TABLE OF CONTENTS. V. WARRANTIES: UCC SPECIFIC PROVISIONS.. 13 A. WARRANTIES Warranty of Title Express Warranty..

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1 CONTRACTS TABLE OF CONTENTS I. APPLICABLE LAW A. CONTRACT INVOLVING SALE OF GOODS: UCC...1 B. IF BOTH PARTIES ARE MERCHANTS: UCC. 1 C. CONTRACT INVOLVING SERVICES OR NON-SALE OF GOODS:..1 COMMON LAW.1 D. PREDOMINANT PURPOSE TEST. 1 II. III. IV. IS THERE A VALID CONTRACT?..1 A. FORMATION IS NOT AN ISSUE....1 B. WHERE FORMATION IS AN ISSUE Offer Termination of the Offer.2 3. Acceptance 4 4. Consideration...6 C. DEFENSES TO FORMATION Absence of Mutual Assent...7 D. DEFENSES TO ENFORCEMENT Statute of Frauds Unconscionability Lack of Capacity 10 MODIFICATION A. NEW CONSIDERATION Common Law UCC B. ORAL MODIFICATIONS Statute of Frauds 11 C. BY OPERATION OF LAW Destruction or Injury to Identified Goods Failure of Agreed-Upon Method of Transportation...12 WHAT ARE THE TERMS OF THE CONTRACT?.. 12 A. PAROL EVIDENCE RULE Admissibility of Prior or Contemporaneous Agreements..12 B. AMBIGUITY.13 V. WARRANTIES: UCC SPECIFIC PROVISIONS.. 13 A. WARRANTIES Warranty of Title Express Warranty.. 14

2 3. Implied Warranty of Merchantability Implied Warranty of Fitness for a Particular Purpose..15 B OBLIGATIONS TO REMOTE PURCHASERS Packaged with a Record Communication to the Public C. THIRD PARTIES D. VOUCHING IN. 16 E. FEDERAL CONSUMER PRODUCT WARRANTIES LAW.. 16 VI. THIRD PARTY BENEFICIARY: ASSIGNMENT, DELEGATION & RIGHTS..16 A. GENRALLY.. 16 B. THIRD PARTY BENEFICIARY Step 1: Intended vs. Incidental Beneficiary Step 2: Creditor vs. Donee Beneficiary Step 3: When does the Beneficiary Acquire Contract Rights Step 4: Who can sue Whom? C. ASSIGNMENT OF CONTRACT RIGHTS Assignment Limitations Non-assignment Provisions Is the Assignment Revocable? Who can Sue Whom? Successive Assignments. 19 D. DELEGATION OF CONTRACT DUTIES Requirements Rights and Liabilities. 19 E. UCC THIRD-PARTY RIGHTS Entrustment Voidable Title Thief Cannot Pass Good Title VII. HAVE THE TERMS OF THE CONTRACT BEEN PERFORMED?.. 20 A. A PROMISE OR CONDITION Precedent Concurrent Subsequent Express Conditions Implied in Fact Conditions Constructive Conditions B. HAVE THE CONDITIONS BEEN SATISFIED OR EXCUSED? Failure to Cooperate Actual Breach Right to Demand Assurances Anticipatory Repudiation Substantial Performance Disability of Contract

3 7. Waiver or Estoppel Impossibility, Impracticability, or Frustration C. HAS THE DUTY TO PERFORM BEEN DISCHARGED? Performance or Tender of Performance Condition Subsequent Illegality Impossibility/Impracticability/Frustration Mutual Rescission Novation Release/Covenant Not to Sue Accord and Satisfaction. 24 VIII. BREACH AND REMEDIES.25 A. GENERAL Breach Damages Restitution Specific Performance Defenses Rescission B. UCC REMEDIES UCC Risk of Loss in the Absence of Breach UCC Risk of Loss upon Breach Buyer's Remedies Buyer's Damages Seller's Remedies Seller's Damages Liquidated Damages Limitations on Damages Statute of Limitations....32

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5 CONTRACTS I. APPLICABLE LAW A. CONTRACT INVOLVING SALE OF GOODS: UCC The UCC applies to transactions in moveable goods. B. IF BOTH PARTIES ARE MERCHANTS: UCC Additionally, a number of article 2 provisions differentiate between merchants and nonmerchants. A merchant is defined as one who regularly deals in goods of the kind sold, or who otherwise by her profession holds herself out as having a special knowledge or skill as to the practices or goods sold. C. CONTRACT INVOLVING SERVICES OR NON-SALE OF GOODS: COMMON LAW The common law governs contracts for services. D. PREDOMINANT PURPOSE TEST If the transaction involves goods and services, determine the predominant purpose of the contract and apply the appropriate law. II. IS THERE A VALID CONTRACT? A. FORMATION IS NOT AN ISSUE In your essay, provide an introductory paragraph such as: "There appears to be a valid contract. The terms are sufficiently certain and definite. Parties - Monica and Rachel; price - 1$ per widget; subject matter widgets per month; time for performance - every Monday. There was acceptance - Rachel agreed to all the terms of the offer and consideration was supplied by the bargained for exchange of widgets for money. B. WHERE FORMATION IS AN ISSUE In order for there to be a valid contract there must be mutual assent of the parties 1, consideration or a substitute to support the contract, and there must be no valid defenses to formation. 1. Offer To be valid, an offer must: (1) be an expression of promise, undertaking, or commitment to enter into the contract; (2) contain definite and certain terms; and (3) be communicated to the Offeree. a. Manifestation of Present Intent 1 In other words: offer and acceptance. CONTRACTS 1

6 The test for intent is objective, what a reasonable person would understand from the words or conduct of the Offeror in the given circumstances. The intent must be to enter a contract and not merely to negotiate. Statements reasonably understood to be in jest, anger or the result of duress or intoxication cannot be offers. b. Definite and Certain Terms Enough of the essential terms of a contract must be provided to make it capable of being enforced and make performance relatively certain: (1) identification of the parties; (2) subject matter; (3) time for Performance; and (4) price. (1) Requirement/Output Contracts Offers that designate quantity by requirement or output 2 are certain since these quantity terms can be objectively determined. However, if it is not an output contract, quantity must be included to create a sales contract. (2) UCC Sale of Goods Agreements for the sale of goods controlled by the UCC will not fail due to the omission of an essential term if: (1) the parties make a contract; (2) there is a reasonably certain basis for remedy in the event of breach; and (3) parties exercise good faith 3. Exception: The quantity term will not be implied by the UCC. c. Communication Requirement The offer must be communicated to the Offeree. 2. Termination of the Offer An offer may be accepted only as long as it has not been terminated. It may be terminated by: (1) an act of either party; or (2) operation of law. a. Termination by Act of Parties The Offeror terminates an offer if she: (1) directly communicated the revocation; or (2) acts inconsistent with continued willingness to maintain the offer; or (3) the Offeree receives correct information of this from a reliable source. Offers made by publication may be terminated only by use of comparable means of publication. (1) Effective When Received Revocation is effective when received by the Offeree, but publication of revocation only when published. (2) Offeror's Power to Revoke 2 See: UCC That is: honest in fact in the conduct of the transaction.

7 Offers not supported by consideration or detrimental reliance can be revoked at will by the Offeror, even if she has promised not to revoke for a certain period of time. (a) Limitations The Offeror's power to revoke is limited if: 1) Common Law There is an option contract supported by consideration. 2) U.C.C. Firm Offer A written offer signed by a merchant giving assurances that is will be held open will be irrevocable, without consideration, for the stated period of time of for a reasonable period of time if no period is expressly stated. The period of irrevocability may not exceed three months. 3) Detrimental Reliance The Offeror has detrimentally relied on the offer and the Offeror could reasonable expect such reliance; or 4) Unilateral Contracts In the case of unilateral contract, the Offeree has embarked on performance 4. b. Termination by the Offeree (1) Rejection An Offeree may reject an offer: (1) expressly; or (2) by making a counteroffer 5. (a) Effective When Received A rejection is effective when received. Once an offer has been rejected, the original offer is not valid. However, if the Offeror restates the offer after it has been rejected, the Offeree has the power to accept the new offer. (b) Rejection of Option Rejection of an option does not terminate the offer. The Offeree is still free to accept the offer within the option period unless the Offeror has detrimentally relied on the Offeree's rejection. 4 This is usually construed as an option contract giving the Offeree reasonable time to complete performance. 5 As distinguished from mere inquiry. It serves as a rejection and a new offer. CONTRACTS 3

8 (2) Lapse of Time An offer may be terminated by the Offeree's failure to accept within the time specified by the offer or within a reasonable period if no deadline was specified. c. Termination by Operation of Law The following events will terminate the offer: (1) Death or insanity of either party. (2) Destruction of the contracts proposed subject matter. (3) Supervening illegality. 3. Acceptance Valid acceptance of a bilateral contract requires: (1) an Offeree with the power of acceptance; (2) unequivocal terms of acceptance; and (3) communication of acceptance. a. Who May Accept The person to whom the offer was addressed has the power of acceptance, as does a member of the class to whom the offer was addressed. b. Acceptance must be Unequivocal (1) Common Law Acceptance must mirror the offer's terms, neither omitting nor adding terms. Otherwise, it may be a counter offer. (2) U.C.C At common law for an acceptance to be effective it must conform to the offer, otherwise it will serve as a counter offer. Under the UCC, however, an acceptance will be effective even if additional or different terms are contained therein. (a) Additional Terms Additional terms are construed as proposed additions to the contract and must be separately accepted to modify the original offer. 1) Between Merchants

9 If both parties to the contract qualify as merchants, the new terms do become part of the contract unless: (1) the original offers objected in advance to the addition of terms; (2) if the original Offeror objects to the new terms within a reasonable time after notice of them is received; (3) if the new terms would materially alter the original terms 6. (b) Different Terms An acceptance form that contains different terms than the offer is considered an acceptance and a contract will be formed unless the Offeror specifically limits the acceptance to the terms of the offer 7. There is a split of authority, however, over whether different terms become part of the contract. 1) California Law Under California law terms in offer prevail over different terms in acceptance if materially different. 2) Majority Law Under majority law conflicting terms in the offer and acceptance are knocked out of the contract and are replaced by UCC gap-filler provisions. If it concerns a major provision no contract is formed. 3) Minority Law Discrepant terms in the acceptance are ignored. (c) Open Terms The fact that one or more terms are left open 8 does not prevent the formation of a contract if the parties intended such and there is a reasonable basis for giving a remedy. The court can supply reasonable terms for those that are missing. (d) Performance If the parties have exchanged non-matching forms and begin to perform, a contract has been created. The contract will consist of the terms on which the parties agree, plus supplementary terms on which the parties agree, plus supplementary terms supplied by the UCC where the parties are silent. c. Communication of Acceptance 6 For example: a disclaimer of warranties, not an arbitration clause. 7 If so, it is treated as a counter offer. 8 Including price. CONTRACTS 5

10 Acceptance is judged by an objective reasonable person standard. The Offeree's subjective state of mind is irrelevant. The modern rule and the UCC permit acceptance by any reasonable means unless the Offeror unambiguously limits acceptance to particular means. (1) Mailbox Rule Under the mailbox rule, if the acceptance is by mail or similar means and it is properly addressed and stamped, it is effective at the moment of dispatch. If it is improperly sent, it will be effective on receipt. (a) Limitations The rule does not apply if: (1) the offer states that acceptance is not effective until received; (2) if an option contract is involved 9 ; (3) Offeree sends rejection and then sends an acceptance whichever arrives first is effective; (4) the acceptance is sent first then a rejection, the acceptance is effective unless the rejection is received first and the Offeror detrimentally relies on it. (2) Acceptance without Communication Acceptance without consideration, in a bilateral contract, may occur where: (1) there is an express waiver of communication in the offer; (2) the offer requires an act as acceptance; (3) the Offeree silently takes the offered benefits. (3) Unilateral Contract If the offer requires performance of the bargained for duties by the Offeree, it contemplates a unilateral contract. (a) Notice Notice of performance is required to complete acceptance when: (1) the Offeror requires it; or (2) the Offeror has no other way of learning that performance has occurred, and the Offeree knows, or should know of this. 4. Consideration Courts will enforce a bilateral or unilateral contract only if it is supported by consideration or a substitute for consideration. The parties must exchange something. In the case of a bilateral contract, they exchange promises; thus each party incurs a detriment and a benefit. In the case of a unilateral contract, they exchange a promise for an act. a. Insufficient Consideration (1) Gift There is no bargain involved when one party gives a gift to another. 9 Effective on receipt.

11 (2) Past Consideration A bargained for exchange cannot occur if one party is induced by a benefit conferred by the other party prior to their present negotiation. (3) Moral Consideration A bargain does not occur if one party is induced to offer a promise or an act due to a sense of moral obligation. (4) Economic Adequacy If there is evidence of fraud, undue influence or duress. If the promise is clearly worthless or a token indicating the transaction is a disguised gift. (5) Pre-Existing Duty A promise or act is not adequate consideration of the party is already obligated to perform it. The necessary detriment can exist if the party tenders some additional performance or if unforeseen and substantial hardship has occurred which will add to the burden of performance. (6) Illusory Promise A promise is not adequate consideration if the Promisor has retained unlimited freedom to determine whether to perform or not. There is no legal detriment. b. Substitute for Consideration (1) Promissory Estoppel or Detrimental Reliance Promissory estoppel is a sufficient substitute for consideration. The following elements must be present: (1) the promisor should reasonably expect her promise to induce action or forbearance; (2) of a definite and substantial character; and (3) such action of forbearance is in fact induced. (2) Specific Circumstances An obligation discharged by law 10 can be revived by a gratuitous promise made in writing. A promise to perform an existing voidable duty is enforceable without consideration. C. DEFENSES TO FORMATION 1. Absence of Mutual Assent a. Mutual Mistake 10 For example: statute of limitations. CONTRACTS 7

12 A mistake by both parties is a defense if: (1) the mistake concerns a basis assumption on which the contract was made: (2) the mistake has a material adverse effect on the agreed-upon exchange; and (3) the adversely affected party did not assume the risk of the mistake. (1) Assumption of Risk When the parties know their assumption is doubtful, the parties will be deemed to have assumed the risk that their assumption was wrong. b. Unilateral Mistake Whether it be of identity, subject matter, or computation, a mistake by one party is generally insufficient to made a contract voidable. However, if the non-mistaken party knew or should have known of the mistake, the contract is voidable by the mistaken party. (1) Mistake by Intermediary Where there is a mistake by intermediary, the mistake will usually be operative as transmitted unless the party receiving the message should have been aware of the mistake. c. Misrepresentation If a party induces another to enter into a contract using fraudulent misrepresentation 11 or by using non-fraudulent material misrepresentation 12 the contract is voidable by the innocent party if she justifiably relied on the misrepresentation. (1) Fraud in Execution If there is fraud in the execution, the contract is void rather than voidable. d. No Consideration See Supra. e. Illegality of Contract If the consideration or subject matter of the contract is illegal, the contract is void. (1) Exceptions Exceptions include instances where: (1) the plaintiff is unaware of illegality while the defendant knows; (2) the parties are not in pari delicto; (3) the illegality is failure to obtain a license when the license is for revenue raising purposes rather than protecting the public. 11 That is: acts known to be untrue. 12 Asserting facts not known to be untrue that would induce a reasonable person to enter into a contract.

13 If the only purpose behind the contract is illegal, the contract is voidable by a party who is: (1) unaware of the purpose; or (2) aware but did not facilitate the purpose and does not involve serious moral turpitude. acts. Remember an illegal purpose does not necessarily include illegal D. DEFENSES TO ENFORCEMENT 1. Statute of Frauds A law in every state that requires certain types of documents to be in writing and signed by the party to be charged (usually, the defendant in a lawsuit). These agreements are promises: (1) in consideration of marriage; (2) that by their terms cannot be performed within one year; (3) creating an interest in land; (4) by executors to pay estates' debts out of their own pockets; (5) for the sale of goods for $500 or; (6) acting as a surety for another party's debts 13. a. Memorandum Requirements The Statute is satisfied if the writing contains the following: (1) identity of the parties; (2) contracts subject matter; (3) terms and conditions; (4) a recital of consideration; (5) the signature of the party to be charged. b. Removing the Contract from the Statute of Frauds (1) Part Performance Part performance of an oral land sale contract will permit equitable enforcement of the contract. (2) Detrimental Reliance An oral contract is enforceable if Promisor represented that a writing would be made, and the other party detrimentally relied on the representation. (3) Full Performance Full performance by one party of a multi-year oral contract in less than one year makes the contract enforceable. (4) Sale of Goods Oral contracts for the sale of goods will be enforced under the UCC when the merchant sends a written confirmation: (a) Merchant Confirmatory Memos 13 Mnemonic: mylegs. CONTRACTS 9

14 A written confirmation binds both parties if: (1) between merchants; (2) a writing in confirmation of the contract and sufficient against the sender is received 14 ; (3) the party receiving it has reason to know of its contents; and (4) the recipient does not object to it within 10 days of receipt, it will bind recipient. (5) Writing Not Required in the Following Situation (a) Specially Manufactured Goods Production of special goods has started and are not suitable for sale to others in the ordinary course of business. (b) Delivered Goods Goods have been actually received and accepted, the contract is enforceable, but not beyond the quantity accepted or paid for. (c) Full Payment Received Payment has been received by the Seller. Not enforceable beyond quantity paid for. (d) Admission Admission of the contract's existence by the parties. (e) Estoppel Party has caused the other party to detrimentally rely on the oral promise so that to deny enforcement would cause unconscionable injury or loss. 2. Unconscionability If a contract was unconscionable when made, the court may refuse to enforce it or limit it to avoid unconscionable results. The test for unconscionability is whether, at the time of execution, the contract or one of its provisions could result in unfair surprise and was oppressive to a disadvantaged party. 3. Lack of Capacity a. Minors Contracts made by a minor can be disaffirmed or ratified upon reaching majority by acts manifesting such intent. However, a minor can be bound by necessaries or service contracts to the extent of reasonable value. b. Mental Incompetence 14 Signed by the party to be charged.

15 Contract is void if entered into after adjudication of incompetence, and voidable if entered prior to adjudication. However, if the person regains competence, can be ratified or disaffirmed. c. Intoxication Extreme intoxication places party in position or mentally incompetent. A. NEW CONSIDERATION III. MODIFICATION 1. Common Law For modifications to be valid, they need to be supported by additional consideration. 2. UCC Contract modifications sought in good faith are binding without consideration. Contract modifications must meet the statute of frauds requirements if the contract as modified is within the statute. B. ORAL MODIFICATIONS 1. Statute of Frauds a. Modification of a Written Contract Modifications bringing the subject within the purview of the Statute of Frauds must be in writing. Goods over $500 require modification to be in writing. (1) Part-performance Takes contract out of statute of frauds. (2) Full Performance Oral agreements that are fully performed by both parties need not be in writing. b. Writing Prohibiting Oral Modification A provision that a written contract cannot be modified or rescinded except by a writing is valid and binding. Where the no oral modification provision is provided by a merchant to a consumer, it must be signed by the consumer. c. Waiver of the Writing Requirement An invalid oral modification may serve as a waiver of a party's rights to enforce the contract as written if one of the parties relied to her detriment on the modification. CONTRACTS 11

16 d. Written Confirmation UCC Where there is an oral modification that is then followed by a written confirmation, this will satisfy the Statute of Frauds under UCC e. Waiver of Condition One having the benefit of a condition under a contract may indicate by words or conduct that she will waive that condition and no consideration is required. (1) Installment Contract A waiver in an installment contract must be supported by consideration. If not, the waiver can be revoked. C. BY OPERATION OF LAW 1. Destruction or Injury to Identified Goods If goods are destroyed without fault of either party, before the risk of loss passes to the buyer, the contract is avoided. For damaged goods, the buyer may elect to take goods with a reduction in price. If the goods are destroyed or damaged after the risk of loss has passed to the buyer, the buyer will bear the loss. 2. Failure of Agreed-Upon Method of Transportation If the agreed-upon delivery facilities become unavailable or commercially impracticable, any commercially reasonable transportation must be tendered and must be accepted. IV. WHAT ARE THE TERMS OF THE CONTRACT? A. PAROL EVIDENCE RULE 1. Admissibility of Prior or Contemporaneous Agreements Are not admissible to contradict, or modify a written agreement which was intended as a full and final expression of the parties' bargain. a. Is the Writing Intended as a Final Expression? Intent is a question of fact determined by: (1) Face of the Agreement - Integration. (2) All relevant evidence; or (3) Existence of a merger clause. b. Is the Writing a Complete or Partial Integration?

17 After establishing that the writing was "final", determine if the integration was complete or partial. (1) If there is complete integration, it may not be contradicted or supplemented. (2) If there is partial integration, it may be supplemented by proving consistent additional terms. (3) Test Would parties similarly situated as were these parties to this contract naturally and normally include the extrinsic matter in the writing? (a) If yes, evidence of extrinsic matter not admitted Exceptions The terms of the agreement may be explained or supplemented by: (1) consistent additional terms; (2) course of dealings; (3) usage of the trade or business; (4) course of performance. (b) If No, evidence of extrinsic matter admitted. B. AMBIGUITY If the contract includes an ambiguous term, the result depends on the parties' awareness of the ambiguity. If neither or both parties aware the no contract unless both parties intended the same meaning. If one party is aware a binding contract based on what the ignorant party reasonably believed to be the meaning of ambiguous words, generally construed against drafter. V. WARRANTIES: UCC SPECIFIC PROVISIONS A. WARRANTIES Under the UCC there are four types of warranties: (1) warranty of title and against infringement; (2) implied warranty of merchantability; (3) implied warranty of fitness for a particular purpose; (4) express warranties. 1. Warranty of Title In a contract of sale, the seller warrants that she is conveying good title that is free of liens. a. Modification or Exclusion CONTRACTS 13

18 A warranty of title may only be modified or excluded by: (1) specific language in the contract; or (2) circumstances which give the buyer reason to know that the seller does not claim title in herself or that the seller is only purporting to sell the rights which she or a third person may have in the goods. 2. Express Warranty An affirmation of fact or promise made by the seller to the buyer in the course of negotiations that relates to the goods and is part of the basis for the bargain creates an express warranty that the goods will conform to the affirmation or promise. a. Statement of Fact or Promise Description of the goods, samples and models may be sufficient to create an express warranty. b. Basis of the Bargain The statement must have been part of the deal, the sort of thing that played some part in the buyer's decision to buy. All statements become part of the basis of the bargain unless good reason is shown to the contrary. c. Post-Contractual Affirmation Post-contractual affirmations in fact become part of the basis of the bargain. It can be deemed a modification of the contract, and will be effective without new consideration. d. Disclaimer Words relevant to the creation of an express warranty and words negating or limiting a warranty shall be construed as consistent whenever possible. Where that is not possible, limitations of warranty will be ineffective. If parol evidence is admitted, any disclaimer will be ineffective. If parol evidence is not admitted, disclaimers will be effective. 3. Implied Warranty of Merchantability In every mercantile contract of sale where it is not expressly disclaimed, the law implies a warranty that the goods shall be of merchantable quality. The UCC imposes the implied warranty of merchantability only upon a seller who is a merchant with respect to goods of that kind. There is an obligation of good faith in every sale transaction, so that even a non-merchant seller may be held liable for failure to disclose a known defect. Merchantability is defined as goods which would: (1) pass without objection in the trade; (2) be of fair average quality; (3) fit for the ordinary purpose which goods are used. a. Buyer's Specifications

19 Where goods are conformed to the buyer's specifications the implied warranty is waived. b. Disclaimer To exclude an implied warranty of merchantability, the language must mention merchantability and be conspicuous if in writing. 4. Implied Warranty of Fitness for a Particular Purpose If a seller has reason to know of the particular use of the goods contemplated by the buyer and is also aware that the buyer is relying on the seller's judgment to select suitable goods, then an implied warranty of fitness for a particular purpose arises. a. Reason to Know Apply an objective test. b. Particular Purpose Will do something different from their ordinary purpose. c. Buyer's Reliance Essential The buyer must in fact rely on the seller's superior skill or judgment as part of the transaction for the warranty of fitness for a particular purpose to apply. d. Disclaimer To exclude an implied warranty of fitness for a particular purpose, the exclusion must be in writing and must be conspicuous. To exclude all implied warranties, language must be clear. All implied warranties may be excluded by the use of language which calls the buyer's attention to the exclusion of warranties and makes it clear that there are no implied warranties. e. Buyer Inspection If the buyer inspects the goods or a sample model before entering the contract or refuses to examine the goods, there is no implied warranty of fitness. B. OBLIGATIONS TO REMOTE PURCHASERS 1. Packaged With a Record A seller has an obligation to a remote purchaser 15 that new goods sold or leased that are packaged with a record making an affirmation of fact or remedial promise relating to the goods, will conform thereto. Knowledge by a buyer is presumed when the goods are packaged regardless of whether it is actually read. 2. Communication to the public 15 But not an immediate buyer. CONTRACTS 15

20 With regards to new goods, if an advertisement to the public provides an affirmation of fact or promise relating to the goods and the remote purchaser enters into a transaction with knowledge of and with the expectation that the goods will conform thereto, the seller has an obligation to make the goods conform unless a reasonable person would not believe the affirmation or remedial promise. The burden if on the remote buyer to establish knowledge. C. THIRD PARTIES In most states, the seller's warranty extends to any natural person who is in the family or household of the buyer or who is a guest in her home if it is reasonable that such a person may use, consume, or be affected by the goods, and she suffers personal injury because of the breach of warranty. D. VOUCHING IN If a reseller is sued for indemnity, breach of warranty etc., the reseller can give the seller or other party notice of the suit. If that party does not come and defend, the party will be bound by whatever determination of fact is made that is common to the litigants. E. FEDERAL CONSUMER PRODUCT WARRANTIES LAW If a consumer product manufacturer issues a full warranty, implied warranties cannot be disclaimed. If a limited warrant is issued, implied warranties cannot be disclaimed or modified, but they can be limited in duration to the length of the limited warranty. VI. THIRD PARTY BENEFICIARY: ASSIGNMENT, DELEGATION, RIGHTS A. GENERALLY Following the valid formation of a contract, strangers to the agreement may be found to have rights or obligations traceable to the contract. Third Party beneficiary rights arise at the formation of the contract. Assignment of rights and delegation of duties occur due to actions taken after formation. B. THIRD PARTY BENEFICIARY A contract between two parties in which performance is to be rendered to a third person, for whose benefit the contract was made. 1. Step 1: Intended vs. Incidental Beneficiary Only intended beneficiaries have contractual rights, not incidental beneficiaries. In determining whether a beneficiary is intended, the court will consider whether the beneficiary: (1) is identified in the contract; (2) receives performance directly; or (3) has some relationship with the promise to indicate intent to benefit. 2. Step 2: Creditor vs. Donee Beneficiary

21 There are two types of intended beneficiaries: (1) a creditor 16 ; and (2) a donee Step 3: When does the Beneficiary Acquire Contract Rights? A third party can enforce a contract only when her rights have vested. This occurs when she: (1) manifests assent to a promise in the manner requested by the parties; (2) brings a suit to enforce the promise; or (3) materially changes position in justifiable reliance on the promise. 4. Step 4: Who Can Sue Whom? a. Third-Party Beneficiary vs. Promisor The third-party beneficiary has the same rights of enforcement for breach against promisor as does promisee. The third-party beneficiary is subject to the same defenses the promisor has against the promisee. (1) Restitution The third-party beneficiary has no right of restitution from Promisor since the benefit conferred was from the promisee. b. Third-Party Beneficiary vs. Promisee A creditor beneficiary can sue the promisee on the existing obligation between them. She may also sue the promisor, but may obtain only one satisfaction. c. Promisee vs. Promisor A promisee may sue the promisor both at law and in equity for specific performance if the promisor is not performing for the third person. C. ASSIGNMENT OF CONTRACT RIGHTS For an assignment to be effective, the assignor must manifest the intent to immediately and complete transfer her rights. A writing is usually required to have an effective assignment. The right being assigned must be adequately described. It is not necessary to use the word "assign"; any accepted words of transfer will suffice and consideration is not required. 1. Assignment Limitations Generally, all contract rights are assignable. However, an assignment may not occur if: (1) it would substantially change the obligor's duty or risk; (2) an assignment of future rights to arise from future contracts; (3) an assignment is prohibited by law. 2. Non-assignment Provisions a. Non-assignment Clauses 16 That is: a person to whom a debt is owed by the promise. 17 That is: a person who the promise intends to benefit gratuitously. CONTRACTS 17

22 Non-assignment clauses eliminate the right, but not the power, to assign. The Obligor must bring suit to set aside the assignment. b. Void Assignments Assignment if void clauses eliminate both the power and right to assign. Any attempt to assign creates no rights in the assignment. c. Obligor's Option to Void Contract is void if assigned clause only makes the assignment voidable at the obligor's option. d. UCC Contracts If the original contract is governed by the UCC, no assignment can be barred by contractual language. 3. Is the Assignment Revocable? An assignment for consideration is irrevocable. An assignment not for consideration is generally revocable. a. Exceptions A gratuitous assignment is irrevocable if: (1) the obligor has already performed; (2) a token chose is delivered; (3) an assignment of a simple chose is put in writing; (4) the assignee can show detrimental reliance on the assignment. b. Termination Termination of a revocable gratuitous assignment may be terminated by: (1) death or bankruptcy of the assignor; (2) notice of revocation by the assignor to the assignee or the obligor; (3) the assignor taking performance directly from the obligor; (4) subsequent assignment of the same right by the assignor to another. 4. Who Can Sue Whom? a. Assignee v. Obligor The assignee can enforce all of the rights of assignor. The obligor can assert all defenses it could have done against the assignor pre and post assignment. b. Assignee v. Assignor The assignee can sue the assignor for wrongfully exercising the power to revoke in an irrevocable assignment situation. An action by the assignee against the assignor may also lie where the obligor successfully asserts a defense against the assignor in an action brought by the assignee against the obligor to enforce the obligation.

23 The assignor will not be liable to the assignee if the obligor is incapable of performing. If assignment is revocable, assignee has no remedial rights against assignor. 5. Successive Assignments If the first assignment is revocable, a subsequent assignment revokes it. If it is revocable, the first assignment will usually prevail over a subsequent assignment. a. Exceptions If the second assignee has paid value and taken without notice of the first assignment, the successive assignee gets: (1) the first judgment against the obligor; (2) the first payment of a claim from the obligor; (3) delivery of token chose; (4) is the party to a novation releasing the assignee; (5) can proceed against the first assignee on an estoppel theory 18. D. DELEGATION OF CONTRACT DUTIES Delegation is the transfer of the primary obligation to perform contract duties from one of the parties to a third person. Generally, all duties may be delegated. 1. Requirements The delegor must manifest a present intention to make a delegation. There are no special formalities to be complied with to have a valid delegation. It may be written or oral. a. Limitations The following may not be delegated: (1) the duty involves personal judgment and skill; (2) delegation would change the obligee's expectancy 19 ; (3) a special trust was reposed in the delegor by the other party to the contract; (4) there is a contractual restriction delegation. 2. Rights and Liabilities The obligee must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the contract. Thus, the obligee may sue the delegor for non-performance by the delegate, and sue the delegate if there has been an assumption 20. The promise creates a contract between the delegor and the delegate in which the obligee is a third-party beneficiary. E. UCC THIRD-PARTY RIGHTS 1. Entrustment 18 Also can be used against the subsequent assignee. 19 For example: requirements and output contracts. 20 That is: promise to perform supported by consideration. CONTRACTS 19

24 Entrusting goods to a merchant who deals in goods of that kind gives her power to transfer all rights of the entruster to a buyer in the ordinary course of business Voidable Title If a sale is induced by fraud, the seller can rescind the sale and recover the goods 22. Except the defrauded seller may not recover the goods from a good faith purchaser for value even where: a. The seller was deceived as to the identity of the buyer. b. The delivery was in exchange for a check later dishonored. c. The sale was a cash sale, or d. The fraudulent conduct of the buyer is punishable as larceny. 3. Thief Cannot Pass Good Title If a thief steals goods from a true owner and then sells them, the thief is unable to pass good title to the buyer because the title is void. Therefore, the true owner can recover the stolen goods from the buyer, even if the buyer is a good faith purchaser for value. Exceptions The thief can pass good title if: (1) the goods are money; (2) the goods are negotiable instruments; (3) the buyer has made accessions 23 to the goods; (4) the true owner is estopped from asserting title. VII. HAVE THE TERMS OF THE CONTRACT BEEN PERFORMED? A. A PROMISE OR CONDITION A promise is a commitment to do or refrain from doing something. It may be conditional or unconditional. A condition is an event the occurrence of nonoccurrence of which will create, limit, or extinguish the absolute duty to perform. It is not always clear whether a contract provision is a promise of a condition. The court will look to the "intent of the parties." 1. Precedent A precedent contingency must occur, or be executed, before a party's own duty to perform matures. 2. Concurrent A concurrent contingency must occur simultaneously with a party's performance. 21 For example: if you drop a watch off for repair, it can be sold and you have to recover damages from the jeweler. 22 That is: voidable title. 23 That is: valuable improvements.

25 3. Subsequent Is a contingency that, by occurring, extinguishes an already matured duty to perform Express Conditions Are those expressed in the contract. 5. Implied in Fact Conditions Are those inferred from evidence of the parties' intention and must occur or be present before a party's duty to perform matures. 6. Constructive Conditions Are those read into a contract by a court without regard to the parties' intention in order to ensure that the parties receive what they bargained for. Constructive conditions may relate to the time of performance 25. B. HAVE THE CONDITIONS BEEN SATISFIED OR EXCUSED? A duty of performance becomes absolute when conditions are either performed or excused. Conditions may be excused by: 1. Failure to Cooperate A party who wrongfully prevents a condition from occurring will no longer be given the benefit. 2. Actual Breach An actual, material breach by one party excuses the other's duty of counter performance Right to Demand Assurances If reasonable grounds for insecurity arise with respect to performance of either party, the other may in writing demand adequate assurance of due performance. Until she receives adequate reassurance, the party may suspend her performance. If proper assurances are not given within a reasonable time 27, the party seeking performance can treat the contract as repudiated. 4. Anticipatory Repudiation In cases where the other party's words, actions, or circumstances make it clear that she is unwilling or unable to perform, the aggrieved party may: 24 This can be viewed like discharge. 25 In other words: which party performs first. 26 A minor breach might suspend the duty, but will not excuse it. 27 Not over 30 days for receipt of the demand. CONTRACTS 21

26 a. Ignore the repudiation and urge performance 28 b. Resort to any remedy for the breach, or c. Suspend her own performance (1) Retraction of Repudiation A repudiating party may, at any time before her next performance becomes due, withdraw her repudiation unless the other party has cancelled, materially changed position in reliance on the repudiation, or otherwise indicated that she considers the repudiation final. 5. Substantial Performance Where a party has almost completely performed her duties, but she has also breached in some minor way, the rule of substantial performance avoids forfeiture of return performance. 6. Divisibility of Contract Where a party performs one of the units of a divisible contract, she is entitled to the agreed equivalent for that unit even though she fails to perform the other units. a. Requirements To find a contract divisible: (1) The performance of each party is divided into two or more parts under the contract. (2) The number of parts due from each party is the same; and (3) The performance of each part by one party is the agreed equivalent of the corresponding part by the other party. b. UCC - Installment Contracts Under the UCC, a contract that authorizes or requires delivery in separate lots is an installment contract. The buyer may declare a total breach only if defects in any installment are such as to substantially impair the value of the entire contract. 7. Waiver or Estoppel a. Estoppel Waiver 28 Does not constitute a waiver.

27 A party may waive a condition by indicating that she will not insist on it. However, such a waiver may be retracted at any time unless the other party relies on the waiver and changes her position to her detriment. Upon such detrimental reliance, the waiving party is estopped from asserting the condition. b. Election Waiver If a condition is broken, the party who was to have its benefit may either terminate her liability or continue under the contract. If she chooses the latter, she is deemed to have waived the condition. c. No Consideration If no consideration is given for the waiver, it is not enforceable. 8. Impossibility, Impracticability, or Frustration See Infra. C. HAS THE DUTY TO PERFORM BEEN DISCHARGED? Once it has been established that there is an immediate duty to perform, that duty must be discharged by: 1. Performance or Tender of Performance The duty may be discharged by complete performance or tender of performance, assuming the tendering party possesses the present ability to perform. 2. Condition Subsequent The duty may be discharged by a condition subsequent. 3. Illegality The duty may be discharged by supervening illegality of the subject matter. 4. Impossibility/Impracticability/Frustration a. Impossibility The duty may be discharged by impossibility of performance measured by an objective standard where nobody could perform according to the terms of the contract. The impossibility must arise after the contract was entered into 29. b. Impracticability 29 For example: death or physical incapacity; subsequent enacted law rendering the subject matter illegal; destruction of the subject matter or means of performance. CONTRACTS 23

28 Courts will also discharge a duty because of impracticability where a party would encounter extreme and unreasonable difficulty or expense that was not anticipated. A mere change in the difficulty or expense due to normal risks that could have been anticipated 30 will not warrant discharge by impracticability. c. Frustration of Purpose A duty may also be discharged by frustration of purpose. This requires: (12) a supervening event; (2) that was not reasonably foreseeable at the time of entering into the contract; (3) which completely or almost completely destroys the purpose of the contract; and (4) the purpose was understood by both parties. 5. Mutual Rescission Duties may be discharged by mutual rescission where both parties expressly agree to it. In a bilateral contract rescission can only occur where the contract has been partially performed. In a unilateral contract, it cannot be rescinded where only one party is left to perform. Mutual rescission can be made orally unless the subject matter is within the statute of frauds or unless the contract requires a writing. 6. Novation A duty may be discharged by novation, where a new contract substitutes a new party for one of the parties to the original contract. There must be: (1) a previous valid contract; (2) an agreement among all parties, including the new party; (3) immediate extinguishment of contractual duties as between the original contracting parties; and (4) a valid new contract. 7. Release/Covenant Not to Sue The release must be in writing and supported by consideration or promissory estoppel. 8. Accord and Satisfaction a. Accord An accord is an agreement in which one party to a contract agrees to accept performance different from that originally promised. Generally, an accord requires consideration, which can be less than the original promised. (1) Partial Payment of Original Debt Payment of a smaller amount than is due on a claim is valid consideration if it is made in good faith and there is a bona fide dispute as to the claim 31. b. Satisfaction Satisfaction is the performance of the accord. It discharges both the accord and the original debt. 30 For example: increase in price or raw materials or too many buyers. 31 For example: marking a check "payment in full".

29 VIII. BREACH AND REMEDIES A. GENERAL 1. Breach If the promisor is under an absolute duty of performance and this duty has not been discharged, then this failure to perform in accordance with the contract terms may be held to be breach of contract. a. Is the Breach Minor or Material? A minor breach may allow the aggrieved party to recover damages, but she still must perform under the contract. If the breach is a material one, the aggrieved party need not perform and recover damages. 2. Damages (1) Test Whether a breach is minor or material is a factual issue resolved by a reasonable person test. A material breach occurs when a promise, which goes to the heart of the contract, is not fully performed. (2) Minor Breach For a minor breach, the remedy is an award of damages in an amount to compensate for the defective performance. Because the other party must still tender performance, this remedy is represented by an offset to that performance. But the contract is still in force and enforceable. (3) Material Breach In the event of a material breach, the non-breaching party's duties are discharged but she must still take affirmative actions. In order to mitigate the effects of breach the non-breaching party must seek a replacement contract and notify the Obligor of the defective performance. Failure to mitigate results in a reduction of recoverable damages. a. Compensatory Compensatory damages are awards of money to confer on plaintiff the benefit of the contract had it been fully performed, this is known as the expectation interest. As with tort cases, damages must be causal, foreseeable, certain, and unavoidable. (1) Causal To recover compensatory damages, the plaintiff's harm must have been caused by the defendant's breach. (2) Foreseeable CONTRACTS 25

30 The damage caused must have been foreseeable at the time the contract was entered into. (3) Certain Future profits of a new business are difficult to recover because they are uncertain. (4) Unavoidable The plaintiff cannot recover damages that she could have reasonably avoided. b. Liquidated Damages A liquidated damages clause may limit the damages that are recoverable. Such provisions are valid provided it is shown that, at the time of contracting, actual damages would have been extremely difficult to ascertain and the amount stipulated was a reasonable forecast of the actual harm. Otherwise, the clause is a penalty and proven actual damages will govern. c. Punitive Damages Punitive damages are not available in contract actions. d. Interest and Attorney's Fees Prejudgment interest awards in contract are statutory and granted only as to liquidated sums. Attorney's fees are recoverable if provided for by statute of contract. 3. Restitution The law imposes an obligation to pay for unjust gains received pursuant to an unenforceable contract. a. Where Contracts Materially Breached The non-breaching party can recover the value of her performance, even in excess of the contract rate. The breaching party can recover the value of the benefit conferred in excess of the other party's damages. b. Unenforceable Contract The recovery depends on the nature of the benefit conferred. Specific restitution is available for recovery of tangible property. Where the benefit takes the form of goods or services, the plaintiff is entitled to the value thereof even in excess of the contract. 4. Specific Performance