A) Preliminaries B) Formation

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1 Contracts Page 1 of 12 A) Preliminaries 1) Governing law The Uniform Commercial Code (UCC) governs transactions that are predominantly for goods (movable property, identifiable to the contract at formation), while the Common Law (CL) governs all other transactions and supplements the UCC where the UCC is silent. 2) Merchant Under the UCC, merchants are those who deal in goods of the transaction OR hold themselves out to be experts with respect to the goods. 3) Divisible contract A contract is divisible where on the face of the contract there are separate units of work for separate units of payment. 4) Contract A contract is an agreement (a mutual manifestation of assent), between two or more parties, to the same definite terms, that is supported by consideration. Such an agreement is generally established through the bargaining process of an offer, not terminated, and accepted by the offeree. 5) Objective person rule Under the objective person rule, assent to contract terms is judged in terms of what a reasonable person would conclude from the words and conduct of the parties under the circumstances. B) Formation 1) Offer An offer is a commitment, to definite terms, that is communicated to an identified offeree. A. Commitment A commitment exists when a reasonable person under the circumstances would interpret the communication as an unequivocal manifestation of present intent to be bound by an agreement. B. Definite terms A communication contains definite terms if it addresses all its material terms with certainty and contains all essential terms. 1. Real estate the essential terms are the location of the land and the price. 2. Services the essential terms are the time of employment measured by duration or task. 3. Goods the essential terms are the quantities. 4. Construction the essential terms are the specifications. 5. Gap fillers the law will fill in the immaterial terms if an objective standard to do so exists; history of performance, course of dealing, and trade usage are relevant. C. Communicated received and understood by the offeree D. Reward offer/identified offeree In a reward offer, the identified offeree is the member of the general public who understands the offer and completes the requested task. E. Advertisement Advertisements and price quotes are generally considered invitations to deal rather than offers, unless they express language of commitment, state all material terms with specificity, and identify the person to whom the offer is made. Although advertisements are not generally considered offers, their terms are implicitly included in contracts arising from negotiations initiated by the advertisement. 2) Not terminated A. Revocable offer A revocable offer may terminate before acceptance by its own terms, lapse of time, operation of law (death of offeror, destruction of the subject matter), revocation, and rejection 1. Lapse (generally, oral, UCC) (a) General An offer will stay open according to its terms or a reasonable time if it is silent about the length of time it is open. (b) Oral An oral offer will lapse at the end of the conversation, unless stated otherwise. (c) UCC Under the UCC, where the beginning of a requested performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. 2. Revocation (general, public) (a) General An offer may generally be revoked at any time prior to acceptance. Under the majority rule, a revocation is effective upon receipt (offeree receives reliable information that the offeror no longer desires the transaction or the transaction is impossible). Under the minority rule, a revocation is effective upon dispatch. (b) Public A public offer is revoked when the offeror publicizes notice that the proposed transaction is no longer desirable, and uses the medium in which the original offer was made or a reasonable substitute. 3. Rejection An offer is terminated by rejection when the offeror receives reliable information that the offeree does not desire to be bound by the terms of the offer. Page 1 of 12

2 Contracts Page 2 of Counter-offer A counter-offer serves as a rejection if and only if its language includes a manifestation not to be bound by the terms of the offer and it doesn t expressly seek to keep the offer under advisement. 5. Destruction or illegality of subject matter 6. Death of offeror B. Irrevocable offer An irrevocable offer terminates by lapse of time, death or destruction of someone or something essential to performance, or rejection coupled with detrimental reliance (terminates at the moment of the reliance). An irrevocable offer will not terminate by rejection without detrimental reliance, revocation, or supervening death or incapacity of the offeror or offeree. 1. Types of irrevocable offer An offer is irrevocable when the offeror promises to hold the offer open for a certain period, and (1) the promise is supported by consideration (including nominal or sham consideration) or (2) detrimental reliance; or (3) the offer is a merchant s firm offer under the UCC or (4) a unilateral offer where the offeree has begun performance before the revocation. 2. Merchant s firm offer An offer is a merchant s firm offer if the (1) offeror is a merchant and (2) the offer is in a signed writing that states that it will be held open. In this case, the offer becomes irrevocable for the lesser of the time stated (or a reasonable time, if no time is stated) or three months. 3) Acceptance A. Unilateral vs. Bilateral 1. CL Although the offeror may dictate the manner of acceptance, an offer that is silent or ambiguous as to the nature of acceptance will be construed as inviting acceptance only by a return promise (bilateral offer) rather than a return performance (unilateral offer). 2. UCC Under the UCC, unless unambiguously conditioned, an offer may be accepted in any manner reasonable under the circumstances. B. Acceptance of UNILATERAL offer Under CL, a unilateral offer is accepted only by substantially completing the request act. C. Acceptance of the BILATERAL offer (CL mirror image rule) Under the CL MIRROR IMAGE rule, an offeree accepts when he (1) communicates (2) commitment to be bound (3) by the exact terms of the offer (mirror image). Generally, an acceptance is effective on dispatch. 1. Communicate The acceptance must be communicated in the manner dictated in the offer or a reasonable manner (includes silence where the offeree commences performance in the offeror s presence; or the offeree receives the offeror s goods or services, fails to reject them within a reasonable time, and a reasonable person would conclude the goods or services were offered with expectation of compensation) 2. Commitment A commitment is a communication that a reasonable person in the offeror s position would consider to be an unequivocal manifestation of intent to be bound by the terms of the offer. 3. Mirrors The commitment mirrors the offer when the offeree assents to the exact terms stated in the offer. 4. When effective Under the mailbox rule, an acceptance that is reasonably transmitted (reasonable medium and reasonable steps to insure delivery) is generally effective upon dispatch. 5. MBR Exceptions However, this rule does not apply when (1) the offer provides otherwise, (2) the offer is held open for a limited time through an option contract, (3) the offeree sends a rejection before the acceptance, or (4) the offeror receives a contradictory communication from the offeree and changes position based on that communication. 6. Effect of failure of MBR When mailbox rule does not apply, the acceptance is effective upon receipt, or not effective at all if done contrary to express conditions stated in the offer. D. UCC Acceptance 1. Under UCC 2-206, an offer not otherwise conditioned may be accepted in any reasonable manner, including a promise to ship or shipment of either conforming or non-conforming goods. 2. Effect of shipping non-conforming goods A shipment of non-conforming goods is simultaneously an acceptance and a breach, but a shipment of non-conforming goods as an express accommodation is a counter-offer rather than an acceptance. Page 2 of 12

3 Contracts Page 3 of UCC vary terms Under UCC 2-207, an expression of acceptance containing varying terms is effective when it is definite and seasonable, and not expressly conditioned on the offeror s assent to the varied terms. If acceptance is expressly conditioned on varied terms, then it is a counter-offer 4. UCC conduct Under UCC 2-207, 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. 4) Consideration An agreement is supported by consideration when there is a bargained-for exchange of acts or promises where each party incurs new legal detriment. A. Bargained for exchange Promises or acts are bargained-for when they are given in exchange for or to induce a promise or performance. (Because X WANTED Y s Z) 1. Gift Even if the promisor s promise induces a return promise or act from the promisee, if the promisor did not seek such inducement, there is no bargained for exchange. In such circumstances, the promise is merely an unenforceable gift. 2. Gift & condition If the gift is coupled with a condition, consideration is present if the condition is bargained for. 3. Benefit received (general rule) A promise made in return for a benefit already received is not bargained-for, because it seeks nothing in return. B. Legal detriment Parties incur legal detriment when they promise to do or do something they have no legal duty to do or refrain from exercising a legal right. 1. PELD Under the pre-existing legal duty rule (PELD), parties do not incur legal detriment when they promise to perform or perform an already-existing legal obligation. 2. Duty Owed to Third Party Under the traditional view, a party who promises to perform an alreadyexisting duty owed to a third party incurred no legal detriment, because the promise violates PELD. Under a minority view, a party making such a promise does incur legal detriment. 3. Forbearance to Sue A promise to surrender a claim held in good faith, constitutes detriment and, if bargained for, consideration. 4. Illusory Promises When there is no restriction on a party s duty to make good on a promise, courts have held that no new legal detriment is incurred. However, in such situations, modern courts will read in an implied promise to use best efforts when the parties truly intended to perform. 5. Conditional Promises Parties incur new legal detriment when their promises are conditioned on the happening of an event as long as they do not have full power to control the event s occurrence. 6. Output and Requirements Contracts Under the UCC, parties to output and requirements contracts incur legal detriment, because courts read in an implied promise to use best efforts C. Moral Obligation Under CL, promises based on moral obligation generally cannot be enforced without new detriment. Modernly, a moral obligation is a sufficient detriment to the extent necessary to prevent injustice. D. Promissory Estoppel Under the doctrine of promissory estoppel, a promise will be enforced without consideration when the promisee has detrimentally and reasonably relied on the promise, the promisor could reasonably foresee such reliance, and justice can be served only by enforcing the promise. 5) Defenses A. Within Statue of Frauds (SOF)? Agreements falling within the SOF are an agreement (a) for an interest in land, including a lease of duration more than one year, (b) for the sale of goods for $500 or more, (c) incapable of being performed within a year of the date of contract formation, (d) to guarantee the debt of another, (e) contracts in consideration of marriage B. SOF satisfied? In general, the SOF is satisfied when a sufficient writing evidences the agreement. 1. Under CL Any record (or set of records) will satisfy the writing requirement when it (1) identifies the contracting parties, (2) states the subject matter, (3) states all material terms with reasonable certainty, and (4) is signed by the party against whom enforcement is sought. 2. Under the UCC Any record (or set of records) will satisfy the writing requirement when it (1) identifies the parties (2) indicates a contract for the sale of goods, (3) contains a quantity term, and (4) is signed by the party against whom enforcement is sought. 3. Under the UCC between merchants Between merchants, the SOF is satisfied against both when (1) one sends the other a signed confirmatory writing; (2) the writing is sufficient to bind the sending merchant; and (3) and the receiving merchant fails to object within 10 days. Page 3 of 12

4 Contracts Page 4 of 12 C. SOF Escape hatches 1. Interest in land The purchaser takes possession and either makes a partial payment or improvements to the land. 2. Goods $500 or more (1) The goods are to be specially manufactured and the seller starts to manufacture them before notice of repudiation is sent; (2) the party against whom enforcement is sought admits in court that a contract was made (in this case, the statute is satisfied to the quantity of goods admitted); (3) payment has been made and accepted or the goods have been received and accepted. In this case, the statute is satisfied to the quantity of goods paid for or accepted. 3. Within year One party fully performs the agreement 4. Guarantee debt The guarantor s main purpose is personal benefit 5. Promissory estoppel Under a modern trend in contract law, an agreement will be enforceable despite failing to satisfy the SOF when one of the parties has detrimentally, reasonably, and foreseeably relied on the agreement and justice can only be served by enforcing the agreement. D. Duress Requires a wrongful act or threat from the party seeking enforcement that overcame the will and induced the assent of the defending party. Grounds for rescission and restitution E. Undue Influence Requires the use of power or trust of the party seeking enforcement that overcame the will and induced the assent of the defending party. Grounds for rescission and restitution F. Fraud Requires a material misrepresentation of material fact by the party seeking enforcement that causes the defending party to justifiably (reasonable person standard) rely on the misrepresentation in entering the contract. Grounds for R&R; cross-over w/tort; election of remedies G. Silence silence is generally insufficient for fraud. However, if there is active concealment or a confidential relationship, then there is a duty to speak. H. Fraud in execution Requires that the defending party signed a radically different instrument from that which he was led to believe and a reasonable person would have signed the instrument under the circumstances. Such a contract is void. I. Mutual Mistake Both parties share (1) a mistaken common assumption about (2) an existing material fact (3) on which they base their bargain, and (4) the party asserting the defense did not assume the risk of the mistake. Grounds for R&R J. Unilateral Mistake (1) The defending party mistakes an (2) existing material fact (3) upon which the bargain is made and (4) the other party knew or should have known a mistake was made; OR (1) enforcement against the mistaken party would be oppressive or grossly unfair AND (2) avoidance would impose no substantial hardship on the other party. Grounds for R&R K. Ambiguity One of the material terms is capable of more than one meaning. Grounds for R&R. Exceptions: (1) Both parties intend the same meaning; K formed with common meaning; (2) One party knows or has reason to know of the ambiguity and the other party does not; K formed with the meaning held by the non-knowing party. L. Reformation A writing evidencing a contract may be reformed to reflect the parties actual agreement when an error has been made in reducing the agreement to writing. M. Unconscionability A court will as a matter of law refuse to enforce a contract or a clause of a contract that the court finds unconscionable. While there is no universally accepted definition, courts generally find unconscionable provisions that (1) are the product of substantial unequal bargaining power (includes take-it-or-leave-it, adhesion contracts); or (2) unreasonably favor (no reasonable person would make them and no honest person would accept them) the party with superior power. When a court finds a provision unconscionable, the court will take any step is finds necessary to make the agreement fair. N. Incapacity One who lacks capacity can avoid (R&R) a contract EXCEPT when it provides for necessaries (items reasonably necessary to support the promisor s subsistence) or when the incapacitated party attains capacity and either affirms or fails to repudiate the agreement within a reasonable time. 1. Infant An infant (an individual under the age of 18) lacks capacity, regardless of whether the other party knows or should know of the infancy. 2. Mentally infirm The mentally infirm (those who do not understand the nature and consequences of the transaction) lack capacity as long as the other party knows or has reason to know of the infirmity. Page 4 of 12

5 Contracts Page 5 of 12 O. Illegality A contract with illegal subject matter is generally void; and a contract with an illegal purpose (reason K entered into is illegal) is generally voidable by the innocent party (the party who didn t know, or, if the purpose doesn t involve serious moral turpitude, knew but didn t facilitate the purpose) 6) Modification A. Valid modification A modification is the product of an offer and acceptance (as defined above) that is supported by consideration (defined slightly differently from above). The contract, as modified, must also withstand all defenses to enforcement. B. Modification consideration (CL, circumstances, UCC) 1. CL An agreement to modify an existing contract is unenforceable without additional consideration. 2. Unforeseen circumstances Under the minority rule, an agreement to modify an existing contract, not fully performed on either side, is enforceable without additional consideration if it is fair and equitable in view of extreme unforeseen circumstances 3. UCC An agreement to modify an existing contract is enforceable without additional consideration if done in good faith. C. Anti oral modification clauses At CL, they are not enforced. At UCC, they are enforced unless there is detrimental reliance on the oral modification D. Valid accord and satisfaction An accord is an agreement to substitute a new performance in satisfaction of an existing debt. It is binding on both parties if supported by consideration. A satisfaction is performance the accord. C) Terms 1) CL Under CL, the contract terms are those offered and unequivocally assented to by the offeree. 2) UCC VARY TERMS/ACCEPT EFFECTIVE Under UCC 2-207, the additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract UNLESS A. The offer expressly limits acceptance to the terms of the offer (IRON CLAD OFFER); B. They materially alter it; or C. Notification of objection to them has already been given or is given within a reasonable time after notice of them is received. 3) UCC CONDUCT (knockout rule) Under UCC 2-207, an agreement can be established by conduct despite conflicting writings. In such cases the terms of the particular contract consist of those terms on which the writings agree, together with supplementary UCC gap-fillers. 4) Parol Evidence Rule (PER) Extrinsic evidence (prior agreements or contemporaneous oral agreements) that contradicts a final written expression of an agreement (an integrated writing) cannot be introduced into evidence; and extrinsic evidence that supplements a final and complete expression of an agreement (a complete integration) cannot be introduced into evidence. A. Complete An agreement is complete if (1) it appears on its fact to be complete, (2) OR it would be unnatural for parties in the position of those to the agreement to exclude the offered extrinsic evidence from the written expression of the agreement. B. Exceptions Extrinsic evidence will always be admitted to show (DAM FOIL Complete UCC) duress, ambiguity, mistake, fraud, oral condition precedent, illegality, or lack of consideration. Extrinsic evidence may also be admitted to show that a written expression of an agreement is not complete. Also, usage of trade, course of dealing, or course of performance will always be admitted to explain or supplement a final written agreement under the UCC. D) Performance 1) Setup Conditions satisfied or excused + plus duties not discharged = absolute duty to perform. If absolute duty and less than full performance, then breach = remedies. 2) Conditions A. Definitions 1. Condition A condition is a future and uncertain event or act that triggers or negates a duty to render a promised performance. 2. Express condition An express condition is one that is stated in the contract. 3. Implied condition An implied condition is one that, because of the nature of the agreement, the parties truly intended as a condition, but failed to express. Cooperation is an example of such a condition. Page 5 of 12

6 Contracts Page 6 of Constructive condition A constructive condition is one that the law constructs to do justice and is generally interpreted from the relative performances of the parties. B. Burdens of proof For conditions precedent, the non-protected party has the burden of proving that the condition is satisfied; for conditions precedent, the protected party has the burden of proving the condition is satisfied C. Promise or condition Under modern contract law, where language used in a contract is ambiguous as to whether it expresses a promise or a condition, courts will construe the term as a promise, because failure of conditions lead to forfeiture; and courts generally try to avoid forfeitures. On the other hand, use of express language, such as if, on condition that, provided, or subject to will lead courts to construe the language as a condition. D. Satisfaction of conditions (CL) Under common law, express and implied conditions require full compliance before they are satisfied, while constructive conditions require only substantial compliance before they are satisfied. The factors in determining substantial performance are (1) the extent of the performance, (2) the willfulness of the breach, (3) the quantitative seriousness of the breach, and (4) the likelihood of cure 1. Personal satisfaction Conditions involving personal satisfaction in matters of personal taste or third party approval require good faith satisfaction. Such conditions in matters of functional utility require reasonable satisfaction. E. Excuse of conditions (WEBF) 1. Waiver A condition is excused when (1) it does not form a material part of the exchange, and (2) a reasonable person would conclude from the entitled party s words or conduct (e.g. knowingly accepting defective performance) that he no longer requires it. 2. Estoppel A condition is excused when the party entitled to it engages in conduct on which the other party reasonably, foreseeably, and detrimentally relies on in determining the condition is no longer required. 3. Breach Conditions are excused when an entitled party engages in breach activities that constitute a material breach. 4. Forfeiture Modern courts will excuse a condition when (1) it doesn t form a material part of the exchange, and (2) enforcing it will involve extreme forfeiture. 3) Discharge of duty (IIF) A. Impossibility A duty is discharged when an unforeseeable event (risk not allocated) renders performance objectively impossible 1. Land sale Under the majority equitable conversion rule, the buyer in an executory land sale contract bears the risk. Under the minority UVPA rule, the seller bears the risk 2. Destruction of construction For repairs, the risk of loss is with the owner. Thus, destruction will discharge the contractor s duty and he can get restitution. For new construction, the risk of loss is with the contractor. Thus, destruction will discharge the owner and subcontractor s duties. 3. Goods in transit If FOB seller s place, the buyer bears the risk. If FOB buyer s place, the seller bears the risk 4. Crops Partial destruction only partially discharges the duty 5. Means of production Discharges the duty where the means are essential to the contract only B. Impracticability A duty is discharged when an unforeseeable event (risk not allocated) renders performance an extreme economic hardship to the promisor. If such event is temporary, the duties are suspended and must be promptly performed when the event is over. However, if time is of the essence, the party to whom performance is owed may seek services elsewhere. C. Frustration A duty is discharged when an unforeseeable event (risk not allocated) substantially destroys the parties objective purpose in entering into the contract 4) Breach Failure to Perform A. Prospective Breach 1. *Anticipatory Repudiation Anticipatory Repudiation (A/R) occurs when one of the contract parties gives an unequivocal indication, before his performance is due, that he will not perform as promised, the anticipated breach would constitute a material breach, and the aggrieved party has not fully performed (unilateral obligations exception) Page 6 of 12

7 Contracts Page 7 of 12 (a) Effect A/R (1) discharges the aggrieved party s obligations under the contract, (2) excuses conditions on which the aggrieved party s duty depends, and (3) frees up A to make substitute arrangements subject to the duty to mitigate (b) Options A may (1) terminate and sue; (2) urge retraction (minority Js require notice before retraction rights are cut off); or (3) wait until performance is due 2. Prospective Inability/Unwillingness to Perform Prospective inability/unwillingness to perform (PIP) occurs when one of the contract parties gives an indication, before his performance is due, that he will not substantially perform, the aggrieved party has not fully performed, but the indication does not rise to the level of unequivocal (a) Options PIP entitles the aggrieved party to suspend performance and make written demand for adequate assurance of performance. The other party s failure to respond within a reasonable time, not exceeding 30 days, will constitute repudiation 3. *Prove up notice When a party is not proceeding with performance in accordance with terms of contract but has not materially breached, the other party may, by proper notice, set a reasonable time for performance and specify that time is of the essence. (a) If reasonable time is set, failure to perform by specified dated is material breach. (b) If less than a reasonable time is allowed, the notice is ineffective and insistence on it is repudiation. B. Present Breach 1. Material Breach A breach is deemed material based on: (a) the extent of performance, (b) the willfulness of the breach, (c) the quantitative seriousness of the breach, and (d) the likelihood of cure (a) Suspend A can suspend performance (b) Time to cure Many courts (following R2) require the aggrieved party to itemize defects and allow a reasonable time for cure before canceling and suing for total breach. While waiting for cure, the aggrieved party may suspend performance and sue for partial breach. The majority of courts don t provide time to cure where the breach is willful (c) Total breach If no cure is forthcoming, and the aggrieved party is ready, willing, and able to perform, the aggrieved party may cancel the contract and sue for total breach. 2. Minor breach A breach that is not material is minor. A party aggrieved by a minor breach may not cancel the contract, but may sue for partial breach. 5) UCC Perfect Tender Rule A. Basic rule If shipment of the goods is non-conforming in any way, then there is breach. The buyer s options are: (1) accept the entire shipment; (2) reject the entire shipment; (3) accept a portion and reject a portion. B. Right to cure However, a seller has an unconditional right of cure by (1) making a conforming delivery within the contract time or (2) after the contract time if: (a) the seller had reasonable grounds to believe the tender would be accepted, (b) seasonable notifies the buyer of the intention to cure, and (c) cures within a reasonable time. C. Failure to reject A buyer s failure to reject after a reasonable time to inspect the goods will function as an acceptance D. Revocation of acceptance A buyer may revoke an acceptance of goods if the non-conformity substantially impairs their value AND: (1) the buyer can show acceptance was based on a reasonable assumption that the non-conformity would be cured, (2) the acceptance was reasonably induced by the seller s assurances, OR (3) the difficulty of discovery. E. Installment contracts The perfect tender rule does not apply to installment contracts. Under the UCC rules for installment contracts, the buyer can justifiably reject delivery or cancel the contract only where non-conformity substantially impairs the value of the whole contract. When such an installment is nonconforming, the buyer must accept the installment if it can be cured, and the seller gives adequate assurance of its cure. E) Third Party Problems 1) Third party consideration OK 2) Guaranty debt of another OK but SOF problem 3) Third party beneficiaries Page 7 of 12

8 Contracts Page 8 of 12 A. Identify problem This is a third party beneficiary contract, because OR entered into the contract with EE and TP stands to benefit B. Label players 1. OR B is the promisor, because he made the promise that benefits the third party 2. EE C is the pomisee, because he the promisor made his promise to him 3. TPB A is the third party beneficiary, because he is contemplated in the contract to receive performance 4. Creditor beneficiary A is a creditor beneficiary, because the promisee intends to satisfy an obligation owed to A 5. Donee beneficiary A is a donee beneficiary, because the promisee intended confer a gift on A. C. Intend beneficiary Only intended beneficiaries get rights under the contract. Intent is judged from an objective standpoint, with weight given to the following factors: (1) whether the third party is specifically identified in the promise, (2) whether performance runs directly the third party, and (3) whether there is a relationship (creditor/donee) between the promisee and the third party that supports an intention to benefit D. Vesting Rescission or modification between the promisor and promisee is possible up to the moment of vesting. Under majority rule, vesting occurs when the third party (1) materially changes position in justifiable reliance, (2) brings suit, or (3) learns of the promise and assents to it in the manner requested by the promisor or promisee E. Remedies 1. EE v. OR If TPB is a creditor, then EE gets damages or SP. If TPB is a donee, then EE gets only damages or restitution 2. TPB v. OR TPB s rights are derivative of the original deal. Thus, TPB stands in EE s shoes. OR can raise against TPB the defenses OR could have raised against EE; OR cannot raise against TPB the defenses that EE could have used against TPB, because OR doesn t stand in EE s shoes 3. TPB v EE If TPB is a creditor, then TPB can sue EE on the original debt; if TPB is a donee, then TPB cannot sue EE 4) Assignments A. Identify problem This is an assignment of rights problem, because Assignor assigned her right to receive Obligor s performance to Assignee B. Label players 1. Obligor B is the obligor, because she owes the performance of right that is being assigned 2. Obligee/assignor C is the obligee/assignor, because she is the person originally entitled to receive the performance of the right and who subsequently assigned that right 3. Assignee A is the assignee, because she is entitled to receive the right as a result of the assignment C. Valid assignment An assignment is valid if (1) the assignor delivers a description of the right assigned, (2) makes words of present transfer of an existing right, (3) the right is assignable. Since the law favors assignments, rights are assignable unless: (a) prohibited by contract; (b) prohibited by statute; or (c) too personal to be assigned (increases the obligor s risk) D. Revocation and priorities 1. Revocable An assignment is revocable if: (1) it is oral; (2) it is gratuitous; and (3) there is no token chose. If the assignment is revocable, then the last in time generally wins. 2. Irrevocable An assignment is irrevocable if: (1) it is not oral; (2) there was consideration; or (3) there is a token chose. If the assignment is irrevocable, then the first in time generally wins. E. Remedies 1. A v B A can t sue B 2. C v. B C stands in A s shoes. Thus, C has a direct cause of action against B, subject to B s defenses against A. 3. C v. A If there is no consideration, then C has no rights against A. If there is consideration, then C can sue A under the implied warranties of assignment (the rights exist and are not subject to defenses; any of the writings are genuine; there are no competing assignments) 5) Delegations Page 8 of 12

9 Contracts Page 9 of 12 A. Identify problem This is a delegation of duties problem, because Promisor/Delegator has delegated her duty to perform under to Delegatee B. Label players 1. Delegator/obligor A is the delegator, because he is the person originally obligated to perform the duty 2. Obligee B is the obligee, because he is the person entitled to receive the performance of the duty being delegated 3. Delegatee C is the delegatee, because he is the person to whom the duty has been delegated C. Valid delegation A delegation is valid, if (1) obligor delivers a description of the duty delegated, (2) obligee expressly or impliedly undertakes the duty (consideration; or assignment of rights, contains an implied promise to undertake the duties), and (3) the duty is delegable. Since the law favors delegations, duties are delegable unless: (a) prohibited by contract; (b) prohibited by statute; or (c) too personal to be delegated (increases the promisor s risk) D. Effect of delegation If invalid, B can ignore it and demand performance from A; If valid, B must accept C s satisfactory performance E. Effect of performance If satisfactory, it discharges A and C s duties to B. If unsatisfactory, B has remedies against A or C F. Remedies 1. Novation A three party agreement that occurs when the obligee expressly or impliedly agrees to a substitution of the delegatee for the delegator; consent by the original promisee to the delegation is not sufficient to create a novation. A novation is implied where the delegator repudiates his obligations and the obligee accepts performance from the delegatee without expressly reserving his rights against the delegator. If the obligee expressly retains rights, then there is no novation. 2. B v. A If there is no novation, then C is primarily liable and A is secondarily liable. If there is a novation, then A is off the hook 3. B v. C Since C stands in A s shoes, B has a direct action against C, subject to the defenses that A could have raise against B 4. A v. C A can sue C if A is still secondarily liable to B (i.e. no novation) 6) General considerations A. Differentiating There is a TPB problem where the third party is the plaintiff and his rights arose at formation; there is an assignment problem where the third party is the plaintiff and his rights arose after formation; there is a delegation problem where the third party is the third party is the defendant. B. Assignment of contract Assignment of contract is construed as both an assignment of rights and a delegation of duties C. Agreement not to assign contract for goods Under the UCC, an agreement not to assign the contract is interpreted as barring only delegation of duties F) Remedies 1) Damages A. Liquidated Damages Courts will enforce an agreed damages clause only when it is not a penalty, i.e. when: (1) the injury caused by the breach is difficult to quantify; and (2) the agreed sum is a reasonable pre-estimate of the probable loss determined at time of contract (UCC or at time of breach). 1. Other remedies Unless the contract expressly provides otherwise, the presence of an LD clause will not preclude the non-breaching party from pursuing other remedies, such as specific performance, even when the LD clause is a penalty. 2. Arguments for When arguing for enforcement, paint a scenario that actual damages could have gone higher when viewed at the time of formation, or that there is no market for resale. 3. Argument against When arguing against enforcement, look to see if there is a fix sum that is not tied in any way to the gravity of the breach. 4. Real property 10% of total contract price is presumed reasonable in most jurisdictions, especially if A is likely to have difficulty selling the tract. 5. Unconscionability Follow up with unconscionability argument. Unreasonably low LD may reflect unconscionability Page 9 of 12

10 Contracts Page 10 of 12 B. Reliance damages Foreseeable expenses in preparation or partial performance up to the time of breach can be awarded as damages if A can t show expectation damages with reasonable certainty or the contract is enforced under promissory estoppel. Generally, courts limit the amount of reliance damages to K price and the amount is reduced to the extent that B can prove A would have sustained losses in the event of full performance. C. Expectation Damages The normal remedy for breach of K is money damages in an amount sufficient to place the aggrieved party in as good a position as it would have been in had the contract been performed. The plaintiff may recover direct damages (those arising naturally from the breach), consequential damages (damages arising indirectly from the breach, e.g. loss of use of money or lost profits), and incidental damages (losses reasonably associated with actual damages); minus costs and losses avoided. However, damages may be awarded only if they are reasonably foreseeable to both parties at the time of contract, quantifiable and traceable to the breach with reasonable certainty, and reasonably unavoidable. 1. Sale of goods (a) Seller s remedies (1) Undelivered goods Unpaid K price, minus M price at the time and place of tender or resale price if resale is commercially reasonable and the seller gives notice to the buyer (2) Delivered If the goods are delivered (accepted and not paid for, identified to the contract and un-resalable, lost or damaged after risk of loss has passed), the seller can recover the unpaid K price (3) Lost profits Lost profits, including reasonable overhead are available where the ordinary measure of damages is inadequate to put the seller in as good a position as performance. This can occur in the lost volume seller situation (seller in business of selling the goods and has a fairly available supply of similar goods enabling it to meet existing demand); or where the seller never procured the goods in the first place. Lost profits are considered an item of special damages and must therefore be pleaded with particularity (b) Buyer s remedies (1) Undelivered goods M price (at the place of tender at the time the buyer learned of the breach) or repurchase price (if buyer purchases a reasonable substitute without unreasonable delay), minus unpaid K price (2) Delivered goods Where the Buyer accepts defective goods or revokes acceptance, the value as warranted minus the value as accepted, determined by the objective market value at the time and place of acceptance (often equal to the reasonable cost of repair); OR resale of paid goods (if the sale is private, the buyer must give notice of intent to sell). 2. Sale of real property (a) Seller s remedies Unpaid K price minus M price (or minus resale price in analogy with UCC) at the time of breach. Lost volume seller profits awarded in rare situations (b) Buyer s remedies The normal remedy is M price minus K price at the time set for delivery of the deed (if A/R, some courts measure at time of repudiation). However, in English Rule jurisdictions, if the seller s breach consists of a good faith failure to deliver good title, damages are limited to return of deposit plus reasonable reliance expenses. 3. Employment (a) Employee remedies Damages are lost wages (the salary that would have been payable during the contract term) minus earnings (income that employee has, will, or could reasonably earn with reasonable diligence). The employee need not take a position of lesser rank, reduced salary, or located unreasonably distant from the former place of employment. (b) Employer remedies Extra cost to find, employ and train a substitute for the remaining term of the employment contract. Consequential damages are rarely awarded for public policy reasons. 4. Construction (a) Contractor s remedies Expected profit + Cost expended up to moment of breach minus payments received (b) Owner s remedies Page 10 of 12

11 Contracts Page 11 of 12 (1) Partial completion (abandonment) Reasonable cost to complete the project, plus damages suffered as a result of delay, minus unpaid K price (=Cost to complete + amount paid original K price) (2) Full completion (defective performance) Cost of repair, if just (=cost not disproportionate to diminution in value=no economic waste) or owner has an esthetic interest; otherwise, value as promised minus value as performed (diminution in value) 5. No formula Use common sense: What would it take to put A in the position he or she would have obtained had the K been performed? 6. Recovery for breaching Party A breaching party can recover contract damages if and only if he has substantially performed 2) Restitution A. Purpose To put the wrongdoer in the position he or she would have occupied had the K never been formed. B. Breach of K (election) The aggrieved party may choose restitution of any benefits conferred on the other party in partial performance if: (1) neither party has fully performed; and (2) the breach is material. 1. Measure Value to the breachor of the performance rendered. When the benefit conferred on B is not money, then the normal measure of the value to B is the costs avoided=what it would have cost B to obtain a similar substitute at the time and place of performance. C. Unenforceable K Restitution is awarded to prevent unjust enrichment when a party renders performance under the mistaken belief that a contract exists but lacks an enforceable contract claim. 1. Measure For goods, the measure is specific restitution=return of the property. For services, the measure is the reasonable value of the services rendered, but limited to K rate if performance is excused through impossibility D. Mistake/Quasi contract Under the theory of quasi contract, restitution is available when (1) one party confers a benefit on the other; (2) with reasonable expectation of payment from the other (3) the other party expressly or impliedly requested the benefit; and (4) it would be unjust to allow the other party to keep the benefit without paying compensation E. *Recovery for breaching party Under the traditional view, a breaching party could not recover restitution. Under the modern majority rule, when the contract results in unjust enrichment to the nonbreaching party, the breaching party can recover in restitution, unless the breach is willful. Under the strong minority position, even the willful breacher can recover in restitution. 1. Measure Value to A of B s part performance, minus damages suffered as a result of the breach F. Identified goods/replevin The seller can get the price or the buyer can get the goods if the goods are identified to the contract and reasonable cover is not possible. G. Ceiling Some courts use the K price as a ceiling. Most courts do this when a client discharges an attorney 3) Equity A. Specific performance Under a breach of contract action, the court has discretion to order the breaching party to specifically perform its promise. The necessary elements are: (1) Definite and certain contract; (2) Inadequate legal remedy; (3) Mutuality; (4) Feasibility; (5) lack of Defenses. 1. Performance issues (a) Time of essence A court will deny SP of a land sale K where time is of the essence and performance is tendered late, if breaching party tenders full performance within a reasonable time, and SP would result in substantial hardship to B. (b) Abatement Abatement is a reduction in the purchase price to compensate for reduced acre size or encumbrance to land. In majority Js, buyer can get SP with abatement after waiving breach. Seller can get SP with abatement only if the defect is deemed to be minor. If defect is deemed substantial, then there is no SP. (c) Marketable title A court will order SP of a land sale K in favor of the seller only where the seller has marketable title at closing. 2. Definite and certain K The contract must be definite enough for the court to fashion a clear order. 3. Inadequacy Where the subject matter is unique or damages are speculative, the law usually considers damages inadequate. Page 11 of 12

12 Contracts Page 12 of 12 (a) 3PK Promisee on 3P K always has inadequate legal remedy (b) Land sale K Benefits and burdens of land ownership unique (c) Sale of goods SP where (1) the goods (not terms) are unique; or (2) other proper circumstances (trouble getting substitute; consequential damages for flip sale) (d) LD clause The presence of a LDC does not by itself make legal remedies adequate 4. Mutuality Under the traditional rule, a court will not compel one party s performance where it would not compel the other party s performance. Under the modern majority rule, if the party seeking SP has substantially performed or can adequately assure the court that future performance will be rendered, then mutuality of remedy is not required. 5. Feasibility The court must be able to: assert J; and supervise performance without incurring excessive burden (e.g. construction K). (a) Jurisdiction The court needs either PJ over the party ordered to perform or In rem J over the land. (b) Personal services SP is not possible in against an employee in a personal services contract, because involuntary servitude is prohibited under 13 th Amendment, and a court cannot feasibly supervise compelled employment. However, there is a remedy. Courts will enforce a negative injunction to not work for a substitute employer under the theory that there is an implied negative covenant to not work for someone else, as long as the injunction will not unreasonably interfere with the employee s right to make a living. 6. Defenses (a) Latches P s unreasonable delay in bringing suit has prejudiced D w/r/t the suit (the inequitable conduct does not need to be sufficient to establish breach of contract). Delay is measured from when D has notice of facts giving rise to the suit. Where SOF has run, the burden is shifted to P to show the delay was reasonable (b) Unclean hands P behaved inequitably w/r/t rights being asserted in the case. The conduct must be sufficiently egregious that the equitable claim would be tainted (negligence no, but blatant or reckless conduct yes). The conduct need not rise to the level that would support a defense to contract formation. (c) Sale to BFP (d) Unconscionability Inadequate consideration; unilateral mistake; covenant not to compete with unreasonable scope or causing harm to community; other harsh result situations B. Rescission A court will rescind a contract and order restitution if the contract is unenforceable or has been discharged. Rescission is a legal remedy if P has already tendered benefits received and notice of rescission to D. Rescission is equitable if P tenders benefits received and notice of rescission through the pleadings. 1. Good defenses Laches, unclean hands, estoppel, sale to BFP 2. Bad defenses PER 3. Election of remedies If A elects rescission and loses, then A can sue in tort. If A elects to sue in tort and loses, then A cannot later sue for rescission, because the tort election is deemed to affirm the contract. C. Reformation A court will reform a written K to reflect the true agreement of the parties Page 12 of 12