duress is an improper threat that deprives a party from making a meaningful choice to contract. Improper threat Examples of improper threats include threats of a crime, a tort, or criminal prosecution, or the threat of pursuing a civil action (when made in bad faith). In addition, it is improper to threaten to breach a contract if doing so would violate the duty of good faith and fair dealing Deprivation of meaningful choice A person is deprived of meaningful choice only when he does NOT have a reasonable alternative to succumbing to the threat. Thus, with regard to the threat of a civil action, a person generally has the reasonable alternative of defending against the action. However, if the threat also involves the seizure of property in conjunction with the civil action, or causes the person to be unable to fulfill other contractual obligations, then the person may be deprived of a meaningful choice. EXAM NOTE: In assessing the effect of the threat, the test is a subjective one: Did the threat induce the persons assent?

Effect of duress on the K: When a partys agreement to enter into a contract is physically compelled by duress, such as the threat to inflict physical harm, the contract is void. In other instances when a party is induced to enter into a contract by duress, such as when the threat is a breach of the duty of good faith and fair dealing, the contract is voidable. Remedy available (damages) Generally, restitution damages are available to the party induced to enter a contract under duress.

Undue influence A party to a K who is a victim of undue influence can void the K. Undue influence is the unfair persuasion of a party to assent to a K. KEY: whether a party has been able to exercise free and competent judgment or whether the persuasion of the other party has seriously impaired that judgment. Usually arises when a party puts very intense sales pressure on another party who often seems weak minded or susceptible to high-pressure sales tactics. NOTE: When a confidential relationship between contracting parties is established, the burden of proving that the contract is fair may be placed upon the dominant party. The dominant party to the contract may also be held to a higher standard of disclosure than he would be in a contract between arms-length parties.

Incapacity Parties to a K must be competent (i.e., have the legal capacity to be held to contractual duties). Incompetency arises because of infancy, mental illness or defect, guardianship, intoxication, and corporate incapacity. The following people lack the capacity to K Minors (under age 18) and mentally ill Mentally ill two standards The person CANNOT understand the nature and consequences of his actions; OR, The person CANNOT act in a reasonable manner in relation to the transaction (if the other side knows this) Very intoxicated persons (if other side knows this) Standards Minors = blanket protection Intoxicated persons = depends on what other side knows or should know at time Mentally ill = intermediate level of protection What happens if you K with a person who lacks capacity? The contract is voidable, meaning the incapacitated party can disaffirm EXCEPTION: For necessities, the party without capacity must still pay fair value (not necessarily the contract price) Educational loans, insurance Ks NOTE: a party without capacity can ratify the deal by keeping the benefits of the K after capacity is obtained Very intoxicated persons Note: generally, the intoxicated party may be liable in quasi-contract for the fair value of the goods or services furnished.

DEFENSES TO K ENFORCEMENT BASED ON WHAT K SAYS

A party to a contract can assert that the nature of the agreement or the manner in which it was arrived at should prevent its enforcement.

Illegality Illegal Ks are unenforceable. But, a K entered in furtherance of an illegal act (that is not itself illegal) will still be enforced. Typically, the law will just leave parties where they stand, but there is a modern trend towards allowing less-guilty parties to recover restitution. Effect of illegality Illegal transactions are not recognized or enforceable, restitution is not awarded for consideration, and no remedy is available for partial performance. EXCEPTIONS:1) Ignorance When one party is justifiably ignorant of the facts that make the contract illegal, that party may recover if the other party to the contract acted with knowledge of the illegality.2) Party lacks illegal purpose If only one party has an illegal purpose, then the other party can recover if he did not know of the illegal purpose, OR if he knew of the illegal purpose but did NOT facilitate that purpose, AND the purpose does NOT involve serious moral turpitude. (EXP) A seller of gambling equipment can recover the price, as long as he did not become involved in illegal gambling using the equipment. This is true even if the seller knows of the illegal purpose.3) Divisible contracts Some contracts can be easily separated into legal and illegal parts so that recovery is available on the legal part(s) only.4) Licensing violation When a party fails to comply with a licensing, registration, or similar requirement and, thus, is prohibited from performing an act, the other partys promise made in consideration for the performance of the prohibited act or a promise to perform that act is unenforceable under public-policy grounds if the requirement has a regulatory (e.g., health, safety), rather than economic (e.g., revenue-raising) purpose, AND public policy for the requirement clearly outweighs the interest in enforcing the promise.5) Restitution A party to an illegal contract not only cannot enforce the contract, but also is not entitled to restitution with respect to a performance rendered. Exception - not in pari delicto When the parties are equally at fault (in pari delicto), neither party is entitled to restitution for a performance rendered. But, if the parties are NOT in pari delicto, the less guilty party may be able to recover restitutionary damages. Exception - withdrawal A party to an illegal contract who withdraws from the transaction before the improper purpose has been achieved may be entitled to restitution for a performance that the party has rendered when the party has not engaged in serious misconduct.

Public policy Contracts against public policy will not be enforced. Look for an exculpatory agreement that exempts intention or reckless conduct from liability, a covenant not to compete without a reasonable need or reasonable time and place limits, or restrains marriage.

Unconscionability A court may modify or refuse to enforce a K or part of a K on the grounds that it is unconscionable. A K is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would have agreed to it. The K or part of K at issue must have been offensive at the time it was made. Unconscionability may also be applied to prevent unfair surprise. This is a question of law. Two kinds of unconscionability:i. Procedural a defect in the bargaining process itself, such as a hidden term (surprise) OR an absence of meaningful choice (no other contracting option)ii. Substantive a rip-off in some term of the contractno reasonable person would agree to it.

DEFENSE BASED ON THE FORM OF THE AGREEMENT

Statute of fraudsUnder the statute of frauds, certain agreements must be, if not actually in writing, then at least evidenced by writing, in order to be enforceable. The basic idea is to prevent false claims by an unethical plaintiff that there was an oral agreement when, in reality, there was no such agreement. WRITING REQUIRED Contracts that fall within the Statute of Frauds are unenforceable unless they are evidenced by a writing. The writing must:i. Be signed by the party to be charged (i.e., the person against whom enforcement is sought); andii. Contain the essential elements of the deal. The writing does NOT need to be formal (i.e., receipts or correspondence can serve as memoranda). The essential elements may be in more than one writing ONLY IF one of the writings references the other(s). The writing does NOT need to be delivered to the party trying to enforce the contract. Even if it is lost or destroyed, it still operates to satisfy the Statute of Frauds, and its prior existence can be proved by oral evidence. EXAM NOTE: Note that a memorandum sufficient to satisfy the Statute of Frauds does NOT need to be written at the time a promise is made. The memorandum also does NOT have to be addressed to the promisee to be enforceable by the promisee. TYPES OF CONTRACTS WITHIN THE STATUTE OF FRAUDS MSOUR Marriage - A contract made upon consideration of marriage; Suretyship - A contract to answer for the debt or duty of another; One year - A contract that CANNOT be performed within one year from its making; UCC - Under the UCC, a contract for the sale of goods for a price of $500 or more; and Real property contract - A contract for the sale of an interest in real property.

Marriage Provision Any agreement in consideration of marriage is within the Statute of Frauds, except the promises by each to marry the other (i.e., the marriage contract itself). A prenuptial agreement is the paradigm of an agreement made in consideration of marriage that is subject to the Statute of Frauds. A promise made in consideration of marriage does not become enforceable merely because the marriage has taken place in reliance on it. EXCEPTION: Additional part performance or action in reliance (promissory estoppel) may make such a promise enforceable even in absence of writing.

Suretyship Provision Suretyship is a three-party contract, wherein one party (the surety) promises a second party (the obligee) that the surety will be responsible for any debt of a third party (the principal) resulting from the principals failure to pay as agreed. A suretyship induces the second party to extend credit to the third party. A promise to answer for the debt of another must generally be in writing to be enforceable EXCEPTIONS: Indemnity contracts An indemnity contract (i.e., a promise to reimburse for monetary loss) does NOT fall within the Statute of Frauds as a suretyship provision. Main purpose exception If the main purpose of the surety in agreeing to pay the debt of the principal is for the suretys own economic advantage, rather than for the principals benefit, then the contract does NOT fall within the Statute of Frauds, and an oral promise by the surety is enforceable. One-Year Provision to be interpreted VERY NARROWLY ask is there no possible way that the K could be performed within one year? Contracts that CANNOT be performed within one year due to the constraints of the terms of the agreement MUST be in writing. The year starts the day after the contract is made. It is the time that the contract is made that is important, not the length of performance. The fact that a contract is not completed within one year does NOT mean that it is voidable under the Statute of Frauds. For the Statute to apply, the actual terms of the contract must make it impossible for performance to be completed within one year. EXCEPTION full performance Full performance will generally take the contract out of the Statute of Frauds. QUALIFICATION: While part performance would NOT take the contract out of the Statute of Frauds, restitution would be available to the party who performed.

UCC - sale of goods for $500 or more EXAM NOTE: The UCC Statute of Frauds requirements and exceptions for goods when the price is at least $500 are frequently tested on the MBE. Sufficiency of the writing When the price of goods is at least $500, the UCC requires a memorandum of the sale that:i. Indicates that a contract has been made;ii. Identifies the parties;iii. Contains a quantity term; andiv. Is signed by the party to be charged. NOTE: The memorandum needs to be signed ONLY by the party being sued; it does NOT need to be signed by both parties. Type of writing required To satisfy the Statute of Frauds, the above terms must be in writing, but that writing need NOT be an actual contract. It doesnt even need to be contained on one piece of papera series of correspondence between the parties may suffice. Mistake in writing A mistake in the memorandum or the omission of other terms does NOT destroy the memorandums validity. An omitted term CAN be proved by parol evidence. However, enforcement is limited to the quantity term actually stated in the memorandum. (MBE QUESTION) EXAM NOTE: Some states have raised the threshold amount from $500 to $5,000. On the exam, assume that the amount is $500, unless stated otherwise. EXCEPTIONSpecially manufactured goods - 2-201(3)(a) No writing is required if:i. The goods are to be specially manufactured for the buyer;ii. The goods are NOT suitable for sale to others; AND,iii. The seller has made either a substantial beginning of their manufacture OR commitments for their procurement.

Real Property Contracts A promise to transfer or receive any interest in real property is within the Statute of Frauds. The Statute does NOT apply to the conveyance itself (which is governed by a separate statute), but it DOES apply to a contract providing for the subsequent conveyance of an interest in real property. The Statute of Frauds also applies to a promise to create an interest in real property, the assignment of a right to purchase real property, an option contract for the sale of an interest in real property, and a promise to give a mortgage or other lien as security. While leases and easements, as property interests, are generally subject to the Statute of Frauds, a lease or easement for one year or less is usually NOT within the ambit of the Statute. In addition, licenses and assignments of mortgages are typically NOT within the Statute. EXCEPTION: Part performance Even if an oral contract for the transfer of an interest in real property is NOT enforceable at the time it is made, subsequent acts by either party that show the existence of the contract may make it enforceable, even without a memorandum. Such acts include: Payment of all or part of the purchase price; Possession by the purchaser; or Substantial improvement of the property by the purchaser. NOTE: Most jurisdictions require at least two of the above three acts to establish sufficient part performance.

Miscellaneous SOF problems Agency law: do you need a signed writing to authorize an agent to form a K that is in SOF world? YES. This is known as the equal dignity rule. Modification: Suppose you have a deal that falls within the SOF, and the SOF requirements are met. Now the parties want to modify the deal. Must the modification also satisfy the SOF? NOT AUTOMATICALLY only if modification is within the ambit of the SOF. It does not matter that the initial deal fell under the SOF.

PERFORMANCE

Four big topics1) Parol-evidence rule2) Warranties3) Conditions4) Excuse of performance obligations

The parol evidence rule

The parol evidence rule generally prevents a party to a written contract from presenting prior extrinsic evidence that contradicts the terms of the contract as written. The rule is concerned with whether any of the earlier oral or written terms are part of the parties contract, even though they are absent from the parties written agreement.

STEP ONE: Determine what the agreement entails. The first step is to determine whether the parties writing is integrated, meaning that the parties intended it to be their final agreement. The parol evidence rule applies only to a document that is an integration. If the document is determined NOT to be an integration (i.e., not to be the final expression of the parties agreement), such as a preliminary negotiation document or tentative draft agreement, then the parol evidence rule will NOT apply.STEP TWO: If the writing is an integration, then you need to decide whether it completely expresses all of the terms of the parties agreement. Complete integration: K expresses all terms of the agreement Partial integration: there is a writing that sets forth the parties agreement about some terms, but not all terms. When this is the case, parties CAN introduce supplementary extrinsic evidence (oral or written) of other terms as long as the evidence is consistent with the writing, but NOT if the evidence contradicts the terms of the writing.

How to determine total, partial, or no integration: Level of detail If the written contract appeared to be detailed, then a court would likely conclude that it was final and totally integrated. Look for a merger clause Likely to be completely integrated if it has an explicit integration or merger clause, which usually said something like: This contract is the final and complete expression of the parties agreement and supersedes all prior contracts, agreements, understandings, negotiations, assurances, guarantees, or statements. UCC rule (much more lenient) Presumes that a written K is only a partial integration of the parties agreement Therefore, court will allow in any outside terms UNLESS a court concludes that they certainly would have been included in the written contract. NOTE: most of the time it is really difficult to determine natural omissionlook to industry norms to see if the disputed term certainly would have been included in writing.

When the parol evidence rule is inapplicableKEY: The parol evidence rule does NOT apply to communications that occur after the execution of the written contract; it applies ONLY to agreements reached before OR contemporaneously with the execution of the written contract.

PE rule does NOT bar evidence relevant to a defense against K formation (duress, mistake, fraud, etc.) Even if a writing is completely integrated, a party can introduce evidence of a second separate deal. Even if a writing is completely integrated, a party can introduce evidence of a prior communication that is designed to interpret an ambiguous term in the final agreement. Parol evidence may also be admitted to prove a condition precedent to the existence of the contract. The parol evidence rule does not apply to evidence of agreements between the parties subsequent to execution of the writing.

Parol evidence and the UCC RuleTrade Usage and Course of Dealings or Performance

2-202 Even if the terms of a written K for the sale of goods appear to be unambiguous, a party may explain or supplement the terms by evidence of trade usage or course of dealings or performance Course of performance - 1-103(a) A course of performance is a sequence of conduct that is relevant to understanding an agreement between the parties if:1) The agreement involves repeated occasions for performance by a party; AND,2) The other party accepts performance WITHOUT objection AND with knowledge of the course of performance. A course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance. Course of dealing - 1-103(b) A course of dealing is a sequence of conduct concerning previous transactions between the parties that can reasonably establish a common basis of understanding for interpreting their conduct. Trade usage - 1-103(c) A usage of trade is any practice or method of dealing in the particular business or industry that is practiced with such regularity so as to justify an expectation that it will be practiced in the instant case.1-103(e) If the express contract terms cannot be reasonably reconciled with the course of performance, course of dealing, or trade usage, priority is given as follows: (1) express terms prevail over all others, (2) course of performance prevails over course of dealing and trade usage, and (3) course of dealing prevails over trade usage.

Warranties

A warranty is a promise about a term of the contract that explicitly shifts risk to the party making the promise.

There are three warranty issues that arise in the UCC universe:

(1) Express warranties A promise that affirms or describes the goods and that itself is part of the basis of the bargain. EXCEPTION: sellers opinion Such a statement is NOT an express warranty when it is merely the sellers opinion. The use of a sample or model good creates an express warranty that the goods sold will be like the sample. An express warranty can be made subsequent to the K for sale Although this would modify the original agreement, under the UCC, no consideration is needed to make a modification enforceable NOTE: disclaimer clauses that conflict with express warranties are ignored.(2) Implied warranty of merchantability A warranty of merchantability is implied whenever the seller is a merchant. To be merchantable, goods MUST be fit for their ordinary purpose AND pass without objection in the trade under the contract description. NOTE: A breach of this warranty MUST have been present at the time of the sale. Unless the circumstances indicate otherwise, the warranty can be disclaimed by use of as is, with all faults, or similar language that makes plain that there is no implied warranty. The disclaimer may be oral, but it MUST use the term merchantability AND must be conspicuous if in writing. LIMITATION: If the buyer, before entering into the contract, has examined the goods or a sample or model as fully as the buyer desires, or has refused to examine the goods, then there is no implied warranty with respect to defects that an examination ought to have revealed to the buyer.(3) Implied warranty of fitness for a particular purpose This warranty is triggered when a buyer relies on a sellers expertise to select a special type of good that will be used for a special purpose. The seller makes an implied warranty (unless disclaimed) that the goods will satisfy this special purpose. Note that the seller need not be a merchant for this implied warranty to apply. This warranty can be disclaimed by general language, but the disclaimer must be in writing and be conspicuous.

Conditions

A condition is a future and uncertain event that must take place before a partys contractual rights or obligations are created, destroyed, or enlarged. They can be express or implied.

Types of conditions(1) Express conditions Created by language in the contract (i.e. only if, provided that, etc.) MUST be satisfied strictly, unless the condition is somehow excused. Substantial performance will NOT suffice if theres substantial but not complete performance the non-breaching party does NOT have to perform at all. How are express conditions met? Depends on nature of the performance. Preferred approach: objective standard of satisfaction: if most people would be satisfied, then the condition is met. Contracts involving aesthetic taste, such as art or tutoring services, will measure whether any satisfaction conditions are met with a subjective standard. When a party in good faith determines that the work is not satisfactory, then that person is NOT liable on the K.(2) Implied conditions Deemed to be part of the contract because: The nature of the agreement suggests that the parties truly intended the condition but failed to expressly include it; OR, Because fairness requires including the condition to prevent an unjust result. The most common type of implied conditions are called constructive conditions of exchange and arise most frequently in construction and employment Ks A court will imply that the builder or employee must perform first (at least substantially) before the other sides performance (the payment of money) becomes due. NOTE: Only substantial performance is required to satisfy an implied condition. The party receiving the protection of the condition may waive the condition by words or conduct. A condition will also be waived if the other party wrongfully interferes or hinders the occurrence of the condition. This will be judged by a good-faith standard

Implied conditions, CCE, and UCC performance rules

A party to a K cannot recover until performance is tendered to the other party. When parties expressly agree to a condition, they are generally held strictly to that condition, meaning that there must be full compliance. However, with implied conditions or constructive conditions of exchange, courts permit less than full compliance with the constructive conditions. This doctrine is known as substantial performance.

Implied conditions and the CCE The constructive condition of exchange says that one partys performance is conditioned on the other sides performance. The constructive condition of exchange need not be satisfied perfectly. The doctrine of substantial performance provides that a party who substantially performs can recover on the K even though full performance has not been tendered. A party will satisfy the CCE if there is NOT a material breach QUALIFICATION: Substantial performance works to satisfy the CCE ONLY IF the failure is NOT willful. NOTE: Under the doctrine of prevention, a party must refrain from conduct that prevents or hinders the occurrence of a condition. If a K is clearly divisible, then it will be broken down into mini-Ks for the purpose of determining if there has been substantial performance. EXAM NOTE: Divisibility in a K can support an argument by one party that it has substantially performed something. A contract is divisible if the performances to be exchanged can be divided into corresponding pairs of part performances so that the parts of each pair are properly regarded as equivalents. The standard of determining whether performances can be considered agreed equivalents is flexible A court may find a K to be divisible based on considerations of fairness and the desire to avoid forfeiture Recovery in substantial performance scenarios In general, the party who substantially performed the K can recover the K price minus any amount that it will cost the other party to obtain complete performance as had been promised. Note: even if there is NO substantial performance, a party who performed to some degree and cannot recover in K can still potentially recover through restitution.

UCC Performance Rules***Highly tested*** The UCC requires perfect tender. In general, substantial performance will NOT suffice. EXCEPTIONS: Parties CAN contractually change the default rules to include discussion of substantial performance instead of perfect tender. Installment Ks do NOT have to satisfy perfect tender. Perfect tender perfect goods, perfect delivery - Where a transaction involves the sale of goods, the seller's performance must ordinarily strictly conform to the agreement, or the buyer may reject the items The seller is in breach of the contract if his tender is NOT perfect. Perfect tender and rejection of goods If sellers performance is NOT perfect, buyer can either:1. Retain some goods delivered and sue for damages; OR2. Reject some or all goods and sue for damages Revocation of acceptance the buyer MAY also revoke an acceptance of the goods (occurs when the goods seem OK and are accepted at delivery, BUT a defect is discovered within a reasonable time). IF seller fails to tender perfect goods AND time is left on the K OR the seller had reasonable grounds to believe that the buyer would accept a replacement, THEN the buyer MUST give the seller a chance to cure. The default method of delivery under the UCC is one delivery of the goods, but the UCC allows for installment contracts (agreement for delivery in separate lots). In this scenario, the buyer CAN reject a specific delivery that isnt perfect ONLY when there is a substantial impairment in the installment that CANNOT be cured. 2-612(2) allows a buyer to reject any non-conforming installment only if the non-conformity substantially impairs the value of that installment and cannot be cured. So, w/ respect to installment Ks, UCC departs from strict requirements of perfect tender and allows for substantial performance. Other issue w/ installment Ks when buyer receives a non-conforming installment and wants to use it as a basis to cancel the entire K NOTE: can only use the non-conformity of one installment as a basis to cancel the whole K if you can show that the defect in the single installment substantially impairs the value of the entire contract.

Common methods of delivery/tenderThe seller must tender the goods in accordance with the contract provisions OR in accordance with the UCC if the contract is silent on tender

Time of tender In the absence of a specific contract provision, the goods must be tendered within a reasonable time after the contract is made. Manner of tender The goods are to be delivered in one delivery, UNLESS otherwise provided in the K, OR the circumstances give either party a right to make or demand delivery in lots (as when a party would clearly have no room to store the goods if delivered all at once). Place of tender Unless otherwise provided in the K, the place of tender will be the sellers place of business (or residence, if the seller has no place of business), UNLESS the goods are identified AND the parties know that they are at some other location, in which case that location will be the place of tender. Methods of tender Sellers place of business If the goods are tendered at the sellers place of business, then the seller must place the goods at the disposition of the buyer AND give the buyer notice, if notice is necessary to enable the buyer to take delivery. Shipment contract If the contract is a shipment contract (often identified by the words F.O.B. (free on board) sellers place of business), then the seller must:1. Deliver the goods to the carrier and make a proper contract for their shipment (i.e., fragile goods should be handled w/ care);2. Obtain and deliver any document necessary for the buyer to obtain possession of the goods (i.e., bill of lading); AND 3. Give the buyer notice that the goods have been shipped. NOTE: A K that requires the seller to ship goods to the buyer by a third-party carrier is either a shipment K or a destination K. When the K is otherwise silent, a shipment K is presumed when the K requires shipment by a third-party carrier. Destination contract If the contract is a destination contract (often identified by the words F.O.B. (free on board) buyers place of business), then the seller must: 1. Deliver the goods to a particular place (specified in the K); AND,2. Tender them there by holding the goods at the buyers disposition AND giving the buyer notice.

Buyers obligations When a conforming tender is made, the buyer is obligated to accept and pay the price when the K. Rejection amounts to a breach of contract. Unless otherwise specified in the K, when goods are shipped by carrier, payment is due from the buyer at the moment the buyer receives the goods. In non-carrier cases, payment is due upon tender of delivery by the seller.

Buyers right to inspect A buyer has a right to inspect goods that are tendered, delivered, or identified to the K for sale, unless the K provides otherwise. A buyers right to inspect is a condition to payment. An inspection may occur at any reasonable time and place and in any reasonable manner, even when the goods are held under reservation. Unless otherwise agreed, the buyer is NOT entitled to inspect the goods before payment of the price if the K (i) provides for delivery C.O.D. OR (ii) is on other terms that, under the applicable course of performance, course of dealing, or usage of trade are interpreted to preclude inspection before payment.

Risk of Loss SCENARIO there is a goods K followed by damage or destruction of the goods before the buyer receives them. Who bears the loss? Risk of loss framework1. Check whether the parties have already dealt with the risk problem in the K. If so, their agreement will control.2. If not, ask whether either party has breached. If so, the breaching party bears the risk of loss. NOTE: This is true EVEN IF the breach is totally unrelated to the delivery damage.3. If there is no breach, and goods are being shipped, then ask what type of delivery K it was: If it was a shipment K, then the risk of loss during delivery rests with the buyer. If it was a destination K, then the risk of loss during delivery rests with the seller.4. In all other cases, ask whether the seller is a merchant.

If YES risk of loss stays w/ seller until buyer receives the goods.

If NO risk of loss moves to buyer when seller tenders the goods.

Material breach and substantial performance If a condition does not occur (and is not excused), then the party whose performance due under the K is contingent on the condition need NOT perform. Here, the duty to perform has been DISCHARGED by the non-occurrence of the condition. If a promise is NOT performed, then the promisee has a claim for breach. In most cases, the breach by one party of its promise to perform will not only be a breach of promise, but also the failure of a condition.

A claim of breach raises critical questions:1. How do courts determine whether there has been a breach?2. Assuming there has been a breach, is it a material breach?3. If there has been a material breach, what is the effect on the parties remaining duties under the contract?

Review of breach A promisor commits a breach when, without justification or excuse, he fails to tender a promised performance when performance is due or tenders a defective performance. However, not all breaches are equal (the severity of the breach affects the promisees duties and rights under the contract).

a. If A commits a material and total breach, then B may withhold his own performance, terminate the K, and bring a claim of damages for breach.b. If A commits a material but not total breach, then B may suspend his own performance, await As cure of the defect in performance, and seek damages for any loss suffered as a result.c. If A commits a non-material breach (substantially performs), then B must tender his own performance BUT CAN seek damages for any loss suffered as a consequence of the promisors defective performance.

NOTE: A material failure of performance justifies suspension whereas a total breach justifies termination of the K.

When is a failure of performance material? Courts consider five circumstances in deciding this:1. Extent to which the injured party will be deprived of the benefit he reasonably expected;2. Extent to which the injured party can be adequately compensated for the loss of that benefit;3. Extent to which the breaching party will suffer forfeiture;4. Likelihood that the breaching party will cure her failure; AND5. Extent to which the breaching party meets the standards of good faith and fair dealing.

The concept of cure A party can avoid committing a total breach by curing a serious defect in performance before it gets to the point of becoming a total breach. It is NOT a total breach if performance is still NOT due under the K AND there is time to cure. While the breaching party may have an opportunity to cure its defective performance, there is a time after which an uncured material failure discharges the other partys remaining duties under the K. When is there time to cure? Courts consider a number of factors in deciding this:1. Extent to which the injured party will be deprived of the benefit he reasonably expected;2. Extent to which the injured party can be adequately compensated for the loss of that benefit;3. Extent to which the breaching party will suffer forfeiture;4. Likelihood that the breaching party will cure her failure; AND5. Extent to which the breaching party meets the standards of good faith and fair dealing.6. Whether K calls for single exchange or series of exchanges so that a continuing relationship is contemplated (injured party might be expected to give more time to cure if the latter is the case)7. The nature of the behavior of the non-performing party (is he a total prick or are there reasons for non-performance)

EXCUSES

There is a clear contract, but something nevertheless has happened to prevent one side from having to perform on the K. The promisor may not be liable for nonperformance if some supervening event or change in circumstances arises after the formation of the contract that discharges the promisors duty to perform.

Impossibility and impracticability A partys duty to perform can be dismissed by impracticability. When is the defense of impracticability available?1) Performance becomes illegal after the contract is made;2) The specific subject matter of the contract (e.g., the goods) is destroyed;3) In a personal services K, the performing party to the contract dies OR becomes incapacitated; OR4) Performance becomes impracticable. NOTE: If the K is to perform services that can be delegated, it is NOT discharged by the death or incapacity of the party who was to perform the services.

Elements of Impracticability1) An unforeseeable event has occurred;2) Non-occurrence of the event was a basic assumption on which the K was made; AND3) The party seeking discharge is NOT at fault.

Other Events Sufficient for Discharge of a Contract Unforeseen natural disasters, wars, trade and military embargoes, strikes, and local crop failures have all been found sufficient to excuse performance. NOTE: non-extraordinary increases in the cost of performance are NOT sufficient to excuse performance. Note: impracticability is NOT available merely when a party has made a bad deal and will have to pay more, even a lot more, than originally contemplated. It requires some totally unexpected occurrence that completely upsets the parties expectations. Generally, the cost increase must be extreme. Assumption of the Risk If a party assumes the risk of an event happening that makes performance impracticable, then the defense of impracticability will NOT apply. Partial Impracticability When impracticability does not prevent a seller from delivering some of the goods, the goods actually produced must be apportioned among all of the buyers with whom the seller has contracted. The buyer, however, may refuse to accept and may cancel the contract. Failure of a Particular Source of Supply If the K provided that a specific source of supply be used, and that source of supply fails, performance is discharged. This is so even when other sources are readily available. Courts will excuse performance when the parties have specifically identified the source in the K. Failure of Agreed-Upon Method of Transportation If, without the fault of either party, the agreed-upon delivery facilities or method of transportation or payment become unavailable OR commercially impracticable, any commercially reasonable delivery method may be tendered AND must be accepted.

Death after a contract Dying does NOT normally excuse liability on a K that has been made. The estate will normally be on the hook for any contractual obligations. ASK: is there something special about the person performing on the K, such that it makes no sense to continue if they die?

Frustration of purpose Performance can still occur, but something has happened to undermine the entire reason for the creation of the K. NOTE: this is VERY rare, and the event must be extreme and not previously allocated to one of the parties The frustration must be so severe that it is not within the assumed risks inherent under the K.

Modification or cancellation Both parties to a deal CAN agree to just walk away from a K as long as there is some performance remaining from each side.

Accord and satisfaction The parties to an earlier contract agree that performance will be satisfied instead by the completion of a different performance. Accord: the new performance Satisfaction: the excusing of the initial performance obligation. NOTE: If the accord is NOT performed, the other party can sue on either the original obligation or the new promise.

Novation This arises when BOTH parties agree that a substitute person will take over the contractual obligations. If there is a valid novation, then the original promisor will be excused from performance (so, in event of breach, original promisor CANNOT be sued).

REMEDIES

Anticipatory repudiation What are your remedy options when the other side says hes not going to perform on the contract (repudiates) before the performance is due?

Anticipatory repudiation under the CL The doctrine of anticipatory repudiation is applicable when a promisor repudiates a promise before the time for performance arises or elapses. The repudiation must be clear and unequivocal (as opposed to mere insecurity) AND may be by acts or words Non-breaching partys options Repudiation excuses the occurrence of any condition that would otherwise prevent the repudiating partys duty from being absolute.

Upon repudiation, the promisee can:1) Treat the repudiation as a breach AND sue immediately for damages NOTE: if you have completed the entire performance and are only waiting for payment you cannot sue early

OR

2) Ignore the repudiation AND demand performance. If the repudiation is ignored, then continued performance by the promisee MUST be suspended IF the performance would increase the damages of the promisor.

LIMITATION: In a situation in which the date of performance has NOT passed and the only performance left is payment, the aggrieved party MUST wait until performance is due before filing suit (to allow the potentially breaching party to change his mind and perform). In other words, in this limited situation, anticipatory breach is inapplicable; the aggrieved party must wait for actual breach before filing suit. (EXP) A hires B to build an office building for $100 million by October 31. On July 31, B has completed part of the project and A tells B that A is broke and is not going to be able to pay B the $100 million as promised. Nevertheless, B continues to perform, and, in fact, completes the office building earlier than required by the K on August 31. If B thereafter decides to sue A, B MUST wait until October 31 to do so.

Retraction of repudiation Repudiation may be retracted until such time as the promisee (i) acts in reliance on the repudiation (by materially changing its position), (ii) signifies acceptance of the repudiation, OR (iii) files a lawsuit for breach of contract. Notice of the retraction MUST be sufficient enough to allow for the performance of the promisees obligations.

Anticipatory Repudiation Under the UCC Occurs when there has been an unequivocal refusal of the buyer or seller to perform, OR when a party creating reasonable grounds for insecurity fails to provide adequate assurances within 30 days of demand for assurances. The repudiation CAN be retracted IF the other party has NOT canceled the contract OR materially changed position. Repudiation allows the non-repudiating party to resort to any remedy given by the contract or code. Prospective Inability to Perform A partys expectations of performance may be diminished by an event that occurs after the contract was made.

EXAM NOTE: Be reluctant to excuse a party from performing solely on the ground that the party does not expect counter-performance to be given.

Under the UCC, either party can demand assurance of performance IF there are reasonable grounds for insecurity about the other partys ability or willingness to perform. Once such assurances are requested, performance may be suspended until they are provided. Failure to give adequate assurances within a reasonable time, not exceeding 30 days, can be treated as repudiation. Retraction - even then, the repudiating party can still retract his repudiation until his next performance is due, unless the other party has already materially changed his position OR otherwise indicated that he considers the repudiation final. NOTE: Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered are determined according to commercial standards. Effect of acceptance The acceptance of any improper delivery or payment does NOT preclude an aggrieved party from demanding adequate assurance of future performance.

DAMAGES FOR BREACH OF CONTRACT Remedies are meant to compensate the nonbreaching party for actual economic losses. Actual economic losses are calculated depending on how the K was formed (e.g., through consideration or promissory estoppel) AND what type of K it was (e.g., sale of goods versus services)

Expectation damages Expectation damages are intended to put the injured party in the same position as if the K had been performed. They are those damages that arise naturally and obviously from the breach and are normally measured by the market value of the promised performance less the consideration promised by the non-breaching party. Thus, to calculate expectation damages, subtract the contract price from the market value of performance. The market value of performance is whatever it reasonably costs to get the performance that was promised in the contract. Expectation damages MUST be foreseeable AND the non-breaching party MUST be able to prove them with reasonable certainty.

EXAM NOTE: Common fact patterns here include brand new or unproven business ventures, which have trouble proving lost profits from a consistent sales track record.

Recovery in specific kinds of Ks

Construction Ks

The general measure of damages for a contractors failure to begin or to complete the building or other structure is: The difference between the contract price and the cost of construction by another builder, PLUS compensation for delay in completion of the construction.

The general measure of damages for the owners failure to pay the contract price, in whole or in part, is: The profits that the builder would have earned, PLUS any costs incurred by the builder, LESS the amount of any payments made by the owner to the contractor AND any materials purchased by the contractor that are used by the contractor on another job.

Sale of goods Ks Damages for failing to deliver goods are measured by: The difference between the K price and the market value of the goods (OR the cost of cover). Real estate Ks Damages for failing to perform a real estate sales K also are measured by the difference between the K price and the market value.

Formula - the general expectation formula can be computed as follows:

Expectation Damages = loss in value + other loss cost avoided loss avoided

Loss in value is the difference between the performance that the non-breaching party should have received under the K and what was actually received, if anything. Other loss includes consequential and incidental damages, if any. The cost avoided is the additional costs that the non-breaching party can avoid by rightfully discontinuing performance under the K as a result of the other partys breach. Loss avoided is the beneficial effect of the breach due to the non-breaching partys ability to salvage or reallocate resources that otherwise would have been devoted to performing under the K. NOTE: Loss avoided is subtracted ONLY IF the savings results from the injured party not having to perform rather than from some unrelated event.

Partial performance A partially performing party can generally recover for work performed, PLUS expectation damages for the work not yet performed. (EXP) B agrees to paint As house for $500, which covers $400 in supplies and labor and $100 in profit. After B paints half of the house and incurs $200 in costs, A breaches. RESULT: B can recover the $200 for costs already incurred AND the $100 of profit, but NOT the remaining $200 for costs not yet incurred. If at the time of a breach the only remaining duties of performance are (i) those of the party in breach AND (ii) for the payment of money in installments not related to one another, THEN breach by nonperformance as to less than the whole, whether or not accompanied or followed by a repudiation, does NOT give rise to a claim for damages for total breach and is a partial breach of contract only. (EXP) A borrows $10,000 from B. The loan is to be paid back in monthly installments with interest over a one-year period of time. A fails to make the first installment payment and tells B that he will be unable to make the other payments as well. B has a claim for partial breach of the contract but CANNOT sue for a total breach of the contract. NOTE: Lenders circumvent this rule by including in the loan agreement an acceleration clause that causes the entire loan to become due upon the failure by the borrower to timely make an installment payment.

Defective performanceThe purpose is to place the plaintiff in as good a position as if the defendant had performed the contract according to its specifications.

Construction contracts In construction contracts, damages for defective or incomplete construction are measured by the cost of repair or completion. The general measure of damages for failing to perform a construction contract is the difference between the contract price and the cost of construction by another builder.

Sale of goods contracts Damages for nonconformity with the contract generally are measured by the difference between the value of the goods as warranted and the actual value of the tendered nonconforming goods.

Waste Economic waste occurs when the amount of damages awarded is disproportional to any economic benefit or utility gained as a result of the award. If the award of expectation damages would result in economic waste, then courts may instead, at their discretion, award damages equal to diminution in value. (EXP) Landowner grants Mining Company a five-year license to remove coal from his property. In return for the license, Mining Company agreed to restore the property to its original state at the end of the five-year period. After five years, Mining Company refused to restore the land. The restoration work would cost $29,000, but, if completed, would result in only a $300 increase in the propertys value. The court may elect to award only $300 in damages, instead of the usual $29,000 expectation award. EXCEPTION: HOWEVER, if the breach is willful, AND only completion of the K will give the nonbreaching party the benefit of its bargain, then a court may award expectation damages EVEN IF that award would result in economic waste. NOTE: the breaching party must normally have acted in an innocent and unintentional manner for DMV damages.

Consequential Damages Consequential damages are reasonably foreseeable losses to a nonbreaching party that go beyond expectation damages, such as loss of profits. Damages are recoverable if they were: The natural and probable consequences of breach; In the contemplation of the parties at the time the contract was made; OR Otherwise foreseeable. To recover damages, a plaintiff MUST prove the dollar amount of the damages with reasonable certainty. Courts are hesitant to award damages for lost profits, as they are difficult to prove. When lost profits are considered too speculative, such as with a new venture, courts often limit a partys recovery to reliance damages (i.e., reasonable expenditures made in connection with the contract). Two types General damages the type of losses that almost anyone would suffer from a breach. These include incidental damages. Incidental damages may be awarded to the non-breaching party as compensation for commercially reasonable expenses incurred as a result of the other party's breach. In the sale of goods, such damages may include the cost of inspecting, transporting, caring for, or maintaining custody over goods. Consequential damages losses that are unique or special to this plaintiff

Mitigating Damages The doctrine of mitigation states that a breached-against party MUST take reasonable steps to reduce damages from breach. The non-breaching party is held to a standard of reasonable conduct in preventing loss. If you refuse to mitigate, the law will calculate damages as if you did mitigate. NOTE: the defendant bears the burden of proving a mitigation failure. Mitigation efforts MUST be reasonably similar to the original K. NOTE: reasonable expenses incurred as a result of efforts to mitigate damages can be recovered, EVEN IF the mitigation attempt was unsuccessful.

Special problems that might appear on MBE Lost volume profits If the paying party breaches, then normally the selling party needs to mitigate by reselling the goods or services to another person. HOWEVER, if the seller is a retailer who sells this type of product all the time, the seller can try to argue for LVP. Volume sellers (those sellers who have an unlimited supply of the goods and who make a profit per item) cannot be made whole through resale at the K price. Although they can resell the goods at the same price as the K price, they have lost the opportunity to sell them in the first instance when the seller breached or repudiated. They are, therefore, entitled to those lost profits. To qualify as a lost volume seller The seller needs to show only that it could have supplied both the breaching purchaser and the resale purchaser with the goods. Measure of lost profit - UCC 2-708(2) The list price minus the cost to the dealer or manufacturer.

Incomplete performance If the paying party breaches in a partially completed building K, the builder CANNOT continue to work on the job. How to calculate recovery:

EXPECTATION DAMAGES = K PRICE AMT ALREADY PAID AMT THAT WOULD BE NEEDED TO FINISH THE JOB

OTHER MONEY DAMAGES AND SPECIFIC PERFORMANCE

Reliance damages

ASK: What loss has the plaintiff incurred that would never have taken place but for the breached K?

Reliance damages may be recovered if a non-breaching party incurs expenses in reasonable reliance upon the promise that the other party would perform. NOTE: Unlike with a restitutionary recovery, with reliance damages, there is NO requirement that the defendant benefit from the plaintiffs expenditures. The injured party can choose to pursue reliance damages instead of expectation damages, but a party CANNOT recover both reliance and expectation damages. LIMITATIONS: Reliance damages are mitigated by any losses that the plaintiff would have sustained if the K had been performed. In addition, reliance damages generally may NOT exceed the full contract price.

Restitution damages

GOAL: Give the plaintiff an amount equal to the economic benefit that the plaintiff has conferred on the defendant

Benefit conferred pursuant to a K When a defendant is unjustly enriched, restitution generally allows the plaintiff to recover on the benefit conferred by the plaintiff upon the defendant (rather than on the harm suffered by the plaintiff). Generally, this benefit may be measured by either: The reasonable value of the defendant obtaining that benefit from another source; OR, The increase in the defendants wealth from having received that benefit (e.g., the increase in value of property owned by the defendant). Recovery by nonbreaching party Instead of seeking to enforce a contract, a nonbreaching party may seek restitution for any benefit conferred on the breaching party by way of part performance or reliance. Restitution is available whether the breach is by non-performance or by repudiation HOWEVER, in the case of non-performance, restitution is available ONLY IF the breach gives rise to a claim for damages for total breach Restitution can result in a recovery for the nonbreaching party in a losing contract, even if recovery exceeds the contract price. LIMITATION: The nonbreaching party CANNOT seek restitution if he has performed all of his contractual duties and the only performance that remains due from the other party is the payment of a definite sum of money. (EXP) A corporation contracts with a landscaper to design and install the landscaping for its new headquarters at a price of $75,000. When the landscaper completes the work, the corporation refuses to pay the landscaper. The fair market value of landscapers work to the corporation is $80,000. However, because the only performance that remains due from the corporation is the payment of a definite sum of money, the landscaper cannot seek restitution. Instead, landscaper is limited to expectation damages of $75,000. Recovery by breaching party If a plaintiff has not substantially performed and is in breach of the contract, the plaintiff is not permitted to recover under the contract. EXCEPTIONS: If the defendant has benefited from the plaintiffs performance, the plaintiff can generally recover in restitution for the benefit conferred on the defendant less the defendants damages for the breach. Most courts hold that a plaintiff in breach is permitted to recover in restitution ONLY IF her breach is NOT willful. If the breach is willful, then she CANNOT recover anything in restitution UNLESS the nonbreaching party has accepted or agreed to accept the substitute performance. In general, the breaching partys recovery is limited to a ratable portion of the contract price.

Liquidated damages Liquidated damages are an amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. A provision for liquidated damages is enforceable and NOT construed as a penalty if the amount of damages stipulated in the contract is reasonable in relation to either the actual damages suffered OR the damages that might be anticipated at the time the contract was made. When the contract contains a liquidated damages clause, the party seeking to repudiate that clause must show that the agreed-to damage is so exorbitant as to be in the nature of a penalty.

Three-prong test to validate a liquidated damages clause1) The parties intended to agree in advance to the settlement of damages that might arise from the breach;2) The amount of liquidated damages was reasonable at the time of contracting, bearing some relation to the damages that might be sustained; AND,3) Actual damages would be uncertain in amount and difficult to prove.

Uncertainty of actual damages When determining whether actual damages would be uncertain in amount and difficult to prove, courts look to the time of contracting, NOT to the time of breach. Additionally, the damages contained in a liquidated damages clause MUST be for a specific amount for a specific breach; the provision may NOT merely serve as a threat to secure performance or as a means to punish nonperformance. Although exculpatory language in the contract stating that the liquidated damages provision is not a penalty does not control, it should be given some weight.

Punitive damages Punitive damages are very rarely available in contract actions Some statutes apply them for the purpose of punishing fraud, violation of fiduciary duty, acts of bad faith, and for deterrence According to the Restatement, punitive damages are NOT recoverable unless the conduct constituting the breach is also a tort for which punitive damages [can be recovered].

Benefit conferred independent of a contract A person who confers a benefit on another in the absence of any contractual relationship, such as a doctor who happens upon an accident and renders emergency medical services to a victim, may be able to recover in restitution to the extent that retention of the benefit would result in unjust enrichment of the recipient.

Specific performance

When damages are an inadequate remedy, the non-breaching party may pursue the equitable remedy of specific performance.

How to determine adequacy of legal remedy: Court will consider a variety of factors, including: The difficulty of proving damages with reasonable certainty The hardship to the defendant Balance of the equities Practicality of enforcement Mutuality of agreement NOTE: specific performance is presumptively available for real estate transactions. Fact patterns involving land or other unique goods damages are more obviously insufficient to put the n