CONTRACTS, UCC ART. 2, AND ART.

2A
PART I. APPLICABLE LAW AND DEFINITIONS
I. DETERMINING WHICH LAW APPLIES Whether UCC Art 2 Applies Goods Art 2 of the UCC applies to contracts for the sale of goods. Goods are defined as all things which are movable at the time of identification to the contract for sale, which includes: (1) new or used products, (2) food, whether consumed on or off the premises, (3) living or unborn animals, (4) growing crops or timber, regardless of whether the buyer or seller removes them from the land, (5) minerals (gravel, coal, sand), but only if it is removed from the land by the seller. Sub-Rule: UCC Does NOT apply to: 1. real property 2. personal service, employment, or agency contracts 3. gifts 4. bailment contracts: a transfer of possession without transfer of title 5. construction contracts 6. contracts for services rather than goods 7. sale of electricity Predominant Factor Test When a contract involves both goods and services, look to the essence of the transaction to determine whether it is governed by the UCC. If the contract is predominantly for the sale of goods and the services are merely incidental to the contract, then Art 2 applies to the entire contract. Whether UCC Art 2A Applies NY Distinction: UCC Article 2A applies to a lease or sublease of goods. Art 2A generally follows Art 2 by substituting the term lease for sale, but there are a few different rules. Be sure to distinguish between true leases and a lease that is a disguised sale of goods on credit. Whether Common Law Applies The Common Law with NY distinctions applies to all other contracts. II. DEFINITIONS Merchants Art 2 of the UCC defines merchants as persons who (1) regularly deal in goods of the kind involved in the transaction or (2) possesses or hires an intermediary with knowledge or skill in the goods involved in the transaction. The code frequently imposes higher standards on buyers/sellers of goods who are merchants.

Good Faith Art 2 of the UCC imposes an obligation of good faith on buyers and sellers, which it defines as honesty in fact in the conduct or transaction concerned. It implies that neither party will do anything that will impede the rights of the other party to receive all benefits of the contract Sub-Rule: Merchants For a merchant, acting in good faith also requires observance of reasonable commercial standards of fair dealing in the trade. Tender UCC Art 2 defines tender as the sellers act of placing and holding conforming goods and then giving the buyer any necessary notification of the sellers readiness to perform under the contract terms to enable the buyer to take delivery. The time, place, and manner of tender are determined by the parties contract and the provisions of Art. 2.

PART 2. CONTRACT FORMATION

Analysis 1. look for an agreement -was there an offer? -was the offer terminated? -was there acceptance? -was there consideration? 2. look to see if it is legally enforceable/any defenses III. TYPES OF CONTRACTS Contract A valid contract is a voluntary agreement containing definite terms, mutually assented to by competent parties, supported by valid consideration. To be legally enforceable, a contract must contain the following: TACO (1) definite Terms, either expressed or implied, (2) Acceptance of a valid offer, (3) Consideration support the promise, and (4) a binding Offer inviting acceptance. Express Contract An express contract is created by the parties words (oral or written) Implied Contract An implied contract is created by the parties conduct Exam Tip: The same rules apply to express and implied contracts, but answer choices may ask to distinguish between them Contracts Under UCC Art 2 UCC Art 2 defines a contract as the total legal obligation created by a bargain. A contract may be made in any manner sufficient to show an agreement including conduct by both parties that recognizes the existence of the contract.

Sub-Rule: Sufficient Writing A contract is only required to state a quantity term. A writing is sufficient if it omits or incorrectly states an agreed term, however the contract is not enforceable beyond the quantity of goods shown in the writing. Quasi-Contract: Restitution Under the common law, a quasi-contract is not a contract it is a fiction imposed by law to avoid unjust enrichment or to compensate a performing party who detrimentally relied on the unenforceable contract. It is also known as the equitable remedy of Restitution. The party can recover the reasonable value of the benefit conferred, NOT the contract price. Exam Tip: look for an unfair result where there was no express or implied agreement between the parties or where the agreement is unenforceable due to illegality, Statute of Frauds, mutual mistake, impossibility, incapacity, duress, etc. Bilateral Contracts Under the Common Law, a bilateral contract arises where both parties make binding promises to perform (either express or implied) and one promise is consideration for the other promise. To constitute a binding bilateral contract, there must be an offer and acceptance (acceptance can be any reasonable way) of that offer and mutual assent to the agreement in which both parties become contractually bound to perform under the terms of the contract. Unilateral Contracts Under the Common Law, a unilateral contract arises where the offeror promises to pay for a completed performance. The offer can be accepted only by performance. The offeree has no contractual duty to perform, even if he begins performance and no notice of performance is required to be given unless the offeror would otherwise not know of the performance. Exam Tip: MBE fact patterns 1. offer that explicitly states it can only be accepted by performance 2. reward, contest, prize UCC Unilateral Contract Offers Under UCC Art 2 in a sale of goods contract, a unilateral contract offer where the offeree has begun to perform is treated as a bilateral contract, cutting off the offerors power to revoke the offer and requiring the offeree to complete performance or be in breach. The offeree must give notice of acceptance within a reasonable time.

IV. THE OFFER Offer An offer is a partys manifestation of an immediate willingness to enter into a bargain, which justifies the other party in believing that his assent to that bargain is invited and that it will conclude in a binding contract. To be valid, the offer must: (1) be communicated to the offeree, (2) induce performance meaning the parties enter into a legal relationship, and (3) be sufficiently definite

Sub-Rule: Standard for Determining Whether There Was an Offer The court interprets the objective manifestations of the parties together with the surrounding circumstances as what a reasonable person would construe them to be under similar circumstances. The parties subjective thoughts or intent are immaterial in the interpretation of whether there was an offer. Exam Tip: If there is a series of communications between the parties, pay attention to the legal significance, if any, of each statement. Go through each communication looking for an offer and the acceptance. NOT Offers (1) Advertisements, form letters, or catalogues (unless it makes an offer limited in number 200 notebook computers to the first 30 customers, first come first served) Exam Tip: Often tested exception (2) Statements of intention (3) Preliminary contract negations or requests for price quotations (4) A written offer which indicates it is made to several persons simultaneously this is an invitation to negotiation (5) Jokes (6) Identical offers to buy and sell which cross in the mail, because neither has been accepted with knowledge of the others existence Rewards Where you find something and return it to the owner, later you find out that there was an award but you did not know of it, then you cannot sue for the reward. Exception: Offers of reward by the government Definiteness of Terms Common Law An offer must be sufficiently definite to be enforceable meaning that it contains the essential material terms in unambiguous language. Sub-Rule: Real Estate Contracts The offer must contain the particularly identified land and price terms. Most courts will NOT supply a missing price term. Terms in a UCC Contract The only essential contract term is quantity and a contract will fail for indefiniteness without it. Otherwise, if it is clear that the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy, a contract for sale does not fail for indefiniteness even though the parties leave one or more terms open. UCC Contracts Price Term Under UCC Art 2, where the price term is lacking, the court may determine a reasonable price at time of delivery. A sale of goods contract is enforceable even if (1) nothing was said as to the price, (2) the price is left to be agreed upon but the parties fail to agree upon the price, or (3) the price is to be fixed by some agreed market set by a third person but where no price is set.

Sub-Rule: If the price is to be fixed by the buyer or the seller, then it must be fixed in good faith. Sub-Rule: If the parties did not intend to form a contract unless the price was first agreed upon, then there is no contract if there was no agreed price. UCC Output Contract Under UCC Art. 2, a contract lacking in a specific quantity is enforceable if the seller agrees to sell his entire production to the buyer. This is known as an Output Contract. The seller must use his best efforts to supply the buyer and is required to act in good faith, meaning he cannot get out the contract by simply refusing to manufacture any further if he is not making a profit. However, the seller may cease production in good faith if further production would financially imperial his business. If there is no stated output estimate in the contract, then no quantity may be demanded that is unreasonably disproportionate to any normal or otherwise comparable prior output. UCC Requirements Contract Under UCC Art. 2, a contract lacking in a specific quantity is enforceable if buyer agrees to buy all the goods of a particular kind that the buyer may require in its business. This is known as a Requirements Contract. The buyer is obligated to use its best efforts to promote the sale or use of the sellers goods and to act in good faith, meaning he may not buy his goods from another seller at more cheaply if the market price for the goods drops. However, a buyer may in good faith reduce his orders to nothing if his business falls off. If there is no stated requirement estimate in the contract, then no quantity may be tendered that is unreasonably disproportionate to any normal or otherwise comparable prior requirement. Exam Tip: MBE often tests output and requirements contracts with sudden increases in output or requirement cannot be out of line or unfair to the other party

V. TERMINATION OF THE OFFER Pieper Pneumonic: Offers expire when they are TIIRED Time Incapacity Intervening illegality Revocation Express or implied rejection Destruction of the subject matter of the offer Lapse The offeror is the master of the offer and may arbitrarily fix the lifetime of the offer and the courts will not alter that time period, even if it is unreasonable. However, if the offer does not set a time limit for acceptance, then the court will infer a reasonable time limit, in light of the circumstances. Sub-Rule: Lapse of Oral Offers When the parties are dealing face to face or on the phone, unless otherwise agreed by the parties, the offer does not survive the conversation and must be renewed by the offeror. Exam Tip: the unreasonable time period will be clearly long in the question

Revocation Generally, the offeror may directly or indirectly revoke the offer any time prior to acceptance, even if the offeror promises not to. The mode used to revoke should be the same mode used to publish the offer. Once an offer is accepted it cannot be revoked. Direct Revocation: the offeror must communicate revocation of the offer directly to the offeree Indirect Revocation: (1) the offeror engages in conduct that is inconsistent with the offer being valid, AND (2) the offeree must have knowledge of the offerors conduct Exam Tip: this is frequently tested Revocation Effective Upon Receipt The revocation is valid when the offeree receives it. Limitations on Offerors Power to Revoke There are four exceptions to the offerors power to revoke an offer: 1. Options An option is an irrevocable offer where the offeror promises that the offer will remain open and not be revoked for a reasonable period of time in exchange for consideration. Using the word option in the contract gives the offeree assurances that the offer will be held open. Sub-Rule: Oral Options An oral option is enforceable if it is supported by consideration and not otherwise barred by the Statute of Frauds. Oral options not supported by consideration can become irrevocable when there is detrimental reliance on the offer by the offeree NY Distinction: Options Under NY GOL 5-1109, an option need not be supported by consideration if (1) it states it is irrevocable in writing and (2) is signed. NY does not limit this gratuitous option to merchants or sale of goods contracts and is not limited in time to 3 months, although it is still only good for a reasonable time. 2. UCC Merchant Firm Offers Under UCC Art. 2, an offer in a sale of goods is irrevocable where: (1) a merchant (2) in a signed writing (3) promises to hold an offer open. The irrevocable offer it is enforceable even though it is not supported by consideration, but only for up to 3 months, even if the merchant expressly stated it would be held open longer. After 3 months, the firm offer converts to an ordinary revocable offer. Termination of Options/Firm Offers An option or firm offer may be terminated by: DIE

1. Destruction: An offer terminates by operation of law where the subject matter of the offer is destroyed even if the offeree did not receive notice of the destruction. 2. Illegality: The offer terminates by operation of law due to intervening events, which render the subject matter of the offer illegal. 3. Expiration of the stated option time 3. Foreseeable Detrimental Reliance Before Acceptance Where the offeror could reasonably expect that the offeree would rely to their detriment on the offer, and the offeree does so rely, the offer will be held irrevocable as an option contract for a reasonable length of time. Exam Tip: This is a very rare exception and the only situation where it regularly occurs is where a general contractor relies on a subcontractors bid in submitting its final bid to the client. The subcontractors offer becomes an option. 4. Starting to Perform in a Unilateral Contract Where the offeree either tenders performance or begins performance, the unilateral contract becomes an option that the offeror may not revoke for a reasonable period of time. Mere preparation does not affect the offerors right to revoke the offer. If the offeror revokes, the offeree can sue for breach of contract and restitution. Sub-Rule: Offers Irrevocable if Offerors Cooperation Necessary Where the offerees performance requires some cooperation by the offeror in order for the performance to take place and the offeree withholds that cooperation, the offerees performance makes the unilateral contract offer irrevocable. NY Distinction: Unilateral Contract Offers Revocable Until Full Performance In NY, the offeror can revoke the offer at anytime up until full performance, because the offeree was not contractually bound to complete performance. However, the offeree has a claim for restitution (in equity) to prevent unjust enrichment, but has no claim for breach of contract. Rejection by the Offeree Express Rejection The offerees statement that he does not intend to accept the offer irretrievably terminates it. Counteroffer: Common Law Mirror Image Rule Under the common law, the offeree impliedly rejects the offer where he makes a counter-offer, which is an acceptance containing any additional or different terms, even if trivial, not contained in the offer. Acceptance must mirror the offer. Exam Tip: Remember that a counteroffer is both a rejection and a new offer, reversing the roles of the parties. Compare: UCC Battle of the Forms (See Acceptance) Conditional Acceptance An offerees response to an offer containing conditions to the acceptance is not acceptance. Rejection The power to accept terminates when the offeror receives a rejection.

Termination by Operation of Law An offer terminates by operation of law where: 1. the subject matter of the offer is destroyed even if the offeree did not receive notice of the destruction, 2. the offeror or offeree dies or has been adjudicated mentally incompetent prior to acceptance Exception: if the offeror has a non-delegable duty perform and offeree has accepted the offer but the contract has not yet been performed, the offer DOES terminate under the doctrine of impossibility of performance. 3. there are intervening events, which render the subject matter of the offer illegal

VI. ACCEPTANCE OF THE OFFER Definition: Acceptance Acceptance of an offer is an unconditional manifestation of assent by the one to whom the offer was made (class or individual), to all the terms and conditions of the offer and in the manner invited or required by the offer. The offeree must know of the offer in order to accept it. Sub-Rule: Unilateral Contracts In a unilateral contract, the offer is accepted by completing performance. Sub-Rule: Bilateral Contracts A bilateral contract offer may be accepted by a promise to perform or by beginning performance. Beginning performance carries with it an implied promise to complete performance. Mode of Acceptance Acceptance must be by a reasonable mode, usually in the same mode the offer was made, unless the offer expressly demands an exclusive mode of acceptance. Sub-Rule: Exclusive Mode of Acceptance The offeror has the right to demand an exclusive mode of acceptance from an offeree and no other mode will be effective acceptance. The offeror may dictate the mode of acceptance however they see fit, even if unreasonable or difficult (but not unconscionable). The offerors intention that the mode of acceptance is exclusive must be clearly expressed in the offer itself. If the offeree does not utilize the exclusive mode of acceptance, the offerees response will be treated as a counter-offer. Common Law Improper Performance as Acceptance Under the common law, if a party improperly performs in response to an offer, this constitutes an acceptance AND simultaneously gives rise to a buyers cause of action for breach of contract. UCC Improper Performance as Acceptance Under the UCC, if a seller intentionally ships non-conforming goods to the buyer, this constitutes acceptance AND a breach of the contract UNLESS the seller seasonably notifies the buyer that the nonconforming shipment is offered as an accommodation. The buyer is not obligated to accept the non-conforming goods, but if he does, the seller will NOT be liable for breach of contract.

When Acceptance is Effective: Mailbox Rule Acceptance is effective upon dispatch, meaning when it is put out of the offerees possession (mailed, faxed, emailed or instant messaged), even if the dispatch is never received or was subsequently withdrawn the offeree. Exceptions to the Mailbox Rule 1. The offeror may override Ex: the offer states that acceptance is not effective until received 2. an irrevocable offer is involved so acceptance is effective upon receipt 3. if the offeree sends an acceptance and then a rejection, the acceptance is effective UNLESS: (1) the rejection arrived first, AND (2) the offeror relied on it 4. if the offeree sends a rejection and then sends an acceptance, whichever arrives first is effective. The mode of acceptance must be reasonable, so if the offeree utilizes a slower mode of acceptance than the offer was made, then acceptance is not effective until received by the offeror. Exam Tip: commonly tested Silence Acceptance must be an affirmative response. Silence cannot be construed as acceptance. NY Distinction: If someone sends unsolicited merchandise in the mail it is considered a gift; the party receiving the goods does not assent to a contract by keeping the goods. Common Law Mirror Image Rule Under the common law, the acceptance must be absolute and unequivocal of each and every term of the offer. Common Law Last Shot Doctrine Under common law contract rules, and offeree (usually the seller) could do three things with the buyers offer: (1) accept it, (2) expressly reject it, or (3) accept certain terms in the offer, but with additional or different terms to the acceptance. Such an acceptance was a mere counter-offer (implied rejection) which could be impliedly accepted by a buyer if the buyer accepted those goods when were shipped. This is referred to as the last shot doctrine because the terms of the last document controlled the terms of the contract once the delivered goods were accepted by the buyer creating a binding contract. This unfairly gave the sender of the last form the power to rewrite the contract. UCC Acceptance Under UCC Art 2, acceptance is the assent of the offeree, meaning the one to whom the offer was made, to the terms and conditions of the contract. It must be an affirmative response and silence cannot be construed as acceptance. An acceptance is not required to mirror the offer. A unilateral or bilateral contract can be accepted by either a promise or by performance, thus acceptance of a buyers offer occurs: (1) by a return promise accepting the offer, OR

(2) by the sellers act of shipping conforming or nonconforming goods or by beginning this performance, provided that buyers is given notice of acceptance within a reasonable time. UCC Battle of the Forms Provision Under UCC Art 2, an enforceable contract exists even though the acceptance states terms that are additional or different from those in the offer if the offeree makes a definite and seasonable expression of acceptance or a written confirmation that is sent within a reasonable time, unless acceptance is expressly made conditional on assent to the additional or different terms. The expression is definite where it reflects the parties intent to be bound, it is seasonable where it is timely, and the offer has not expired. Exam Tip: usually unread purchase forms Note: UCC 2-207 does not apply where no pre-printed forms where used and a disputed term was subject to protracted negotiations here, common law offer and acceptance rules apply NY Distinction: UCC 2A has no battle of the forms section for leases Subsequent Conduct Recognizing the Existence of a Contract Conduct by both parties that recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. Using the Knock-Out Rule, the resulting contract consists of those terms on which the writings agree together with the provisions in Art 2 (as to price, risk of loss, delivery, or warranties) for those terms on which the parties disagree. Ex: such as where the seller accepts the offer but the acceptance includes additional or different price, delivery or quantity/quality terms and the buyer subsequently physically accepts the goods, Exam Tip: The contract is usually formed, but the offerees different/additional term does not make it into the contract Different Terms Note: A different term corresponds to a term in the other form but it does not say the exact same thing Under UCC Article 2, a definite and seasonable acceptance containing different terms creates a contract consisting of those terms on which the two forms agree, but any conflicting provisions cancel each other out and the court may use the UCC as a gap-filler to replace the conflicting provisions. Sub-Rule: Price, Delivery, Quantity, or Quality Under UCC Article 2, there is no definite and seasonable expression of acceptance where a term regarding price, delivery, or quantity/quality in the acceptance conflicts with the offer. Such an acceptance is considered a counter-offer and neither party is liable for non-performance if the dispute arises before either party partially or fully performs Additional Terms Note: A term is additional where there is not a corresponding term in the other form at all Under the UCC, additional terms in an acceptance are merely considered proposals for addition to the contract and do not become part of the parties agreement. To become binding, any

additional terms must be expressly accepted in writing by the offeror. However, additional terms in a definite and seasonable acceptance become part of the agreement between two merchants UNLESS: (1) the offeror objects to additional terms within a reasonable time, (2) the offer expressly conditions the agreement exclusively to those terms contained in the offer, OR (3) the additional terms materially alter the offer, meaning it would result in surprise or hardship if incorporated without express awareness by the other party. Sub-Rule: Common Materially Altering Terms *this is not an exclusive list* J STRAW 1. clause bestowing Jurisdiction on a particular court or requiring offeror to consent to jurisdiction in a particular court 2. shortening the Statute of limitations 3. limiting Tort liability 4. altering the UCC rules for Risk of loss 5. adding an Arbitration clause, unless arbitration is the customary practice in that trade 6. clause negating express or implied Warranties such as those of merchantability or fitness Common Alterations that are NOT Material 1. a term that is customary in the industry (commonly tested) 2. fixing a reasonable time for complaints 3. fixing a sellers standard credit terms if within the practice in the trade provided they do not alter any bargained for credit terms 4. charging interest on over-due invoices 5. restricting the buyers right to reject defective goods falling within trade tolerances 6. a commercial impracticability clause

VII. CONSIDERATION Definition Courts will only enforce an agreement as a contract if it is supported by consideration. Consideration exists where both parties make promises involving a legally valuable benefit or detriment and those promises are bargained for, meaning both made the promise to receive the return promise. Exam Tip: The following are the most frequently tested issues involving consideration: Past Consideration A promise given in exchange for something already done does not constitute consideration because the promise was not bargained for. NY Distinction past consideration is binding if: (1) the promise and consideration are expressly stated (2) in a writing signed by the promisor, AND (3) the past consideration can be proven

Ex: As thanks for helping me move, I promise to pay you $300. /signed/ Paula Adequacy of Consideration Generally, the court does NOT inquire into the adequacy or fairness of consideration as long as there is a bargain, meaning the party actually wants what is bargained for. Exception: Nominal Consideration This is actually a gift disguised as a bargain Illusory Promise An illusory promise is statement that may sound like a promise but the words used make performance entirely optional. There is no legal detriment because there is not an actual promise despite using promissory language, because it does not commit the promisor to anything. Ex: I promise to sell you my car, unless I decide not to or I promise to buy all the coal I want from you, if you promise to sell me all the coal I want to purchase (the word want is subjective) Contract Modification Common Law: Contract Modification To modify a contract, the parties must both offer new or additional consideration. Simply performing a pre-existing duty is not sufficient. NY Distinction: Contract Modification Additional consideration is unnecessary to modify a contract if the modification is in a signed writing. UCC Art 2: Contract Modification Additional consideration is unnecessary to modify a contract, provided there is a good faith reason for the modification. Partial Payment of a Debt Where the debt is not in dispute, a creditors promise to forgive the balance of a debt in exchange for the debtors partial payment is not enforceable due to lack of consideration because there is no legal detriment to the debtor. NY Distinction: Partial Payment If the agreement is in writing, it is enforceable. Promise to Pay a Time-Barred Debt Where a debtor makes a written promise to pay a debt, the collection of which is barred by the statute of limitations, is enforceable even without consideration because the signed writing is a substitute for consideration. Promissory Estoppel as a Substitute for Consideration Consideration is not necessary where the facts indicate that the promisor should be estopped from not performing. A promise is enforceable if necessary to prevent injustice where: (1) a promisor made a unilateral promise to a promisee

(2) the promisee actually detrimentally relied on that promise (3) it was reasonable for the promisee to rely on the promise, and (4) there was harm done to the promisee by relying on the promise Damages The promisee may receive expectation damages (value of the contract) or reliance damages (what was spent in reliance on the promise), depending on the jurisdiction.

VIII. DEFENSES Absence of Mutual Assent Mutual Mistake Where both parties to a contract make a mistake of fact relating to the agreement, the contract is voidable by the adversely affected party if: (1) the mistake goes to a basic assumption of the contract (2) the mistake has a material effect on the agreed-upon exchange, AND (3) the party seeking to void the contract did not assume the risk of mistake party in a position to better know the risks than the other party or party knew their assumption was doubtful Sub-Rule: Value A mistake as to value is generally not considered material so it is not a defense Unilateral Mistake Where only one party made a mistake of fact relating to the agreement, the mistake will not be a defense to formation UNLESS the other party knew or had reason to know of the mistake. Misunderstanding Misunderstanding is a defense to contract formation where both parties believed they understood each other correctly, but made a mistake in drafting the terms of the contract or both parties were aware of the ambiguity. However, if one party knows or has reason to know of the misunderstanding, it is not a defense and a contract is formed based on the innocent partys understanding of the meaning of the contract. Fraudulent Misrepresentation or Non-Disclosure of a Material Fact Where a party induces another to enter into a contract using a fraudulent misrepresentation or non-disclosure of a fact, the contract is voidable by the innocent party if they justifiably relied on it. Non-fraudulent Misrepresentation or Non-Disclosure An innocent and honest misrepresentation can be a defense to contract formation where it is regarding a material element of the contract, meaning the information asserted would induce a person to agree, and the innocent party justifiably relied on it. Lack of Consideration

Consideration is an element of a contract and the lack of consideration can be put forward as a defense to the contract. Public Policy Illegality If the subject matter of a contract is illegal, the contract is void. Covenants Not-To-Compete The court will invalidate or narrow the scope of a covenant not to compete that operates as an unreasonable restraint of trade. In determining whether the covenant is legally-enforceable, the court will consider the duration and geographic scope of the covenant, the necessity of the covenant based on the uniqueness of the employees services, and the ability of the party seeking to bar enforcement to find employment elsewhere. Exculpatory Clauses An exculpatory clause can eliminate liability for negligence, but NOT for gross negligence or intentional torts. Lack of Capacity Minors A minor (under 18) may disaffirm a contract any time before or shortly after reach the age of majority and must return anything received under the contract that still remains. The contract remains enforceable against the adult. Sub-Rule: Affirmation A minor may affirm the contract upon reaching majority and be bound by it. A minor will be found to have impliedly affirmed the contract if they continued to retain the benefit of the contract after gaining or regaining capacity. Exception: A minor is liable for the reasonable value necessaries such as food, shelter, clothing, or medical care on a quasi-contract basis, not for the entire contract price NY Distinction: Contracts of Minors By statute, minors cannot void contracts in the following situations: 1. life insurance contracts by those 14 years or older 2. educational loans by those 16 years old and older 3. all contracts by 18 year olds 4. realty contracts related to the marital home, and 5. contracts involving artistic or athletic services Mental Incapacity A contract is voidable by a person whose mental capacity is so deficient that he is incapable of understanding the nature and significance of a contract. Exception: An incapacitated person is liable for the reasonable value necessaries such as food, shelter, clothing, or medical care on a quasi-contract basis, not for the entire contract price NY Distinction: Mental Incapacity

Contracts by those adjudicated incompetent are void. Contracts by those who are not adjudicated incompetent are NOT voidable unless the incompetent person can restore the other party to their previous position. Intoxication A contract is voidable by a person who was so intoxicated that he did not understand the nature and significance of the agreement IF the other party had reason to know of the intoxication. Exception: An intoxicated person is liable for the reasonable value necessaries such as food, shelter, clothing, or medical care on a quasi-contract basis, not for the entire contract price Economic Duress It is rarely a successful defense against formation accept where the other party is threatening to break an existing contract and the victimized party has no reasonable alternative available for obtaining needed goods or services. Unconscionability The court may refuse to enforce a provision or an entire contract to avoid unfairness that shocks the conscience of the court. The unconscionability may be substantive or procedural. Substantive Unconscionability The terms of the contract are grossly unfair; however, unfair price alone is not sufficient Procedural Unconscionability The process by which the parties reach an agreement is unfair significant power imbalance, inconspicuous risk-shifting provisions (small print), adhesion contracts Statute of Frauds Exam Tip: if the word oral appears in the question, check whether the contract is within the Statute of Frauds Generally, oral contracts are valid. However, the contracts below must be in a writing signed by the party to be charged or his lawful agent reflecting the material terms of the agreement in order to be enforced. The Statute of Frauds must be asserted as an affirmative defense in the Answer; if not, then it is deemed to be waived. A party can sue for the reasonable value of services or part performance rendered, or restitution of any other benefit conferred. MY LEGS Marriage contract Year contract Land contract (real property sale or lease) Executor contract Goods Sale contract Suretyship contract (guarantee the debt of another) NY Distinction: The following contracts are also within the Statute of Frauds 1. promise to pay a discharged debt 2. an assignment of an insurance policy or promise to name a beneficiary of such a policy 3. contracts to pay a commission or finders fee, except for contracts with an attorney, auctioneer, or licensed real estate broker Sub-Rule: Signature Requirement

Signature is broadly construed it can be printed or typed, initials, or letterhead. Exam Tip: Remember to be sure that the party being sued is the one who signed the writing Sub-Rule: Satisfactory Writing 1. A sale of goods contract under UCC Art 2 must contain a quantity term and be signed by the party to be charged 2. A lease of goods contract under UCC Art 2A must state that it is a lease, include the quantity, duration, and rental payments and be signed by the party to be charged. 3. All other contracts must contain a statement of the parties to the contract, the subject matter of the contract, and be signed by the party to be charged. Sub-Rule: Contract Modification A contract modification must also be in writing if the contract, as modified, is within the Statute of Frauds. Marriage Contract A promise the consideration for which is marriage must be evidenced by a writing. Year Contract Contracts where performance absolutely cannot be completed within a year must be evidenced by a writing. The clock begins to run when the agreement was made, not when performance begins. Exceptions: 1. Lifetime contracts are NOT within the statute of frauds (because a person could die at any time). NY Distinction: Lifetime contract ARE within the statute of frauds. 2. Full Performance Where the party has already fully performed the contract for over 1 year, a writing is not necessary. Exam Tip: it does not matter if performance actually takes more or less than a year. If performance within a year is theoretically possible, no writing is required. Specific tasks can theoretically be accomplished within a year, so dont be tricked by tasks that appear they will take a long time. Land Contract Any contracts for the sale or lease of real property or express easements for more than one year, or mortgages, must be evidenced by a writing signed by the party to be charged . Sufficient Writing A memorandum for the sale of land is sufficient if it contains the price, a description of the party, which does not need to be a legal description, and a designation of the parties Sub-Rule: Equal Dignities Rule Where an agent is acting on behalf of a principal when dealing with an interest in land, the agent must be authorized in writing concerning the real property or the principal must ratify. Exceptions: 1. leases for one year or less

2. part performance: A real property contract does NOT have to be in writing where the buyer (1) is in possession of the property, (2) has made some payment, or (3) made improvements to the property 2 out of 3 required! Executor Contract A promise by an executor or administrator to pay the estates debts out of his own funds must be evidence by a writing signed by the party to be charged. Sale of Goods Contract Under UCC Art 2, a contract for the sale of goods for $500 or more is unenforceable unless in writing sufficient to indicate that a contract has been made and signed by the party to be charged or his authorized agent or broker. NY Distinction: Under UCC Art 2A, a lease must be in writing if total of payments under the lease will be $1,000 or more Exceptions to Statute of Frauds for Sale of Goods Contracts There are four exceptions where oral contracts are enforceable without a writing: MAPS 1. Merchant Memo Rule Under UCC Art 2, an oral contract between two merchants is enforceable when either merchant (1) confirms the oral contract in a signed, written confirmation and (2) the other merchant receives it within a reasonable time after the oral contract is made, (3) had reason to know of its contents, and (4) does not object within 10 from its receipt. The memo need not refer to the prior oral agreement; however, it must state the quantity and any additional terms which materially alter the oral agreement will not be part of the contract. Memorandum may be a purchase order, acknowledgment of an order, invoice, a written contract, or an irrevocable letter of credit 2. Admission Under UCC Art 2, an oral contract is enforceable for the quantity of goods that the party against whom enforcement is sought admits he orally contracted for in his (1) pleadings, (2) pre-trial testimony during Discovery, or (3) his testimony at trial. 3. Part Performance Under UCC Art 2, an oral contract is enforceable for only the quantity of goods for which (1) payment as been made and accepted, OR (2) delivery has been made and accepted. 4. Specially manufactured Goods Under UCC Art 2, the entire oral contract is enforceable if: (1) circumstances indicate that the goods where specially made for the buyer, (2) the seller has made a substantial beginning of their manufacture or has made a commitment for their procurement before the seller receives notice of the buyers repudiation, AND (3) the goods are not suitable for re-sale to others in the ordinary course of the sellers business. Suretyship Contract A promise to answer for the debt of another must be evidence by a writing signed by the party to be charged.

Exception: Main Purpose If a suretys main purpose in making a promise is to benefit himself, then the contract is not within the statute of frauds NY Distinction: there is NO main purpose exception

PART 4. DETERMINING CONTRACT TERMS

IX. WORDS AND CONDUCT OF THE PARTIES Parole Evidence Rule Where the parties have created an integration, meaning a writing intended to be the full and final expression of the bargain, any evidence of a prior or contemporaneous agreement (either oral or written) that contradicts a later writing is inadmissible. In determining whether the writing is an integration, the court considers the specific circumstances, the identity of the parties, and the existence of a merger clause. Evidence Outside the Scope of the Parole Evidence Rule The following extrinsic evidence is admissible because it does not seek to contradict an integration: 1. to correct a clerical error or reform a mistake 2. to establish a defense against formation such as a formation defect or the existence of a condition precedent 3. to interpret a vague or ambiguous term if the meaning of the agreement is not plain, outside evidence is admissible 4. to supplement a partially-integrated writing UCC Parole Evidence Under UCC Art 2, ONLY a merger clause will exclude extrinsic evidence. Subsequent Developments Remember that the parole evidence rule has nothing to do with what happens after the agreement is reduced to writing. Conduct A written contracts terms may be explained or supplemented by the following, whether or not the writing appears to be ambiguous: (descending order of importance) 1. course of performance: what the parties did under this contract 2. course of dealing: what the parties did under prior contracts with each other 3. usage of trade: what others in the trade do in similar contracts UCC Battle of the Forms (See Acceptance) UCC Gap-Filler Terms

If certain terms are missing from the agreement, UCC will imply certain terms with its gapfiller provisions to fill in the missing terms. If these terms are included in an acceptance, they do not constitute a counter-offer as they are always implied in a contract. CIDER 1. Credit The buyer must tender payment when the goods are tendered unless the buyer has negotiated for credit. The seller is not obligated to extend credit. 2. Inspection The buyer may inspect goods prior to acceptance unless the contract expressly provides otherwise or the goods are shipped with a negotiable bill of lading. 3. Delivery The sellers tender of the goods is at the sellers place of business unless both parties know that the goods are located elsewhere. The seller is not obligated to ship the goods, absent an express delivery term in the contract. Sub-Rule: Lot Delivery The code defines a lot as a parcel that is the subject matter of the sale or delivery. Unless otherwise agreed, (ex. installment contract) all goods called for in a contract must be tendered in a single lot delivery and payment is due only on such tender. However, where the circumstances impliedly give a party the right to make or demand delivery in lots then the price may be apportioned for each lot. 4. Exchange Performances must be exchanged concurrently. The buyer must tender the purchase price in order to claim the seller defaulted. The seller must tender the goods or show tender was excused because the buyer repudiated the contract in order to claim the buyer defaulted. 5. Risk of Loss in Sales of Goods Generally The risk of loss for damage to the goods is controlled by the parties agreement. Otherwise, the risk of loss is on the party who is in the best position to bear that risk because that party is the one who is most likely to have taken precautions to protect the goods from loss. Breach If one party breaches and the goods are damaged, the breaching party bears the risk of loss, regardless of who otherwise bore the risk and of whether the loss is unrelated to the breach. Ex: If the seller ships non-conforming goods, giving the buyer the right to reject the shipment, then risk of loss stays with the seller. Ex: Risk of loss will be on the buyer if the buyer repudiates the contract, even though the risk of loss would otherwise be on the seller Sub-Rule: Insurance If the contract was breached and the goods involved are damaged or destroyed in transit, and the non-breaching party had the risk of loss and had insurance on the goods, then to the extent that the insurance was insufficient, the breaching party will suffer the loss. Ex: If the seller ships nonconforming goods and they are destroyed in transit, then to the extent the buyers insurance on the goods is insufficient or non-existent, then the breaching seller will suffer the risk of loss.

Delivery Terms and Risk of Loss If the contract is silent as to risk of loss, the party bearing the loss depends upon how the goods are delivered. Delivery by Common Carrier Where delivery is made by a common carrier, the risk of loss shifts to the buyer when the seller completes his delivery obligations, which depends upon the type of delivery contract. i. Shipment Contract (FOB sellers location) Where the contract authorizes or requires the seller to ship the goods by carrier but does not specify a destination (FOB sellers location), the risk of loss passes to the buyer when the seller delivers the goods to the carrier. ii. Destination Contract (FOB buyers location) Where the contract requires the seller to deliver the goods to a particular destination, the risk of loss passes to the buyer when the goods are tendered to the buyer at the destination. Where a Carrier is NOT Involved Where the parties make no provision for goods to be delivered by a carrier Ex: buyer is to pick up the goods or seller is to deliver the goods directly to buyer i. Seller is a Merchant The risk of loss passes to the buyer when he takes possession of the goods. ii. Seller is NOT a merchant The risk of loss passes to the buyer upon the sellers tender of the goods. When Goods Held by a Bailee If the goods are held by a bailee (warehouse) and the goods are to be delivered to the buyer without being moved or shipped then risk of loss passes to the buyer upon: (1) the buyers receipt of a bill of lading (contract and receipt issued by a carrier) or (2) the bailee notifies the buyer of his right to take possession of the goods. When Goods are Destroyed through No Fault of Either Party When the goods are totally destroyed through no fault of either party before the risk of loss passes to the buyer, the UCC rescinds the contract allowing the buyer to assert a claim for restitution damages to recover any deposit paid, but the buyer cannot assert a claim for expectation damages for the lost bargain. NY Distinction: Risk of Loss for Lease of Goods Under UCC Art 2A Generally, the risk of loss is always on the lessor. Exception: If the lessor is a bank, the risk of loss is on the lessee. UCC Warranties Contracts for the sale of goods may include certain implied and express warranties. Express Warranties A seller is liable for breach of any express warranty, which includes statements of fact, promises, descriptions of the goods, and the use of a sample or model, which is the basis of the bargain,

meaning the buyer could have relied on it at the time of contract. Statements of opinion or vague commendation do not form express warranties. Does not matter if the buyer actually relied Implied Warranty of Merchantability Implied in every contract for sale by a merchant who deals in goods of the kind that are the subject of the contract, meaning a seller with specialized knowledge about the particular goods, is a warranty of merchantability warranting that the goods are fit for their ordinary purposes. The seller has an absolute liability. Implied Warranty for a Particular Purpose A warranty for a particular purpose will be implied in a contract for the sale of goods where: (1) the seller has reason to know that the buyer has a particular purpose for which the goods are to be used, (2) the buyer is relying on the sellers skill and judgment to select suitable goods, (3) and the buyer in fact relies on it. Exam Tip: If the question gives a reason why the buyer wants the goods, it is likely testing this warranty NY Distinction: Lessors Warranties in a Lease of Goods Under UCC Art 2A The same warranties exist under Art 2A as under Art 2 Exception: Finance Leases Banks cannot be held liable for any warranties on leases. Disclaimer of Warranties A seller can disclaim implied, but not express warranties. Implied warranties can be disclaimed by either: Specific Disclaimers A warranty can be specifically disclaimed only by conspicuous language, meaning larger or contrasting type, font, color, or otherwise set off. General Disclaimers Expressions such as as is, or with all faults Limitation of Buyers Remedies A seller may limit a buyers remedies for breach of an express or implied warranty if the limitation is not unconscionable at the time of contract. Limiting a buyers remedies for personal injury is presumed to be unconscionable.

PART 5. PERFORMANCE AND EXCUSE FROM PERFORMANCE

X. PERFORMANCE OF CONTRACTS FOR SALE OF GOODS (UCC) Buyers Payment Obligation Under Art 2 Tender of payment by check is sufficient unless the seller demands cash and gives the buyer reasonable time within which to get cash.

The Perfect Tender Rule UCC Art 2 requires the seller to exactly perform all contract obligations. The perfect tender rule permits the buyer to reject goods that fail to conform to the contract in any respect, including quantity, quality, or timeliness. Exceptions to Perfect Tender Rule However, UCC Art 2 does NOT apply the perfect tender rule to the following contracts: ICOP 1. Installment contracts A buyer in an installment contract is precluded from rejecting an installment UNLESS the non-conformity substantially impairs the value of the whole contract and the nonconformity cannot be cured. A buyer is not prevented from suing the seller to recover damages due to the non-conformity of installment. 2. Commercially impracticability Where the delivery was late, but the original delivery date was made commercially impracticable by an event that was not considered by the parties when the K was executed (floods, snowstorms, civil unrest) 3. Objective and reasonable belief If a seller in good faith (1) sends nonconforming goods objectively and reasonably believing that such goods ARE conforming, and (2) when notified of the non-conformity the seller indicates to the buyer its intention to cure the breach, then (3) the buyer must give the seller additional, reasonable time to tender conforming goods, even beyond the date fixed in the contract for performance. If the buyer does not give the seller this additional, reasonable time to cure, but instead invokes the perfect tender rule and repudiates the contract based on sellers breach, then it is the buyer who has wrongfully breached the contract. 4. Prior to performance rejection If the buyer rejects nonconforming good prior to the date for performance fixed in the contract, then the seller has the option to cure the tender before the performance date expires. Time Has Expired: Seller has no option to cure unless if, based on the parties prior performance and dealings, the buyer has shown flexibility in accepting non-conforming goods Installment Contracts An installment contract under the UCC is one where separate lots are to be separately delivered, accepted, and paid for. The court will treat the contract as a series of separate and independent contracts within the whole and each part/installment as separately enforced regardless of the performance of another part. Breach or defective performance of one part/installment does not necessarily breach the entire contract, UNLESS (1) the breach of the part/installment evinces an intent to repudiate the whole contract; or (2) the breach of the part/installment impairs the value of the whole contract. Buyers Acceptance of the Goods Acceptance After a reasonable opportunity to inspect the goods, the buyer signifies to the seller that the goods are conforming or that the buyer will take them despite their non-conformity. After the

buyer accepts the goods, he cannot reject them, but he may revoke the acceptance under certain conditions. Sub-Rule: Implied Acceptance 1. the buyer keeps the goods without objection after having a reasonable opportunity to inspect them and reject them if nonconforming, or 2. the buyer continues to retain and use the goods after a rejection or revocation of acceptance Rejection of Non-Conforming Goods Under UCC Art 2, when nonconforming goods are tendered, the buyer may reject the entire nonconforming shipment or accept any reasonable commercial unit and reject the rest. The rejection must be within a reasonable amount of time after delivery. Definition: Commercial Unit a commercial unit is a single whole for the purposes of sale, the division of which would materially impair its character or value (ex: a furniture set or a quantity like a bale or gross) Note: risk of loss stays with seller because seller breached Revocation of Acceptance Under UCC Art 2, generally a buyer cannot revoke acceptance of goods. Exceptions: 1. The buyer may revoke his acceptance of nonconforming goods within a reasonable time after he discovers or should have discovered a latent defect that is a substantial impairment of the worth of the goods to the buyer, OR 2. The buyer accepted the goods with knowledge of the nonconformity, but the seller gave assurances that the defect would be cured and it was not. Consequences of Rejection/Revocation of Acceptance If the buyer rejects the goods or revokes his acceptances, he may (1) return the goods to the seller at the sellers expense, (2) obtain a refund of any money the buyer has paid for the nonconforming goods, and (3) sue for damages for breach of contract. Exam Tip: Although the consequences are the same, questions will ask you to distinguish between rejection and revocation in the answer choices (look for implied acceptance) Sub-Rule: Buyers Responsibilities for Goods after Rejection/Revocation 1. If, after rejecting nonconforming goods or revoking acceptance of nonconforming goods, the goods are left in the buyers possession, then the buyer must hold the goods for a reasonable time and with reasonable care 2. If the buyer is a merchant and the seller is not from the buyers geographic area, the merchant-buyer has a duty to follow any reasonable instructions received from the seller. Instructions are not reasonable if expenses for undertaking those instructions are not promptly assumed by the seller. 3. If the nonconforming goods are perishable or threaten to rapidly decline in value and the merchant-buyer has not received instructions from the seller, then he must make a reasonable effort to sell the goods on the sellers behalf.

XI. PERFORMANCE OF COMMON LAW CONTRACTS Substantial Performance Definition A partys basic duty at common law is to substantially perform the contract. The doctrine of substantial performance is an equitable rule designed to prevent an injustice where a contract breach inadvertently caused a minor or nonessential deficiency which can be inexpensively remedied. If the breaching party substantially performed, then the breach is considered immaterial. usually arises in the context of construction contracts Timing of Performance Generally, failure to perform by the time stated in the contract is not a material breach if performance is rendered within a reasonable period, UNLESS the contract expressly states that time is of the essence. What is a reasonable period depends on the circumstances and in determining reasonableness the court will consider: (1) the hardship to the party if the contract is not performed by the stated date, (2) the parties intent, and (3) the presence or absence of good faith. Substantial Performance Factors The court considers the following factors in determining whether there was substantial performance and the breach was immaterial: HAIL 1. Hardship on the breaching party is high if a total material breach is declared 2. Amount of benefit bestowed on the nonbreaching party (substantial) 3. Innocent breach and not willful (not in bad faith) 4. Likelihood or ease of full performance being achieved by the nonbreaching party (high/easy)

XII. EXCUSE FROM PERFORMANCE DUE TO SUBSEQUENT EVENTS Other Partys Breach The other partys breach may provide an excuse for non-performance, depending upon the nature of the contract. Sale of Goods (Art 2) If the seller does not perfectly perform all contract obligations, the buyer may: 1. accept the entire shipment, including non-conforming goods, 2. reject the entire shipment, including conforming goods, OR 3. accept the conforming goods and reject the non-conforming goods. Regardless of what the buyer chooses to do with the goods, he may sue the seller for breach of contract for damages. Common Law Contracts Under the common law, only a material breach by the other party excuses the nonbreaching party from further performance or their duty to pay.

Anticipatory Repudiation Definition Anticipatory repudiation of a bilateral contract arises before the date for full performance where one party clearly and unequivocally announces an unwillingness or inability to perform the contract. a request to renegotiate, refusal to perform an honestly disputed or ambiguous contract, or a statement that the party might not be able to perform is not anticipatory breach When Remedies for Anticipatory Breach Are Not Available Remedies for anticipatory breach are not available where the nonbreaching party has fully performed and the breaching partys only obligation is to pay money in future installments. Here, the nonbreaching party must await the future payment dates to sue for breach of contract. An Acceleration Clause avoids this problem and accelerates all future payment installments in the event that one payment installment is breached. Nonbreaching Partys Remedies In the event of an anticipatory breach, the nonbreaching party is not required to perform the contract further but must be able to establish that they were ready, willing, and able to perform the contract but for the other partys repudiation. The nonbreaching party may: 1. immediately sue and claim damages for a total breach or rescission of the contract 2. wait until the day that performance is due to sue for damages, OR 3. wait and urge the breaching party to reconsider performance this is not considered an election of remedies and the party may sue any time thereafter. Retraction of Repudiation After a party anticipatorily repudiates the contract, he may retract his repudiation any time UNTIL the aggrieved party has: 1. commenced a suit on the breach 2. relied on the repudiation and materially changed his position (ex. entered a new contract to cover); OR 3. effectively communicated to the breaching party an intent to treat the repudiation as final and the contract as breached. Failure to Give Adequate Assurances Demanding Assurances of Performance If reasonable grounds exist for a partys insecurity about the other partys ability to perform the contract then, if commercially reasonable, the party can suspend further performance and in writing demand adequate assurances of their future performance. If the other party does not give adequate assurances within 30 days of the requesters demand, then they can treat this as a repudiation of the contract by the other party. However, the party cannot demand a particular type of assurances or use this as an opportunity to rewrite the contract. Ex. good faith rumors of buyers unwillingness/inability to pay, anticipatory repudiation of contract NY Distinction: This remedy also applies to non-sale of goods contracts

Adequate assurances include: The reasonableness of the assurances will depend on the surrounding facts and circumstances. The party must tender proof that he can and will perform through, for example: 1. a sureity promise by a person that they will pay the debts of another 2. a bond 3. bank line of credit 4. an audit or financial report that clearly shows buyers solvency 5. credit report prepared by the buyers bank Later Agreement Mutual Rescission A mutual rescission is an agreement to cancel the contract, excusing both parties from performance. The parties may only rescind the contract where both have performance remaining on the contract for there to be adequate consideration for the rescission agreement. Modification If a contract is subsequently modified by the parties by mutual agreement, this will serve to discharge those terms of the original contract that are the subject of the modification, but not the entire contract. NY Distinction: Partial Discharge by Modification of Contract No consideration is need if the modification is in writing and signed by the party to be charged, or by his agent. Accord and Satisfaction A duty under a contract may be discharged by an accord and satisfaction. An accord is an agreement in which one party agrees to accept some other, different performance as satisfaction of a duty under the existing contract. It does not matter if the new, different performance is less than what was previously due. Satisfaction is the performance of the accord agreement, discharging the original contract and the accord. Bilateral Executory Accord A bilateral executor accord is an agreement that an existing claim be discharged in the future by the rendition of a substituted performance. This is essentially a promise for a future accord and satisfaction. Novation A novation is an agreement to substitute a new party for an existing one. The novation is only valid if all parties to the original contract and the new party agree to the substitution. Exam Tip: The MBE frequently asks you to distinguish between a novation and a delegation. Discharge by Impossibility At common law, a later unforeseen event (after the contract has been entered into) making performance objectively impossible may discharge contractual duties if: (1) the nonoccurrence of the event was a basic assumption of the parties in making the contract, and (2) neither party has assumed the risk of the event occurring.

Destruction of Contracts Subject Matter If the contracts subject matter is destroyed or the designated means for performing the contract are destroyed, contractual duties will be discharged. This does NOT apply to contracts to build something where the work in progress is destroyed because the contractor can rebuild. Death or Incapacity of an Essential Person Death or physical incapacity of a person necessary to effectuate the contract serves to discharge it. In contracts for services, if the services the person was to provide are unique, then performance is excused. If the services the person was to provide are not unique, then the person can delegate them to another, so the performance is NOT excused. payment of money can always be delegated. Supervening Governmental Regulation or Illegality Supervening governmental regulations or illegality may serve to discharge a contract. Discharge by Impracticality Under UCC Art 2, a later unforeseen event (after the contract has been entered into) making performance impracticable may discharge the sellers contractual duties to the extent of the impracticability if: (1) the seller has encountered extreme and unreasonable difficulty and/or expense, AND (2) the nonoccurrence of the event was a basic assumption of the contract. Sub-Rule: Identification to the Contract The seller is excused only if the damaged or destroyed goods have been identified to the particular contract. Ex: set aside for the buyer, tagged with buyers name Sub-Rule: Risk of Loss A seller who bore the risk of loss when the goods were damaged or destroyed is excused from performance, but a buyer bore the risk of loss when the goods were damaged or destroyed is NOT excused. Increase in the Cost of Sellers Performance Generally, a mere increase in costs, even a doubling in costs, is insufficient to discharge performance unless they change the nature of the contract because the seller assumes the risk of price increase by entering into a fixed price contract. NY Distinction: Price Increase NY courts look at the absolute amount of the increase and the percentage of increase

Discharge by Frustration of Purpose A buyers performance under a contract may be discharged for frustration of purpose if: (1) there is a supervening event or act which renders the buyers primary purpose for entering the contract nearly or completely valueless, (2) at the time of contract, the parties did not reasonably foresee the act or event occurring, AND (3) the seller knew the buyers purpose for entering at the contract.

Ex: a person rented a venue for a specific purpose known to the owner and there a subsequent event that was not reasonably foreseeable that renders the purpose for renting the place moot Exam Tip: frequently tested Failure of an Express Condition Definition A contract may provide, either impliedly or explicitly, that a party who is bound does not come under a duty to perform unless or until some specified condition occurs. A condition is an event, other than the passage of time, the occurrence or non-occurrence of which will create, limit, or extinguish the other contracting partys duty to perform. The failure of a condition or legal excuse relieves a party of the obligation to perform. Classification of Express Conditions 1. Condition Precedent one that must occur before an absolute duty of immediate performance arises in the other party Ex: agreement to pay $10,000 if my house is sold by April 1 2. Conditions Concurrent ones that are capable of occurring together and that the parties are bound to perform at the same time Ex: Tiger lets Jeter use is golf clubs as long as Jeter is a Yankee 3. Condition Subsequent one the occurrence of which cuts off an already existing absolute duty of performance Ex: agreement to buy Blackacre unless zoning is changed 4. Satisfaction Clauses satisfaction is measured by a reasonable person standard unless the contract deals with matters of art or personal test which are judged by a subjective standard Ex: agreement to pay $7,500 for a portrait if satisfied with the work Excuse of a Condition Occurrence of a condition may be excused by the later action or inaction of the person who is protected by the condition. The party protected by the condition can excuse the other partys performance by 1. failing to cooperate 2. material breach, anticipatory repudiation 3. waiver: the party receiving the benefit may indicate by words or conduct that they will not insist on the conditions being met; this does not require consideration Sub-Rule: Estoppel Waiver If the protected party indicates they are waiving the condition beforehand and the other party detrimentally relies on this, the protected party may not retract the waiver

BREACH
Common Law Remedies for Substantial Performance The breaching party who substantially performed can recover the contract price, minus the cost to correct any defects and reach complete performance. The nonbreaching partys remedy is the

cost of completion or correction, unless that cost is grossly out of proportion with any benefit to be achieved. Then the measure of damages is the difference in the value of the substantial performance and the value of what would have been tendered if there had been full performance. Common Law Breach Definition A breach of contract is the total or partial failure, without legal excuse, to perform any promise that forms the whole or part of the contract. A breach by one party entitles the other party to damages. A breach may occur where (1) one party fails to give the promised performance or there was full performance, but it was deficient; (2) one party prevents the other partys performance; (3) one party repudiates the contract; or (4) there is an anticipatory breach. Material Breach A breach is material where the nonbreaching party does not receive the substantial benefit of the bargain. The aggrieved party is entitled to all remedies for breach of the entire contract. NY and Majority Rule: The materially breaching party cannot assert a claim for unjust enrichment and cannot recover anything for benefits bestowed on the nonbreaching party by services rendered. Immaterial Breach Where the breach is immaterial, meaning it is trivial or minor, or the element breached is merely incidental to the contract, the nonbreaching party is not relieved of the duty of performance or of paying for the performance rendered. Damages/ Statute of Limitations Damages will be assessed and the statute of limitations will begin to run from the date the nonbreaching party learned of the anticipatory breach. The party bears the risk of loss due to any adverse changes in market price during the delay.

PART 6. REMEDIES
Buyers Remedy List When a seller breaches the contract, either because the seller repudiates, fails to timely deliver, or where the delivered goods fail to conform to the contract (quantity or quality), the buyer has the following remedies: CIDS WAAR 1. Cover 2. Incidental and Consequential Damages 3. Damages for Lost Bargain or for the Price Paid 4. Specific Performance of Unique Goods 5. Breach of Warranty 6. Acceptance Revoked 7. Demand Adequate Assurances 8. Reject Non-Conforming Goods

Sellers Remedy List of possible remedies available to seller Under UCC Art 2, where the buyer wrongfully repudiates the contract, wrongfully rejects conforming goods, or fails to pay the contract price for delivered goods, the seller has the following remedies against the breaching buyer: SPARKLE 1. Stopping goods in Transit 2. Sue for the entire contract Price 3. Demanding Assurances of performance 4. Resell the goods to another buyer 5. Keeping part of the buyers deposit 6. Sue for Lost profit 7. Exercise right to reclaim goods delivered to insolvent buyer

XIII. NON-MONETARY REMEDIES Specific Performance Specific performance is an equitable remedy available only if monetary damages are inadequate to compensate the injured party. The court orders the breaching party to perform or face contempt of court charges. Availability of specific performance depends on the nature of the contract. Real Property Specific performance is always available and is the usual remedy for real property contracts because real property is considered unique. Service Contracts Specific performance is never available for breach of contracts to provide services, even if they are rare or unique, because the court will not force a party to work against their will. However, injunctive relief may be available. Sale of Goods Contracts Under UCC Art 2, a buyer may request that the court exercise its equitable power to decree specific performance: (1) where the goods are unique (heirloom or priceless), (2) in other proper circumstances, such as where damages would be uncertain or difficult to ascertain or where the buyer cannot readily buy the goods in the market. Other Non-Monetary Remedies Under UCC Art 2 Buyers Non-Monetary Remedies 1. Cancellation If a buyer rightfully rejects goods because they do not conform to the contract, one of their options is to simply cancel the contract. Sellers Non-Monetary Remedies 1. Stopping Goods in Transit or Refuse Delivery

Under Art. 2 of UCC, when a buyer wrongfully repudiates the contract (Anticipatory Breach) or fails to make a timely required payment, a seller refuse delivery or can stop goods in transit, but only if the shipment is a large quantity or in bulk. However if the breaching party is insolvent then any goods in transit can be stopped regardless of the size of the shipment. Note: This remedy is lost once the carrier has effected delivery and acknowledges buyers right to the goods. 2. Exercise Right to Reclaim Goods Delivered to Insolvent Buyer Generally, an unpaid seller does not have the right to reclaim goods from the buyer. However, if the seller has delivered goods on credit and discovered that the buyer was insolvent at the time of delivery, then the seller may: (1) commence an action for the entire contract price, however the judgment will have little value, OR (2) reclaim the goods from the buyer by making a demand for the goods within 10 days after delivery, provided the buyer was insolvent at the time the goods were delivered on credit or paid for the goods with a check that bounced. If the seller successfully reclaims the goods, he is precluded from exercising any other remedies. Sub-Rule: Seller has Priority Over Other Creditors Under UCC Art 2, the seller has priority to reclaim the goods over the buyers other judgment or lien creditors but the sellers right to reclaim is defeated by a good-faith purchaser of those goods who purchased the goods in the ordinary course of business. Exception (that will not remember): The seller may reclaim the goods at any time if the buyer misrepresented its solvency in writing within three months before deliver. Sub-Rule: Definition of Insolvency Under UCC Art 1, a party is in solvent where it ceases to pay its debts in the ordinary course of business, when it cannot pay its debts as they become due, or as defined under federal bankruptcy law. Demand Assurances (See above) XIV. MONETARY REMEDIES DAMAGES Types of Damages Expectation Damages Expectation damages are the standard measure and the goal is to put an injured party in as good a position as full performance would have. Consequential Damages Consequential damages are additional losses particular to that a reasonable person would have foreseen. To recover consequential damages, the must show: (1) the loss was caused by the breach, (2) that the s particular needs were known to the at time of contract, (3) reasonable certainty as to the amount of damages, and (4) that the damages could not have been mitigated Note: Under the UCC, only the buyer may recover consequential damages Incidental Damages (Under UCC)

Under UCC Art 2, incidental damages are any commercially reasonable expenses incurred incident to the other partys breach. buyer can recover: expenses reasonably incurred in inspection, receipt, transportation, care, and custody of goods rightfully rejected seller can recover: expenses incurred in storing, shipping, returning, and reselling the goods Punitive Damages Punitive damages are NOT awarded for breach of contract. Nominal Damages Nominal or token damages may be awarded when there was a breach but no actual loss. Liquidated Damages The parties to a contract may stipulate what damages are to paid in the event of a breach, even if the nonbreaching party did not suffer any pecuniary damages. A liquidated damages clause in a contract will be upheld if: (1) damages would be difficult to estimate, and (2) the amount agreed upon is a reasonable forecast of probable damages they cannot operate as a penalty Even if the liquidated damages clause is struck down, the nonbreaching party is still entitled to actual damages Expectation Damages Common Law Damages are based on an expectation measure or the benefit of the bargain. Expectation Damages UCC Sale of Goods Buyers Damages 1. Cover Damages [cover price contract price + incidental, consequential savings] Under UCC Art 2, where the seller fails to tender the goods or the buyer properly rejects/revokes acceptance of non-conforming goods, a buyer may effect cover by purchasing or contracting to purchase similar goods from another seller in substitution for those due from the seller. The purchase must be made in good faith and without unreasonable delay. The buyers measure of damages is the difference between higher cost to cover and the original contract price, plus consequential damages for lost profits and incidental damages and minus any savings as a result of the breach. Under the UCC, effecting cover is a condition for recovering consequential damages. 2. Market Damages [market price contract + incidental, consequential savings] Under UCC Art 2, where the seller fails to tender the goods, the buyer properly rejects/revokes acceptance of non-conforming goods, or the seller anticipatorily repudiates the contract, the buyer is entitled to damages. Where the buyer does NOT cover or does not cover in good faith, the buyers measure of damages is the difference between the higher market price at the time he learned of the breach and the lower contract price, plus consequential damages for lost profits and incidental damages and minus any savings as a result of the breach. 3. Lost Bargain [value promised value accepted + consequential/incidental]

Under UCC Art 2, where the buyer accepts nonconforming goods and gave the seller notice of the nonconformity within a reasonable time after its discovery, the measure of the buyers damages is the difference between the value of the goods promised in the contract and the value of the goods accepted plus consequential damages for lost profits and incidental damages. Sellers Damages 1. Resale Damages [contract price resale price + incidental damages-expenses saved] Under UCC Art 2, when a buyer wrongfully repudiates the contract or refuses to accept conforming goods, the seller may promptly re-sell those goods and sue the buyer for the resulting damages. The resale must be performed in a commercially reasonable manner (good faith) at a public or private sale and it should be with notice to the breaching buyer. The damages are the difference between the higher price in the sales contract and the lower resale price, plus any incidental damages suffered by the seller and minus any expenses saved. Sub-Rule: When the Goods are Unfinished at Time of Breach When a buyer repudiates the contract and the seller has not completed production of those goods, then the seller in good faith may: 1. complete the goods and re-sell them, 2. cease production and sell the goods for scrap, OR 3. to proceed in any other reasonable manner 2. Market Damages [contract price market price + incidental damages-expenses saved] If the seller does resell the goods, does not resell in good faith, or fails to give notice to the breaching buyer, then the seller can recover only the difference between the higher price in the sales contract and the fair market price at the time and place of delivery (which is not necessarily the resale price) plus any incidental damages and minus any expenses saved. 3. Lost Profit: Volume Dealers [contract price cost of goods + incidental damages expenses saved] The difference between the breached contract price and the resale price is an inadequate remedy for the volume seller who has an unlimited supply of goods because he is able to immediately resell the goods for the same price to another buyer. Here, the sellers measure of damages is his lost profit, which is the contract price minus the cost of the goods to the seller plus any incidental damages and minus any expenses saved. 4. Contract Price Under Art 2 of UCC, the seller may sue the buyer for the entire contract where: 1. the seller delivers conforming goods on credit but the buyer fails to pay for those goods, 2. conforming goods were destroyed after risk of loss passed to the buyer, OR 3. the buyer wrongfully fails to accept conforming goods and the seller cannot re-sell them because they are obsolete or not usable by anyone except the buyer. 5. Keeping Part of the Buyers Deposit If a breaching buyer paid a deposit on the contract, the buyer is entitled to restitution in the amount of the deposit. However, the buyers right to restitution is limited and the seller can keep 20% of the total purchase price or $500, whichever is less, plus any damages caused by the buyers breach.

Sub-Rule: Real Estate Contracts In a real estate contract, the seller is entitled to keep the buyers deposit if the buyer breaches as liquidated damages. The amount of the deposit must be a reasonable forecast of the sellers damages in the event of breach to be valid. Building Contracts Where an owner breaches a construction contract after construction has been started but before construction is completed, the building is entitled to recover any profits he would have derived from the contract plus any costs he has incurred up to the date of breach. (contract price minus cost of completion) Duty to Mitigate The nonbreaching party has a duty to mitigate their damages and cannot recover damages they could have avoided with reasonable effort. The duty to mitigate is built into UCC remedies. Sub-Rule: Employment Contracts If the employer breaches, the employee has a duty to use reasonable care in finding a position of the same, kind, rank, and grade in the same city. If the employee is not required to take a job, but they will only be able to recover the difference between the contract salary and the comparable job salary.

XV. RESTITUTION

PART 7. THIRD PARTIES TO A CONTRACT

XVI. THIRD-PARTY BENEFICIARIES Definitions Third Party Beneficiary A third party beneficiary arises where two parties enter into a contract that will render some performance or benefit to a third party. Promisor The party who promises to perform for the third-party beneficiary. Promisee The party who secures the promise. Intended Beneficiary The intended third-party beneficiary is the person who is not a party to a contract but has contractual rights because the parties intended the contract to benefit him. In determining whether the beneficiary was intended, consider whether the beneficiary: 1. is identified to the contract 2. receives performance directly from the promisor, or 3. has some relationship with the promisee to indicate intent to benefit

Donee Beneficiary A donee beneficiary is an intended third-party beneficiary whom the promisee intends to benefit gratuitously. Creditor Beneficiary A creditor beneficiary is an intended third-party beneficiary to whom the promisee intends the contract to pay off a debt. Incidental Beneficiary If the third party was not an intended beneficiary, they are merely an incidental beneficiary with no contractual rights. Rescission and Modification of Third-Party Beneficiary Contracts Vesting of Beneficiary Rights A third party can only enforce a contract if his rights have vested. This occurs when he: 1. materially changes position in justifiable reliance on the promise, 2. brings a suit to enforce the promise, or 3. manifests assent to a promise in the manner requested by the parties Modification and Rescission The promisor and promisee cannot rescind or modify the contract after the third partys rights have vested without the third partys consent. Exception Contrary language in the contract controls. Rights and Liabilities Promisor to Intended Third Party Beneficiary An intended third party beneficiary may sue a breaching promisor to the contract to enforce their rights and the promisor may raise any defense that the promisor has against the promisee. Promisee to Creditor Beneficiary A creditor beneficiary can sue the promisee on the existing obligation between them, donee beneficiaries cannot. Promisor to Promisee A promisee may sue the promisor at law and in equity for specific performance if the promisor does not perform for the third party (creditor or donee).

XVII. DELEGATION OF DUTIES AND ASSIGNMENT OF RIGHTS Delegation of Duties A party to a contract, known here as the delegator, may delegate his contractual duties, either orally or in writing, without the consent of the person to whom performance is owed, known as the obligee. The person to whom the duties are delegated is known as the delegate. The delegator must manifest a present intention to make a delegation.

Exam Tip: The MBE uses the terms assignment and delegation loosely the question may say assigned rights but the facts may show that there was also a delegation of duties Exceptions Generally, all duties may be delegated. However, the following duties may not be delegated: 1. *there is a contractual restriction on delegation or assignment 2. *duties involving the partys particular judgment, skill, or reputation 3. delegation would change the obligees expectancy Ex: requirements or output contract 4. a special trust was reposed in the delegator by the other party to the contract Rights and Obligations of the Parties The delegator remains liable to the obligee on the contract, so the obligee may sue the delegator for nonperformance of the delegate OR the delegate. Sub-Rule: Requiring the Delegate to Perform The obligee may only require the delegate to perform if the delegate assumes the duties of the contract by promising to perform in exchange for consideration. Exam Tip: Distinguish from novation substitutes a new party for an original party to the contract, completely releases the original party, and requires assent of all parties Assignment of Rights An assignment of rights is where two parties create a contract and one party, the assignor, transfers his rights to the other partys performance to a third party, the assignee. The party who owes the duty to perform is the obligor. The assignor must manifest an intent to immediately and completely transfer rights. Gratuitous assignments are permissible as consideration is not required. The effect of an assignment is to establish privity of contract between the obligor and the assignee, extinguishing it between obligor and assignor. Exam Tip: Distinguish from a contract with a third party beneficiary assignment: two parties contract and then another person is brought in; third party beneficiary: all three people are present from the beginning Exceptions Generally, all contractual rights may be assigned. However, rights may not be assigned where: 1. *a contract clause providing that attempts to assign are void Sub-Rule: Contract Language Assignment of the contract is prohibited only bars delegation Assignment of contractual rights is prohibited assignment valid but obligor can sue the assignor for breach Assignment is void only this bars assignment 2. *the assignment would substantially change the duties or risk of the obligor Ex: personal service contracts changes; right to payment does not 3. it is an assignment of future rights 4. the assignment is prohibited by law

Assignment of the Entire Contract An assignment of an entire contract transfers both rights and obligations. Revocable Assignments Generally, gratuitous assignments, meaning no consideration was given for them, are revocable by: 1. notice of revocation 2. assignor taking performance directly from the obligor 3. subsequent assignment of the same right to another 4. death/bankruptcy of assignor Exceptions: However, a gratuitous assignment is not revocable if: 1. the obligor has already performed 2. the assignee can show detrimental reliance on the gratuitous assignment NY Distinction: A gratuitous assignment is irrevocable if in writing and signed by the assignor. Irrevocable Assignments An assignment for consideration is irrevocable. Rights and Obligations of the Parties Assignee can sue the obligor because the assignee is the party entitled to performance. The obligor can raise any defense inherent in the contract. The assignee can sue the assignor for wrongfully revoking an irrevocable assignment. Successive Assignments of the Same Rights The last gratuitous assignee in time prevails over earlier gratuitous assignees because a later gratuitous assignment revokes an earlier one. The first assignee for consideration prevails over all subsequent assignees and all prior gratuitous assignees. Exceptions: A later assignee for consideration who took the assignment without notice of the prior assignment will prevail if the subsequent assignee is the first to get payment or a judgment against the obligor. Exam Tip: If you encounter multiple assignments in a question, you should analyze each assignment in the order it was made to see if that particular assignment was valid. Entrustment An owner who entrusts goods to a merchant who deals in goods of the kind has no rights against a bona fide purchaser, meaning they bought it in the ordinary course of business without knowledge that the sale is in violation of the ownership rights of another. 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 and the merchant accidentally sells the item to someone else.