LEARNING OBJECTIVES

After completing this lecture, you will be able to:

1. Identify the sources of contract law.
2. Define the essential elements of a legally enforceable contract.
MBE® 3. Explain common substitutes and alternatives to consideration and legally valid
contracts.
CONTRACTS 4. List defenses to contract formation.
5. Analyze and evaluate performance issues.
6. Explain the meaning and effects of breach of contract.
7. Apply rules pertaining to legal damages and other breach of contract remedies.
8. Evaluate third-party issues.

NOTE: This lecture covers heavily tested topics on the bar exam and is not intended to
be your sole source of information on the subject matter. Please refer to your Subjects
MBE is a trademark of the National Conference of Bar Examiners. Outline Materials and Bar Points to gain a greater understanding of the nuances within
the subject.

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SOURCES OF CONTRACT LAW SOURCES OF CONTRACT LAW

Common Law
Default law that governs
contractual relations
Contracts that do not involve the
sale of goods
Even in a sale of goods, the
common law will apply unless
the UCC provides contrary
provisions
Hybrid Cases: involves both the sale of goods and service contracts, the question arises as to which source
of contract law should apply.
SOURCES OF CONTRACT LAW Contractual Obligations
UCC
Governs “sales of goods”
• Express: oral or written expressions of the agreement
Sales = any transaction in which the seller transfers title of goods to a
buyer
• Implied-in-fact: formed by conduct rather than words
Goods = any moveable item (does not include intangibles, money, legal
claims, services, or real property)
• Implied-in-law: where one party bestows a benefit on another and it would be
unjust not to pay the reasonable value of the benefit

Majority rule: determined by predominant purpose of the transaction

Three Factors to determine the predominant purpose of the contract:
1) Contract language
2) Nature of supplier’s business
3) Value of goods v. services

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 FORMATION FORMATION
Offer:

1. An outward manifestation; and

2. Signal that acceptance will conclude the deal

ü “I will sell you my car if you’ll pay me $5,000 cash.”

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FORMATION FORMATION
Multiple Offers:
When a question involves a party’s communication proposing a deal to two or more
persons at the same time, a multiple offeree issue arises. FOUR WAYS TO TERMINATE THE POWER OF
ACCEPTANCE:
1. Commercial advertisements:
• American rule: ads, catalogs, and price lists are invitations for offers, since • Lapse of time
responses may exceed available supply of goods or services
• Exception: language that identifies who gets limited supply of goods even if there • Death or incapacity of either party
is an excess demand
• Revocation by offeror
2. Reward offers: communications that promise money in exchange for
performance of specific tasks • Rejection by the offeree

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 FORMATION FORMATION
Lapse: after time stated in offer or after a reasonable time
• Reasonable time: (1) subject matter/market conditions; and (2) degree of urgency American Rule Option Contract
and means of transmission • the offeror can revoke even if he gave a • an offer;
• Face-to-Face Conversation Rule: an offer made in a face-to-face conversation specific time to accept • a separate promise to keep the offer open;
generally lapses at the end of the conversation and
• a valid mechanism for enforcing the
Death or Incapacity: of either party after offer is made terminates power of subsidiary promise
acceptance
Preventing
Revocation of offer by offeror: offeror may revoke at any time, for any reason
• Must be revoked before acceptance and revocation must be communicated to the Revocation
offeree
• Direct revocation: offeror directly communicates to offeree an intent to Reliance/Construction UCC "Firm Offer"
withdraw the offer
• Indirect revocation: • courts will hold offers open when the • offer made by a merchant;
• Offeror takes action that is inconsistent with the intent to go through with offeree detrimentally relies • writing signed by merchant; and
the offer; and • Ex: a general contractor relies on • offer expressly states it will be held open
• Offeree learns of such action from a reliable source subcontractor's bid (irrevocable for time stated or reasonable time,
BUT no more than 3 months)

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FORMATION FORMATION
Termination by Offeree’s Rejection Offer and Acceptance under Unilateral Contracts:

• Outright rejection Bilateral Contract Unilateral Contract

Offer seeking acceptance by a promise Offer seeking performance in return
• Rejection via counteroffer
• Counteroffer = rejection and a new offer Looking for a promise Looking for action (performance)
• Exception: offeree can test the waters by making a mere inquiry
Once promises are exchanged, both Offeror not bound until offeree
• Rejection via non-conforming acceptance parties are bound completes performance, and offeree is
• Mirror image rule: acceptance must mirror the terms, and any variation NEVER bound
is a counteroffer
Unilateral Contracts: (revocation of offer)
• Once offeree begins performance, an option contract is created and the offeror
may not revoke.
• Mere preparations do not create an option contract, only beginning performance.

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 FORMATION FORMATION
Acceptance (Common Law):
Accepting by Mail
Mailbox Rule Mailbox Rule and Option Contracts
• Mirror terms of the offer; and
• Be communicated to the offeror • Acceptance by mail is effective upon • NOT applicable and acceptance is only
DISPATCH effective upon receipt
(Restatement/majority rule)
• Applies unless the offer provides
Exceptions to communication requirement: otherwise
• Unilateral Contracts: acceptance is effective only by completing
performance, no communication is required unless offer provides • Applies only to acceptances
otherwise
• Acceptance by mail • Does NOT govern if rejection is mailed
before acceptance, whichever arrives
first will be effective

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FORMATION FORMATION
UCC – Battle of the Forms
• Rejection of the Mirror Image Rule: an offeree’s nonconforming acceptance or
UCC – Acceptance by Seller’s Shipment confirmation will operate as an effective acceptance of the offer, thus forming a
contract

• Acceptance by Seller’s shipment of non-conforming goods Effect of Additional or Different Terms

Additional Terms: Different Terms:
• Seller can accept Buyer’s offer to purchase goods for prompt or Between merchants, additional terms in offeree’s Terms in the two writings dealing
current shipment acceptance or confirmation become part of the contract with the same topic knock each
1. Promise to ship goods; other out (“knockout” rule)
2. Ship conforming goods; or 3 Exceptions:
1. offer expressly limits acceptance to its own terms
3. Ship non-conforming goods, unless seller sends shipment as an 2. offeror objects to additional terms within a
accommodation (i.e., counteroffer) reasonable time
3. if the additional terms would materially alter the
contract

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 FORMATION CONSIDERATION
UCC Bargain Theory
(bargained-for there was something
exchange) promised, and the
Conditional Acceptance: if offeree’s “acceptance” is specifically conditioned promise must have been
made in order to obtain
on the offeror first agreeing to the additional terms in acceptance before something else of value
offeree will proceed, this nonconforming, conditional acceptance will NOT be
effective to form a contract. (it’s a counteroffer) Consideration

Contracts Formed by Conduct: the UCC provides that the parties’ conduct a benefit to the promisor and/or
in recognizing the existence of a contract is sufficient to establish a contract a detriment to the promisee
even though their writings do not otherwise establish a contract.
• Terms of the contract:
• Terms on which the writings of the parties agree; and Benefit/Detriment Test
• UCC default terms Test: is promisee doing something he
had a legal right NOT to do or forgoing
some activity he HAD a legal right to?

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CONSIDERATION CONSIDERATION
Inadequacy of Consideration: courts don’t police the equivalence or fairness of
the exchange Alternatives in the Absence of Consideration
• The supposed inadequacy of consideration is no defense to a breach of contract
claim. Past or Moral Consideration

General Rule Exceptions Material Benefit Test

Illusory Promises: the promise of performance that leaves performance to the (enforceable) (minority rule)
unlimited discretion of the promising party is illusory and does NOT constitute A promise in exchange for • A written promise to A promise made in
consideration. something already given pay a debt barred by recognition of a past
or performed is NOT the statute of benefit conferred is
supported by limitations enforceable if:
Gratuitous Promises: promises to make a gift are generally unenforceable due to consideration.
insufficient consideration. • A written promise to • Promisee conferred the
pay a debt discharged benefit on the
• Exception: gratuitous transfers are legally binding by bankruptcy promisor; and
• The benefit is material

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 CONSIDERATION STATUTE OF FRAUDS
Promissory Estoppel: promisee that reasonably relies to his detriment on a General Rule: oral and written contracts are equally enforceable
gratuitous promise may be able to enforce that promise, even without consideration. • SOF Exception: If the contract falls under the SOF, it must be in writing and signed by
(4 requirements) the party against whom enforcement is sought
ü A promise
ü Foreseeable reliance
Categories of Contracts Subject to the Statute of Frauds
ü Actual reliance (must be induced by the promise)
M MARRIAGE contracts
ü Injustice without enforcement
Y Contracts that cannot be performed within 1 YEAR of their making
Factors to analyze “injustice” requirement: Contracts for the sale of LAND
• Strength of proof of other 3 requirements L
• Blameworthiness or willfulness of the breach E Contracts of an EXECUTOR to answer for a duty of a decedent
• Relative position or equities of the parties
• Extent to which the reliance was detrimental G Contracts of GUARANTEE or suretyship
• Availability of alternatives short of enforcing the promise
S Contracts for the SALE of goods of $500 or more (UCC 2-201)

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STATUTE OF FRAUDS STATUTE OF FRAUDS

Contracts not to be performed within a Year Satisfying the Statute of Frauds
• Measured from date of contract formation, NOT the date performance begins ü Writing: a memorandum of the agreement
• Parties to the transaction
• At the point of formation, is it at all possible (even if not probable) to complete the
• Nature and subject matter of the contract
required performance within 1 year?
• Essential terms
• Frequently Tested Situations:
• Contracts that can be breached or excused within a year of formation
• A lifetime or permanent contract of employment ü Signature: any symbol with intention to authenticate the writing

Guaranty/Suretyship Agreements – Main Purpose Exception: ü Performance: may satisfy SOF for some categories of contracts
• Where the main purpose of the guarantor is to protect his own economic • Land sale contracts: part performance showing payment, taking possession,
interests, the guarantee agreement is NOT governed by the SOF, and can be oral. or making substantial improvements
• One-year contracts:
• If fully performed: enforceable despite SOF
• If only partially performed: not enforceable

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 STATUTE OF FRAUDS GAP-FILLERS
UCC Statute of Frauds UCC Default Provisions
Governs contracts for the sale of goods of $500 or more Implied Warranties
Title Merchantability Fitness for a Particular
5 Ways to Satisfy UCC SOF: Purpose
• Good title; • Goods fit for ordinary purposes for • Goods being sold are fit for the
Signed Writing Writing;
• Rightful transfer; and which those goods would be used particular purpose buyer
Quantity; and
• No liens or security intends to use them
Signed by the party against whom enforcement is sought
interests ONLY applies if seller is a merchant
Merchant’s Sender and recipient are merchants; ONLY applies when, at the time of
Confirmation Writing is in confirmation of the contract and contains a quantity; and Excluded/modified by: Displaced by: contracting, seller has reason to
Recipient does not send a written objection within 10 days • specific language; or • specific use of word know the particular purpose AND
Judicial Admission Party admits contract formation in pleading, testimony, or otherwise in court • circumstances which “merchantability” and the buyer is relying on seller’s
give buyer reason to conspicuousness if in writing; or expertise
suspect seller does not • any other language or
Partial Performance Goods for which payment is made/accepted; or claim unencumbered circumstances that would be Negated when:
Goods which have been received/accepted title reasonably understood by a buyer • disclaimer is written, clear, and
to exclude the warranty (“as is”) conspicuous; OR
Specially Manufacturer detrimentally relied by beginning performance before buyer’s • goods have patent defects
Manufactured Goods withdrawal; and which were easily detectable
Manufacturer can’t resell the goods in the ordinary course of business

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GAP-FILLERS GAP-FILLERS
UCC Default Provisions
Common law Default Rules for Service Contracts
Express Warranties: arises when seller expressly makes them as part of the basis of
the bargain • Missing Price Term: if one party performs services at the request of another
• Any affirmation of promise or fact; but no price is discussed in advance, then the default rule under common law
• Any description of the goods; or will apply
• Any sample or model
• Reasonable value for services rendered
No need to use words “warrant” or ”guarantee” to create. However, vague or “sales
talk” statements are considered “puffing,” not warranty.

Missing Terms:
• Price term = reasonable price at time established by the contract for delivery
• Time term = reasonable time
• Place of delivery term = seller’s place of business

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 GAP-FILLERS
UCC & CL Obligation of Good Faith and Fair Dealing
Good Faith = honesty in fact and the observance of reasonable commercial
standards of fair dealing in the trade
• Open Price Terms: if contract leaves price to be fixed by one of the parties, then
that party must fix the price in good faith
• Satisfaction Terms: if contract contains a satisfaction clause or similar term,
then the determination as to whether a party’s performance obligation must be
exercised in good faith
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INTERPRETING AMBIGUOUS LANGUAGE
Objective vs. Subjective Meaning
• Rule: the objectively reasonable meaning of a term at the time of
contracting would control over a contrary subjective
!
understanding of the term by one of the parties.
• Exception: when one party has reason to know of the other
party’s subjective understanding, the first party is bound by that
meaning.
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GAP-FILLERS
Open Quantity Terms
• Output contracts: buyer agrees to purchase all or a percentage of
a seller’s output for a particular good
• Requirement contracts: seller agrees to supply the buyer with all
or a percentage of the buyer’s requirements for a particular good
• Under the UCC, the party entitled to determine the particular
quantity of goods to be sold (either the buyer demanding delivery
of his requirements or the seller demanding purchase of her
output) must make that determination in good faith
• UCC also prohibits any unreasonable disproportionate demand or
tender, if there was either:
• A stated estimate; OR
• A past course of dealing
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INTERPRETING AMBIGUOUS LANGUAGE
Contra Proferenem:
• Rule: if an ambiguous term is included in the contract, then in
case of doubt, it is construed against the drafter.
• Applies to all contracts drafted by one of the parties, whether an
adhesion contract or one between parties of equal bargaining
power.
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 TRADE USAGE, COURSE OF DEALING, COURSE OF PERFORMANCE THE PAROL EVIDENCE RULE
Extrinsic evidence used to fill gaps and resolve ambiguities in the contract.
Usage of Trade is any practice or method of dealing having such regularity of observance in a The Parol Evidence Rule: governs the admissibility of oral and documentary
place or trade as to justify an expectation that it will be observed with respect to evidence of negotiations and other communications between the parties
the transaction in question that took place prior to or contemporaneously with the execution of the
[what all members of the trade do] contract.
Course of is a pattern of conduct concerning previous transactions between the parties
Dealing that is fairly to be regarded as establishing a common basis of understanding for Integration
interpreting their subsequent expressions and other conduct
[what the parties did in their previous contracts] Partial Complete
• terms within the contract are • the contract is intended to
Course of is present when a particular contract involves repeated occasions for
intended as the final expression of represent a complete and
Performance performance by a party and the other party, with knowledge of the nature of the
performance and opportunity for objection to it, accepts the performance or those specific terms exclusive statement of all the
acquiesces in it without objection • NOTE: the terms “full integration” and terms
[how the parties have acted under their current contract] “partial integration” are interchangeable.

ü Admissible: to supplement terms and resolve ambiguities

Inadmissible: to contradict express terms of the contract
If Conflict: course of performance > course of dealing and usage of trade; course of dealing > Determining Partial and Complete Integration Merger clause
usage of trade

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THE PAROL EVIDENCE RULE THE PAROL EVIDENCE RULE

WHEN PAROL EVIDENCE RULE WILL NOT APPLY
Purpose of Evidence:
The effect of the rule depends on the purpose for which the parol evidence is being
• Subsequent Agreements
introduced
Purpose Rule • Collateral Agreements: PE rule will not affect agreements between parties that
Explain or Always admissible for this purpose (majority rule) are entirely distinct from the written agreement of the contract at issue
Interpret
• Attacks on the validity of the written agreement
Supplement Admissible for this purpose UNLESS the contract is completely 1. failure of an oral condition precedent to the agreement
integrated. 2. mistake or duress
3. fraud
UCC Distinction: trade usage, course of dealing, and course of 4. reformation
performance can supplement a completely integrated agreement - there was an antecedent valid agreement;
- the antecedent agreement is incorrectly reflected in the
writing because of mistake or fraud; AND
Contradict Inadmissible for this purpose - proof established by clear and convincing evidence

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 PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE
Obligations under the UCC – Risk of Loss (ROL)
Carrier vs. Non-Carrier Cases
Description When does ROL transfer?
Seller’s Obligations = transfer and deliver goods Carrier Parties to a sale of Shipment K: ROL passes to buyer when goods are
goods contract delivered to carrier
agree to use a • “FOB Seller” or K is silent (default rule)
Buyer’s Obligations = accept and pay for the goods common carrier • Buyer bears ROL if goods damaged in transit

Destination K: ROL passes to buyer when goods are

tendered at destination specified in the contract
• “FOB Buyer”
• Seller bears ROL if goods damaged in transit
When something happens to the goods before the buyer receives them:
Non- Parties to a sale of • If seller is NOT a merchant, ROL transfers to buyer as
• If seller bears ROL, he must provide replacement goods carrier goods contract do soon as goods are made available (tendered)
• If buyer bears ROL, he must pay the contract price NOT agree to use a
common carrier • If seller IS a merchant, ROL transfers to buyer once
goods are physically in buyer’s possession

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PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE

Excusing Performance due to Faulty Assumptions

Modification
Common Law
Preexisting Duty Rule: a promise to
increase compensation for duties
already owed is unenforceable because
there is no consideration for the
modification.
Exceptions:
• Mutual Modification
• Unforeseen circumstances
Present Material Facts
UCC
Unilateral Mistake: one party’s mistake about present material fact(s) is
An agreement modifying an existing
NOT excused unless other party knew/had reason to know of the mistake
contract needs no consideration to
be enforceable, so long as it is made
in good faith
Mutual Mistake: voidable by disadvantaged party (3 requirements)
• mistaken assumption of material fact(s);
• mistake made by BOTH parties; and
• disadvantaged party did not bear risk of mistake under the contract

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 PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE
Excusing Performance due to Faulty Assumptions
Future Facts (after contract formed) Excusing Performance by Agreement of the Parties
Impossibility • objective impossibility; and Accord and Satisfaction
Rescission
• the contingency that creates the impossibility was not known
to the parties at the time of making the contract • the parties may agree • Accord: obligee promises to accept substituted performance in
to discharge each satisfaction of the obligor’s existing duty
Impracticability • contingency was unforeseen; and
• increased cost/burden is far beyond what either party other’s remaining
duties of • Legal Effects: A&S satisfies obligor’s original obligation, but accord
anticipated alone does not discharge obligor’s duty – only suspends it
UCC: increased costs/market changes are business risks performance under
• typical cases involve severe shortages or unforeseen an existing contract.
• Consideration required - sufficient if:
shutdown of major supply sources
• where accord involves agreement for partial or substituted
Frustration of Contingency occurs that dramatically reduces the value of performance, the substituted performance differs significantly from
Purpose performance to receiving party. original performance, or its obligation is doubtful
Modern Test: • where accord involves agreement for partial payment, there is a
• principal purpose of K is substantially frustrated; good-faith or bona fide doubt about the amount owed
• frustration was substantial in nature; and
• non-occurrence of the event that caused frustration was a
basic assumption of the K

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PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE

Anticipatory Repudiation (AR) may be established by party’s
Failure to Give Adequate Assurance = Repudiation
• No response within reasonable time (30 days UCC); OR
• Definitive statement that it will breach; OR • Response does not provide reasonable assurance

• Voluntary act that renders party unable to perform its contractual obligations
Rights of Aggrieved Party upon Repudiation
• Cancel the contract and terminate all rights/obligations
If AR cannot be established but there are reasonable grounds for insecurity, the • Action for damages or specific performance; OR
insecure party may make a demand for adequate assurance of performance • Ignore the repudiation

Two step process: Retraction of Repudiation - may retract unless/until the other party:
1. Reasonable grounds for insecurity? • Acts in reliance on repudiation;
• Accepts repudiation by signaling this to breaching party; OR
2. Does the party adequately assure performance? • Commences suit for damages/specific performance

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 PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE
Think…
Conditions: the obligation to perform is conditioned upon IF ⇢ THEN Implied Conditions
some event or action by the other party. Obligations are
triggered when that event or action occurs.
Material Breach Substantial Performance

If the breach is serious enough, the court If the breach is less serious, the court will
will treat like a failure of an express treat performance as “close enough” – party
Common law rules condition. has rendered substantial performance.

Failure of Express Condition = discharge the party’s obligation to perform The aggrieved party is generally discharged The aggrieved party will NOT be discharged
• Identifying language: “expressly conditioned,” ”unless and until,” “on from his own performance obligations. of his own performance obligations.
condition that,” “provided that,” or similar wording

• Situations where performance obligation is NOT discharged:

• Waiver
• Bad Faith Conduct

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PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE

Failed Condition that Cannot be Excused: Failure of Condition – UCC rules
• Other methods of enforcement to mitigate the consequences for the breaching
party.
Conditions in Relation to the Perfect Tender Rule: under the perfect
tender rule, terms are enforced exactly, every contract term is treated as
• Divisibility of the Contract: breaching party can argue the contract is divisible an express condition
and only part of the contract has been materially breached.
• Divisibility Test: is it easily apportioned into agreed equivalents? If Seller fails to make
• TIP: if the whole is merely the sum of its parts, then it’s divisible. But if it’s perfect tender, Buyer
more than the sum of the parts, it is not divisible (i.e., a house). has 3 options

• Quantum Meruit: where a party failed to fulfill an express condition or is in

material breach, the breaching party may still recover:
• Reasonable value of benefits conferred Reject the Accept the Accept part
• Recovery will be reduced by damages caused by breach goods goods and reject part

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 PERFORMANCE, MODIFICATION, AND EXCUSE PERFORMANCE, MODIFICATION, AND EXCUSE
Buyer’s 3 Options if Seller Fails to Make Perfect Tender Work-Arounds for Breaching Sellers
Reject the Goods Accept the Goods Accept Part and Right to Cure - Before K deadline Right to Cure - After K deadline
Reject Part Seller makes non-conforming tender but When reasonable grounds to believe
• Must reject within a When buyer had a reasonable time to inspect and • Buyer can only time for performance has not passed, delivery was acceptable
reasonable time and signifies acceptance by: do so in terms of then the seller may substitute conforming • Belief based on buyer’s express
notify seller • Stating goods conform to contract; commercial units goods assurances, trade usage, course of
• Buyer may then sue • Taking goods despite non-conformance; of that good dealing, or course of performance
for damages unless • Failing to make effective rejection; OR
cure applies • Taking any action inconsistent with seller’s
• If buyer fails to reject ownership of goods Two requirements: Two requirements:
in manner specified • Seller must give buyer reasonable • Seller must give buyer reasonable notice
above, then it is Legal consequence of buyer’s acceptance notice of intent to cure; and of intent to cure; and
deemed an • Buyer must pay contract price • Seller must make conforming delivery • Seller must make conforming delivery
acceptance of the • Buyer may seek damages for any non- by contract deadline within reasonable time
goods by the buyer conformity if seller has been seasonably notified
• Buyer can revoke acceptance if non-conformity
substantially impairs value of the goods and if Imperfect Tenders in Installment Contracts:
(1) buyer accepted because unaware of non-
conformity, OR (2) seller assured cure but failed • Perfect tender rule DOES NOT apply. Buyer must generally give the seller an
to cure opportunity to cure any defects in the installment deliveries, unless the seller
“substantially impairs” the value of the entire contract.

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DEFENSES DEFENSES
Misrepresentation
Incapacity Fraudulent Misrepresentation (4 elements)
Infancy/Minors Mental Incompetence ü A misrepresentation
Modern Rule May enter into a K, but it is Lacks capacity to contract if mentally • D must have made an assertion inconsistent with existing facts
voidable at minor’s option incompetent at time of contracting • Oral or written misrepresentations
• Fraudulent conduct such as concealment
Power of Obligated to return goods Obligated to return goods received; IS • A half-truth
Avoidance received; not liable for damages liable for damages or reasonable value
or reasonable value for use of for use of goods/services UNLESS other ü State of Mind
goods/services party aware of incompetence, then • Scienter: satisfied if D made assertion either knowing it to be false OR knowing he had
treated like minor no idea whether it was true or false; AND
• Intent to Mislead: satisfied if D made assertion for purpose of misleading aggrieved
Ratification At 18, may ratify Ks made as May ratify Ks if becomes competent at
party OR knowing there was a substantial likelihood to mislead
minors later time
Necessaries Voidable, but merchant has Same as minors ü Materiality
quasi K right to recover Additional necessary: legal • Objective: assertion is likely to induce a reasonable person to enter into a contract
reasonable value for representation in connection with • Subjective: if party making assertion had reason to know that it was likely to induce
goods/services incompetency proceedings the particular aggrieved party into entering into the contract
ü Reasonable Reliance

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 DEFENSES
Fraudulent Non-Fraudulent
Misrepresentation Misrepresentation
• A misrepresentation • A misrepresentation
• Materiality
• State of mind • Reasonable reliance
(scienter and intent)
• Negligent Misrep
• Materiality • D would have known the
assertion was false if he
• Reasonable reliance had exercised
reasonable care
• Innocent Misrep
• D made assertion not in
accord with existing
facts
Fraudulent
Nondisclosure
• Nondisclosure was material
to the K
• Reasonable reliance
• Duty of disclosure and failure
to fulfill it
• Duty to disclose:
• Relationship of trust and
confidence
• Party’s true assertion at
time is rendered untrue
by intervening events
• Good faith requires
DEFENSES
Duress
ü A threat;
ü Threat is wrongful in nature; and
• Threat is a crime or tort
• Threat is a criminal prosecution or bad faith civil process
• Threat is a bad faith breach of contract (economic duress)
ü No reasonable choice but to succumb to the threat
Hard cases: economic duress
• No adequate and reasonably priced substitutes for the services/goods
that are threatened to be withheld
• Threatened breach would cause aggrieved party to break his own
contracts
• The alternative of acquiescing to the threat and then suing for damages
is inadequate to address the harm caused

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DEFENSES DEFENSES
Unconscionability
Undue Influence ü Procedural unconscionability (bargaining process)
ü Unfair persuasion used (multi-factor test); and • Bargaining process created an absence of meaningful choice for aggrieved
• Discussion of the transaction at an unusual or inappropriate time party
• Consummation of the transaction at an unusual place ü Substantive unconscionability (contract terms)
• Insistent demands that the transaction or business be finished immediately • Contract terms are unreasonably favorable to one party to the contract
• Extreme emphasis on the untoward consequences of delaying the
transaction Legal consequences:
• The use of multiple persuaders against the target of persuasion • Refuse to enforce K;
• Absence of third-party advisors to the target of persuasion • Excise the offending clause and enforce remainder; or
• Statements that there is no time to consult financial advisors or attorneys • Limit application of offending clause to avoid unconscionable result

Public Policy
ü Other party was vulnerable to such persuasion 1. Subject of contract is prohibited by law
• Mental infirmity, recent trauma, relationship of trust/confidence 2. Contract formed for purposes of committing a crime or tort
3. Contract performance would violate values/freedoms

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 REMEDIES REMEDIES
Expectation Damages (default award) Reliance Damages
• Aggrieved party will be entitled to the amount that will restore him to the • Designed to restore the aggrieved party to the position he was in prior to the
position he would have been in had the contract been fully performed. contract.
• Formula:
Loss of value of the breaching party’s performance • Reliance interest measured by:
+ any incidental and consequential costs generated by the breach • Expenditures made in preparation or actually performing
– any payments received from the breaching party • Less: any loss the aggrieved party would have suffered even if the
– any costs saved as a result of the breach contract had been fully performed
= Expectation Damages of the Aggrieved Party
• May be available where expectation damages were not
• Limitations:
• Expectation damages can’t calculated with reasonable certainty
• Damages are unforeseeable
• Where damages can be mitigated

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REMEDIES REMEDIES
Restitutionary Damages Liquidated Damages Provisions (LDP)
• The value of benefits conferred upon the other party in the transaction • Designed to provide damages of their own choosing in the event of breach

• Calculation: court’s discretion and as justice requires by either Enforceable: clause designed to compensate for a breach
• Reasonable value of cost of benefits conferred; OR Unenforceable: clause designed to punish a breach
• Extent to which the other party’s property has increased in value
because of the performance rendered
LDP Test: (either can uphold the clause)
1. Was the clause reasonable at the time of contracting in relation to the
• Aggrieved party is likely to elect to recover restitutionary damages
anticipated harm?
when it would exceed the amount recoverable based on his
2. Was the clause reasonable in relation to the harm and losses that actually
expectation interest (most likely to arise in context of “losing”
occurred due to the breach?
contract)

• Limitation: available if aggrieved party has partially performed but

NOT if the party has fully performed

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 REMEDIES REMEDIES
Monetary Damages - UCC Monetary Damages - UCC

Delivered and No delivery and acceptance

accepted (due to wrongful rejection or repudiation) Buyer covers Buyer does NOT cover
Seller’s Contract price Re-sold goods: Buyer’s • difference between K • difference between K
Remedies • difference between K price and Remedies price and cover price price and market price
resale price

Did not re-sell goods:

• difference between K price and
Difference in Value Damages for Accepted Goods:
market price
• Available if buyer receives and accepts nonconforming goods from the seller
• Buyer is entitled to recover the difference between value of goods
Lost volume seller:
contracted for and the goods received
• recover the profit that would have
been made on the lost sale

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REMEDIES REMEDIES
Monetary Damages - UCC Equitable Remedies

Incidental Damages: Specific Performance

• Buyer or seller can recover
• Expenses incurred in: • Available: where monetary award is considered inadequate (unique objects
• Seller dealing with the goods after buyer’s breach and real property)
• Buyer arranging for cover • Not available: contracts for personal services and long-term relationships
• UCC: liberalized rule
Consequential Damages: • “uniqueness” – unable to find reasonable substitutes
• Buyer can recover • “capable of immediate performance” – allowed for output and
• Consequential damages that were reasonably foreseeable to the requirement contracts
seller at time of contracting

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 REMEDIES REMEDIES
Equitable Remedies
Other Possible Remedies

Negative Injunctions
• Order prohibiting the breaching party from taking particular action Promissory Estoppel:
• Most commonly used in employment setting • Type of interest a party may recover under promissory estoppel depend
• Availability: on jurisdiction, as some courts award:
• Mid-term relief: to prevent competing if employee’s services are unique • Expectation damages;
and extraordinary • Reliance damages; or
• Choose on case-by-case basis and tailor the remedy to the injustice
• Post-employment relief (non-compete clauses) validity factors: at issue
• Is there a significant business justification for enforcing post-
employment restraints?
• Is the scope of the non-compete clause reasonable in duration and
geographical reach?
• Is there an express provision?

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REMEDIES REMEDIES
Other Possible Remedies
Other Possible Remedies
Restitution and Unjust Enrichment:
Agreed-To Remedies:
• May be available even when other party has not breached
• Parties may contract out of the legal and equitable remedies available
• Benefits conferred under a failed contract: when a party bestows benefits on his under the law by specifying agreed-to remedies
trading partner in connection with what turns out to be a “failed” contract

• Benefits conferred by a breaching party: recover benefits conferred on non-breaching • Two typical forms:
party, offset by damages of the breach • Liquidated damages provisions
• Provisions limiting or excluding damages
• General unjust enrichment: recover where it is unjust for the recipient to retain benefit • Enforceable unless unconscionable or fails essential purpose
without paying • Limitation of consequential damages for personal injury in the case
• Medical services provided by medical professional of consumer goods is prima facie unconscionable
• Benefits conferred by mistake
• A person who bestows benefits without request by benefitting party is considered an
”officious intermeddler” not entitled to recovery
• Exception: doctors and other health care professionals who provide emergency
health care to a patient unable to consent

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 THIRD-PARTY BENEFICIARIES THIRD-PARTY BENEFICIARIES

Classification Standing to Sue? Vesting of Third-Party Rights to Sue

Intended Beneficiary
• Creditor beneficiary
• Donee beneficiary
Incidental Beneficiary
Yes: intended beneficiaries can sue the
promisors who directly promised to
provide the benefit, but can’t sue the
promisees based on the contract,
although they can sue on any prior
obligation
No: incidental beneficiaries cannot sue
anyone to enforce the contract
• Parties to a contract are free to modify or rescind by mutual consent, and they
may modify or rescind a 3rd party beneficiary provision without consent
UNLESS beneficiary’s rights under the contract have vested
• Intended beneficiaries – vesting occurs when:
• Beneficiary brings suit on the matter
• Beneficiary changes position in justifiable reliance on the contract
• Beneficiary manifests assent to the contract at the request of promisor or
promisee
• Rights of the beneficiary have vested under express contract terms

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THIRD-PARTY BENEFICIARIES ASSIGNMENT AND DELEGATION

Defenses Available to Promisor:

Assignment of Rights: all rights are generally assignable
• Any valid defenses the promisor has against the promisee are also Assignment: a transfer of a right to receive a contract performance
effective against the 3 party beneficiary
rd
• Owner of the right must manifest an intention to make a present transfer of an existing right
Exceptions:
• Promisor may not assert defenses based on separate transactions with • Assignment would materially change the duties of the other party
the promisee • Obligor has a personal interest in rendering performance to the obligee and not a 3rd party
• Violation of applicable law or public policy
• Assignment is prohibited by the contract (treated as breach of K by assignor)
• Exception: If the contract provision provides that any assignments “ARE VOID,” then
assignment is completely negated

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 ASSIGNMENT AND DELEGATION ASSIGNMENT AND DELEGATION
Assignment for Value vs. Gratuitous Assignment:
• For value: valid against obligor and cannot be revoked by assignor
• Gratuitous: (legal effects)
• Between assignee and obligor: valid against obligor, who can’t claim
lack of consideration as a defense
• Between assignor and assignee: an executory gift is revocable but an
executed gift is not. A gift is executed when there is intention
coupled with actual or symbolic delivery.
Delegation of Duties:
Rights and Obligations of the Parties after Assignment: • Delegation occurs when a 3rd party agrees to satisfy a performance obligation
• Rule: assignee gets whatever right to the contract his assignor had AND owed by one of the parties to a contract
takes subject to whatever defenses the obligor could have raised against Rights of the Obligee against the Delegator:
the assignor • A delegation of duties does NOT operate as a “transfer” of duties from delegator
• Payment to Assignor: obligor’s payment to assignor is a defense unless to delegatee
the obligor has been notified that the payments are now owed to the • Absent novation, a delegation does not relieve delegator from obligations under
assignee the contract

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ASSIGNMENT AND DELEGATION KAPLAN BAR REVIEW

Liabilities of the Delegatee:

• If delegation was for consideration, delegator has a breach of contract action
YOU CAN DO THIS!
against delegatee who doesn’t perform
• If delegation was for consideration, obligee can bring action against delegatee as
an intended 3rd party beneficiary of the delegation

Delegable Duties: generally, all contractual duties are delegable

• Exceptions:
• Personal services
• When contract prohibits delegation

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