CONTRACTS OUTLINE SUMMER 2011

Overview: 1. Applicable Law 2. Contract Formation 3. Statute of Frauds 4. Contract Terms 5. Performance 6. Excuses for Non-Performance 7. Remedies 8. Third-Party Problems

APPLICABLE LAW
I. Law to apply on MBE a. UCC Article 2 Applies to sale of goods (movable personal property) i. Parties need not be merchants, but particular provisions require they be merchants. ii. For sales involving both goods and service, the more significant aspect is determinative. b. Common law Applies to all other Ks Law to apply on NYBE a. UCC Article 2 Applies to sale of goods b. Article 2A Applies to lease of goods i. E.g., leasing a convertible (but apply the common law on MBE). c. Common Law Applies to all other Ks

II.

** CONTRACT FORMATION
I. Note on analysis Formation Methodology a. Look first for an agreement (an offer that's been accepted), then see if the agreement is legallyenforceable (are there any defenses against formation?) i. offer ever made? ii. offer terminated? iii. was the offer accepted? Vocabulary a. Contract A LEGALLY ENFORCABLE agreement (look for an agreement then see if legally enforceable). i. Express Contract An oral or written contract created by the parties WORDS ii. Implied-in-fact Contract A contract created by the parties CONDUCT b. Quasi-Contract i. Definition A quasi-contract is an equitable remedy that applies whenever contract law yields an unfair
(inequitable) result.

II.

ii. Rule Quasi-contract is not limited by contract rules, but is governed by equitable principles. iii. Remedy The REASONABLE VALUE of the benefit conferred; NOT the contract price, NOT the cost
to confer the benefit

iv. Purpose Quasi-contract is designed to protect against unjust enrichment. v. Quasi-contract is the remedy of last resort. vi. E.g. If Ben Affleck works for Sony but does not get paid, and the agreement is invalid b/c it does not
comply with SOF, he can argue for reasonable value under a quasi K theory. c. Bilateral Contract: offer can be accepted in any reasonable way (flexible). d. Unilateral Contract: offer can only be accepted by performing (rigid). i. Typical examples: 1. offer that says it can be accepted only by performing 2. reward, contest, prize

III.

First Stage of Agreement Process Is There an Offer? a. General Definition An offer is a manifestation of an intention to be bound. b. Advertisements

i. Rule An advertisement is usually not an offer (problem: unlimited number of people could accept). ii. Exception If the advertisement specifies a quantity, then it is specific enough to be an offer. iii. E.g., IHOP breakfast special $2.49 vs. first hundred people on Sunday $2.49. c. Indefiniteness i. Rule generally, an offer must be sufficiently definite to constitute an offer (under common law, an
open price term will invalidate the offer).

ii. Exception: If there is no price mentioned, court will read in an open price term except in real property sales. iii. Exception: Requirements Contracts [Art. 2] 1. Requirements contracts are sufficiently definite even though there is no specific quantity
mentioned b/c they are objectively quantifiable. (However, as many as I want Ks are invalid as an illusory promise.) a. But not Sudden Increases An increase in requirements that is out of line w/ the buyers prior requirements is NOT permitted under a requirements contract.

IV.

Second Stage of Agreement Process Was the Offer Terminated Before Acceptance (Is the Offer Still Open)? a. General Rule An offer cannot be accepted if it has terminated b. Four ways to terminate: i. Lapse 1. Rule An offer lapses after a stated term or after a reasonable time has passed. 2. E.g., offeror may impose a one month deadline or 6 months may pass. ii. Revocation
1. Rule An offer may generally be revoked any time before acceptance. a. Direct Revocation The offeror unambiguously indicates directly to the offeree that he has changed his mind. b. **Indirect Revocation: (i) The offeror engages in conduct that unambiguously indicates hes changed his mind AND (ii) the offeree is aware of the conduct. Rule: If offeror unintentionally leaves an offer remains open, and sells to another without the offeree gaining knowledge, the offeree may still accept the offer. a. E.g., I offer to sell my Honda to Eva, but sell to Teri the next day without Evas knowledge, Eva can still accept my offer. But once Teri tells Eva, the offer is indirectly revoked and Eva can no longer accept. There are 4 cases in which an offer cannot be revoked: a. Option: promise to keep the offer open. i. Recognized under both Common Law and UCC. ii. MBE: option requires consideration. iii. NYBE: Option does not require consideration provided it is written and signed. b. Foreseeable reliance before acceptance i. Very rare b/c most instances of reliance are unforeseeable. Only case to look for is where a contractor relies on a subcontractors bid in computing its own bid for a project. c. Beginning performance on a unilateral K i. MBE: beginning performance makes the offer irrevocable. 1. However, mere preparation for the project is not acceptance. ii. NYBE: Offer is not irrevocable and may be revoked until project is complete. d. Firm Offer (Article 2): in a sale of goods, if a merchant promises in a signed writing to keep an offer open, the offer is irrevocable. i. "merchant" - almost every kind of business person ii. "signed" - broadly defined (initials, symbol, letterhead) iii. Timing: A firm can last no longer than 3 months, even if its terms call for longer. Always look for option first b/c it has no maximum time limit. If no time is mentioned, it stays open for a reasonable time, not exceeding 3 months. Effective Upon Receipt a. Rule Revocation of an offer is effective only on receipt; mailbox rule doesnt apply to revocation.

2.

3.

4.

iii. Rejection 1. Rule An offer terminates when the offeree rejects the offer. 2. Counteroffer a. Rule A counteroffer operates as a rejection, but mere bargaining or questioning does not. b. E.g., If Edie offers to sell her house to Nina for $500K, and Nina responds, I will only pay $460K, Nina cannot later accept Eddies original offer. Her retort was a counter offer and a simultaneous rejection. But if Nina responded, Will you take $460K?, she can still accept. 3. Conditional Acceptance a. Rule A conditional acceptance operates as a rejection. b. E.g., Disney sends actor an offer to start in a film, and Actor responds I accept on the condition that I get top billing. The Actors words are a rejection and a counter offer. 4. ** Acceptance Varying Offer ("battle of the forms") a. Common Law i. Mirror image rule applies (acceptance must mirror the offer): 1. Any variation in the terms constitutes a rejection and counter offer. ii. Article 2 1. A variation in the terms constitutes an acceptance 2. New/changed terms become part of the contract only if: a. Both parties are merchants, b. The term is not a material change (i.e. one likely to cause hardship or surprise for the offeror), i. Note: if the term is "customary in the industry" not "material" change c. The offeror does not object w/in a reasonable time, and d. The acceptance of the offer is not conditioned on acceptance of the new/changed terms. *(On exam, offerees additional terms almost never become part of the contract.)* iv. Death of Either Party Before Acceptance: The death of either party before acceptance terminates a REVOCABLE offer. V.

Third Stage of Agreement Process Has the Offer Been Accepted?

a. Language of Offer Controls Manner of Acceptance i. Rule Offeror can control the manner of acceptance, and acceptance by other means will be invalid. 1. E.g., If offeror says report for work if you accept, and offeree says I accept, no acceptance. ii. However, if the terms do not indicate that performance is the only manner of acceptance, we presume the offer may be accepted by any reasonable means [bilateral]. 1. E.g., I need the Widgets shipped w/in 24 hours, followed by phone call assuring I will ship w/in 24 hours, is a valid acceptance. iii. Exception: Offeror cannot make offerees silence the condition of acceptance. Start of Performance as Acceptance i. Bilateral Contract Start of performance is acceptance of an offer to enter into a bilateral contract and carries with it an implied promise to finish the job. 1. E.g., If A says to B I will give you $10 to paint my house, and B begins painting, B has accepted, and must finish. ii. Unilateral Contract Start of performance does NOT qualify as an acceptance of an offer to enter into a unilateral contract (only full performance will do). 1. E.g., If A says to B I will give you $10 to paint my house, and you can only accept by painting, and B begins painting, B has not accepted until the work is complete, and he is not bound to finish the job. 2. Can offeror revoke after start of performance? a. MBE: No, offer is irrevocable. b. NYBE: Yes, can revoke, but offeree will recover in quasi K for reasonable value. Improper Performance as Acceptance i. Rule [Common Law] Improper performance usually operates as acceptance. 1. E.g., painting house wrong color in unilateral situation is an acceptance and a breach, ii. Accommodations [Art. 2 - Sale of Goods] Improper performance operates as acceptance and breach. 1. BUT, if the seller tells the buyer that it is sending the wrong goods as an accommodation, then there is no acceptance. It is simply a counteroffer that the buyer can accept or reject.

b.

c.

d.

Timing of Acceptance i. General rule Mailbox rule: Acceptance is effective when mailed, even if it gets lost. ii. Exceptions 1. Offer states otherwise a. E.g., Acceptance must be received by Jan 1 2. Irrevocable Offer a. E.g., if there is an option open, acceptance is only valid upon receipt. 3. Rejection Sent First a. Whichever letter gets there first wins the race. Capacity i. Minors, intoxicated people, mentally incompetent people lack capacity and have the right to dissafirm a K at their own option. The other party who has capacity must abide by their decision. ii. Implied Affirmation An incapacitated party can impliedly affirm a contract by retaining the benefit of the contract w/out complaint after gaining (or regaining) capacity. 1. D. lacked capacity at time of agreement 2. D. gained or regained capacity later on 3. D. kept benefit w/o complaint iii. Exception: 1. Necessaries An incapacitated party is liable for necessaries (e.g., food, shelter, clothing or medical care), BUT only on a quasi-contract basis for reasonable value Duress (including Economic Duress) i. Rule Both physical and economic duress are defenses to contract formation. 1. Elements of Economic Duress (very limited) a. A threat to break an existing contract unless the person gets a better deal b. The other party only agrees b/c he needs to get the first deal done c. There are no reasonable alternatives Misrepresentation/Non-Disclosure of a Material Fact i. Rule Even an honest, innocent misrepresentation OR non-disclosure will be a defense to contract formation, if it goes to a material fact. Ambiguity/misunderstanding of Term i. Rule If there is ambiguity over a term in the contract and neither party knows or has reason to know about the ambiguity, there is a defense to contract formation. 1. E.g., B and S say the same thing, but mean different things (on different wavelengths - Peerless) ii. Exception If there is an ambiguity over a term in the contract and one party knows or has reason to know about the ambiguity, then the innocent partys meaning controls. Mistake about a Material Fact i. Mutual Mistake 1. Definition A shared belief that is not in accord w/ the facts 2. Rule A mutual mistake about a MATERIAL FACT is a defense to contract formation, but mistake as to value is not a mistake. ii. Unilateral Mistake 1. Definition 1 parties mistake about a material fact that is not shared by the other party 2. Rule One partys mistake is NOT a defense to contract formation UNLESS the other party knew or had reason to know about the other partys mistaken belief. Lack of Consideration i. Definition Consideration is BARGAINED-for legal detriment/benefit. ii. Forms Consideration can take the form of a promise, performance, or forbearance iii. Past Consideration 1. MBE: Past consideration is NOT consideration at all b/c cannot BARGAIN for something that has already been done. 2. NYBE: Past consideration is binding if it is expressly stated in a signed writing and can be proven. iv. Adequacy of Consideration 1. Rule Adequacy of consideration is irrelevant unless nominal. v. Illusory Promise/Mutuality of Agreement 1. Rule: If both parties are not bound in some way, there is no consideration. a. E.g., Agreement to provide as many as I want vi. ** Pre-Existing Duty Rule and Contract Modification 1. Common Law

VI.

Is the Agreement Legally Enforceable? Defenses against Formation

a.

b.

c.

d.

e.

f.

g.

h.

MBE: Must have NEW consideration to modify a contract as between the parties (n/a to third parties). b. NYBE: You do NOT need new consideration to modify a contract as long as the modification is in a signed writing. 2. Article 2: a. Consideration is not required, but parties must show good faith (no hold up game). vii. Part Payment for Promise to Forgive Rest of Disputed Debt 1. MBE Part payment is not consideration for a promise to forgive the rest of a debt that is DUE and UNDISPUTED, but if it is not due or disputed, no consideration is necessary. 2. NYBE You dont need consideration if the promise to forgive the balance of an undisputed debt is in a signed writing viii. Written Promise to Pay Debt, Collection of Which is Barred by Statute of Limitations 1. Unanimous Rule A written promise to pay a debt, collection of which is barred by the statute of limitations, is enforceable even w/out consideration. ix. Promissory Estoppel as a substitute for consideration (a.k.a. "reliance") 1. Rule If there is no consideration, promissory estoppel can serve as a SUBSTITUTE for consideration, provided there is: 2. A promise; and 3. Foreseeable, detrimental reliance on the promise (even w/o consideration) 4. E.g., Tenant repaints apartment after LL verbally promises he will renew lease. Public Policy i. Illegality look for illegal subject matter. ii. Covenant Not to Compete [big on NY Bar] 1. Rule A court will INVALIDATE or NARROW a covenant not to compete that operates as an unreasonable restraint on trade. Consider: a. Scope of Covenant (both time and geography) b. Need for Covenant (uniqueness) iii. Exculpatory Clause 1. Rule An exculpatory clause can eliminate liability for negligence, but not for gross negligence or intentional torts. Unconscionability (very unusual for court to invalidate for this) i. Need both: 1. Substantive Unconscionability The TERMS of the agreement are unfair (e.g., indentured servitude) 2. Procedural Unconscionability The PROCESS by which the agreement was reached was unfair (e.g., fine print, legalese, unequal bargaining power)

a.

STATUTE OF FRAUDS
Bar Exam Tip: In a Statute of Frauds problem, ask: 1. What contracts require a writing? 2. Do you have a satisfactory writing? 3. If you dont have a writing, is there an exception?

I.

What contracts require a writing? a. The Transfer of an Interest in Real Estate i. Rule TRANSFER of ANY interests in REAL ESTATE is covered by the Statute of Frauds and
must be in writing (e.g., sales, easements, leases >1) 1. Statutory Exception for Leases under 1 Year No writing is required for leases of 1 year or less. 2. "Part Performance" of Real Estate Contracts Exception a. Rule Part performance eliminates the need for a writing b. Requirements Part performance requires 2 of the following 3: i. Some payment ii. Buyer makes permanent improvements iii. Buyer is in possession of the property

ii. Equal Dignities Rule: Authority to act as an agent in a real estate transaction must be written. b. Service Contracts That, by their terms, Cannot be Fully Performed within 1 Year i. Rule A service contract that cannot be fully performed w/in 1 year from the date of the agreement
must be in writing to satisfy the Statute of Frauds. 1. Year long period starts on the day of the contract. 2. Exception: Full Performance for Contracts That Cannot be Fully Performed within 1 Year a. Rule Full performance of contracts that cannot be fully performed w/in 1 year eliminates the need for a writing ii. Lifetime Contracts 1. MBE Lifetime contracts do not fall w/ in the Statute of Frauds so they can be oral. 2. NY Lifetime contracts fall w/in the Statute of Frauds so they must be in writing. c. Sale of Goods for $500 or more [Article 2] i. Rule A sale of goods for $500 or more must be in writing to satisfy the Statute of Frauds ii. Exceptions 1. Acceptance or Payment a. Rule No writing needed for goods that the buyer has already accepted OR paid for (but not the rest of the goods). Exception applies ONLY to the goods accepted or paid for. NOT to the whole contract. 2. Custom-Made Goods a. Rule No writing needed for custom-made goods not suitable for sale to others b. time - when seller has started to make them (we know there's a contract b/c why else would seller make these goods for this buyer. so, don't need writing to protect seller) d. A Lease of Goods Where the Lease Payments Total $1,000 or More [Article 2A] [NY only] i. Rule A lease of goods where the lease payments total $1K or more must be in writing to satisfy the Statute of Frauds e. Suretyship (a.k.a. Back-up Promise) i. Rule A promise to satisfy the debt of another must in writing to satisfy the Statute of Frauds 1. MBE Exception: If the person who agrees to the surety entered it for his own

benefit, the SOF does NOT apply. a. E.g., House tells Home Depot he will provide surety for Painters debt if Painter doesnt pay. b. NYBE: This exception does not exist. f. A Promise by an Estate Representative to Use Her Own Funds to Pay Estate Expenses (rare) g. A Promise Given in Consideration of Marriage i. Rule Pre-nups and post-nups must in writing, but promises to marry do not. h. Contract Modification i. Rule: Must satisfy the SOF if the K, as modified, fits into a SOF category. ii. Agreements not to verbally modify the writing: 1. Art 2: Recognized. Parties can impose their own SOF for modifications. 2. Common Law: Not recognized. No writing required. i. Miscellaneous Provisions of NY Statute of Frauds The following types of contracts must also be in
writing to be enforceable: i. Assignment of insurance policy ii. Promise to pay a discharged debt iii. Agreement to pay a finders fee or brokers commission, except to an attorney, auctioneer or real estate agent

II.

Do You Have a Satisfactory Writing? a. Sale of Goods [Art. 2] i. Rule The writing must contain a quantity term AND be signed by the D (i.e. the party asserting
the Statute of Frauds defense). Price not required. 1. Same writing could be a one way street. b. Lease of Goods [2A] i. Rule The writing must:

c. III.

State its a lease Include the number of items leased Include the term & rental payments Be signed by the D All Other Contract Within Statute of Frauds Prongs i. Rule The writing must contain ALL material terms (who and what) AND be signed by the D

1. 2. 3. 4.

If You Dont Have a Writing, Is there an Exception? a. Judicial Admissions No writing needed for judicial admissions in a pleading, in testimony or in response to
discovery i. if somebody admits in testimony that there's a K --> no need to protect thru SOF b. *** Merchants Confirmatory Memo i. Rule A merchant can use its OWN signed writings to satisfy the Statute of Frauds against the other party to the contract if: 1. Both parties are merchants; 2. The writing claims there is a prior oral agreement (w/ quantity term); and 3. The recipient doesnt object in writing w/in 10 days

CONTRACT TERMS
I. Words of Both Parties
a. ** Parol Evidence Rule i. Rule The PER keeps out evidence of a PRIOR agreement (either oral or written) that contradicts a LATER writing. 1. Rule n/a to Subsequent Developments: The PER has nothing to do w/ what happens AFTER an agreement is reduced to writing (the rules of modification apply). a. may have consideration problem (to modify) b. may have SOF problem (if contract, as modified, falls into SOF) c. BUT - no PER problem - PER looks BACKWARDS ii. Exceptions to the Parol Evidence Rule (i.e., where the parol evidence gets in) 1. To Correct a Clerical Error (e.g., a typo, transposing numbers, etc.) 2. To Establish a Defense against Formation of an Agreement (e.g. lack of capacity) 3. To Explain Vague or Ambiguous Term in Written Contract 4. To Supplement a Partially-Integrated Writing a. Partially-Integrated = A final statement of the terms included, but not a complete statement of all the terms agreed to. b. Merger Clause (This contract is limited to the terms herein) i. Common Law Merger clause is treated as evidence that the writing is COMPLETE on its face and CANNOT BE SUPPLEMENTED. Everything that happened before is "merged" into the later writing. ii. Article 2 & 2A Nothing short of a merger clause will keep out extrinsic evidence. General Rule Conduct can be used to explain terms or fill in gaps in the following 3 ways (from most to least important): i. Course of Performance what the parties have done under this contract ii. Course of Dealing what parties did under earlier contracts w/ one another iii. Usage of Trade what others in the trade do under similar contracts Express Warranties i. Definition An express warranty is a statement of fact, promises, descriptions, use of samples or models; does not include mere opinions ii. Rule A seller is liable to a buyer for breach of any express warranty the seller makes. iii. Basis of Bargain To be actionable, an express warranty must be a "basis of the bargain". If a buyer could have relied on the warranty, its a basis of the bargain. Implied Warranty of Merchantability i. Definition The implied warranty of merchantability states that goods are fit for their ordinary purpose

II.

Conduct
a.

III.

Sellers Warranties of Quality in a Sale of Goods under Article 2

a.

b.

c.

ii. Requirements Seller is a merchant who "deals in goods of the kind" [means: has specialized knowledge about the particular goods involved] Implied Warranty of Fitness for a Particular Purpose i. Definition The implied warranty of fitness for a particular purpose states that goods are fit for the buyers special purpose. ii. Requirements 1. Buyer has a special purpose in mind 2. Buyer is relying on the seller to select suitable goods 3. Seller knows both of these facts (note seller does NOT have to be a merchant at all) Rule Express and implied warranties apply to leases of goods in NY i. Exception - Finance Leases Bank does NOT make any implied warranties. Any implied warranties are made only by the party selling to the Bank. Disclaimer i. Rule A seller can disclaim implied warranties, but NOT express warranties using the magic words: as is or with all faults. Seller can disclaim w/out magic words if the disclaimer is CONSPICUOUS and, for IWM, specifically states the words merchantability. Limiting Buyers Remedies i. Rule A seller can limit a buyers remedies for breach of ANY warranty (express or implied) if the limitation is not unconscionable. 1. Consumer Goods Exception With consumer goods, limiting a buyers remedies for PERSONAL INJURY is presumed to be unconscionable. 2. If a limited remedy fails of its essential purpose, the remedy provisions of Art. 2 apply. Hierarchy to Determine Who Bears the Risk of Loss i. Agreement of parties controls look for express language ii. Breach any party who breaches bears the ROL, even if the loss is unrelated to the breach iii. **Delivery by Common Carrier (e.g., UPS, FedEx, Red Ball Freight) 1. Rule Risk shifts to the buyer when the seller completes its delivery obligation 2. Two Types of Contracts a. Shipment Contract ROL shifts to buyer only after seller (i) gets the goods to a common carrier, (ii) makes reasonable delivery arrangements; and (iii) notifies the buyer. b. Destination Contract ROL shifts to buyer once seller gets the goods to a specific destination. 3. FOB ("free on board") a. If city where seller is located shipment contract b. If anywhere else destination contract iv. Non-Carrier Cases (e.g., buyer is to pick up, the seller is to deliver) 1. Rule The answer depends on whether the seller is a merchant a. If the seller is a merchant seller bears the risk of loss until the buyer takes possession of the goods b. If the seller is a non-merchant seller bears the risk of loss until the seller tenders the goods (i.e. makes available) v. Risk of Loss in Leases of Goods (Article 2A) - NY Only 1. Rule The lessor bears the risk of loss, EXCEPT in a finance lease.

IV.

Sellers Warranties of Quality if a Lease of Goods under Article 2A [NY only]

a.

V.

Limitations on Warranty Liability in Sales and Leases of Goods

a.

b.

VI.

Risk of Loss in Sales of Goods

a.

PERFORMANCE OF CONTRACT
I. Performance of Contracts for the Sale of Goods (*Article 2*) a. Perfect Tender Rule i. Rule If tender is not perfect, buyer may reject the goods. b. Option to Cure i. Rule A seller who fails to make perfect tender may have an OPTION TO CURE. It usually
depends on whether the time for the sellers performance has expired.

1. If time for performance has expired, seller has option to cure.

2. If time for performance has EXPIRED: NO option to cure unless buyer has been flexible
about what goods it would accept in the past

c. Installment Contracts i. Definition An installment sales contract REQUIRES or AUTHORIZES the seller to deliver the
goods in SEPARATE INSTALLMENTS.

ii. No Perfect Tender Rule The Perfect Tender Rule does NOT apply to an installment sales contract,
**so it is much more difficult for a buyer to reject. [policy: assumes seller will cure in the course of ongoing performance] iii. Rule: B has the right to reject an installment only if there is SUBSTANTIAL IMPAIRMENT in the installment that cannot be cured. iv. B has the right to reject the entire contract only if a defect in an installment SUBSTANTIALLY IMPAIRS the value of the whole contract. d. Acceptance of the Goods i. Implied Acceptance An implied acceptance occurs when the buyer keeps the goods after having an opportunity to inspect. Point Merely paying for goods is not an acceptance. Buyer must have a chance to inspect them first. Damages Once a buyer accepts goods, it is too late to reject them. a. ** However, a buyer who accepts non-conforming goods can still get damages. Bar Exam Tip If there is a huge spread b/t the time of receipt and the time of complaint, look for a question on implied acceptance. Examples a. I contracted to buy clothing from Fredericks of Hollywood. I paid for the goods before they arrived in Austin. Did I impliedly accept the goods by paying for them? i. No. Merely paying for goods is not an acceptance. Buyer must have a chance to inspect them first. b. The goods arrived at my home more than 2 months ago. Have I impliedly accepted them? i. Yes b/c you have had the goods for 2 months and never complained. Therefore, you have impliedly accepted the goods.

1. 2. 3. 4.

Revocation of Acceptance of the Goods 1. Rule Once a buyer accepts, the buyer cannot revoke acceptance a. Exception A buyer can revoke acceptance of goods only if (i) the non-conformity substantially impairs their value AND (ii) was difficult to discover (i.e. a latent defect). i. note: harder to revoke acceptance than it is to reject acceptance in first place 2. Bar Exam Tip Whether a buyer rejects goods OR revokes acceptance of goods - consequences are same. B can: a. return the goods to the seller, b. get her money back, and c. sue the seller for breach. 3. Examples a. Monk buys a mobile home on July 7 and moves in that day. On September 9, it rains for the first time. Monk then discovers hairline cracks in the roof. Can Monk reject the mobile home? i. No. By living in the mobile home for more than 2 months, Monk has impliedly accepted it. Therefore, it is too late for Monk to reject. b. Can Monk revoke his acceptance of the mobile home? i. Yes b/c hairline cracks (i) substantially impair the value of the mobile home AND (ii) the hairline cracks are difficult to discover (i.e. latent defect). Buyers Payment Obligation 1. Rule Checks are a fine form of payment, but a seller under Article 2 can insist on cash. If the seller does insist on cash, the buyer will have an additional reasonable time to get it. a. Buyer can pay by check, but seller can refuse it. If seller refuses, buyer has an additional reasonable time to get cash. 2. Example Seller contracts to sell her car to Buyer - contract requires payment by 5:00 pm. What if Buyer gives Seller a check at 5:00 pm and Seller refuses check? a. B. will have extra time to get cash even though contract deadline passed

Performance of Common Law Contracts

Rule Performance does NOT have to be perfect. SUBSTANTIAL PERFORMANCE is all that is required (i.e. cannot be a material breach). Examples 1. I contract w/ Martha Stewart to decorate my house. She finishes the job, except for one bathroom. Has Martha substantially performed her part of the bargain? a. Yes. Under the common law, perfection is not required (almost is good enough). 2. What if Martha quits after decorating only the foyer? a. That is a material breach so Martha has not substantially performed (major screw-up).

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CONTRACTS OUTLINE SUMMER 2007 EXCUSE OF NON-PERFORMANCE BASED ON LATER EVENTS

Other Partys Breach
General Idea The other partys breach MAY provide an excuse for non-performance. --> whether it is an excuse or not - depends on nature of contract Sale of Goods 1. Rule If tender is not perfect, the buyer can: OPTIONS a. accept all the goods, or b. reject all the goods, or c. accept any commercial units and reject the rest. d. DAMAGES - whichever option the buyer chooses, she can still get damages from the seller. Example Seller contracts to sell 50 green t-shirts to Buyer. Seller delivers 49 green t-shirts and 1 yellow t-shirt. What can Buyer do? a. Buyer has three options: (1) accept all of the shirts, including the yellow one; (2) reject all of the shirts, including the green ones; or (3) accept some of the shirts and reject the rest. Regardless of which option the buyer chooses, the buyer can still get damages from the seller b/c the seller has breached the contract by not making perfect tender.

2.

Common Law Contracts 1. Rule a. DAMAGES: Damages are available for ANY breach of contract, b. ** EXCUSE: BUT, only a material breach excuses the injured party from having to perform. 2. Divisible Contract a. Definition - payment made on a per-unit basis b. Rule - can recover contract price on any unit for which have substantially performed c. Requirement Contract must be EXPRESSLY stated in per-unit basis d. Apply substantial performance test on a per unit basis 3. Examples a. I hire Martha Stewart to decorate my house. She finishes, except for one bathroom. What are my rights against Martha? i. She obviously breached the contract so you can get damages from her, but you are not excused from paying the contract price b/c Martha substantially performed. b. What if Martha quits after she decorates only the foyer? i. That is a material breach. You not only get damages, but you are also excused from having to pay her the contract price. However, Martha can still recover in quasi-contract for the reasonable value of the benefit conferred. c. Martha contracts to decorate 10 identical cabanas for $90K. She decorates 3 cabanas, then quits. Can Martha recover under the contract for painting the 3 cabanas? i. No b/c only completing 30% of the work is a material breach. Martha cannot recover on the contract, but she can still recover in quasi-contract for the reasonable value of the benefit conferred. d. What if the contract provides for payment of $9K per cabana instead of $90K for all 10? i. This is a divisible contract so you do substantial performance on a per unit basis. Here, Martha will get 3 x $9K (i.e. the contract price for the three cabanas she actually decorated).

Other Partys Anticipatory Repudiation

General Idea The other partys anticipatory repudiation may provide an excuse for non-performance (UNLESS the repudiation is retracted) Anticipatory Repudiation: before time to perform arises vs. Breach: does not perform at time supposed to perform Consequences - An anticipatory repudiation operates just like a material breach (if not retracted)

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Retraction of Anticipatory Repudiation An anticipatory repudiation can be retracted to the extent that the other party has not relied on it note: material breach CANNOT be retracted General Point There can be anticipatory repudiation through conduct. Examples 1. Martha contracts to decorate my house for $50K, payable on completion. After Martha starts the job, I tell her that I am not going to pay her. What are Marthas rights? a. For the most part, an anticipatory repudiation operates just like a material breach. Martha can stop work and sue me for damages. 2. What if I tell Martha the next day that Ive changed my mind and will pay her as promised? a. That is ok. I can retract my anticipatory repudiation as long as Martha has not relied on it (e.g., by taking another job). 3. Martha contracts to decorate my house in exchange for a unique painting I own. While Martha is decorating my house, I sell the painting. Is Martha excused from performing? a. Yes. I have repudiated the contract by my conduct. It is just like I told Martha that I am not going to pay here when she is done b/c I no longer have the painting to pay her with.

Later Agreement
General Idea A later agreement b/t the parties may provide an excuse for non-performance 1.) Rescission 1. Idea Rescission is an agreement to cancel the contract 2. Point For a rescission to be effective, each party must have some performance remaining 3. Examples a. Opie contracts to mow Helen Crumps lawn. Before Opie mows the lawn, Opie and Helen agree to rescind the contract. If Opie does not perform, can Helen sue him for breach of contract? 1. No. Opie is excuse by the rescission agreement. b. Same facts, except that Opie and Helen agree to rescind the contract after Opie has finished moving her lawn. Is Helens obligation to pay excused by their rescission agreement? 1. No b/c for a rescission to be effective, each party must have some performance remaining, otherwise there wouldnt be consideration for the rescission agreement. 2.) Modification 1. Idea A modification is an agreement replacing an existing contract w/ a new contract 2. Point A modification agreement takes effect immediately (at the time it is entered into) 3. Example Mike borrows $2K from Susan and promises to repay her w/ interest. Later, she agrees to discharge the debt now if Mike promises to fix her hot tub. Mike makes the promise. What are Susans rights if Mike does not fix her hot tub as promised? a. She can only sue Mike on the hot tub deal b/c Mike duty to pay her $2K was excused by the modification which took effect immediately. 3.) Accord & Satisfaction 1. Accord An agreement to accept a stated performance in FUTURE satisfaction of an existing duty 2. Satisfaction Performance of an accord. 3. Modification v. Accord: See whether the agreement takes effect now (modification - wipes out existing obligation immediately) or then (accord - wipes out existing obligation only when accord is satisfied) 4. Examples a. Same facts, except they agree that if Mike fixes Susans hot tub, then she will discharge the debt. What are Susans rights if Mike does not fix her hot tub as promised? i. Then Susan can sue him either on the hot tub deal or on the original debt. That is b/c the original debt is not excused until the accord is satisfied. An accord is an agreement that is going to wipe out an existing obligation in the future when that agreement is satisfied. b. How can you tell if Mike and Susan have a modification or an accord? See whether the agreement takes effect now (modification - wipes out existing immediately) or then (accord - wipes out existing only when satisfied)

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4.) Novation 1. Idea A novation is an agreement substituting a new party for an existing one. a. key: the other side must agree to the substitution b. vs. mere "delegation of duties" - no consent from the other side; that side can still sue original party bound to original agreement 2. Examples a. Opie contracts to mow Helens lawn. Later, Opie, Goober and Helen agree that Goober will mow it instead. If Goober does not mow the lawn, can Helen sue Opie for breach of contract? i. No. Opie is excused by the novation. The key is that Helen agreed to the substitution and thus has no more rights against Opie. b. What if Opie and Goober agree that Goober will mow the lawn w/out Helens consent? i. Here, all you have is a delegation of duties, not a novation. Helen can still sue Opie b/c she never gave her consent and thus there was no novation.

Impossibility or Impracticability
General Rule A later unforeseen event that renders the sellers performance "impossible" (common law) or "impracticable" (Article 2) may provide the seller w/ an excuse for non-performance. [sellers' excuses] Bar Exam Tip Impossibility/impracticability rarely excuses the seller on the MBE. Destruction of Something Necessary for Performance 1. Common Law a. Rule Destruction of something necessary for performance provides the seller w/ an excuse for nonperformance under the contract. b. Example Caldwell leases his hall to Taylor for a concert on June 1. The hall burns down on May 26. Taylor sues Caldwell for breach of contract. Is Caldwell excused from performing? i. Yes b/c destruction of the concert hall makes his performance impossible. 2. Article 2 a. Rule Destruction of something necessary for performance provides the seller w/ an excuse for nonperformance under the contract b. **Trick Questions i. Were the goods identified to this particular contract? If not, seller still has to perform ii. Did the buyer bear the risk of loss? - A SELLER who bore risk of loss when goods were damaged or destroyed is excused by impracticability, but a BUYER who bore the risk of loss is not. 1. Impracticability is seller's excuse - will not help buyer. Buyer can still pay the money - his performance isn't impossible or impracticable. iii. Are goods fungible? c. Examples i. B contracts to buy 500 computers from S. After the contract and before delivery, fire destroys one of Ss warehouses. Thousands of computers are destroyed. Is S excused from performing? 1. Only if the computers that were destroyed had been "identified" to this particular contract (e.g., tagged w/ buyers name or roped off for sale to this particular buyer). ii. Rihanna contracts to sell car to Beyonce for $100,000. Before the risk of loss had passed to Beyonce, the car is destroyed by a fire. Is Rihanna excused from performing? 1. Yes - R bore the risk of loss, but she's excused by a later unforeseen event. iii. Same facts, except that car is destroyed after the risk of loss had passed to Beyonce. Is Beyonce excused from paying for car? 1. No - a buyer is not excused by doctrine of impracticability. His performance isn't impossible/impracticable b/c he can still pay the money. iv. Jerry contracts to sell his Vette for $26K. After Jerry tenders the car, but before Buyer takes it, a flood destroys the car. Under the risk of loss rules, must Buyer pay for the car? 1. Yes. Jerry is not a merchant in this hypo so the risk of loss passed to the buyer when Jerry tendered the car. Buyer is not excused just b/c the goods were destroyed (Buyer can still pay the money - his performance isn't impossible or impracticable). v. S contracts to sell B 100 bales of hay for $800. After the contract, but before the risk of loss has passed to B, fire destroys Ss hay. Is Ss performance excused by the fire? No. Unlike Jerrys

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Corvette, hay is fungible and is easily replaced. Seller must go out and get the hay elsewhere to fill the contract. Death or Incapacity of Person Essential for Performance 1. Rule Unless there is some evidence that the person who died or became incapacitated has SPECIAL SKILLS or was special to the contract, then death or incapacity does not provide an excuse b/c the duty can simply be delegated to someone else. 2. Examples a. Ida hires Van Gogh to paint her portrait. If Van gets hurt and cannot paint, is he liable? 1. No b/c artists have unique talents. His incapacity provides him w/ an excuse b. What if Ida hired Van to paint the exterior of her barn rather than her portrait? 1. Anyone can paint the exterior of a barn. Therefore, Van is not excused b/c he could have delegated his duty to someone else. c. If Van paints the portrait, but Ida dies, is her estate liable for the contract price? 1. Yes b/c in theory anyone can pay money. The money can just as easily come form Idas estate. Supervening Government Regulation or Order 1. Rule A supervening government regulation or order that bars partys performance of contract provides an excuse 2. Example Roseanne contracts to perform as a featured dancer at Sugars, an Austin nudie bar. The City Council learns of this and outlaws nude dancing. Is Roseanne excused from performing? a. Yes. Frustration of (Primary) Purpose (BUYERS Remedy) 1. Rule If the elements of frustration of purpose are met, buyer is excused from performing 2. Elements a. At time contract was entered into, seller KNEW buyer had special purpose b. A later unforeseen event thwarts buyers purpose 3. Point Mere lack of profitability is not enough to rise to the level of frustration of purpose 4. Examples a. Phoebe rents Joes apartment for Thanksgiving for its great view of the Macys Thanksgiving Day parade. Joe knows why Phoebe is renting his place. The parade is cancelled 2 days before Thanksgiving. Is Phoebes performance excused by frustration of purpose? i. Yes. At the time the contract was entered into, Joe knew that Phoebe had a special purpose and a later unforeseen event thwarts that purpose. b. Phoebe agrees to rent Joes store. Joe knows that Phoebes purpose for renting the store is to operate a coffee shop. A month later, Starbucks announces that it is opening a coffee shop right next door. Is Phoebes performance excused by frustration of purpose? i. No. Phoebe can still open a coffee shop there. Mere lack of profitability does not rise to the level of frustration of purpose.

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*** Failure of an Express Condition

Express Condition 1. General Definition An express condition is contract language that does not create an obligation, but limits obligations created by other contract language (e.g., if, so long as, when, provided, on condition that and unless) 2. Point Strict compliance is required. If express condition not COMPLETELY satisfied --> performance excused. 3. Point - Every condition protects somebody. Note - the protected party does not have to use the excuse (can go through with the contract if they want to). 4. Examples a. B contracts to buy Ss house for $300K on the condition that it is appraised for at least $300K. The house is appraised for $299,500. Is Bs performance excused? 1. Yes. Express conditions must be completely satisfied. If not, then performance is excused. Almost is not good enough. b. ** Can B sue S for breach of contract b/c the house did not appraise for at least $300K? 1. No. Express conditions dont create obligations. They only limit obligations that are otherwise created by a contract. Satisfaction Clauses 1. Rule Apply a REASONABLE person standard UNLESS the contract deals w/ art or matters of personal taste 2. Examples a. Xena contracts to have her house painted and pay $2K if shes satisfied with the work. What if everyone likes the work except Xena? 1. The general rule is that "satisfaction" means "reasonable satisfaction". If a reasonable person would have been satisfied w/ the paint job of the house, then Xena has to pay. b. What if Xena contracts w/ an artist to paint her portrait instead? 1. If satisfaction deals w/ art or matters of personal taste, then all we are about is whether Xena herself is satisfied (i.e. a subjective standard). Conditions Precedent/Concurrent/Subsequent 1. Bar Exam Tip You are most likely to encounter a condition precedent. 2. Example Tiger Words agrees to let Derek Jeter use his golf clubs for $100/week a. "If it rains on July 4 . . . " 1. This is a condition precedent b/c something has to happen before Tiger is obligated to let Derek use the clubs. b. "As long as Derek Jeter keeps the clubs in good repair . . . " 1. This is a condition current b/c the condition runs along side performance. As long as Derek keeps the clubs in good repair, then for that duration of time, Tiger is obligated to let Derek use the clubs. c. "Until the Mets win the World Series . . . " 1. This is a condition subsequent b/c performance comes first and then the occurrence of the condition cuts it off. Excusing the Condition 1. Idea The occurrence of the condition may be excused by the later action (or inaction) of the person who is protected by the condition. 2. Failure to Cooperate a. Rule Failure to cooperate (action or inaction) may excuse the occurrence of a condition. b. Example B agrees to buy Ss house for $300K provided that B gets a $200K mortgage at 5% of less (express condition). B makes no effort to get a mortgage. B refuses to buy the house. When S sues B for breach of contract, B asserts that the condition wasnt satisfied: he didnt get a mortgage. Who wins? i. Seller wins. Buyers failure to cooperate and look for a mortgage excuses the occurrence of the condition. Buyer forfeits protection of condition - unconditionally bound to buy house. 3. Waiver a. Definition A waiver is a voluntary relinquishment of a right b. Rule A waiver may excuse the occurrence of a condition c. *Point A waiver can be retracted to the extent that the other party has not relied. d. Example Owners duty to make monthly payments is conditioned on Builders providing an architects certificate for the work. Owner tells Builder he will pay w/out a certificate. The next month, Builder does not provide a certificate. Owner refuses to pay. What result?

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i. Owner has to pay. Owner waived the protection of the condition. However, Owner can insist on the certificate in the future, just not on this occasion.

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CONTRACTS OUTLINE SUMMER 2007 ***REMEDIES

Note: usual remedy --> damages (money) Non-Monetary (In Rem) Remedies (the thing itself)
Specific Performance 1. Rule Specific performance is an EQUITABLE REMEDY that is available **ONLY IF monetary damages are clearly inadequate to compensate the injury party.** 2. Turns on Subject Matter Whether specific performance is available depends on the subject matter of the contract. a. Real property specific performance generally available (b/c real property is unique; no monetary substitute for real property) b. Article 2 specific performance only available if (1) goods are unique (e.g., art, antiques, custom goods) or (2) buyer cannot cover (i.e. obtain similar goods in the marketplace) c. Service contracts specific performance is not available (will not force party to work against his will), but injunctions are 3. Bar Exam Tip Specific performance is almost never the right answer on the MBE. 4. Examples a. Thoreau contracts to sell Walden Pond to Proust. Later, Thoreau has second thoughts & refuses to convey Walden Pond. Proust wants Walden Pond, not money. What result? i. Proust gets the pond b/c real property is viewed as unique. There is no monetary substitute for real property. b. Seller contracts to sell a rug to Buyer. Seller breaches. Buyer sues for the rug (not money). i. Under Article 2, specific performance is available only if the goods are unique and the buyer cannot cover (i.e. get similar goods in the marketplace). c. BarBri hires me to lecture. I breach. Can BarBri get specific performance? i. No. Specific performance is generally not available in service contracts. The court isnt going to force somebody to work b/c it smacks of slavery and the person probably wouldnt do a good job anyway if they were forced to work. d. BarBri hires me to lecture. I breach and go lecture for Denny Crains Bar Review. Can BarBri get an injunction barring me from lecturing for Denny Crains Bar Review? i. Yes. Courts are willing to bar an employee from working for a competitor so BarBri can get an injunction. Unpaid Sellers Right to Reclaim Goods (Article 2) 1. Rule An unpaid seller has no rights under Article 2 in goods it has delivered to the buyer a. note - look for an 'on-credit' sale 2. Exceptions a. *An unpaid seller has a right to reclaim goods from the buyer if (1) the buyer was insolvent when it RECEIVED THE GOODS and (2) the seller demands return w/in 10 days of Bs RECEIVING THE GOODS. b. Seller has a right to reclaim goods at any time if the buyer misrepresented its solvency to the seller in writing w/in 3 months before delivery 3. Point The seller has no right to reclaim the goods from a 3 rd party (i.e. the right to reclaim, if it exists, is only available against the original buyer) 4. Examples a. B buys goods on credit on May 10. B is insolvent on May 22, the date B received the goods. S learns of Bs insolvency on May 29. Does S have a right under Article 2 to reclaim the goods? i. Yes, IF - S demands return of the goods w/in 10 days b/c B was insolvent on the date the goods were delivered. b. What if B had already sold the goods to a 3 rd party on May 25? i. Under Article 2, the seller has no right to reclaim the goods from a 3 rd party. Entrustment (Article 2) 1. Rule An owner who entrusts her property to a merchant "who deals in goods of the kind" (not just any merchant) has no rights against a BFP

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2. 3.

Bar Exam Tip On the bar exam, the fact pattern is always the same: an owner takes jewelry or a car in to be repaired by a merchant who also sells that particular kind of good. Example Britney takes her watch to Cartier to be repaired. Cartier wrongfully sells the watch to Gwen, a BFP. Can Britney get her watch back from Gwen? a. No. An entrusting owner has no right to get her property back from a later BFP. The owners only right is to sue Cartier for conversion.

Right to Request Assurance (Article 2) 1. Rule A party with reasonable grounds for insecurity may request in writing, adequate assurance from the other party that they will perform in accordance with the contract. 2. Failure to Provide Assurance If seller fails to provide adequate assurance upon request, buyer can treat that as an anticipatory repudiation of the contract. However, the seller can later provide adequate assurance and reinstate the contract as long as the buyer has not relied on sellers failure to provide adequate assurance. 3. Note -- A party cannot use this provision to rewrite the contract or demand a particular kind of assurance. All the provision allows you to get is "adequate" assurance. 4. Examples a. B contracts to buy computer chips from S. B learns from other manufacturers that Ss recent deliveries have contained an uncommon number of defective chips (reason to worry). What can B do? i. The buyer can request in writing that seller provide adequate assurance about the quality of the chips. b. If S does not provide B with adequate assurance, what are Bs rights against S? i. Buyer can treat failure to give adequate assurance as an anticipatory repudiation. c. S contracts to sell B goods on credit. Later, S learns that B is missing payments to other suppliers. Can S demand that B pay cash? i. No. A party cannot use this provision to rewrite the contract or demand a particular kind of assurance. All the provision allows you to get is adequate assurance.

Monetary Remedies (Damages)

Punitive Damages 1. Rule Punitive damages are NOT awarded for breach of contract b/c the purpose of contract damages is to compensate, not to punish. 2. Bar Exam Tip When it comes to remedies, dont think of good guys & bad guys. The purpose of contract remedies is to compensate the injured party, not to punish the breaching party. Liquidated Damages 1. Idea Liquidated damage clause is a clause in the contract itself that fixes damages for breach 2. Rule Liquidated damage clauses are permissible if the damages were difficult to estimate in advance and the provision is a reasonable forecast of probable damages a. *BUT - l.d. cannot operate as a penalty 3. Points a. Graduated damage clauses (i.e. damages go up w/ length of delay) are more likely to be held valid b. One size does NOT fit all Fixed liquidated damage measure is probably going to be held invalid c. Even if the liquidated damage clause is held invalid, the injured party still gets their actual damages 4. Examples a. Simon hires Thom to redo his office. The contract provides for damages of $100/day for each day Thom is late. Thom finishes 20 days late. Is the liquidated damages clause valid? i. Yes. $100/day is flexible. The damages are graduated so they are a reasonable forecast of the probable damages. Moreover, liquidated damages are common in the construction industry. b. What if the contract provides for $2K in damages in the event that Thom is late? i. That is not a reasonable forecast of probable damages. There is no proportionality here. If Thom is one day late he has to $2K and if he is 100 days late he has to pay $2K. c. Will Simon get any damages from Thom if the liquidated damages clause is struck down? i. Yes. He will still get his actual damages, but he wont get the liquidated damage sum. ** Expectation Damages [*usual measure of damages*] 1. Idea Expectation damages are the sum that leaves an injured party in as good a position as full performance (i.e. gives them the benefit of the bargain) 2. Common Law

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a.

Examples i. I agree to paint Houses house for $10K. I breach. He pays another painter $13K to paint the house. How much can House recover from me for breach of contract? 1. $3K. This puts House in the position he would have been had their been full performance (i.e. painted house and out-of-pocket $10K). ii. Same facts, except that House refuses to pay me after I have started painting his house. I have already spent $5K. I expected to clear $1,500 in profit. What are my damages? 1. $6,500. I expected to have $1,500 profit in my pocket if the contract was fully performed. But instead, I am in the hole $5K. House must pay a total of $6,500 to put me in the same position as if there was full performance.

3.

Article 2 a. Buyers Damages [3 options] i. Rules 1. Cover Damages (general rule): If B covers in good faith, B gets [cover price - contract price] 2. Market Damages: If B doesnt cover in good faith or doesnt cover at all, B gets [market price - contract price] 3. Loss In Value: If B keeps non-conforming goods, B gets [value "as promised" - value delivered] a. Note: the value "as promised" is NOT the contract price - it is the market value of the promised good; B can keep the benefit of bargain if negotiated a good deal (value "as promised" > contract price) ii. Point Sellers tend to breach in rising markets, so replacement goods will usually cost a buyer more. Buyer can pay over market price to cover so long as the purchase was in good faith. iii. Examples 1. B contracts to buy carpeting for $2,500. S does not deliver. The market price for similar carpeting is $2,700. What are Bs damages if B pays $2,800 for the same carpeting? a. $300. Since B covered in good faith, B gets the cover price ($2,800) minus the contract price ($2,500). Buyer can pay over market price to cover so long as the purchase was in good faith. 2. Same facts, except that B pays $6K for much better carpeting. Can B recover the $3,500 difference b/t the cover price and the contract price? If not, what are Bs damages? a. When the buyer doesnt cover in good faith, he is limited to recovering the difference between the market price and contract price. Here, Bs damages are $200 ($2,700 - $2,500). B must eat the rest of the money that he spent. 3. What if B does not buy any replacement carpeting at all? a. If B doesnt cover at all, B gets the market price minus the contract price. Here, Bs damages are $200. 4. ** B contracts to buy an antique rug for $4K. B later discovers its not antique. B keeps it anyway. The rug is worth $2K. Had it been antique, it would be worth $7K. What are Bs damages? a. $5K. If B keeps non-conforming goods, he is entitled to the difference b/t the value of the goods as promised ($7K) and the value of the goods delivered ($2K). b. Sellers Damages [4 options] i. Rules 1. Resale Damages (general rule): If S resells in good faith, S gets [contract price - resale price] 2. Market Damages: If S doesnt resell in good faith OR doesnt resell at all, S gets [contract price - market price] 3. ** Lost Profit: If S is a "lost volume dealer", S gets [lost profit] a. Wrinkle for Lost Volume Sellers Dealers who sell out of a theoretically unlimited inventory still lose profit even if they are able to resell the goods for the same price or more. (b/c could have made 2 profits instead of 1) 4. Contract Price (rare): If seller CANNOT resell the goods, S gets [whole contract price]. ONLY IF no market in which seller could sell the goods. Seller's analog to B's specific performance remedy. ii. Point Buyers tend to breach in falling markets, so seller wont be able to get as much for the goods. iii. Examples

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1.

2. 3.

4. 5.

6.

I contract to sell my used Toyota to Izzy for $7K. Izzy breaches the contract. A week later, I sell the car to George for $6,500. What are my damages? a. $500. Since I resold in good faith, I get the contract price ($7K) minus the resale price ($6,500). What if I sell the car to George for $7K? a. $0. I have been made completely whole by the resale. If I sell it to George for $2K, can I recover the $5K difference from Izzy? a. Probably not b/c a seller has to use good faith when reselling. Seller cant simply go out and dump the goods in to the marketplace. Here, I am going to be limited to the difference b/t the contract price and the market price. What if I decide not to sell the car at all? a. I am entitled to the difference b/t the contract price and the market price. ** Izzy contracts to buy a car off the lot of Classic Toyota for $7K. Izzy breaches the contract. A week later, Classic sells the same car to George for $7K. What are Classics damages? a. $7K b/c Classic is a lost volume seller. This is how it ALWAYS is on the bar: seller resells the same goods to another buyer for the same price. The bar examiners are trying to get you to say that Classics damages are $0, but dont fall into their trap. Classic has lost the profit it would have made from Izzy! I agree to buy a custom-made set of dishes featuring the Sokolow family name/crest from Spode. I breach the contract. What are Spode's damages? a. Whole contract price. Because cannot resell - no market.

Incidental Damages 1. Definition Incidental damages are the cost of caring for/transporting goods after breach and the cost of arranging a substitute transaction. a. Note - available to both Buyer and Seller. 2. Rule Incidental damages are always recoverable. 3. Point There is no foreseeability requirement 4. Example Classic has to store and insure the car after Izzy breaches. Classic also advertises the car for sale after Izzys breach. Can Classic recover these costs from Izzy? a. Yes. These are examples of incidental damages and incidental damages are always recoverable.

*** Consequential Damages 1. Definition Consequential damages are damages that are (1) special to this particular P and (2) reasonably foreseeable by the breaching party at the time of the contract. a. Consequential damages are about a lot more than causation. b. ** Note: NOT available to a seller under Art. 2 NOTE - can get BOTH expectation damages PLUS consequential damages (see "Review Question" hypo below) 2. Examples a. Miller contracts w/ UPS to ship a broken mill shaft to a mill shaft maker for $100. UPS does not perform. Miller pays DHL $150 to ship the shaft. What are Millers damages? - $50 in expectation damages. Miller was supposed to pay $100. Miller had to pay somebody else $150 for the service. Miller gets $50 back. b. Same facts, except that UPS delays in shipping the shaft. Miller does not have another shaft. As a result, the mill is shut down for 9 extra days. Can Miller recover its $2K in lost profits? i. Probably not. While these damages are special to Miller, they probably arent reasonably foreseeable by UPS at the time the contract was entered into b/c most mill operators will have more than 1 mill shaft. ii. Consequential damages are about a lot more than causation. c. Review Question - House hires me to paint his beach house for $3K. Before I agree, he tells me that hell lose $500 in rent if I dont finish by Friday. I repudiate the contract. House cant get anyone to paint by Friday and loses the rent. He later pays $3,400 to get the job done. What are Houses damages? i. First, House has suffered $400 in expectation damages. He was supposed to pay $3K for painting, but ended up having to pay $3,400. ii. Second, House has suffered $500 in consequential damages for the lost rent. The lost rent money is special to House and it was reasonably foreseeable to me at the time the contract was entered into b/c House told me about how he would lose $500 if I didnt finish painting by Friday.

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iii. **$900? total of expectation damages PLUS consequential damages? --> right answer. iv. $3,900 ($3,400 + $500)? No - House only gets back extra money he had to spend (not total amount spent on the replacement) Avoidable Damages (The Rule of Mitigation) 1. Rule Injured party CANNOT recover damages they could have avoided with reasonable effort. a. Look for: employment contract i. "comparable job" - same kind of work; in same city 2. Example Kay Pasa is fired in violation of her contract. She makes $900/week. Her former employer alleges that Kay can get a comparable job paying $800/week. What are Kays damages? a. $100/week. A fired employee will not be forced to get a new job, but their failure to take a "comparable job" (i.e. same kind of work in same city) will reduce their potential damage award.

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CONTRACTS OUTLINE SUMMER 2007 THIRD-PARTY PROBLEMS

Third-Party Beneficiary Law
General Idea A TPB relationship occurs when two people enter a contract w/ the intent to benefit a third party. Consequence The TPB can enforce the contract. Examples of Third-Party Beneficiaries 1. I buy a life insurance policy, w/ the proceeds to go to my wife on my death. After I die, the insurer refuses to pay my wife. Can she recover from the insurer for breach of contract? Yes. Wife is a TPB of the contract w/ the insurance company. The contract was entered into w/ the intention of benefiting wife. 2. Arnold Schwarzenegger pays Travis Tritt $5K to sing for W on July 4. W is Third-Party Beneficiary of the contract. Travis takes the $5K, but never performs. Can W sues Travis under the contract and collect damages for breach? Yes, as the TPB of Arnolds contract w/ Travis. Arnold and Travis entered into the contract w/ the intention of benefiting W. Vocabulary 1. Third-Party Beneficiary A person who did not make a contract, but still has rights under it b/c the contract was intended to benefit him (W). 2. Promisor The person who promises to perform for the third party (Travis). 3. Promisee The person who secures the promise (Arnold) 4. Intended/Incidental Beneficiary A third party NAMED in the contract is an "intended" beneficiary; otherwise, hes an "incidental" beneficiary. a. *This is important b/c only an intended beneficiary has legal rights* b. Ex W had invited Scooter Libby to come hear Travis on July 4. Travis takes the $5K, but never performs. Can Scooter sue Travis under the contract and recover damages for breach? 1. No b/c Scooter was only an incidental beneficiary and an incidental beneficiary has no legal rights. 5. Creditor/Donee Beneficiary If the promisees main reason for entering the contract is to discharge a debt owed to a third party, the third party is a "creditor beneficiary"; otherwise, he is a "donee beneficiary". a. Note: most third-party beneficiaries are donee beneficiaries. b. Ex In gratitude for Ws campaign support, Arnold pays Travis $5K to sing for W on July 4. 1. Here, W is a donee beneficiary. Arnold is simply making W a gift of Travis performance. c. Ex Same facts, except Arnolds main purpose is to pay off a debt Arnold owes W. 1. W is a creditor beneficiary b/c Arnold owed W money before. Rescission or Modification 1. Rule The promisor and promisee can rescind or modify the contract UNLESS the rights of the TPB have vested. a. "Vested" = TPB learns about contract and relies on it 2. Point Promisor and promisee can retain the right to rescind or modify after vesting as long as the parties do so expressly in the contract (i.e. contract language controls). 3. Examples a. Can Arnold and Travis modify or rescind their contracts before W learns about it? 1. Yes b/c Ws rights have not yet vested. b. W leans of the assignment and invites Scooter to the White House to hear Travis sing on July 4. Can Arnold and Travis modify or rescind their contract? 1. No b/c once W learns about the contract and relies on it, Ws rights have vested. Once that happens, Arnold and Travis cant modify or rescind their contract w/out Ws consent. c. The contract lets Arnold change beneficiaries. W has relied on having Travis sing for him by inviting Scooter to the White House for dinner on July 4. Can Arnold terminate Ws rights? 1. Yes b/c contract language controls. Therefore, Arnold can terminate Ws rights even though W had relied on the contract. Ws reliance has to give way to the contrary language of the contract. Rights of a Third-Party Beneficiary 1. TPB vs. Promisor a. Rules

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i. A TPB can sue the breaching promisor ii. The promisor can raise the same defenses against the TPB it could have raised against the promisee b. Examples i. Can W sue Travis for breach if Travis does not perform as promised? 1. Yes b/c an "intended" TPB can sue the breaching promisor. ii. Arnold paid Travis w/ a $5K check and the check bounced. Can W recover damages from Travis if Travis does not sing on July 4 as promised? 1. No. Arnold couldnt recover since he had committed a material breach so therefore W cant recover either. TPB vs. Promisee a. Rule Only a creditor-beneficiary, NOT a donee-beneficiary, can sue the promisee. b. Example Can W recover damages from Arnold if Travis does not sign on July 4 as promised? i. Only if W was a creditor-beneficiary.

Promisee vs. Breaching Promisor 1. Rule The promisee can recover from the breaching promisor. 2. Examples a. Can Arnold recover damages from Travis if Travis doesnt sign on July 4 as promised? i. Yes - they have a contract; can recover like any other contract. b. Even if W is a donee beneficiary. i. Yes, but in that case, Arnold would not have suffered very much damage.

Delegation of Duties - transfer of burdens under a contract

General Rule Contractual duties may be delegated w/out the consent of the person to whom performance is owed (the oblige) 1. Exceptions a. If contract prohibits delegation b. *If contract prohibits "assignment", then it also prohibits delegation c. Duties involve special skill or reputation *** Rights of Obligee *** A.) Delegating Partys Liability 1. Rule The delegating party remains liable to the oblige. 2. Example Opie contracts to mow Helen Crumps lawn for $25. Opie delegates the duty to Goober. Goober goofs and does not mow the lawn. Can Helen still sue Opie for breach of contract? a. Yes b/c if you have a delegation, the delegating party remains liable. B.) Delegates Liability 1. Rule The delegate is also liable to the oblige ONLY IF the delegate received consideration for the services 2. Justification The obligee is a TPB of the contract b/t the delegating party and the delegate. 3. Example Same facts, except that Opie pays Goober $15 to mow Helens lawn. Goober goofs and does not mow the lawn. Can Helen sue Goober for breach of contract? a. Yes b/c if the delegate gets consideration for performing the duties, then the delegate is liable to the obligee as well. Examples 1. Opie contracts to mow Helen Crumps lawn for $25. Opie delegates the duty to Goober. Goober does a great job. Helen objects to the delegation. Does Helen have to pay? a. Yes. As long as Goober does the job right, Helen has to pay. 2. What if the contract b/t Opie and Helen prohibits delegation? a. Contrary language in the contract controls. Helen can prevent delegation by putting appropriate language in her contract w/ Opie. 3. What if their contract prohibits assignment? a. On the MBE, if a contract prohibits assignment, then it also prohibits delegation. 4. David Letterman is hired to host the 2008 Academy Awards show. There is no contract language prohibiting delegation or assignment. Can Letterman delegate his duties to me? a. No b/c Letterman has special skills or reputation.

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Can Letterman delegate his duties to Robin Williams? a. No, even though Robin Williams is funnier than David Letterman. (was hired for special skills and reputation)

Assignment of Rights - transfer of benefits under contract

General Idea An assignment of rights occurs where two people make a contract and then later on, one person transfers his rights under the contract to a third party. ** Bar Exam Tip An "assignment of rights" transfers only rights, NOT obligations (frequently tested). By contrast, "assignment of an entire contract" transfers both rights and obligations. Example of an Assignment of Rights Batman contracts to provide security for Gotham City for $200K. Batman assigns his right to the $200K payment to Robin. Vocabulary 1. Assignor The person who later transfers rights under a contract (Batman) 2. Assignee The person to whom the rights are transferred - 3rd party (Robin) 3. Obligor The person who owes the assigned performance (Gotham City) Comparison with Third-Party Beneficiary 1. Third-Party Beneficiary All 3 parties are involved from the beginning (1-step process) 2. Assignment 2 people contract and a third person appears later on (2-step process) *** Requirements for Making an Effective Assignment 1. Consideration No consideration is required, but the lack of consideration will effect the revocability of the assignment 2. Promises Promises are not effective to create a valid assignment. There must be **language of a present intent to transfer**. Assignment is a present transfer of rights - need "language of present assignment". 3. Examples a. Must Robin give Batman consideration to make the assignment valid? 1. No b. What if Batman promises to assign the right to receive the $200K payment to Robin? 1. That is ineffective. You must have language of present assignment (i.e. transfer). Language like I will or I promise to assign are not effective. Restrictions on Assignment 1. Contract Language Controls a. Rules i. Clause that prohibits assignment can still assign but assignor will be liable for breach ii. Clause that completely invalidates assignment bars any assignment b. Examples i. The Batman-Gotham City contract provides, rights under this contract are not assignable. Batman assigns the right to payment to Robin anyway. Can Robin collect from Gotham City? 1. Yes b/c this language merely prohibits assignment. However, Batman will be liable to Gotham City for breach of contract. ii. Same facts, except that the contract states, All assignments under this contract are void. 1. This language completely invalidates the assignment. It means not only dont do it, but also that it wont be valid if you actually do it. 2. *** Cannot Change Duties a. Rule An assignment cannot substantially change the duties of the obligor. i. note - can always assign right to receive payment (doesn't "substantially change" duties); cannot assign right to services b. Examples i. Batman assigns his right to the $200K payment to Robin. Does this substantially change the duties of the obligor, Gotham City? 1. No. You can always assign the right to receive payment since it is just as easy to write a check to one person as another. ii. Can Gotham City assign its right to Batmans services to Metropolis?

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No b/c the assignment would substantially change Batmans duties. Metropolis is a completely different city w/ a different layout, a different size population, and a different crime rate.

3.

Requirements Contracts a. Rule A requirements contract is assignable as long as the assignees requirements are not out of line w/ the assignors requirements. b. Example Gotham City contracts to buy all the kryptonite it needs in 2008 from a distributor. Gotham City later assigns its rights under the contract to Metropolis. Does this substantially change the duties of the obligor (the distributor)? i. Yes, unless Metropolis kryptonite requirements are not out of line w/ Gothams kryptonite requirements.

Rights of an Assignee 1. Assignee vs. Obligor a. Rule The assignee can sue the obligor for breach of contract, but is subject to the same defenses the obligor could have raised against the assignor. b. Examples i. Can Robin sue Gotham City if he is not paid for Batmans work? 1. Yes. The assignment transfers the right to enforce the contract to Robin. ii. If Batman fails to perform the services, can Robin still collect from Gotham City? 1. No. The assignee steps into the assignors shoes and only has the rights that the assignor would have had. 2. Accidental Payment to Assignor a. Rule Payment by the obligor to the assignor is effective UNLESS the obligor is aware of the assignment. b. Example In May, Batman assigns his rights under the Gotham City contract to Robin. Unaware of the assignment, Gotham City makes the June payment to Batman. Is Gotham City liable to Robin? i. No - b/c didn't know anything about the assignment. Just did what they were supposed to do. Multiple Assignments 1. Gift Assignments a. Rule Permissable, but "fragile" (easily revoked). The last gratuitous assignee in time prevails b/c a later gift assignment revokes an earlier one. b. Example Batman assigns the right to payment from Gotham City to Robin as a Chanukah gift. Batman later assigns the same right to charity. To whom should Gotham City make payment? i. To the Charity as the last gratuitous assignee in time. The later gift assignment to charity wiped out the earlier gift assignment to Robin. NY - gift assignment is irrevocable IF in a writing, signed by assignor. 2. Assignments for Consideration a. Rule The first assignee for consideration prevails b/c assignments for consideration are much more durable in nature. i. Method - If you encounter multiple assignments in a question, analyze each assignment in the order it was made to see if that particular assignment was valid. ii. Exception A later assignee for consideration prevails over an earlier assignee if (i) he does not know of the prior assignment AND (ii) is the first to obtain payment from or a judgment against the obligor. b. Examples i. On 1/1, Batman assigns the right to pay from Gotham City to Robin as a gift. 1. Gratuitous assignment is valid so Gotham City should pay Robin. ii. On 2/2, Batman promises to assign the same right to Christian Bale, his latest alter ego. 1. A promise to assign is not valid b/c an assignment is a present transfer. Therefore, as of 2/2, Gotham City should still pay the money to Robin. iii. On 3/3, Batman sells the same right to Chad, shortly before he was hanged, for $100. 1. This assignment for consideration wipes out the earlier gift assignment to Robin. As of 3/3, Gotham City should pay the money to Chad. iv. On 4/4, Batman sells the same right to Al Gore for $1K. Whom should Gotham City pay? 1. This is also an assignment for consideration, but the first assignee for consideration generally prevails. Therefore, on 4/4, Gotham City should pay Chad or his executor, if Chad has already been hanged.

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v. What if Al is unaware of the other assignments and is the first to notify Gotham City of his rights? 1. Being the first to notify is not enough. For Al Gore to prevail, he must also be the first to obtain payment from Gotham City or be the first to obtain a judgment against Gotham City.

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