Law School Mini-Outline:

Contracts
 CONTRACTS

GOVERNING LAW
Uniform Commercial Code (UCC): governs the sale of goods (tangible personal property). Common law
principles apply unless displaced by the UCC.

Common Law (CL): governs all other contracts.

Mixed Contracts: if a contract involves both goods and services, then look at the predominant
purpose to determine if the UCC or CL governs.

CONTRACT FORMATION

Valid Contract: Mutual Assent + Certainty of Terms + Consideration

Mutual Assent: the most common manifestation of mutual assent is offer and acceptance.

(1) Valid Offer: a manifestation of the willingness to enter into a bargain where the other party
understands that party is invited to form a deal (objective theory); it must be clear, definite, and
explicit.

 Communications That Are Not Valid Offers:

o Jokes;
o Invitations to make an offer (e.g., offers to large groups);
o Offers that lack specificity (e.g., preliminary negotiations); and
Advertisements, unless the ad identifies a particular person or class of persons who
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may accept the deal through performance.

(2) Termination of Offer: the power to accept the offer terminates if any of the following occurs: (1)
revocation, (2) lapse of time, (3) rejection, (4) counteroffer, or (5) death or incapacity of the offeree
or offeror.

(1) Revocation: an offer may be revoked any time prior to acceptance, directly or indirectly.

• Effective Upon Receipt: revocation is effective when the offeree receives reliable news
of the revocation. UCC: revocation is also effective when notice is delivered in a reasonable
form at the place of business of the contract or another location designated for receipt of such
communications.

• Irrevocable Offers: there are four situations where an offer is not freely revocable:

(1) Valid Consideration: an option contract (where an offer is irrevocable) is created when
an offeror promises to hold the offer open for a specified period of time in exchange for
valid consideration.

(2) Firm Offers: when a merchant makes an offer to buy/sell goods in a signed writing,
the offer is irrevocable for the period stated or a reasonable time, never to exceed three
months.

(3) Reasonable Reliance: an option contract is created if an offeror reasonably expects

the offeree’s reliance on the offer.

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(4) Unilateral Contracts: an option contract is created if an offer invites acceptance by

performance only and the offeree has begun performance; the offeree has a reasonable time
to complete performance.

(2) 
Lapse of Time: an offer terminates after the time specified by the offeror, or if no time is specified,
then a reasonable period of time.

(3) Rejection: a rejection is legally operative when received by the offeror.

(4) Counteroffer: (1) rejects the original offer and (2) makes a new offer to enter into a contract based
on the terms in the counteroffer.

CL: historically, courts applied the mirror-image rule under which an acceptance that included
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different terms than those in the original offer was considered a counteroffer. Some jurisdictions still
follow this approach under common law. The modern common law view, however, is the same as
the UCC view.

UCC: an acceptance that includes terms different than the original offer is not considered a
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counteroffer unless acceptance is dependent or conditioned upon assent to the changes or
additional terms.

Exception for Option Contracts: when an offer remains open because of an option contract,
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a counteroffer made during the option period does not terminate the power of acceptance.

(5) 
Death or Incapacity: if the offeror or offeree dies or becomes incapacitated, then the offer terminates
unless an option contract was created, in which case the offer remains open for the option period.

(3) Valid Acceptance: an objective manifestation of assent to the specific terms in the offer, in the invited or
required manner, with knowledge that the offer was made; it must be definite and unequivocal.

• Conditions: an offeror may include requirements or terms that must be met for the offeree to have the power
to accept. If conditions dictated by the offer are not met, then acceptance is not valid.

• Manner: if an offeror does not specify the method or manner, acceptance may be by any reasonable
manner and by any reasonable communication method.

• Notice: bilateral contracts (i.e., parties exchange promises) require an offeree to exercise reasonable
diligence to notify the offeror of acceptance; unilateral contracts (i.e., exchange of a promise for
performance) require no notification unless notification is requested or the offeree has reason to
know the offeror will not learn of the performance.

• Mailbox Rule: acceptance made in the correct manner and medium is valid as soon as it leaves the
offeree’s possession, but rejections are legally operative when received.

o Exceptions: the mailbox rule does not apply to (1) option contracts, (2) when the offer states
acceptance is valid only when received, or (3) when the offeree sends a rejection and then an
acceptance, in which case acceptance is valid only if received first by the offeror.

• Absence of Written Contract: under the UCC, if both parties engage in conduct that recognizes the
existence of a contract for the sale of goods, this conduct will be sufficient to create a contract even
if the parties’ written communications are not sufficient to establish mutual assent.

• Shipment Contracts: under the UCC, an order to buy goods for prompt shipment invites acceptance
either by a prompt promise to ship or by prompt shipment of conforming or nonconforming goods.

Certainty of Terms: the terms must be sufficiently definite to enable the court to determine the parties, whether
the agreement has been breached, and a remedy. (Note: the specifics of this concept are rarely tested on the
MEE, but it is a main component of a valid contract and listed on the MBE Subject Matter outline from the NCBE.)

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• CL: the offer must identify the offeree, conduct the offeree must perform, the subject matter of the contract,
and the price or other definable obligations with reasonable certainty.

• UCC: the offer must identify the subject matter and quantity unless the contract is an output contract (i.e.,
to purchase the entire amount produced by the seller) or requirements contract (i.e., to sell the buyer the
amount the buyer needs).

Consideration: parties must enter into a bargained-for exchange (one party’s promise/performance induced
the other party’s promise/performance); a benefit to the promisor and detriment to the promisee are evidence
of consideration.

• No Consideration: there is no valid consideration in the following situations:

(1) Conditional Gifts: unless the promisor’s motive was to induce a return promise;
Past/Moral Consideration: past services given gratuitously, unless enforcing the promise is
(2) 
necessary to prevent injustice;
Preexisting Legal Duty: promises to act in a way that is the same as the promisor’s
(3) 
then-existing legal obligation;
Large Disparity in the Exchange: contracts in which the exchange was not truly bargained for or
(4) 
a mere formality, but courts usually do not inquire into the adequacy of consideration; or
(5) Illusory Promises: where the promisor has retained the choice to perform or not.

NONCONTRACTUAL GROUNDS FOR ENFORCEMENT OF PROMISES

Promissory Estoppel: damages can be recovered even when a contract was not formed if:

(1) The promisor should have reasonably expected to induce an action or forbearance of the promisee or
third party;
(2) The promise did induce such action or forbearance of the promisee or third party; and
(3) Injustice can be avoided only by enforcement of the promise.

Quasi-Contract: a party may recover the reasonable value of goods/services rendered even when a valid
contract was not formed if:

(1) The party seeking recovery provided a benefit to another party;

(2) The party seeking recovery had a reasonable expectation of compensation for the benefit conferred; and
(3) It would be unjust for the other party to retain the benefit without paying for it.

DEFENSES TO ENFORCEABILITY
Statute of Frauds (SOF): a writing signed by the party to be charged is required for the following:

(1) Interests in land;

(2) Contracts that cannot be fully performed within a year;
(3) Promises by executors or administrators to personally pay debts;
(4) Suretyships;
(5) Contracts made in consideration of marriage; or
(6) Sale of goods for $500 or more.

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• Writing: must state the parties, subject matter, and essential terms of the contract. Under the UCC, a
writing that satisfies the statute of frauds is not enforceable beyond the quantity of goods shown in such
writing.

• Signed: a valid signature includes any symbol or express indication of the party’s name, showing
that the party intended to enter into the agreement (e.g., letterhead, initials, typed name, electronic or
stamped signature).

Confirmation Memo Exception: a signature is not required if the contract is between two merchants,
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the party seeking enforcement sent the memo, and the other party had reason to know of the memo’s
contents and did not object within 10 days of receipt.

• Modifications: if a modified contract falls under the SOF, then the modification must be in writing and
signed by the party to be charged.

• Exceptions: the following contracts are enforceable even if they fall under the SOF and there is no
signed writing:

(1) The party against whom enforcement is sought admits the contract exists;
(2) A party has partially performed the obligations under the contract;
(3) The elements of promissory estoppel are met; or
(4) The contract is for specially manufactured goods.

Incapacity: a contract can be set aside due to infancy, mental capacity, or intoxication.

• Infancy: a contract with a minor is voidable by the minor unless (1) the contract is for necessaries, or
(2) the minor ratifies the contract after reaching the age of majority.

• Mental Capacity: a contract with a mentally incompetent person is voidable if the person is (1) unable
to understand the nature and consequences of the transaction or (2) unable to act in a reasonable
manner and the other party has reasons to know of the incapacity.

• Guardianship: if a guardian is appointed to handle the mentally incompetent person’s affairs, any
contracts entered into by the incompetent party will be void.

• Intoxication: a contract is voidable if, at the time of formation (1) the intoxicated person did not understand
the nature and consequences of the transaction or could not act in a reasonable manner, and (2) the other
party had reason to know the other party was intoxicated.

• Ratification: contracts can be ratified by minors reaching the age of majority and persons who regain
competency after mental incapacity or intoxication. Ratification occurs if the person:

(1) Fails to make a timely disaffirmance within a reasonable period after reaching adulthood or regaining
competency;
(2) Partakes in conduct that indicates an intent to be bound; or
(3) Provides express oral or written ratification.

Duress: a contract is void if a party enters into a contract by physical threat to the party or someone close to
the party. A contract is voidable if the pressure takes the form of an unlawful threat that leaves the party thinking
the party had no reasonable alternative but to enter into the contract.

• No Reasonable Alternative: no feasible way to procure substitute performance.

• Economic Duress: does not exist (1) if the parties agree to a modification in good faith based on
market conditions or (2) if a party is in a vulnerable economic position and enters into a deal that
strongly favors the other party.

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Undue Influence: a contract is voidable if the victim enters into a transaction induced by unfair persuasion, which
occurs if (1) the party, due to age, infirmity, or mental or emotional condition is unduly susceptible to persuasion;
and (2) the other party uses excessive pressure or over-persuasion to induce assent.

Mutual Mistake: a contract may be voidable by the disadvantaged party based on a mutual mistake if:

(1) The mistake concerns a basic assumption (i.e., relates to a material fact) on which the contract was
formed;
(2) The mistake will have a material impact on the parties’ performances (i.e., significantly affects the
anticipated cost of performance or value of the benefit received); and
(3) The disadvantaged party did not bear the risk of the mistake (i.e., did not have greater knowledge of the
relevant facts or did not realize it did not have such knowledge but still proceeded).

Unilateral Mistake: a contract is voidable by the mistaken party if:

(1) The mistake concerns a basic assumption on which the contract was formed;
(2) The mistake will have a material impact on the parties’ performances; and
(3) The advantaged party either caused the mistake or knew or had reason to know of the mistake; or the
mistake makes the contract unconscionable.

Misunderstanding: no manifestation of mutual assent occurs if:

(1) A material term of an agreement is ambiguous;

(2) The parties attach different meanings to the term; and
(3) Neither party knows or has reason to know of the meaning attached by the other party, or
both parties know or have reason to know of the meaning attached by the other party.

Misrepresentation: a contract is voidable if a party justifiably relied on (1) a fraudulent or material

misrepresentation or (2) a concealed or nondisclosed fact.

• Fraudulent Misrepresentation: a misrepresentation is fraudulent if it was made with intent to induce

the other party’s assent and the party making the assertion:

(1) Knew or believed the assertion was untrue;

(2) Stated or implied that the party was confident that the assertion was true, knowing such
confidence was unfounded; or
(3) Knew that there was no proper basis to make the assertion.

• Material Misrepresentation: an innocent misrepresentation can be the basis to avoid a contract if

it would induce a reasonable person to assent, or the party making the assertion knew that it was likely
to induce the other party’s assent.

• Concealment: a contract is voidable if a party takes an action with the purpose or knowledge that the
action is likely to prevent the other party from learning a material fact.

• Nondisclosure: failure to inform the other party of a relevant fact may be deemed equivalent to a
misrepresentation when disclosure:

(1) Would prevent a prior statement from being a misrepresentation or fraud;

(2) Would correct the other party’s mistake about a basic assumption of the contract;
(3) Would correct a mistake about the contents of a writing that forms part of the contract; or
(4) Is required because of the relationship of trust and confidence.

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Illegality: a contract to perform acts prohibited by statute is void unless:

(1) One of the parties is among the class of persons the law was enacted to protect, in which case that
party can enforce the contract; or
(2) One of the parties is significantly less morally culpable than the other party, in which case the less
culpable party may enforce the contract.

Violation of Public Policy: contracts contrary to public policies articulated by the Constitution, statutes, or
judicial opinions are generally deemed void.

• Noncompetition Covenants: restrict the business activities of a person or entity (e.g., limitations
on future employment or business relationships and activities). The court will hold such covenants void
against public policy unless the restraint is reasonable in its duration, geographic scope, and restricted
activities.

Unconscionability: a contract is unconscionable in whole or in part if, at the time of formation, there was both (1)
procedural unconscionability and (2) substantive unconscionability. Courts take a sliding-scale approach in which less
evidence of one type is necessary when there is greater evidence of the other type.

• Procedural Unconscionability: occurs when the parties’ bargaining power is unequal, the terms are hard
to understand, or there is a deceptive business practice or a “take it or leave it” situation.

• Substantive Unconscionability: occurs when the contract terms are so unfair or one-sided that a
reasonable person would not have agreed to them.

Adhesion Contracts: are contracts drafted by one side without realistic opportunity for negotiations. However,
they are generally enforceable unless the agreement (1) lacks mutual assent, (2) violates public policy, or (3) is
unconscionable.

CONTRACT CONTENT AND MEANING OF TERMS

CL Modification: requires mutual assent, certainty, and new or different consideration unless (1) the modification
is fair and equitable in the view of circumstances not anticipated by the parties, or (2) enforcement is justified
due to a material change of position in reliance on the modification.

UCC Modification: requires good faith by both parties; no new consideration is needed.

Parol Evidence Rule (PER): when parties have a final written agreement that is completely integrated, courts
may not consider other terms reflected in prior or contemporaneous discussions or writings to determine what
terms govern. If the written agreement is partially integrated, the integrated portion supersedes all inconsistent
terms of prior or contemporaneous agreements, but the court will still consider evidence of consistent additional
terms.

• Integration: under the four-corners approach, the courts look at the writing itself to determine the parties’
intent. However, courts are increasingly considering evidence beyond the writing itself to determine if the
writing is partially or completely integrated.

Complete Integration: occurs when the parties intend the written agreement to be a complete and
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exclusive treatment of the contract’s terms.

Partial Integration: occurs when parties intend the written agreement to be a final expression of
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some, but not all, terms of the parties’ agreement.

• Merger Clauses: generally signal that the agreement is final and completely integrated, unless (1) the
agreement is obviously incomplete, (2) the agreement was induced by fraud or mistake, or (3) there is
some other reason that the agreement is voidable.

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• Exceptions: the PER does not apply to subsequent oral or written communications between parties, or
if the evidence is introduced:

(1) To ascertain the meaning of an ambiguous term;

(2) As evidence of a defense to contract formation;
(3) Regarding subject matter not addressed in the integrated agreement (i.e., separate agreement);
(4) To show the integrated agreement was subject to a condition precedent; or

(5) To explain and supplement (but not contradict) the terms of the contract. This applies only to UCC contracts
and course of performance, course of dealing, or usage of trade evidence.

Additional or Different Terms: if one party or both parties are nonmerchants, then additional or different
terms are not part of the contract unless agreed upon as a modification.

• Battle of the Forms: for UCC contracts, if both parties are merchants, an additional term becomes
part of the contract unless:

(1) The offer expressly limits acceptance to the terms of the offer;
(2) The additional term materially alters the contract; or
(3) 
The other party has already objected to the additional term or objects to the additional
term within a reasonable time after receiving notice of it.

• Knockout Rule: for UCC contracts, if both parties are merchants, any conflicting terms are knocked
out of the contract and the term is decided based on UCC gap fillers.

Ambiguous Terms: the court follows rules of construction to interpret contract terms:

• Plain Meaning Rule: if a term is clear and unambiguous on its face, its plain meaning will be applied
as written without admission of extrinsic evidence.

• Resolving Inconsistencies: when multiple definitions are possible, courts generally assign weight to
the definitions in the following order: (1) specifically defined terms, (2) course of performance, (3) course
of dealing, and (4) trade usage.

Omitted and Implied Terms: if an agreement does not include a term necessary to allocate rights and
responsibilities, the court may supply a reasonable term or a term it concludes was intended by the parties.

• Gap Fillers: common gap fillers include a reasonable price (at the time of delivery for UCC contracts);
goods must be shipped or delivered within a reasonable time; payment must be made at the time and
place of delivery.

Express Warranties: an express warranty is created if the seller (1) makes a promise or statement of fact about
the quality of goods, (2) describes certain attributes of the goods, or (3) displays a sample or model representing
the attributes and quality of goods being sold.

• Puffery: a seller’s praise or opinion about the value or quality does not create an express warranty.

• Disclaimers: express warranties cannot be disclaimed through the use of general disclaimers.

Implied Warranty of Merchantability: warrants that the goods fit the contract’s description; are of fair, average
quality; and are fit for the ordinary purpose of the goods. Under the UCC, this warranty is created if (1) the seller is a
merchant, and (2) the warranty is not disclaimed in a writing (e.g., “sold as is”).

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Implied Warranty of Fitness for a Particular Purpose: arises where a seller:

(1) Has reason to know that the buyer has a particular purpose for which the goods will be used;
(2) Has reason to know that the buyer is relying on the seller’s judgment or skill to recommend or select suitable
goods; and
(3) Recommends or selects such goods for the buyer.

Implied Warranty of Title: warrants that (1) the seller has conveyed valid title, (2) the transfer of title is
rightful, and (3) the goods are free of any known encumbrances.

• Disclaimers: warranty of title can be excluded or modified by specific contract language to the contrary,
but a general disclaimer is not sufficient to disclaim the warranty of title.

• Exceptions: warranty of title does not apply if:

(1) The buyer has reason to know that the seller does not claim to have title; or
(2) The seller is purporting to sell only such right or title that the seller has or a third person may have.

PERFORMANCE AND BREACH

Conditions: if a party’s performance is conditioned on an event that does not occur, then no performance is due,
and the nonperforming party cannot be held liable for breach unless an excuse or waiver applies.

• Types:

(1) Condition Precedent: states an event must occur before a duty arises.
(2) Condition Subsequent: discharges a duty that already exists.
(3) 
Concurrent Conditions: exist when each party’s performance is conditioned upon the other party’s
performance.

• Creation: conditions arise if they are (1) expressed in the parties’ agreement or (2) implied by law.

• Excuses: the nonoccurrence of a condition is excused if (1) it would be unjust to insist on the occurrence
of the condition, or (2) the party wrongfully prevented the condition from occurring.

• Waiver: a condition may be waived via election waivers or estoppel waivers.

Election: a voluntary relinquishing of a known right; only applies to immaterial terms.

o 

Estoppel: one party manifests a willingness to perform even though the condition has not yet occurred;
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applies to all terms and can be retracted if the other party has not detrimentally relied on it.

• Satisfaction: a reasonable person standard is used to determine if a condition is satisfied, unless the party’s
duty to perform is conditioned upon the party’s satisfaction with a matter of personal aesthetics. In those cases,
the condition is not satisfied if the party is dissatisfied in good faith. Note that if the party whose satisfaction
is required is an entity and not a person (e.g., corporation, partnership, or company of any type), then the
objective standard for satisfaction will be used. If the satisfaction of an independent person who is not a party
to the contract is required, a subjective standard will be used.

Breach: to prevail on a breach-of-contract claim, the nonbreaching party must show it was ready, willing, and
able to perform.

• CL Material Breach: a party’s failure to substantially perform its obligations will discharge the
nonbreaching party’s obligation to continue performance. Factors used to determine if there was
substantial performance include:

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(1) The extent to which the injured party will be deprived of the reasonably expected benefit;
(2) The extent to which the injured party can be adequately compensated for the deprived benefit;
(3) The extent to which the breaching party will suffer hardship;
(4) The likelihood the breaching party will cure the failure; and
(5) The extent to which the breaching party’s conduct constitutes good faith and fair dealing.

Divisible Contracts: if contractual performance can be divided into multiple jobs and each job must
o 
be paid for when completed, then one party’s performance of a particular job triggers the other
party’s duty to pay for that job, even if the performing party breaches another part of the contract.

Delay in Performance: if a delay constitutes material breach, to determine whether the injured party’s
o 
duty to perform is discharged, the courts will look at (1) whether the delay prevented or hindered
any reasonable substitute arrangements and (2) whether timely performance was important (time is
of the essence clause).

• CL Partial Breach: if a breach is immaterial, the nonbreaching party is required to fulfill its remaining
duties but may then sue to recover damages.

• UCC Perfect Tender Rule: requires that the goods and tender match all contract specifications.

o Seller’s Breach: if goods or delivery do not conform to the contract, the buyer may:

(1) Reject all goods;

(2) Accept some goods and reject the rest; or
(3) Accept all goods and sue for the deficiency.

Inspection: the buyer has the right to inspect goods at a reasonable time, place, and manner; the buyer
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bears the expense of inspection unless the goods are nonconforming and rejected.

Cure: if the time for performance has not yet expired, then the seller may notify the buyer of the seller’s
o 
intent to cure and may cure within the time for performance under the contract. If the contractual
performance time has expired, the seller has the right to cure if the seller:

(1) Had reasonable grounds to believe that the tender would be accepted;
(2) Notifies the buyer of the intent to cure the defect; and
(3) Provides a cure within a reasonable time.

Right to Reject: acceptance extinguishes the buyer’s right to reject nonconforming goods and occurs
o 
if the buyer:

(1) Tells the seller that the goods conform;

(2) Fails to reject the goods after having a reasonable time to inspect them; or
(3) Acts in a way inconsistent with the seller’s continued ownership of the goods.

o Revocation of Acceptance: a buyer can revoke acceptance if:

(1) Acceptance was based on a reasonable assumption that nonconformity would be

cured, and it has not been cured within a reasonable time;
(2) Nonconformity would have been difficult to detect before acceptance; or
(3) The seller made assurances that there was no nonconformity.

– Timing: a buyer must notify the seller of revocation within a reasonable time after the buyer
discovers the nonconformity and before any substantial change to the condition of the goods.

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Installment Contracts: the perfect tender rule does not apply to contracts that are divisible, where there are
o 
separate deliveries to be separately accepted, often occurring over a period of weeks.

– Rejection: a buyer can reject a single installment if nonconformity substantially impairs the
value of that installment and cannot be cured.

– Cancellation: a buyer cannot cancel the whole contract unless (1) nonconformity in the installment
substantially impairs the value of the entire contract, and (2) the buyer notifies the seller of the cancellation.

Anticipatory Repudiation: if one party unequivocally communicates that it does not intend to perform, the
nonbreaching party is excused from future performance and can immediately sue for damages or ignore the
repudiation and urge performance. The communication must be absolute, be definite, and involve the entire
performance.

• Assurances: if one party has reasonable grounds to believe the other will fail to perform, it has the
right to temporarily suspend performance and request assurances that the other party will perform.
The request must be made in writing and failure by the other party to provide adequate assurances
constitutes a repudiation of the contract.

• Retraction: before performance is due, a repudiating party may retract its repudiation unless the other party
has (1) materially changed its position or (2) indicated it considered the repudiation final.

Implied Duty of Good Faith and Fair Dealing: exists in every contract and requires parties act and speak
honestly regarding the transaction, or in observance of reasonable commercial standards (UCC); this duty does
not apply to negotiations.

Risk of Loss: refers to which party will bear the cost of paying for damages that arise during the execution of
a contract and are related to the subject matter of the contract. If the risk of loss is specified in the contract, then
the contract terms will govern. If the risk of loss is not specified in the contract, responsibility will be determined
by either common law or UCC principles.

• CL: in real estate transactions where property is seriously damaged between the execution of the contract
and the closing date: if the risk of loss is not specified, then the majority rule places the risk of loss on
the buyer (equitable conversion); under the minority rule, the seller has the risk of loss because the seller
is still the property owner.

• UCC: The following risk-of-loss rules apply unless otherwise specified in the parties’ contract:

o Shipment Contracts:

– If the sales contract provides that the goods will be delivered by a third-party carrier, but not to a
specific place, then the risk of loss shifts to the buyer when the goods are delivered to the carrier.

– If the sales contract provides that the goods will be delivered by a third-party carrier to a specific
place, then the risk of loss shifts to the buyer when the goods are delivered to the buyer at the
specified place.

o Effect of Breach on Risk of Loss:

– When the seller breaches by tendering nonconforming goods that the buyer has the right to
reject, the risk of loss effectively remains on the seller until cure or acceptance. If the buyer has
accepted the goods and then rightfully revokes the acceptance, the buyer can treat the risk of
loss as having been on the seller since the beginning, but only to the extent of a deficiency in
the buyer’s insurance.

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– When the buyer breaches the contract (including by repudiation) before the risk of loss has passed to
the buyer, the seller may treat the risk of loss as resting on the buyer for a commercially reasonable time,
to the extent there is a deficiency in the seller’s insurance.

o Nonshipment Contracts:

– If the seller is a merchant, the risk of loss remains on the seller until the buyer receives the goods.
If the seller is not a merchant, the risk of loss passes to the buyer when the seller makes the goods
available to the buyer to take delivery.

DISCHARGE OF DUTIES
Impossibility: (1) if the subject of a contract is destroyed or performance becomes objectively impossible
(not merely more difficult or more expensive) through (2) an unforeseeable event that happens after the contract
was entered into, then the party’s obligation to perform is discharged unless (3) the party bore the risk of the
occurrence of the event.

Impracticability: (1) if performance becomes objectively and commercially impracticable (extremely difficult)
through (2) an unforeseeable event that happens after the contract was entered into, then the party’s obligation to
perform is discharged unless (3) the party bore the risk of the occurrence of the event.

Frustration of Purpose: (1) if the primary purpose of the contract is eliminated through no fault of the parties,
then the duties under the contract may be discharged unless (2) the parties foresaw the risk or the party raising
the defense bore the risk of the event’s occurrence.

Accord and Satisfaction: an accord is an executory agreement, supported by consideration, to forgive

a prior obligation in exchange for a new obligation. For an obligation to be discharged as an accord and
satisfaction in exchange for a lesser payment, with no alteration in the type of obligation, there must be:

(1) A bona fide dispute over the amount that is due; and
(2) An agreement that the amount to be given is a final settlement (not a progress payment).

• Breach: the original contract duty is not extinguished until the duties under the accord have been
performed. If there is a breach of the accord, the nonbreaching party can sue under the accord or the
original contract.

Novation: is a new contract that immediately extinguishes all obligations under the original contract. A contract
is a novation if it (1) discharges a prior contractual duty, (2) creates a new contractual obligation, or (3) adds
a new party.

Release: if a release of a contractual obligation is not supported by consideration, it must be in writing.

Mutual Rescission: occurs when all parties to an agreement agree to surrender their rights and terminate the
contractual obligations. This results in the modification of contractual obligations between the parties and must
be supported by consideration.

• Prior to Performance: where none of the parties has yet performed, each party’s surrender of rights
under the agreement constitutes consideration for the mutual rescission.

• After Performance: if one of the parties has already performed that party’s contractual obligations,
then the agreement cannot be mutually rescinded.

• Writing: an agreement to rescind does not need to be in writing to be enforceable unless required by
statute, even if the original contract included such a requirement.

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REMEDIES
Liquidated Damages: a clause with a specific amount or formula for damages will be enforced if it is
reasonable. Courts consider the following factors to determine reasonableness:

(1) Difficulty of estimating or proving the harm caused by breach;

(2) Whether the liquidated damages clause is a reasonable forecast of that harm; and
(3) Whether the liquidated damages clause is a penalty.

Specific Performance: a court can grant specific performance if (1) monetary damages are inadequate to
compensate the nonbreaching party, and (2) the award of specific performance is equitable.

Expectation Damages: put the nonbreaching party in the economic position it would have enjoyed if the
contract had been performed (losses in value caused by breach + gains prevented by breach – savings from not
performing).

• Construction Contracts: a party may recover damages for defective or unfinished construction based
on the (1) diminution in the property’s market price or (2) the cost to complete performance or to remedy
the defects.

Waste: if the cost to complete is clearly disproportionate to the loss in value caused
o 
by the breach, then to avoid waste, the remedy will be limited to the diminution in the property’s
market price caused by the breach.

• UCC Damages: the default measure of expectation damages is market damages, but damages differ
for sellers and buyers.

Market Damages (Buyers): difference between the market price of the goods and the contract price
o 
at the time the buyer received notice of the seller’s breach.

Market Damages (Sellers): difference between the contract price of the goods and the market price
o 
at the time the seller tendered the goods.

Cover (Buyers): if a buyer purchases substitute goods in good faith, the damages are the difference
o 
between what the buyer paid for the substitute goods and the contract price.

Resale (Sellers): if the seller resells the goods in good faith, the damages are the difference between
o 
the original contract price and the resale price.

Lost-Volume Sellers: if a seller carries sufficient volume of a good where the seller can make the resale to
o 
the second buyer and sale to the first buyer, then damages are the difference between the contract price
and the seller’s costs in acquiring or producing the goods.

Reliance Damages: represent the amount that would put the nonbreaching party in the position that party was
in before entering into the contract; only awarded to the extent they are reasonable.

Restitution Damages: requires a defending party to give up any gains enjoyed and is available only to a party
who had a reasonable expectation of compensation for the benefit conferred on the other party.

• Breaching Party: restitution is available to the breaching party who prevails in a claim for unjust
enrichment, though the recovery will be reduced to the extent there are damages caused by the breach.

Nominal Damages: are minimal awards granted when there is no compensable harm caused by the breach.

Reformation: if there is clear and convincing evidence that the written document does not conform to the
actual agreement, the court can rewrite the agreement; however, reformation will not be granted if it would
adversely affect the rights of a bona fide purchaser.
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Rescission: a party may seek unilateral rescission of a contract at law or in equity. The rescinding party effectuates
a rescission by (1) tendering the contractual benefits to the other party and then (2) bringing an action for restitution.
An equitable rescission uses the power of the court to undo the transaction. Rescission may be used where the contract
was not supported by mutual assent due to fraud, fraudulent misrepresentation, misrepresentation of a material fact
(even if not fraudulent), mutual mistake, or unilateral mistake.

• Rescission at Law: promptly after discovering the grounds for rescission and prior to or at the time
of filing suit, the plaintiff must provide notice of the rescission to the defendant and completely and
unequivocally return the benefits received from the contract, unless (1) the property was worthless when
received or has been destroyed or lost by the other party or because of the property’s own defects, (2)
the property has been used or disposed of without knowledge of the grounds for rescission, or (3) the
amount received under the contract is less than the amount due the party seeking to rescind.

• Equitable Rescission: the court invalidates the contract upon a showing by the plaintiff of the grounds
for rescission. The plaintiff must return the benefit to the defendant, though the tender does not need to take
place prior to filing suit and can be ordered as part of the relief granted by the court. Equitable rescission is
appropriate where the remedy at law is inadequate.

• Acquiescence: in any rescission for fraud, the defrauded party is deemed to have acquiesced to the
transaction and waived the right to rescind if (1) the defrauded party does anything to recognize the
transaction or that is inconsistent with the transaction’s repudiation (i.e., makes installment payments or
continues to accept benefits under the contract), or (2) the defrauded party delays such that the other party
acts to that party’s detriment in reliance on the contract.

Consequential Damages: are special damages that are caused by a breach of contract but do not directly
flow from the breach; they are only available when a party seeks expectancy damages.

Incidental Damages: are other reasonable expenses incurred as a result of the breach, often to mitigate the
harm caused or to protect the claimant’s or other party’s interests.

Punitive Damages: are not awarded in breach-of-contract actions, unless the defendant engaged in the
breach of a fiduciary duty, fraud/misrepresentation, or another tort.

Attorney Fees: are not recoverable by the prevailing party unless the contract or applicable statute provides
for their recovery.

LIMITATIONS ON RECOVERY
Expenses Saved:

• Expectation Damages: the court will reduce the nonbreaching party’s recovery for any expenses
avoided because of the breach.

• Reliance Damages: the court will reduce the nonbreaching party’s recovery if the party would have lost
money had the contract been performed because a party should not receive reliance damages in excess of
what would have been recovered as expectation damages.

Duty to Mitigate: if a nonbreaching party fails to take reasonable actions to avoid unnecessary losses, then
the court will decline to award damages that could have been avoided.

Certainty: parties are only awarded damages that are proven with reasonable certainty.

Foreseeability: the damages suffered must be reasonably foreseeable at the time the contract was made.

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THIRD-PARTY RIGHTS
Third-Party Beneficiaries: intended beneficiaries can enforce the obligations under the contract
if (1) the intended beneficiary’s rights have vested before the parties have modified the contract, and
(2) enforcement is against the promisor.

• Intended Beneficiaries: are parties whom contracting parties explicitly intend to benefit (i.e., creditor or
donee beneficiaries); incidental beneficiaries have no rights to enforce the agreement (i.e., third parties who
benefit from performance, but parties did not intend the benefit).

• Vesting: an intended beneficiary’s rights vest if:

(1) The intended beneficiary sues to enforce his rights under the contract;
(2) The principles of promissory estoppel are met;
(3) A party to the contract requests the intended beneficiary to assent to the contract; or
(4) The contract includes an explicit provision stating the intended beneficiary’s rights will immediately
vest upon execution of the contract.

• Effect of Vesting: once the rights vest, an intended beneficiary may sue the promisor, but not the
promisee unless the intended beneficiary is a creditor beneficiary. If so, the creditor beneficiary may sue
the promisee for nonfulfillment of the underlying legal obligation.

• Defenses: a promisor can raise any defense or excuse to nonperformance that could have been raised
by the promisee unless the intended beneficiary is a creditor beneficiary.

Assignment: contractual rights are freely assignable unless:

(1) The assignment would materially change the obligor’s duty;
(2) The assignment would materially increase the burden or risk on the obligor;
(3) The assignment would materially impair the obligor’s chance of obtaining return performance;
(4) The assignment would materially decrease the value of the returned performance to the obligor; or
(5) The contract provides otherwise (but such provisions are strictly construed).

• Creation: an assignment may be made orally or in writing unless the original contract required the
assignment to be in writing. If the contract is governed by the UCC, the assignment must be in writing if
the assignment is greater than $5,000.

• Revocable: an assignment is revoked if the assignor:

(1) Informs the assignee of the revocation;

(2) Received performance from the obligor;
(3) Made a subsequent assignment of the same rights;
(4) Dies; or
(5) Declares bankruptcy.

• Irrevocable: an assignor’s right is extinguished when an assignment has become irrevocable. An

assignment is irrevocable if:

(1) The assignment was made in exchange for consideration;

(2) The obligor has already provided performance to the assignee;
(3) The assignment was made to the assignee in writing; or
(4) The assignee has reasonably relied on the assignment to the assignee’s detriment.

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• Defenses: an assignee may enforce rights against the obligor, but the obligor may raise any defenses or
excuses it could raise against the assignor, unless there has been a novation.

Delegation: occurs when the delegator transfers a contractual duty to the delegatee (a third party), who makes
an enforceable promise to perform it for valid consideration. A delegation does not extinguish the delegator’s
duty to perform if the delegatee fails to do so.

• Creation: a delegation may be made orally or in writing, unless the original contract requires it to be
in writing.

• Exceptions: duties that cannot be delegated include:

(1) Services for artistic abilities or other unique skills;

(2) Duties where law or public policy restrict or prohibit delegation; or
(3) Where the contract prohibits delegation.

• Enforcement: the delegator or obligee can sue the delegatee for nonperformance or deficient
performance unless there has been a novation.

• Defenses: claims are subject to the same defenses or excuses that could be raised in a breach-of-
contract action against the original parties.

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