Contracts and Sales
Contracts and Sales
1) What is a contract?
a) A contract is a promise for the breach of which the law gives a remedy of the
performance of which the law recognizes as a duty.
b) Law
i) Common law governs contracts.
ii) Sales of goods governed by UCC Art 2.
(1) Goods = all things movable.
(a) So cars, horses, hamburgers are governed by UCC Art 2.
(b) Does not apply to real estate, services, intangibles, construction.
(2) Merchant = one who regularly deals in goods of the kind sold, or who
holds himself out as having special knowledge or skills as to the goods
involved.
(a) Exam tip: for Art 2 provisions dealing with general business practices,
almost anyone in business can be deemed a merchant. But some Art 2
provisions are narrower and require person to be a merchant with
respect to goods of the kind involved in the transaction. (Implied
warranty of merchantability)
c) Types
i) As to formation:
(1) Express – formed by language, oral or written.
(2) Implied in fact – formed by manifestations of assent – by conduct.
(3) Quasi contract – not a real contract, just constructed that way by court to
avoid unjust enrichment.
(a) So P can bring action in restitution to recover the amount of benefit
conferred on def.
ii) As to acceptance:
(1) Bilateral – exchange of mutual promises
(a) Each party is a promisor and a promisee.
(2) Unilateral – acceptance by performance
(a) Where offeror requests performance rather than a promise. So
promise to pay upon completion of a requested act. Once act is
completed, contract is formed.
(b) There is only one promisor and one promisee.
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iii) As to validity
(1) Void – one that is without any legal effect from the beginning.
(a) It cannot be enforced by either party.
(2) Voidable – one that either party may elect to avoid.
(a) By raising defense such as infancy or mental illness.
(3) Unenforceable – one that is otherwise valid but may not be enforceable
due to extraneous defense to formation, such as SOL or statute of frauds.
d) Creation
i) Court must decide whether there was in fact a contract. Ask:
(1) Was there mutual assent?
(a) Offer (promise, undertaking, or commitment with definite and certain
terms communicated to offeree); and
(b) Acceptance before termination by revocation, rejection, or operation of
law.
ii) All 3 elements must exist to have an enforceable contract. Check this
carefully on exam.
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c) Offer
i) An offer creates a power of acceptance in the offeree and a corresponding
liability on the part of the offeror.
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(3) Subject matter:
(a) Must be certain in order for the court to enforce the promise.
(ii) Except for real property, failure to state a price does not prevent
formation.
1. If contract for sale of goods, UCC Art 2 provides that the price
will be a reasonable price at the time of delivery.
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v) Communication
(1) Offeree must have knowledge of the offer.
d) Termination of offer
i) An offer cannot be accepted after it has been terminated.
3. Detrimental reliance
a. When offeror could reasonably expect offeree would rely
on the offer and offeree does so rely to her detriment, the
offer will be held irrevocable as an option contract for a
reasonable length of time.
i. Offeree entitle to relief measured by extent of
detrimental reliance.
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4. Part-performance – true unilateral contract offers
a. Becomes irrevocable once performance begins.
b. Offeror must give offeree a reasonable time to complete
performance.
i. But offeree is not bound to complete performance – she
may withdraw prior to completion – remember, there is
no acceptance until performance is complete!
c. Substantial preparations to perform do not make offer
irrevocable but may be detrimental reliance.
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iv) Termination by operation of law
(1) Death or insanity of either party (unless offer is a kind the offeror could
not termination, like option supported by consideration).
(a) This need not be communication to the other party.
(2) Destruction of proposed contract’s subject matter.
(3) Supervening illegality
e) Acceptance
i) Manifestation of assent to the terms of an offer.
(2) Generally, offeree is not required to give offeror notice that he has begun
performance.
(a) But he is required to give reasonable notice after performance has been
completed.
(b) No notice is required if:
(i) Offeror waived notice; or
(ii) Offeree’s performance would normally come to the offeror’s
attention within a reasonable time.
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v) Bilateral contract
(1) May be accepted either by a promise to perform or by the beginning of
performance.
(a) Remember, unless offer specifically provides that it may be accepted
only through performance, it will be construed as an offer to enter into
a bilateral contract.
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(5) Mailbox rule
(a) Acceptance by mail/similar means creates a contract at the moment of
dispatch (mail is properly addressed and stamped) unless:
(i) Offer stipulates that acceptance is not effective until received, or
(ii) An option contract is involved.
1. Acceptance under an option contract is effective upon receipt.
(iii)Offeree sends a rejection and then sends an acceptance, then
whichever arrives first is effective.
(iv) Offeree sends an acceptance and then a rejection, then the
acceptance is effective (mailbox rule applies) unless the rejection
arrives first and the offeror detrimentally relies on it.
Case 1: Case 2:
Offeror: Offeree: Offeror: Offeree:
| | | |
Send offer | Sends offer |
| Send acceptance | Send accept.
| | | |
| Send rejection | Send rejection
| | Receive reject. |
Receives acceptance | and detrimentally |
| | relies on it |
Receives rejection | | |
| | Receives accept. |
CONTRACT – | |
mailbox rule NO CONTRACT - exception
applies to the mailbox rule
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Offeree sends rejection, then acceptance
Case 1: Case 2:
Offeror: Offeree: Offeror: Offeree:
| | | |
Send offer | Sends offer |
| Send rejection | Send rejection
| | | |
| Send acceptance | Send accept.
| | Receive accept. |
Receives rejection | | |
| | | |
Receives acceptance | | |
| | Receives rejection |
NO CONTRACT – | |
mailbox rule does CONTRACT - mailbox rule
not apply does not apply (whichever
(whichever received first controls)
received first
controls)
Case 1: Case 2:
Offeror: Offeree: Offeror: Offeree:
| | | |
Send offer | Sends offer |
| | | |
Send revocation | Send revocation |
| Send acceptance | Receive revocation
| | | |
| Receive revocation | Send acceptance
| | | |
| | | |
CONTRACT – | |
mailbox rule NO CONTRACT – receipt of
applies – revocation revocation terminates power
effective only on of acceptance
receipt
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3) Consideration
a) Elements
i) Bargained for exchange between the parties, and
(1) Promise induce the detriment and the detriment induce the promise.
(2) Gift
(a) There is no bargain involved (no consideration).
ii) Legal value - that which is bargained for must be considered of legal value –
it must constitute a benefit to the promisor or detriment to the promisee.
(1) Adequacy
(a) Court does not consider the adequacy of consideration.
(b) But if it is entirely devoid of value – token consideration – it will be
deemed insufficient.
(c) Sham consideration – not actually paid – may also be insufficient.
(d) But if there is value in the thing bargained for, consideration will be
found even if value never comes into existence.
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(3) Preexisting legal duty
(a) Performing or promising to perform an existing legal duty is
insufficient consideration
b) Mutuality
i) Consideration must exist on both sides of a contract.
(1) If only 1 party is bound to perform, the promise is illusory and will not be
enforced.
(2) Courts often supply implied promises to infer mutuality.
(a) I.e., a party must use her best efforts.
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iii) A promise to choose one of several alternative means of performance is
illusory unless every alternative involves legal detriment to promisor.
(1) Not illusory if:
(a) At least one alternative involves legal detriment and power to choose
rests with promisee or 3rd party, or
(b) A valuable alternative (involving a legal detriment) is actually
selected.
4) No defenses exist
a) Contract may be unenforceable because there is a defense to formation of contract
or defense to enforcement.
b) Defenses to formation
i) Absence of mutual assent
(1) Mutual mistake
(a) If both parties are mistaken about facts relating to the agreement,
contract may be voidable by the adversely affected party if:
(i) Mistake concerns a basic assumption on which contract is made;
1. I.e., parties think contract is for sale of diamond but it was
really a cubic zirconia
(ii) Mistake has a material effect on the exchange; and
1. I.e., cubic zirconia is worth only fraction what diamond is
worth
(iii)Party seeking avoidance did not assume risk of the mistake.
1. So mutual mistake is not a defense if adversely affected party
bore risk that assumption was mistaken.
a. Such as when 1 party is in a better position to know the
risks that the other, or
b. When parties knew their assumption was doubtful.
(b) Mistake in value is generally not a defense.
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(3) Ambiguity mistakes
(a) If contract includes an ambiguous term:
(i) Neither party aware of it, no contract unless both parties intended
the same meaning.
(ii) Both parties aware of it, no contract unless both parties intended
the same meaning.
(iii)One party aware of it, binding contract based upon what the
ignorant party reasonably believed to be the meaning of the
ambiguous words.
(4) Misrepresentation
(a) Fraudulent misrepresentation – contract voidable
(i) Fraudulent inducement by one of another to enter into contract,
contract is voidable by the innocent party if she justifiably relied
on the fraudulent misrepresentation.
(b) Nonfraudulent misrepresentation – contract is voidable if material
(i) Contract is voidable by innocent party if she justifiably relied on
the misrepresentation and the misrep was material.
1. Material if either info asserted would induce a reasonable
person to agree or maker of misrep knew info would cause the
person to agree.
(c) Innocent person may rescind agreement.
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c) Defenses based on lack of capacity
i) Legal incapacity
(1) Infants (minors)
(a) Cannot enter into a contract biding on themselves.
(b) Contractual promises of an adult made to an infant are binding on the
adult.
(c) Disaffirmance
(i) Infant can disaffirm before age of majority. Return anything that
she received under the contract that still remains, but no obligation
to return any part of consideration that is gone.
(d) Affirmance
(i) Infant can choose to be bound by his contract upon age of
majority. Done expressly or by failing to disaffirm within a
reasonable time after reaching majority.
(e) Exception – infant is bound to pay the reasonable value of necessities.
(3) Intoxication
(a) Voidable if other party had reason to know of the intoxication.
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d) Defenses to enforcement
i) Statute of frauds (SOF)
(1) Generally, oral contract is valid.
(2) Exception:
(a) Certain agreements must be by:
(i) A writing;
1. Contract need not be in writing, but there must be a writing
signed by the person to be held liable on the contract that
reflects the material terms of the contract.
2. Can be reflected in multiple writings.
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3. Effect of performance
a. If full performance, seller can enforce buyer’s oral promise
to pay.
b. If partial performance, that unequivocally indicates that the
parties have contracted for sale of land, this removes it
from SOF. Part performance requires at least 2 of:
i. Payment (in whole or part)
ii. Possession
iii. Valuable improvements
(v) Performance not within 1 year
1. If it cannot, by its terms, be performed within a year, must
satisfy SOF.
2. Date runs from date of agreement (not date of performance).
3. Lifetime contract – not within SOF (can be oral) because may
be performed in less than a year if person dies.
(vi) Goods priced at $500 or more
1. A writing is sufficient even if it omits or incorrectly states a
term, but the contract is not enforceable beyond the quantity of
goods shown in the writing.
2. Exception – when no writing is needed:
a. Specially manufactured goods
i. If made for buyer and not suitable for others in the
ordinary course of seller’s business, the contract is
enforceable if seller has made a substantial beginning of
their manufacture or commitments for their purchase
prior to receipt of repudiation.
b. Admissions in pleadings or court
i. If admitted that contract for sale was made in this
manner, it will be enforceable without a writing.
c. Payment or delivery of goods
i. If goods are received and accepted or paid for, contract
is enforceable. But only to the quantity accepted or
paid for.
3. Between merchants – confirming memo
a. If 1 party, within a reasonable time after oral contract,
sends the other written confirmation that is sufficient for
SOF, it will bind the recipient if:
i. He has reason to know of the confirmation’s contents;
and
ii. He does not objects in writing within 10 days of receipt.
(3) Exam tips:
(a) Check that party that signed the writing is the person to be charged
(sued). If not, consider merchant’s confirming memo. But this needs
to be between merchants – if they aren’t, confirming memo rule
doesn’t apply and signature of one party cannot bind the other.
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(b) Acronym for when a writing signed by party to be charged is not
required for sale of goods, even if for more than $500. These things
take it out of the SOF – SWAP
(i) Specifically made goods
(ii) Written confirmation by a merchant
(iii)Admission in court
(iv) Performance
ii) Unconscionability
(1) Allows court to refuse to enforce a provision or an entire contract to avoid
unfair terms, usually due to some unfairness in the bargaining process.
(a) Unfair price alone is not a ground for unconscionability
(b) Determined at time contract as formed.
(2) Common instances of procedural unconscionability
(a) Inconspicuous risk-shifting provisions
(i) Found in fine print.
(ii) Courts have invalidated these because they are inconspicuous and
incomprehensible to the average person, even if brought to actual
attention.
(b) Adhesion contracts – “take it or leave it”
(i) Courts will deem clause unconscionable and unenforceable if
signer is unable to procure necessary goods from any seller without
agreeing to a similar provision.
(c) Exculpatory clause
(i) Release for intentional wrongful acts is usually unconscionable.
(ii) Release for negligent acts may be unconscionable if they are
inconspicuous, but mostly upheld if for activities that are
hazardous.
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(d) Limiting remedies
(i) Clause that limits liability for damages to property are not
unconscionable unless inconspicuous.
(ii) If contract limits to a certain remedy and that remedy fails of its
essential purpose, it may be held unconscionable.
1. I.e., limit remedy to repair and item cannot be repaired.
(3) Effect if court finds unconscionability:
(a) Refuse to enforce the contract;
(b) Enforce the remainder of the contract without that clause; or
(c) Limit the application of any clause to avoid unconscionable result.
(4) On MBE, this is seldom a good defense.
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(3) Tests for deciding:
(a) Corbin test – majority view
(i) Takes into account specific circumstances of the transaction
involved and asks whether parties like these would normally
include in their writing the extrinsic matter they seek to introduce.
(ii) If would normally have been included in the writing, it will then be
excluded under the parol evidence rule.
iii) Evid that does not vary, contradict, or add to an integration falls outside parol
evid rule and will be admitted.
(1) Things that can be shown by extrinsic evid without violating parol evid
rule:
(a) Formation defects
(i) Fraud, duress, mistake, illegality
(b) Conditions precedent
(c) Interpretation
(i) Uncertainty, ambiguity or a dispute to the meaning of terms, parol
evid is admissible to aid in reaching a correct interpretation of the
agreement.
(ii) If meaning is plain, parol evid is inadmissible.
(d) Showing of true consideration paid
(e) Reformation
(f) Subsequent modifications of a written contract
iv) Art 2
(1) Follows the above rules, but allows evid of consistent, additional terms
unless:
(a) There is a merger clause, or
(b) Courts find from circumstances that writing was intended as a
complete and exclusive statement of the terms.
(2) Terms may be explained or supplemented by the following, whether or not
writing appears to be ambiguous:
(a) Parties’ course of dealing.
(i) Sequence of conduct concerning prior transactions that may
establish a common basis of understanding.
(b) Usage of trade
(i) Practice of method of dealing regularly observed in particular
business setting to justify an expectation.
(c) Parties’ course of performance
(i) If contract involves repeated occasions for performance and course
of performance was accepted previously.
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c) Art 2 provisions for interpreting contracts
i) Battle of the forms
(1) Under Art 2, contract can be formed even though terms of acceptance do
not match the offer. So what terms are in the contract?
(2) Contracts involving nonmerchants
(a) Terms of the offer govern
(i) Additional/different terms are considered proposals that do not
become part of contract unless the offeror expressly agrees.
(3) Contracts between merchants
(a) Additional terms in acceptance will be included in contract unless:
(i) They materially alter the original terms of the offer;
(ii) The offer expressly limits acceptance to the terms of the offer; or
(iii)The offeror has already objected to the particular terms or objects
within a reasonable time after notice of them is received.
(b) Different terms in acceptance:
(i) Some courts treat them as additional terms.
(ii) Some courts follow the knockout rule:
1. Conflicting terms in the offer and acceptance are knocked out
of the contract. Any gaps left are filled by the UCC.
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ii) Supplemental (gap-filler) terms
(1) Art 2 provides terms that may be missing from contract.
(2) Price
(a) Is a reasonable price at time of delivery if:
(i) Nothing is said as to price;
(ii) Price is left open to be agreed upon by the parties and they fail to
agree; or
(iii)Price is to be fixed in terms of some standard that is set by a 3rd
person and it is not set.
(3) Place of delivery
(a) If not specified, place is seller’s place of business (or home).
(4) Time for shipment/delivery
(a) Due in a reasonable time.
(5) Time for payment
(a) Due at the time and place at which the buyer is to receive the goods.
(6) If contract provides that an assortment of goods is to be delivered but
does not specify who is to choose
(a) Assortment is to be at buyer’s option.
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(c) FOB – free on board
(i) Followed by location and that is where risk of loss passes to buyer.
(ii) Seller bears risk and expense of getting goods to that named
location.
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v) Warranties
(1) Warranty of title
(a) Any seller of goods warrants that title transferred is good and there are
no liens or encumbrances on title of which buyer is aware.
(b) Automatic – need not be in contract.
(c) Can be disclaimed by specific language or circumstances that give
buyer notice that seller does not claim title.
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(6) General disclaimer methods
(a) General language, such as “as is,” “with all faults.”
(b) By inspection or refusal to inspect
(i) If buyer, before entering contract, has examined goods or sample
fully as she desires or has refused to examine, there is no warranty
as to defects that a reasonable examination would have revealed.
(c) By course of dealing, course of performance, or usage of trade.
(8) Warranty disclaimers that limit damages for personal injury caused by
breach of warranty on consumer goods are prima facie unconscionable.
Warranties
Type How arise By whom Disclaimer
Implied:
Warranty of By sale of goods Any seller By specific language or
title (title is circumstances showing seller
good, transfer does not claim title
rightful, no liens
or
encumbrances)
Warranty of By sale of goods of the Merchant By disclaimer mentioning
merchantability kind regularly sold by only “merchantability” (if written,
(fit for ordinary the merchant it must be conspicuous).
purposes)
May also be disclaimed by “as
is” language, inspection or
refusal to inspect, or course of
dealing/performance, or usage
of trade.
Warranty of By sale of goods where Any seller By conspicuous written
fitness for seller has reason to disclaimer.
particular know of particular
purpose (fit for purpose and of buyer’s May also be disclaimed by “as
buyer’s reliance on seller to is” language, inspection or
particular choose suitable goods refusal to inspect, or course of
purpose) dealing/performance, or usage
of trade.
Express By affirmation of fact, Any seller Extremely difficult to
promise, description, disclaim
model, or sample
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6) Performance and excuse of nonperformance
a) Common law
i) Party’s basic duty is to substantially perform all that is called for in the
contract.
b) Art 2
i) Generally requires perfect tender.
iv) Buyer has right to inspect before paying unless contract calls for COD or
indicates otherwise.
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ii) Def:
(1) Promise – commitment to do/refrain from doing something.
(a) Unconditional promise is absolute.
(i) Failure to perform an unconditional promise is a breach of
contract.
(b) Conditional promise may become absolute by occurrence of the
condition.
(2) Condition
(a) Event, other than the passage of time, the occurrence/non-occurrence
of which will create, limit, or extinguish other party’s absolute duty to
perform.
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(2) Express conditions
(a) Expressed in the contract
(3) Implied conditions
(a) Inferred from evid of parties’ intentions.
(4) Constructive conditions
(a) Are read into the contract by the court without regard to parties’
intention.
(i) Done in interest of fairness.
(b) Time test
(i) Constructive conditions concurrent
1. If both performances can be rendered at same time, they are
constructively concurrent – so each is a condition precedent to
the other.
2. So absent excuse, each party must first tender its own
performance in order to put the other under a duty of
immediate performance.
(ii) Constructive conditions precedent
1. If performance takes time to complete while other is instant,
completion of longer one is constructive condition precedent to
execution of shorter one.
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(c) Effect of anticipatory repudiation
(i) Treat it as total repudiation and sue immediately
(ii) Suspend performance and wait to sue until performance date
(iii)Treat it as offer to rescind and treat contract as discharged
(iv) Ignore repudiation and urge promisor to perform
1. Party can still sue for breach later if still repudiates.
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(8) Excuse of condition by waiver or estoppel
(a) One with benefit of condition can indicate by words or actions that she
will not insist on condition being met.
(i) Consideration is not required for waiver of condition.
(ii) If no consideration is given for waiver, condition must be ancillary
or collateral to main subject and purpose of contract.
(iii)Waiver of condition does not waiver right to damages.
(b) Waiver will be binding (estoppel) if person detrimentally relies on the
waiver.
(i) Waiver can be retracted any time prior to reliance.
(c) If condition is broken, can chose to terminate liability or continue
under the contract.
(i) If continue, condition is deemed waived.
(d) Installment contract
(i) If waiver is not supported by consideration, beneficiary of waived
condition can insist on strict compliance with terms for future
installments by giving notice that he is revoking the waiver (as
long as no detrimental reliance).
v) By impossibility
(1) Duties will be discharged if it is impossible to perform them.
(a) Must be objective – duties could not be performed by anyone.
(b) Must arise after contract was entered into.
(i) If problem existed at time contract as formed, it is a question of
whether the contract is voidable because of mistake.
(2) Each party is excused from duties yet to be fulfilled.
(a) Either party may sue for rescission and get restitution.
(3) Temporary impossibility suspends contractual duties, does not discharge
them.
(4) Specific situations:
(a) Death or physical incapacity of person necessary to effectuate contract
serves to discharge it. Must be unique to that person.
(i) If services could be delegated, contract is not discharged.
(b) Supervening illegality
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(c) Subsequent destruction of subject matter or means of performance
(i) Except a contractor’s duty to construct a building is not discharged
by destruction of the work in progress. Not impossible – can still
rebuild.
(ii) However, when a contract to repair’s subject matter is destroyed,
repairer’s performance is discharged by impossibility because
there is nothing left to repair.
(iii)This will not apply if risk of loss has already passed to the buyer.
vi) By impracticability
(1) Test:
(a) Extreme and unreasonable difficulty and/or expense; and
(b) Its nonoccurrence was a basic assumption of the parties.
(2) Art 2
(a) Follows above rules. If performance is impossible or commercially
impracticable, seller will be discharged to extent of the impossibility
or impracticability.
(b) Generally, seller assumes risk and must perform. But if parties would
not have placed the risk of the extraordinary occurrence on the seller,
he will be discharged.
(c) Events sufficient for discharge:
(i) Shortage of raw materials
(ii) Inability to convert them into product due to war, strike, embargo,
shut down of major supplier
(iii)Catastrophic local crop failure (not just shortage)
(d) Increase in costs not sufficient to discharge
(i) Increase of more than 50% held insufficient
(e) Seller’s inability to perform is only partial:
(i) He must allocate deliveries among customers.
vii) By frustration
(1) If purpose of contract has become valueless by virtue of some supervening
event not the fault of the party seeking discharge.
(2) Elements:
(a) Some supervening act/event leading to the frustration;
(b) Parties did not reasonably foresee the act or event occurring;
(c) Purpose of the contract is almost completely destroyed by act/event;
and
(d) Purpose of the contract was known by both parties at time of contract.
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viii) By rescission
(1) Mutual rescission
(a) Express agreement between the parties to rescind.
(i) This itself is a binding contract supported by consideration –
giving up right to counter-performance by the other.
(b) If 3rd party beneficiary case and rights of 3rd party have already vested,
then contract cannot be discharged by mutual rescission.
(d) Can be oral, even if contract expressly states that it can be rescinded
only by a written document, unless:
(i) Subject matter of contract falls within SOF, or
(ii) Contract is for sale of goods.
1. Art 2 requires written rescission if original contract requires
written rescission.
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x) By novation
(1) Occurs when new contract substitutes a new party to receive
benefits/assume duties that originally belonged to original party under old
contract. Novation will discharge the old contract.
(2) Elements:
(a) Previous valid contract;
(b) Agreement among all parties, including new parties to contract;
(c) Immediate extinguishment of contractual duties between original
parties; and
(d) Valid and enforceable new contract.
xi) By cancellation
(1) Destruction of written contract will not discharge it.
(2) But if parties manifest intent to have these acts serve as discharge, it will
have this effect if consideration is present.
xii) By release
(1) Release and/or contract not to sue will discharge contractual duties.
(2) Must be in writing and supported by new consideration or promissory
estoppel elements.
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(c) Effect
(i) Accord suspends the right to enforce the contract in accordance
with the terms of the accord contract.
(2) Satisfaction
(a) Performance of the accord agreement.
(b) Its effect is to discharge:
(i) Original contract, and
(ii) Accord contract.
xvi) By lapse
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Performance of contract
7) Breach
a) Occurs when:
i) Promisor is under an absolute duty to perform, and
ii) This absolute duty has not been discharged, and
iii) There is a failure to perform in accordance with contractual terms.
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ii) Material breach
(1) If obligee does not get substantial benefit of the bargain.
(2) Nonbreaching party:
(a) May treat the contract as at an end – discharging any counter-
performance, and
(b) Have an immediate right to all remedies for breach of the entire
contract.
(3) Failure to perform by time in contract is generally not a material breach if
performance is rendered in a reasonable time.
(a) Unless timely performance is essential to contract, then it may be
material.
iii) So remember: minor breach allows aggrieved party to recover damages, but
she still must perform. Material breach, aggrieved party need not perform.
iv) If buyer rejects goods and they are in her possession, she must hold them with
reasonable care and obey any instruction as to them.
(1) If seller gives no instruction within a reasonable time, buyer may reship
the goods to seller, store them for seller’s account, or resell them for
seller’s account.
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v) Buyer’s right to revoke acceptance
(1) Once goods are accepted, buyer can no longer reject and is now obligated
to pay for them (less any damages resulting from seller’s breach).
(2) Exception:
(a) Buyer may revoke acceptance if goods have a defect that substantially
impairs the value, and:
(i) She accepted the goods on the reasonable belief that the defect
would be cured and it has not been; or
(ii) She accepted the goods because of the difficulty of discovering the
defects or because of the seller’s assurance that the goods
conformed to the contract.
(3) Revocation must occur:
(a) Within a reasonable time after defects discovered/should have been
discovered; and
(b) Before any substantial change in goods occurs that is not caused by
defect.
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d) Anticipatory repudiation
i) Can be treated as an immediate breach of contract.
e) Breach of warranty
i) Seller warranties condition of goods even after acceptance.
ii) Failure of warranties is a breach.
8) Remedies
a) Nonmonetary
i) Specific performance
(1) If the legal remedy is inadequate, this can be sought by nonbreaching
party.
(2) Always available for land sale contracts, rare goods, or unique at the time
performance is due.
(3) Not available for contracts to provide services, even if services are rare or
unique.
(a) But court may enjoin breaching employee from working for a
competitor for duration of contract if services contracted for are rare or
unique.
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ii) Nonmonetary remedies under Art 2
(1) Buyer
(a) Cancellation
(i) Buyer can cancel the contract if rightfully rejects goods because
they do not conform to the contract.
(b) Right to replevy
(i) On buyer’s prepayment
1. If buyer made part payment and seller has not delivered the
gods, buyer may replevy the goods if:
a. Seller has become insolvent within 10 days after receiving
buyer’s first payment, or
b. Goods were purchased for personal, family, or household
purposes.
2. Buyer must tender any unpaid portion of purchase price to
seller.
(ii) On buyer’s inability to cover
1. Buyer may replevy undelivered, identified goods from seller if
the buyer, after reasonable effort, is unable to secure adequate
substitute goods.
(2) Seller
(a) Right to withhold goods
(i) Can be done if:
1. Buyer fails to make payment due on or before delivery
2. When goods sold on credit, and before delivery, seller
discovers buyer is insolvent.
a. But here, goods must be delivered if buyer tenders cash for
payment.
(b) Right to recover goods
(i) On buyer’s insolvency
1. If buyer received goods on credit while insolvent, seller can
reclaim goods upon demand made within 10 days after buyer’s
receipt of goods.
a. 10 day limit does not apply if misrepresentation of
solvency has been made in writing to seller within 3
months before delivery.
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(ii) Shipped or stored goods from bailee
1. On buyer’s insolvency
a. Seller may stop delivery of goods in possession of carrier if
buyer is insolvent.
2. On buyer’s breach
a. Seller may stop delivery if buyer breaches or seller has
right to withhold performance pending receipt of
assurances.
(c) Different from anticipatory repudiation, which requires more than just
fear of nonperformance – there must be a clear indication that other
will be unable to perform.
(i) I.e., “I am not going to perform” = anticipatory repudiation. “I’m
not sure if I can perform” = reason to demand assurances.
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(iii)In sale of goods, only buyer can recover consequential damages.
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ii) Standard measure
(1) Contracts for sale of goods
(a) Buyer’s damages
(i) If seller does not deliver/buyer rejects goods/revokes acceptance
1. Difference between contract price and either:
a. Market price - benefit of the bargain damages; or
i. Market price determined at time buyer learns of breach.
b. Cost of replacement goods – cover
i. To use this, buyer must make a reasonable contract for
substitute goods in good faith and without unreasonable
delay.
2. Plus incidental and consequential damages, less expenses
saved due to seller’s breach.
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iii. Should only be used when other measures will not put
seller in as good a position as he would have been in if
buyer did not breach. So typically used for sellers with
unlimited inventory because a lost sale will result in
loss of 2 sales (i.e., sale of TV, by resell, then seller
loses out on 2 sales, so lost profit is a better measure to
compensate seller).
iv. To determine if this it the measure to be used, look at
seller’s supply – if unlimited, then he is a lost volume
seller and lost profits measure can be used. If limited,
lost profits measure cannot be used and use other
methods instead.
Art 2 damage measures for total breach (buyer does not accept/seller does not deliver)
Buyer’s measures
Benefit of bargain
Market price – Contract price
Or + Incidental + Foreseeable - Expenses
Cover damages (costs of consequential saved
Cost of reasonable replacement shipping, storing, damages
goods – Contract price etc. due to breach)
Seller’s measures
Benefit of bargain
Contract price – Market price
Or
Resale
Contract price – Resale price + Incidental - Expenses saved
Or damages (costs of
Lost profit shipping, storing,
Contract price – Cost of goods etc. due to breach)
(only used if seller has lost sales
volume from breach)
Or
Action for price
Contract price
(only used if goods cannot be
sold to others at reasonable
price)
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(2) Contracts for sale of land
(a) Damages = difference between contract price and fair market value of
land.
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(b) Contracts for sale of goods
(i) Buyer breach – seller cannot bring action against buyer for full
price unless goods cannot be resold or were damaged when risk of
loss was on buyer.
(c) Manufacturing contracts
(i) Buyer breach – manufacturer is under duty to mitigate by not
continuing work after the breach.
1. But if completion will decrease damages, then mfg can
continue.
(d) Construction contracts
(i) Owner’s breach – builder does not have to mitigate by finding
other work, but does have duty to mitigate by not continuing work
after breach.
c) Restitution
i) Based on preventing unjust enrichment.
ii) It is the value of the benefit conferred. Usually to def.
(1) May also be measured by the detriment suffered by P if benefits are
difficult to measure or benefit measure would achieve an unfair result.
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9) 3rd parties to contract
a) 3rd party beneficiaries
i) A (promisee) contracts with B (promisor) that B will render some
performance to C (3rd party beneficiary).
ii) Types
(1) Incidental beneficiary – do not have contractual rights
(2) Intended beneficiary – have contractual rights
(a) Consider whether beneficiary:
(i) Is identified in contract,
(ii) Receives performance directly from promisor, or
(iii)Has some relationship with the promisee to indicate intent to
benefit.
(3) Creditor beneficiary – person to whom debt is owed by the promisor
(4) Donee beneficiary – person whom the promisee intends to benefit
gratuitously
(2) Prior to vesting, promisee and promisor are free to modify or rescind
beneficiary’s rights under the contract.
(a) Once vested, no changes without his consent.
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Determining intended 3rd party beneficiary status and contractual rights
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(iii)Assignment prohibited by law
1. I.e., wage assignments
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(b) Assignee vs. assignor
(i) Assignee can sue assignor for wrongfully revoking assignment.
(ii) Assignee can sue assignor if obligor successfully uses a defense to
enforce the obligation.
(iii)Assignor not liable to assignee if obligor is incapable of
performing.
ii) Delegation
(1) Y (obligor/delegator) promises to perform for X (obligee). Y delegates
her duty to Z (delegate).
(2) Generally, all duties can be delegated.
(a) Exceptions:
(i) Duties involve personal judgment and skill
(ii) Delegation would change the obligee’s expectancy
(iii)A special trust was reposed in the delegator by the other party to
the contract
(iv) There is a contractual restriction on delegation
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c) Power of person other than owner to transfer good title to purchaser
i) Entrusting
(1) Entrusting goods to a merchant who deals in goods of that kind gives him
power – but not right – to transfer all rights of the entruster to a buyer in
the ordinary course of business.
(a) I.e., A leaves her watch with Jeweler for repairs. Jeweler sells watch
to, who does not know that J does not have a right to sell. Z gets good
title against A. A’s only remedy is to sue J for damages.
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