Introduction to Contracts: The Big Picture

"Flow" of the Analysis

CONTRACT LAW: GENERAL PRINCIPLES

To approach a contract law fact pattern effectively, you need to be able to identify where you are
in the flow of the analysis: Formation, Alternative Theories, Performance, and/or Remedies. As
we progress through this course, we will explore the following issues in each section:

 Formation
o Was a traditional, enforceable contract formed?
 Is there mutual assent between the parties?
 Is the agreement supported by consideration?
 Are there any defenses to formation or enforcement that could invalidate
the otherwise valid contract?
 Does this agreement trigger the statute of frauds?

 Alternative Theories

o If a traditional, enforceable contract was NOT formed, are there any alternative
theories of recovery available to the plaintiff to enforce the agreement or promise?
 Is promissory estoppel available?
 Does a quasi-contract exist?
 Is there a moral obligation and a subsequent promise?

 Performance

o If a traditional, enforceable contract was formed, did the parties perform their
contractual obligations under the contract?
 Substantial Performance or Perfect Tender?
 Parol Evidence Rule?
 Warranties?
 Conditions?
 Excuses?
 Anticipatory Repudiation?

 Remedies

o If a traditional, enforceable contract was formed and one party failed

to perform their contractual obligations under the contract, what remedies are
available to the plaintiff?
 Monetary Damages?
 Equitable Relief?
 Mitigation of Damages?

o If an alternative theory of recovery is satisfied, what remedies are available to the

plaintiff?
The Gateway Issue: Common Law vs. Article
2 of the Uniform Commercial Code
CONTRACT LAW: GENERAL PRINCIPLES

The Gateway Issue

The gateway issue in all contract fact patterns will be to determine whether the rules set forth in
the common law or Article 2 of the Uniform Commercial Code (UCC) govern the contract.

Uniform Commercial Code vs. Common Law

Article 2 of the UCC governs if a contract deals with the purchase or sale of goods (e.g.,
agreement to buy 100 dry erase markers from an office supply store).

 "Goods" means all things (including specially manufactured goods) which are movable
at the time of identification to the contract for sale other than the money in which the
price is to be paid, investment securities (Article 8) and things in action. "Goods" also
includes the unborn young of animals and growing crops and other identified things
attached to realty as described in the section on goods to be severed from realty (Section
2-107). U.C.C. § 2-105.

The common law governs if a contract deals with services or real estate (e.g., hiring a law
school tutor to give you contract law lessons).

Mixed Contracts

For mixed contracts (contracts that have elements of both services and goods), two rules operate
to determine whether the common law or UCC applies.

First, the all-or-nothing rule maintains that the common law and UCC CANNOT govern one
contract at the same time. Thus, mixed contracts must be governed solely by the common law or
solely by the UCC. However, there is a limited exception for divisible contracts (contracts that can
divide the goods and services portions into separate mini-contracts).

Next, the predominant purpose of the contract determines whether the common law or UCC
governs (i.e., whether a good or service plays a bigger role in the contract). If the predominant
purpose of the contract involves the purchase or sale of goods, the UCC applies. If the predominant
purpose of the contract involves services or real estate, the common law applies.
 How is a Traditional, Enforceable Contract
Formed?
FORMATION

Formation of the Traditional, Enforceable Contract

A traditional, enforceable contract is formed when the following three elements are satisfied:

1. There is mutual assent between the parties;

o Mutual assent requires a "meeting of the minds" between the parties. We
determine whether there is a meeting of the minds between the parties by
establishing whether there is a valid offer and a valid acceptance of that offer. If
we conclude that there is an offer and acceptance, then mutual assent is present
between the parties.

2. The offer and acceptance (i.e., agreement) is supported by consideration; AND

o Consideration requires a transfer of legal value in a bargained-for exchange
between the parties. Promises to give gifts and other similar transfers that are not
induced by the other side's action or forbearance lack consideration and cannot be
enforced under a traditional contract theory. However, promises that lack
consideration may still be enforced under an alternative legal theory of
enforcement (e.g., promissory estoppel).

3. There are no defenses to formation or enforcement that would invalidate the otherwise
valid contract.
o Even if mutual assent and consideration are present, a party against whom
enforcement is sought can avoid liability by asserting a valid defense to contract
formation or enforcement. Commonly tested defenses include:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconscionability
 Formation of the Offer
Mutual Assent

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

MUTUAL ASSENT

Mutual assent between the parties is present when there is a valid offer and acceptance.

OFFER FORMATION

To form a valid offer, the offeror must:

1. Manifest an objective willingness to enter into the agreement;

o The offer is governed by an objective test, which means that outward appearances
of words and actions are determinative – not hidden intentions (e.g., a person
makes an offer with his fingers crossed behind his back).

2. Create a power of acceptance in the offeree; AND

o The offeror creates a power of acceptance when the offeree can simply say, “I
accept” and know that he has concluded the deal.
o Generally, an offer must be directed to a specific offeree. However, there is a
limited exception for contest offers and reward offers that promise something to
anyone who accomplishes a certain task (e.g., posted sign offers a cash reward for
finding lost cat).
o An advertisement is usually considered an invitation to deal rather than an offer.
This is because an advertisement usually fails to confer a power of acceptance to
the other side. However, advertisements that are very specific and leave nothing
open to negotiation may constitute offers.

3. Specify all necessary terms of the agreement.

o Under the common law, all essential terms must be specified in the offer, which
includes: parties, subject, quantity, and price.
o Under the UCC, the price term is not required in the offer. (UCC § 2-305). The
only required terms under the UCC are: parties, subject, and quantity.
 Requirements and output contracts are valid under the UCC even though
they do not specify an exact quantity. In a requirement contract, the seller
agrees to sell as much as the buyer would require. In an output contract,
the seller agrees to sell his entire production to the buyer.
 Termination of the Offer and Irrevocable
Offers
Mutual Assent

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

MUTUAL ASSENT

Mutual assent between the parties is present when there is a valid offer and acceptance.

TERMINATION OF THE OFFER

If a valid offer is terminated at any time before acceptance, the offer is invalidated. It cannot be
accepted or revived unless a new offer is made.

An offer is terminated if any of the following occur at any time BEFORE acceptance:

1. The offeror revokes the offer by express communication to the offeree (unless the offer is
irrevocable – see below);
2. The offeree learns that the offeror has taken an action that is absolutely inconsistent with
a continuing ability to contract;
3. The offeree rejects the offer by express communication to the offeror;
4. The offeree expressly communicates a counteroffer to the offeror;
5. The offeror dies or otherwise becomes incapacitated;
6. A reasonable amount of time passes; OR
7. Operation of law (i.e., supervening illegality or destruction of property).

IRREVOCABLE OFFERS

Generally, the offeror is free to revoke an offer at any time prior to acceptance. However, there
are four main types of offers that are irrevocable:

1. Option Contracts;

o An offer is irrevocable if consideration is given in exchange for a promise to keep

the offer open (e.g., “I promise not revoke this offer for one week if you pay me
an additional $100 to keep the offer open.”).
2. UCC Firm Offers;

o Under UCC § 2-205, an offer is irrevocable if a MERCHANT makes a firm offer

to buy or sell goods, provided that the offer: (1) is in writing; (2) contains an
explicit promise to not revoke the offer; and (3) is signed by the merchant.
o A firm offer will last either as long as stated in the offer or for a reasonable
amount of time not to exceed 90 days.
o The UCC defines a merchant as "a person who deals in goods of the kind or
otherwise by his occupation holds himself out as having knowledge or skill
peculiar to the practices or goods involved in the transaction." (UCC § 2-104).

3. Offeree Starts Performance on a Unilateral Offer; AND

o A unilateral offer to contract is irrevocable once the offeree starts performance. A

unilateral offer arises from a promise that requests acceptance by performance, as
opposed to a bilateral offer, which arises from a promise that invites acceptance
by a return promise or does not specify any particular means of acceptance.

4. Detrimental Reliance.

o An offer is irrevocable if the offeree reasonably and detrimentally relies on the

offer in a foreseeable manner.
 Acceptance of the Offer
Mutual Assent

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

MUTUAL ASSENT

Mutual assent between the parties is present when there is a valid offer and acceptance.

ACCEPTANCE OF THE OFFER

To accept the offer, the offeree must:

1. Manifest an objective willingness to enter into the agreement;

o Acceptance of the offer is governed by an objective test, which means that
outward appearances of words and actions are determinative – not hidden
intentions (e.g., a person accepts an offer with his fingers crossed behind his
back).

2. Accept the offer according to the rules established by the offeror who is master of the
offer; AND

o The offeree must accept the offer according to the terms and conditions
established by the offeror (e.g., offeror can require offeree to accept by sending a
signed writing within a certain time period).
o A unilateral offer arises from a promise that requests acceptance by an action or
performance, as opposed to a bilateral offer, which arises from a promise that
invites acceptance by a return promise or does not specify any particular means of
acceptance.
o For bilateral offers, the start of performance manifests acceptance.
o For unilateral offers, the start of performance makes the offer irrevocable – the
offer is only accepted once performance is complete.

3. Have a power of acceptance.

o To form a valid offer, the offeror must create a power of acceptance in the
offeree.
o The offeror creates a power of acceptance when the offeree can simply say, “I
accept” and know that he has concluded the deal.
o Generally, an offer must be directed to a specific offeree. However, there is a
limited exception for contest offers and reward offers that promise something to
 anyone who accomplishes a certain task (e.g., posted sign offers a cash reward for
finding lost puppy).
o To validly accept an offer, the offeror must have conferred the power of
acceptance to the offeree who is attempting to accept. To accept a contest or
reward offer, the offeree must be aware that the contest or reward offer exists.
 Acceptance and The Mailbox Rule
Mutual Assent

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

MUTUAL ASSENT

Mutual assent between the parties is present when there is a valid offer and acceptance.

THE MAILBOX RULE

If an offer is terminated at any time before acceptance, the offer is invalidated. It cannot be
accepted or revived unless a new offer is made.

Under the mailbox rule, an ACCEPTANCE that is sent by mail, email, or fax is valid at the
moment of dispatch (NOT when the letter is received), UNLESS:

1. The offeree-sender uses the wrong address or has improper postage (e.g., forgets to put a
stamp on the envelope);
2. The offeror stipulates that the acceptance is valid upon receipt;
3. An option contract is involved;
4. The offeree-sender sends a termination letter BEFORE the acceptance letter (e.g., a
counteroffer or rejection letter); OR
5. The offeror detrimentally relies on a termination BEFORE he receives the acceptance
letter.

If an exception applies, then the acceptance becomes effective at the moment the offeror receives
the acceptance.

The mailbox rule ONLY applies to ACCEPTANCE letters. The mailbox rules does NOT apply
to any other type of communication that is sent by mail, email, or fax (e.g., revocation, rejection,
or counteroffer letters).
 Acceptance or Counteroffer? The Mirror
Image Rule and UCC § 2-207
Mutual Assent

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

MUTUAL ASSENT

Mutual assent between the parties is present when there is a valid offer and acceptance.

COUNTEROFFER vs. ACCEPTANCE

When the offeree adds additional or different terms to the offer and sends it back (orally or on
paper) – is this communication an acceptance or a counteroffer?
 An acceptance of an offer is required to form a traditional, enforceable contract.
 A counteroffer operates as both a rejection that terminates the original offer AND as a
new offer.

MIRROR IMAGE RULE

Under the common law, the terms in the acceptance must match the terms of the offer exactly. If
the purported acceptance contains different or additional terms, it is NOT an acceptance -- it is a
counteroffer.

UCC § 2-207 ("BATTLE OF THE FORMS")

Under the UCC, the acceptance does NOT have to mirror the offer and can include different or
additional terms from those in the offer.

UCC § 2-207(1) determines whether the purported acceptance (containing different or additional
terms) will operate as an acceptance or as a counteroffer. UCC § 2-207(1) states:

1. A definite and seasonable expression of acceptance or written confirmation;

2. which is sent within a reasonable amount of time;
3. operates as an ACCEPTANCE even though it states terms additional to or different
from those offered or agreed upon;
4. UNLESS acceptance is expressly made conditional upon assent to the additional or
different terms.
If the purported acceptance is a valid acceptance under UCC § 2-207(1), the next issue is
whether the additional or different terms in the acceptance will govern the contract or whether
UCC gap fillers will be implemented.

Under UCC § 2-207(2), the ADDITIONAL terms (see distinction between "additional" and
"different" terms below) will govern the contract if BOTH parties are merchants UNLESS:

1. The initial offer expressly limited acceptance to its terms;

2. The additional terms materially alter the deal; OR
3. The offeror objects to the additional terms within a reasonable amount of time.
4.
If either party is NOT a merchant, or any of the 3 exceptions above apply, the different or
additional terms will NOT control and UCC gap fillers will be implemented.

THE KNOCKOUT RULE

Most courts apply the knockout rule with UCC § 2-207(2) to determine whether the new terms
control or whether UCC gap fillers must be implemented. Under the knockout rule, a distinction
is made between "different" and "additional" terms.

 A different term is a term that was not included in the original offer that conflicts with
the terms of the original offer (e.g., offeree changes the price term from $5,000 to $4,000
and sends it back to the offeror).
 An additional term is a term that was not included in the original offer that
does NOT conflict with the original offer (e.g., offeree adds a choice of law provision
that was not included in the original offer and sends it back to the offeror).

Under the knockout rule, different terms in the original offer and acceptance knock each other
out creating a gap in the contract. UCC gap fillers are then used to plug this gap (regardless of
whether the parties are merchants).

The knockout rule does not apply to additional terms added by the offeree. UCC § 2-207(2)
will determine whether the additional terms control or whether UCC gap fillers must be
implemented.
 Valid Consideration vs. Invalid
Consideration
Consideration

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

CONSIDERATION

Consideration involves a transfer of legal value in a bargained-for exchange between two parties.
Consideration is present if:

1. The promisee incurs a legal detriment OR the promisor receives a legal benefit; AND
o Notably, most courts only focus on whether the promisee incurred a legal
detriment, irrespective of a benefit to the promisor.
o A legal detriment generally consists of: (1) promising to do something the party
has no prior legal duty to do; (2) performing an action that the party is not
otherwise obligated to undertake; or (3) refraining from or promising to refrain
from exercising a legal right which the party is otherwise entitled to exercise.
o Promising not to sue (settlement of a legal claim) will act as a legal detriment so
long as the party promising not to sue has an honest and good faith belief in the
validity of the claim.

2. The promise induces the detriment AND the detriment induces the promise.
o A bargained-for exchange requires reciprocal inducement – that the promise
induces the promisee to incur his legal detriment and that the legal detriment
induces the promisor to make his promise.

EXAMPLES OF INVALID CONSIDERATION

 Gift Promises are NOT consideration.

o E.g., A promises to give B his truck for free. Here, B incurs no legal detriment
and A's promise to give B his truck is not induced by any action or forbearance
from B. This is a gift promise, not bargained-for consideration.
 Conditional gifts are NOT consideration.
o E.g., A promises to give B his truck if B will drive 30 minutes away to pick the
truck up from A's house. Here, A's promise to give B his truck is not induced by B
coming to pick the truck up. Thus, A is not bargaining for B to come. This is a
conditional gift, not bargained-for consideration.
 A preexisting legal duty is NOT consideration.
o E.g., A promises to pay B $100 if B refrains from smoking crack-cocaine for 6
months. Here, B already has a preexisting legal duty imposed by law to refrain
from smoking crack-cocaine. Thus, B incurs no legal detriment, which means
consideration is not present.
o Notably, if A promised to pay B $100 if B refrained from smoking tobacco for 6
months, then consideration would be present (assuming B is 18 years of age or
older and can legally smoke tobacco). Refraining from or promising to refrain
from exercising a legal right which the party is otherwise entitled to exercise
constitutes a legal detriment.

 Past consideration is NOT consideration.

o E.g., A's truck catches fire as A is demonstrating the truck’s safety features to B.
After the fire erupts, B rushes over and extinguishes the flames saving A's life.
Grateful, A promises to pay B $100 for the rescue. Here, A's promise to pay B is
induced by an action that B already completed. This is past consideration, not
bargained-for consideration.

 A pretense of consideration or sham consideration is NOT consideration.

o E.g., A and B are cousins. A wishes to give B his truck that is valued at $10,000
as a gift for B's birthday. Attempting to form an enforceable contract, A "sells" B
his truck for $1 solely to meet the consideration requirement. Here, A is not
induced to give B his truck for the $1. This is merely a pretense of consideration,
not bargained-for consideration.

 An illusory promise is NOT consideration.

o An illusory promise occurs when the promisor fails to clearly commit to the deal.
o E.g., A promises to buy B's truck if “he feels like it.” Here, A is not committing to
the deal. This is an illusory promise, not bargained-for consideration.
 Contract Modification and The Preexisting
Duty Rule
Consideration

CONTRACT FORMATION
A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

CONSIDERATION

Consideration is a transfer of legal value in a bargained-for exchange between two parties.

Consideration is present if:

1. The promisee incurs a legal detriment OR the promisor receives a legal benefit; AND
2. The promise induces the detriment AND the detriment induces the promise.

CONTRACT MODIFICATION

A contract modification occurs when the parties to a contract change or add additional terms to
an existing enforceable contract.

 Under the common law, a contract modification must be supported by consideration. The
preexisting duty rule stipulates that a promise to do something of which the party is
already legally obligated to do, by contract or otherwise, is not consideration.

 Under the UCC, a contract modification need NOT be supported by consideration. The
UCC stipulates that a contract modification will be valid if the parties enter into the
modification in good faith.

COMMONLY-TESTED MODIFICATION FACT PATTERN

A rents an apartment from B for one year at a rent of $2,000 per month. Nine months into the
lease contract, A (running short on cash) and B both agree to modify the rent to $1,500 per
month for the remainder of the lease. Subsequently, B crosses out the $2,000 price term on the
original lease and writes in $1,500 as the new price term. Both A and B sign and initial the
contract to approve the modification. At the end of the month, A pays B the agreed upon $1,500.
B then sues A for $500 for breach of contract. Will B recover the $500?
Yes. Here, the contract is governed by the common law, because it involves a lease for real
estate. Under the common law, B can successfully sue A at the end of the month for $500,
because the modification was NOT supported by consideration. A had a preexisting legal duty to
pay B the full $2,000. Thus, the $1,500 A paid B does NOT constitute additional or new
consideration for the modification. Therefore, the original contract controls and A is in breach of
contract having only paid $1,500 of the $2,000 owed to B.
 Contract Defenses: Overview
Defenses

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

DEFENSES TO CONTRACT FORMATION AND ENFORCEMENT

Even if mutual assent and consideration are present, the otherwise valid contract can be
invalidated if any of the following defenses are successfully asserted:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconconscionability

If a defense is successful, the contract will generally be void or voidable.

 A void contract is treated as though it never existed (i.e., neither party can enforce the
contract).
 A voidable contract is enforceable until a party takes action to rescind the contract (i.e.,
the adversely affected party may be able to enforce the contract).
 Incapacity (Infancy, Mental Illness, and
Intoxication)
Defenses

CONTRACT FORMATION
A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

DEFENSES TO CONTRACT FORMATION AND ENFORCEMENT

Even if mutual assent and consideration are present, the otherwise valid contract can be
invalidated if any of the following defenses are successfully asserted:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconconscionability

INCAPACITY

A party must have capacity to enter into a contract. Restatement (Second) of Contracts § 12.

INCAPACITY BY INFANCY

Unless a statute provides otherwise, a person has the capacity to incur

only VOIDABLE contractual duties until the beginning of the day before the person turns 18. In
other words, if a minor enters into a contract with an adult, the minor may choose to either:

 Disaffirm (rescind) the contract and avoid liability under it; OR

o If the minor chooses to disaffirm the contract, the minor must return anything that
he received under the contract that still remains in his possession at the time of
disaffirmance (there is no obligation to return anything that has been negligently
squandered or destroyed).

 Affirm (enforce) the contract and hold the adult party liable under it.
o A minor may affirm the contract expressly or by failing to disaffirm the contract
within a reasonable amount of time after reaching majority thereby ratifying the
contract.
Restatement (Second) of Contracts § 14.
INCAPACITY BY MENTAL ILLNESS

A person incurs only VOIDABLE contractual duties by entering into a transaction if by reason
of mental illness or defect, the individual is unable to:

1. Understand in a reasonable manner the nature and consequences of the transaction, OR

2. Act in a reasonable manner in relation to the transaction AND the other party has reason
to know of his condition.

If the mentally ill party wishes to avoid liability under the contract, he may disaffirm the contract
when lucid or by his legal representative.

However, a party to a contract who is mentally ill CANNOT disaffirm the contract if:

1. The contract was made on fair terms; AND

2. The other party is without knowledge of the mental illness or defect (e.g., the mentally ill
party is in a lucid state at the time of contracting).

Restatement (Second) of Contracts § 15.

INCAPACITY BY INTOXICATION

A person incurs only VOIDABLE contractual duties by entering into a transaction if the other
party has reason to know that by reason of intoxication, the individual is unable to:

1. Understand in a reasonable manner the nature and consequences of the transaction, OR

2. Act in a reasonable manner in relation to the transaction.

If the intoxicated party wishes to avoid liability under the contract, he must act promptly
upon recovery to disaffirm the contract and is required to return any value received, if possible.

Restatement (Second) of Contracts § 16.

NECESSARIES DOCTRINE

When necessaries (e.g., food, shelter, clothing, healthcare, etc.) are furnished to a party who
lacks capacity (i.e., minors, mentally ill parties, and intoxicated parties), the party who lacks
capacity is liable for the reasonable value of the services or goods (not the agreed-upon price)
under a quasi-contract theory of restitutionary recovery.
 Mutual and Unilateral Mistake
Defenses

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is:

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

DEFENSES TO CONTRACT FORMATION AND ENFORCEMENT

Even if mutual assent and consideration are present, the otherwise valid contract can be
invalidated if any of the following defenses are successfully asserted:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconconscionability

MISTAKE

A mistake is a belief that is not in accord with the facts. Restatement (Second) of Contracts §
151. A mistake can be mutual or unilateral:

 A mutual mistake occurs when both parties are mistaken as to a basic assumption of the
contract.
 A unilateral mistake occurs when only one party is mistaken as to a basic assumption of
the contract.

MUTUAL MISTAKE

A contract is VOIDABLE at the adversely affected party's discretion if:

1. There is a mistake of fact existing at the time the deal is made;

2. The mistake relates to a basic assumption of the contract;
3. The mistake has a material impact on the deal; AND
4. The adversely affected party did NOT assume the risk of mistake.
o A party assumes the risk of mistake when:
 The risk is allocated to him by agreement of the parties (e.g., "as is"
contracts), OR
  He is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats
his limited knowledge as sufficient (i.e., "conscious ignorance".
 In City of Everett v. Estate of Sumstad, an auctioneer sells a safe
without knowledge as to the contents of a locked compartment in
the safe. Later, the buyer discovers more than $32,000 of cash in
the locked compartment. The courts bars the seller's recovery
under a mistake theory, because the seller assumed the risk of
mistake. The seller treated his limited knowledge of the contents of
the locked compartment as sufficient when entering the sale (i.e.,
he acted with conscious ignorance). City of Everett v. Estate
of Sumstad, 631 P.2d 366 (Wash. 1981).

Restatement (Second) of Contracts § 152.

UNILATERAL MISTAKE

A contract is VOIDABLE at the adversely affected party's discretion if:

1. There is a mistake of fact existing at the time the deal is made;

2. The mistake relates to a basic assumption of the contract;
3. The mistake has a material impact on the deal;
4. The adversely affected party did NOT assume the risk of mistake; AND
5. The mistake would make the contract unconscionable OR the other party had reason to
know of the mistake or his fault caused the mistake.

Restatement (Second) of Contracts § 153.

 Misunderstanding (i.e., Ambiguous Terms)
Defenses
CONTRACT FORMATION

A traditional, enforceable contract is formed when there is

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

DEFENSES TO CONTRACT FORMATION AND ENFORCEMENT

Even if mutual assent and consideration are present, the otherwise valid contract can be
invalidated if any of the following defenses are successfully asserted:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconconscionability

MISUNDERSTANDING

If the agreement includes a term that has multiple possible meanings, the result depends on the
parties' knowledge of the misunderstanding:

 If NEITHER party knows or should know of the misunderstanding, then no contract

exists UNLESS both parties intended the same meaning.
 If BOTH parties know or should know of the misunderstanding, then no contract
exists UNLESS both parties intended the same meaning.
 If ONE party knows or should know of the misunderstanding, then a binding contract
exists based on the ignorant party's reasonable interpretation of the ambiguous terms.

Restatement (Second) of Contracts § 20.

 Fraudulent and Nonfraudulent
Misrepresentation
Defenses

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

DEFENSES TO CONTRACT FORMATION AND ENFORCEMENT

Even if mutual assent and consideration are present, the otherwise valid contract can be
invalidated if any of the following defenses are successfully asserted:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconconscionability

MISREPRESENTATION

A misrepresentation is an assertion of fact that is not true (i.e., a "lie"). A person's non-disclosure
of a fact known to him is equivalent to an assertion that the fact does not exist when the party not
disclosing the fact knows that:

 Disclosure of the fact is necessary to prevent some previous assertion from being a
misrepresentation or from being fraudulent or material;
 Disclosure of the fact would correct a mistake of the other party as to a basic assumption
on which that party is making the contract and the failure to disclose would constitute a
breach of good faith and fear dealing;
 Disclosure of the fact would correct a mistake of the other party as to the contents or
effect of a writing, evidencing or embodying an agreement in whole or in part; OR
 The other person is entitled to know the fact because of a relation of trust and confidence
between them.

Restatement (Second) of Contracts § 161.

A misrepresentation can be fraudulent or nonfraudulent.

FRAUDULENT MISREPRESENTATION

There are two types of fraudulent misrepresentation:

Fraud in the factum (i.e., "fraud in the execution) occurs when a person tricks someone else
into signing a contract by making it appear that he or she is signing a completely different
document. In such cases, the apparent contract is VOID.

Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another
to enter a contract. Such contracts are VOIDABLE by the adversely affected party if:

1. A fraudulent misrepresentation of fact (generally not opinion);

o A misrepresentation is fraudulent if it is made:
 Knowingly or recklessly without knowledge of its truth; AND
 With the intent to induce assent.
o A misrepresentation of opinion can form the basis of recovery if an "expert"
expresses a high opinion when his opinion is actually low.
 In Vokes v. Arthur Murray, Inc., a dance studio's false representations
about a customer's skill and potential as a dancer provided grounds for
rescission of her agreement to pay for more than 2,000 hours of dance
instruction. Vokes v. Arthur Murray, Inc., 212 So. 2d 906 (Fla. Dist. Ct.
App. 1968).

2. Induced the adversely affected party to manifest assent; AND

3. The adversely affected party was justified in relying on the misrepresentation.

o A person is not justified in relying on puffery. Puffery is a promotional statement
or claim that no reasonable person would take literally (e.g., "Red Bull gives you
wings.")

Restatement (Second) of Contracts § 162.

NONFRAUDULENT MISREPRESENTATION

A contract is VOIDABLE by the adversely affected party if:

1. A material misrepresentation of fact (generally not opinion);

o A misrepresentation is material if:
 It would be likely to induce a reasonable person to manifest his
assent; OR
 If the maker knows that it would be likely to induce the recipient to do so.

2. Induced the adversely affected party to manifest assent; AND

3. The adversely affected party was justified in relying on the misrepresentation.

Restatement (Second) of Contracts § 162.
 Duress, Undue Influence, Illegality, and
Unconscionability
Defenses
CONTRACT FORMATION
A traditional, enforceable contract is formed when there is

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract.

DEFENSES TO CONTRACT FORMATION AND ENFORCEMENT

Even if mutual assent and consideration are present, the otherwise valid contract can be
invalidated if any of the following defenses are successfully asserted:

 Incapacity
 Mistake
 Misunderstanding
 Misrepresentation
 Duress
 Undue Influence
 Illegality
 Unconconscionability

DURESS

A contract is VOID if a party to the contract is compelled by physical duress, such as the threat
to inflict physical harm (e.g., "Sign this or I'll break your legs with my baseball bat.").
Otherwise, a contract is VOIDABLE by the adversely affected party if the adversely affected
party's assent is induced by an improper threat that leaves the adversely affected party no
reasonable alternative. Restatement (Second) of Contracts § 175. A threat is improper if:

 What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it
resulted in obtaining property;
 What is threatened is a criminal prosecution;
 What is threatened is the use of civil process and the threat is made in bad faith;
 The threat is a breach of the duty of good faith and fair dealing under a contract with the
recipient;
 The resulting exchange is not on fair terms, AND:
o The threatened act would harm the recipient and would not significantly benefit
the party making the threat;
o The effectiveness of the threat in inducing the manifestation of assent is
significantly increased by prior unfair dealing by the party making the threat; OR
o What is threatened is otherwise a use of power for illegitimate ends.
Restatement (Second) of Contracts § 176.
UNDUE INFLUENCE

A contract is VOIDABLE by the adversely affected party if the adversely affected party's assent
is induced:

1. Due to the adversely affected party's susceptibility to pressure; AND

o Courts often consider the following factors to determine a party's susceptibility to
pressure:
 The nature of the relationship between the parties (e.g., trustee-
beneficiary, lawyer-client, doctor-patient, and financial adviser-client
relationships usually demonstrate susceptibility to pressure due to the
nature of the relationship);
 The relative levels of sophistication and expertise between the
parties; AND
 Any physical, mental, emotional, or financial conditions that might make a
party more susceptible to pressure.

2. The other side's application of excessive pressure.

o Courts often use the Odorizzi factors to determine the excessive nature of the
pressure applied, which includes:
 Discussion of the transaction at an unusual or inappropriate time;
 Consummation of the transaction in an unusual place;
 Insistent demand that the business be finished at once;
 Extreme emphasis on untoward consequences of delay;
 The use of multiple persuaders by the dominant side against a single
servient party;
 Absence of third party advisers to the servient party; AND
 Statements that there is no time to consult financial advisers or attorneys.
Odorizzi v. Bloomfield School District, 54 Cal. Rptr. 533, 541 (Cal. Dist. Ct. App. 1966).

ILLEGALITY

A contract is VOID if the consideration or performance under the contract is illegal (e.g., hiring
someone to commit a crime). However, the contract may NOT be void if:
 The plaintiff is justifiably ignorant of the facts that make the contract illegal and the
defendant acted with knowledge of the illegality (plaintiff may still enforce the contract);
 The contract is easily divisible into separate legal and illegal parts (legal parts of the
contract may still be enforced);
 One party is not as culpable as the other (i.e., the parties are not in pari delicto) (the less
culpable party may recover restitution);
If only the purpose behind the contract was illegal (not the consideration or performance) (e.g., a
computer store sells a computer to a customer unaware that the customer is purchasing the
computer for the purpose of downloading music illegally), the contract is VOIDABLE by a
party who was:
 Unaware of the illegal purpose; OR
 Aware of the illegal purpose but did not facilitate the purpose AND the purpose does not
involve grave social harm.
Restatement (Second) of Contracts § 182.
UNCONSCIONABILITY

A court may refuse to enforce a contract in whole or in part if the terms of the contract are so
unfair and oppressive to one party that it shocks the conscience of the court. Restatement
(Second) of Contracts § 208.

There are two types of unconscionability that courts consider:

 Procedural unconscionability is present when there is a defect in the bargaining process

(e.g., one side applies excessive pressure).
 Substantive unconscionability is present when the terms of the deal are grossly unfair
and one-sided in one party's favor.

Some courts will only refuse to enforce a contract if both types of unconscionability are present.
Other courts may refuse to enforce a contract if only one type is present.
 Triggering and Satisfying the Statute of
Frauds
Statute of Frauds

CONTRACT FORMATION

A traditional, enforceable contract is formed when there is

1. Mutual Assent between the parties;

2. Consideration; AND
3. No defenses to formation or enforcement that would invalidate the otherwise valid
contract (including the statute of frauds).

STATUTE OF FRAUDS

An otherwise valid contract is unenforceable if the contract:

1. Triggers the statute of frauds; AND

2. Fails to satisfy the statute of frauds.

CONTRACTS THAT TRIGGER THE STATUTE OF FRAUDS

The following contracts trigger the statute of frauds ("O.U.R.")

 (O) One-Year Provision
o A contract that by its terms CANNOT be performed within one year from the day
after its formation triggers the statute of frauds.
o The one-year provision is interpreted very narrowly. There generally must be no
possible way that the contract could be performed within one year from
formation.
 E.g., A hires B to give him contract law lessons for the rest of A's life.
Since A could die within one year from formation, the statute of frauds is
not triggered under the one-year provision.
 E.g., A hires B to build a full-scale replica of the Egyptian pyramids. Here,
even though it is unlikely, it is possible that B could build the replica
within one year from formation. Therefore, the statute of frauds is not
triggered under the one-year provision.
 (U) UCC Goods Contracts for $500 or More
o A contract for the purchase or sale of goods for $500 or more triggers the statute
of frauds.
 (R) Real Estate Contracts
o Any agreement or promise to transfer, receive, or create an interest in real estate
triggers the statute of frauds.
 Notably, agreements to build structures on land (i.e., construction projects)
do not transfer, receive, or create an interest in real estate. Therefore, these
types of construction project contracts do not trigger the statute of
frauds unless they fall under the one-year provision.
SATISFACTION OF THE STATUTE OF FRAUDS

Once it is determined that the statute of frauds is triggered, the next issue is whether the statute
of frauds has been satisfied. There are two main ways to satisfy the statute of frauds:

1. By a signed writing; AND

2. By performance.

SATISFACTION BY A SIGNED WRITING

A writing will satisfy the statute of frauds if the writing:

1. Is signed by the party against whom enforcement is sought (i.e., the party who is
challenging the enforceability of the contract -- usually the defendant);
2. Shows that a contract was formed; AND
3. Includes the requisite terms.
o Under the common law, the requisite terms include: parties, subject matter,
quantity, and price.
o Under the UCC, the requisite terms include: parties, subject matter, and quantity.

SATISFACTION BY PERFORMANCE

Performance of oral agreements can satisfy the statute of frauds under the following
circumstances.

 Common Law Services Contracts under the One-Year Provision

o Under the common law, FULL performance of a services contract by either side
satisfies the statute of frauds. Part performance does NOT satisfy the statute of
frauds.

 Contracts to Transfer, Receive, or Create an Interest in Real Estate

o In most jurisdictions, the seller in a real estate contract can satisfy the statute of
frauds by FULL performance (i.e., conveying the land to the buyer).
o In most jurisdictions, the buyer in a real estate contract can satisfy the statute of
frauds by performance if any two of the following three are met: (1) the buyer
takes possession of the property; (2) the buyer makes payment in full or
part; AND/OR (3) the buyer makes substantial improvements to the land.
 Notably, under a lease agreement, a tenant typically takes possession,
makes payment, and might make minor improvements to the property.
Thus, to satisfy the statute of frauds, the possession, payment, and/or
improvements must be substantial enough to show that the transaction is
more than a lease agreement.
 If the buyer satisfies the statute of frauds by performance, his recovery
under the contract is limited to equitable relief (i.e., specific performance),
not monetary damages.
 UCC Goods Contracts for $500 or More ("P.A.W.S.")

o (P) Performance
 Under UCC § 2-201(3)(c), the statute of frauds is satisfied for the quantity
of goods for which payment has been made and accepted or which have
been received and accepted (the contract is not enforceable under this
provision beyond the quantity of goods for which payment has been made
and accepted or which have been received and accepted).

o (A) Admission in Court

 Under UCC § 2-201(3)(b), the statute of frauds is satisfied if the party
against whom enforcement is sought admits in his pleading, testimony, or
otherwise in court that a contract for sale was made (the contract is not
enforceable under this provision beyond the quantity of goods admitted).

o (W) Written Confirmation Between Merchants

 Under UCC § 2-201(2), the statute of frauds is satisfied if:
1. After an oral agreement between merchants (both parties must be
merchants);
2. Either party sends a signed, written confirmation of the oral
contract (must be signed by the sender); AND
3. The written confirmation is received by the other party to the oral
agreement; UNLESS
4. The party receiving the written confirmation gives a written notice
of objection within 10 days after receipt of the written
confirmation.

o (S) Specially Manufactured Goods

 Under UCC § 2-201(3)(a), the statute of frauds is satisfied when a seller
makes a "substantial beginning" toward manufacture of custom goods that
are to be specially made for the buyer and are not suitable for sale to
others in the ordinary course of the seller's business under circumstances
that reasonably indicate that the goods are for the buyer.
 Alternative Theories of Enforcement:
Overview
ALTERNATIVE THEORIES OF ENFORCEMENT

Even if a traditional, enforceable contract does not exist between the parties, the plaintiff may
still be entitled to relief by asserting an alternative theory of recovery and
enforcement. Commonly tested alternative theories to consider include:

 Promissory Estoppel;
 Quasi-Contract; and
 Moral Obligation with a Subsequent Promise.
 Quasi-Contract and Unjust Enrichment
ALTERNATIVE THEORIES OF ENFORCEMENT

QUASI-CONTRACT ("IMPLIED-IN-LAW" CONTRACTS)

Even if a traditional, enforceable contract does not exist between the parties, a plaintiff may still
be entitled to relief under the alternative theory of quasi-contract.

Under a quasi-contract theory, restitution may be available to the plaintiff if:

1. The plaintiff conferred a measurable benefit to the defendant;

o The benefit conferred must have calculable economic value (e.g., goods/services).
2. The plaintiff conferred the benefit with the reasonable expectation of being
compensated for its value; AND
o A party cannot recover restitution under a quasi-contract theory for conferring a
gift to another party because there is no expectation of compensation when giving
gifts.
3. The defendant would be unjustly enriched if he were allowed to retain the benefit
without compensating the plaintiff, because either:
o The defendant knew or had reason to know of the plaintiff's expectation to be
compensated; OR
 "Officious intermeddlers" who supply unnecessary services to unwilling
recipients cannot recover restitution under a quasi-contract theory.
o The plaintiff had a reasonable excuse for conferring the benefit without the
defendant's knowledge (i.e., emergency situations).
 In Cotnam v. Wisdom, the court permitted the physician-plaintiff to
recover restitution under a quasi-contract theory for rendering emergency
medical services to an unconscious patient who could not have known
that the plaintiff had an expectation of compensation. Cotnam v. Wisdom,
104 S.W. 164 (Ark. 1907).

Under a quasi-contract theory, the plaintiff's recovery is limited to restitution (i.e., an amount
equal to the economic benefit that the plaintiff conferred on the defendant).

"IMPLIED-IN-FACT" CONTRACTS
An implied-in-fact contract is a contract that is inferred from the acts or conduct of the parties
(e.g., a customer telling a barber how they would like their hair cut and willingly accepting the
haircut implies mutual assent between the parties even though the offer and acceptance were
never expressly communicated).
Unlike quasi-contract, an implied-in-fact contract is treated like a traditional, enforceable
contract (i.e., the plaintiff can recover expectation damages for breach of an implied-in-fact
contract). Similar to quasi-contract, an implied-in-fact contract exists if:
1. The plaintiff conferred a measurable benefit to the defendant;
2. The plaintiff conferred the benefit with the reasonable expectation of being
compensated for its value; AND
3. The defendant knew or had reason to know of the plaintiff's expectation to be
compensated.
However, the main distinction between an implied-in-fact contract and a quasi-contract is that all
of the elements of a traditional, enforceable contract (mutual assent and consideration) must be
shown by the parties' acts and conduct in order to establish an implied-in-fact contract.
Notably, a quasi-contract need not be supported by mutual assent (Cotnam court permitted
recovery under a quasi-contract theory when one party to the transaction was unconscious and
clearly unable to assent to the deal).
Moral Obligations with Subsequent Promises
ALTERNATIVE THEORIES OF ENFORCEMENT

Even if a traditional, enforceable contract does not exist between the parties due to lack of
consideration, a plaintiff may still be entitled to relief under a moral obligation.

While past consideration is not consideration, some courts may nonetheless enforce a promise
supported by past consideration if there is a strong moral obligation and justice so requires.

 In the early 19th century case of Mills v. Wyman, Mills provided medical care for
Wyman's adult son who became ill while away from home. Grateful, Wyman later
promised to pay Mills for helping his son recover from the illness. When Wyman reneged
on his promise, Mills sued for breach of contract. The court held that promises made in
recognition of past benefits are not enforceable (i.e., past consideration). The court
reasoned that Wyman may have had a moral duty to uphold his promise to Mills, but not
a legal one. Mills v. Wyman, 20 Mass. (3 Pick. 207 (1825)).
 However, 110 years later in Webb v. McGowin, the court reaches the opposite result.
Webb, an employee of McGowin, sustained permanent injuries acting in a heroic effort to
prevent a 75 lb pine block from striking McGowin, likely saving McGowin's
life. Grateful, McGowin later promised to pay Webb a biweekly sum of money for the
rest of Webb's life. McGowin upheld this promise paying Webb the promised sum for 8
years until McGowin died. Upon McGowin's death, McGowin's estate refused to
continue paying Webb, and Webb sued. The court held that the moral obligation that
motivated McGowin's promise justified enforcing the promise. Webb v. McGowin,
168 So. 196 (Ala. Ct. App. 1935).

Today, some courts may enforce a promise supported by past consideration if there is a strong
moral obligation and justice so requires under Webb. However, other courts are more aligned
with the Mills decision and refuse to enforce a promise that lacks consideration on the basis of a
moral obligation.
 What is performance under a traditional,
enforceable contract?
PERFORMANCE

There are 2 steps on a Contracts fact pattern to determine whether there is a breach of contract:

1. We must determine whether a traditional, enforceable contract was formed.

o Mutual assent?
o Consideration?
o Defenses?
o Statute of Frauds?

2. If we conclude that a traditional, enforceable contract was formed, we must next

determine whether either party failed to perform their contractual duties without a valid
excuse for nonperformance.
o Substantial Performance vs. Perfect Tender?
o Parol Evidence Rule?
o Warranties?
o Conditions?
o Excuses?
o Anticipatory Repudiation?

If a traditional, enforceable contract is formed, and either party fails to perform their contractual
duties without a valid excuse for nonperformance, then the breaching party may be held liable
for breach of contract.
 What Performance is Due? Substantial
Performance vs. Perfect Tender
PERFORMANCE

PERFORMANCE

If a traditional, enforceable contract is formed, and either party fails to perform their contractual
duties without a valid excuse for nonperformance, then the breaching party may be held liable
for breach of contract.

Performance Under the Common Law

Under the common law, substantial performance is required, which means that performance
will be satisfied so long as there is NOT a material breach of the contract. If there is a material
breach, the non-breaching party's performance is discharged. If the breach is NOT material, the
non-breaching party's performance is NOT discharged.

Performance Under Article 2 of the Uniform Commercial Code

Under the UCC, perfect tender is required, which means that a seller must deliver conforming
goods in accordance with the terms of the contract (i.e., “perfect goods” + “perfect delivery”).
The smallest nonconformity is considered a breach that allows the buyer to reject all or a
portion of the goods.

However, there are three main exceptions:

1. The parties can contractually change the default rules to include discussion of substantial
performance instead of perfect tender;
2. Installment contracts (agreement for delivery in separate lots) do NOT have to satisfy
perfect tender – the buyer can reject a specific installment delivery when there is a
substantial impairment in the installment that cannot be cured;
3. If the seller fails to tender perfect goods, the buyer MUST give the seller a chance to cure
the nonconformity if:
o The time for performance under the contract has NOT yet expired; OR
o The seller has reasonable grounds to believe that the buyer would accept a
replacement for the nonconformity.
Revocation of Acceptance. If a buyer fails to reject nonconforming goods after having had a
reasonable opportunity to inspect the goods, the buyer is deemed to have accepted the goods.
The buyer may revoke his acceptance if:

1. The nonconformity substantially impairs the value of the goods;

2. The revocation occurs within a reasonable time after the buyer discovers or should have
discovered the ground for nonconformity and before any substantial change in condition
of the goods which was not caused by their own defects; AND
3. The buyer accepted the goods:
o On the reasonable assumption that the nonconformity would be cured and it has
not been seasonably cured; OR
o Without discovery of such nonconformity if his acceptance was reasonably
induced either by the difficulty of discovery before acceptance or by the seller’s
assurances.
 Parol Evidence Rule
PERFORMANCE

Parol Evidence Rule

When the parties to a contract express their agreement in a writing with the intent that it embody
the final expression of their bargain, the writing is an integration.

If the writing is not an integration (e.g., non-final expressions such as tentative drafts), the parol
evidence rule does NOT apply.

Otherwise, an integration may be complete or partial.

 Complete Integration. If the writing completely expresses all of the terms of the parties’
agreement, then it is a complete integration. Absent an exception, all other expressions or
statements, written or oral, made prior to the writing, as well as any oral expressions
made contemporaneously with the writing, are inadmissible.
o A merger clause recites that the agreement is the complete agreement between
the parties. This is usually strong evidence that the writing is a complete
integration.
 Partial Integration. If the writing sets forth the parties’ agreement about someterms, but
not all the terms, then it is a partial integration. Other expressions or statements, written
or oral, made prior to the writing, as well as any oral expressions made
contemporaneously with the writing, are admissible to SUPPLEMENT the writing so
long as the evidence does NOT contradict the terms of the writing.

The parol evidence rule does NOT apply if any of the following exceptions exist:

 Formation Defects. Extrinsic evidence may be offered to establish a defense to the

formation or enforcement of a contract (e.g., incapacity, mistake, duress, lack of
consideration, etc.).
 Condition Precedents. Extrinsic evidence may be offered if a party asserts that there was
an oral agreement that the written contract would not become effective until a condition
occurred.
 Ambiguity and Interpretation. Extrinsic evidence may be offered for the purpose of
interpreting or clarifying an ambiguity in the agreement.
 Separate Deals. Extrinsic evidence may be offered if it represents a distinct and separate
contract.

NOTE. The parol evidence rule does NOT apply to agreements made between the
parties AFTER the execution of the writing. Agreements made after the execution of the writing
would be analyzed as contract modifications, and do NOT trigger the parol evidence rule.
 Warranties: Creation and Disclaimer
PERFORMANCE

EXPRESS WARRANTIES

Creation

Under UCC § 2-313(1), express warranties by the seller are created as follows:

 Any affirmation of fact or promise made by the seller to the buyer which relates to the
goods and becomes part of the basis of the bargain creates an express warranty that the
goods shall conform to the affirmation or promise.
 Any description of the goods which is made part of the basis of the bargain creates an
express warranty that the goods shall conform to the description.
 Any sample or model which is made part of the basis of the bargain creates an express
warranty that the whole of the goods shall conform to the sample or model.

"It is not necessary to the creation of an express warranty that the seller use formal words such as
"warrant" or "guarantee" or that he have a specific intention to make a warranty, but an
affirmation merely of the value of the goods or a statement purporting to be merely the seller's
opinion or commendation of the goods does not create a warranty." UCC § 2-313(2).

Disclaimer

"Words or conduct relevant to the creation of an express warranty and words or conduct tending
to negate or limit warranty shall be construed wherever reasonable as consistent with each other;
but . . . negation or limitation is inoperative to the extent that such construction is
unreasonable." UCC § 2-316(1). I.e., it is very difficult to disclaim an express warranty.

IMPLIED WARRANTIES

Implied Warranty of Merchantability

Creation

Under UCC § 2-314(1), a warranty that the goods shall be merchantable is implied in a contract
for their sale if the seller is a merchant with respect to goods of that kind. A good is generally
considered merchantable if the good is fit for its ordinary commercial purposes.

Disclaimer

A merchant can disclaim the implied warranty of merchantability in writing or orally:

 If the disclaimer is in writing, the language used to disclaim must be conspicuous.
Language of “as is” or “with all faults” or language that puts the buyer on notice will be
sufficient for disclaiming the implied warranty of merchantability in writing.
o "Conspicuous, with reference to a term, means so written, displayed, or presented
that a reasonable person against which it is to operate ought to have noticed it.
 Whether a term is 'conspicuous' or not is a decision for the court. Conspicuous
terms include the following:
 a heading in capitals equal to or greater in size than the surrounding text,
or in contrasting type, font, or color to the surrounding text of the same or
lesser size; and
 language in the body of a record or display in larger type than the
surrounding text, or in contrasting type, font, or color to the surrounding
text of the same size, or set off from surrounding text of the same size by
symbols or other marks that call attention to the language." UCC § 1-
201(10).
 If the disclaimer is made orally, the merchant must use the term “merchantability” to
disclaim the implied warranty of merchantability.

Implied Warranty of Fitness for a Particular Purpose

Under UCC § 2-315, where the seller at the time of contracting has reason to know any particular
purpose for which the goods are required and that the buyer is relying on the seller's skill or
judgment to select or furnish suitable goods, there is an implied warranty that the goods shall
be fit for such purpose.

The seller need NOT be a merchant for this implied warranty to apply.

Disclaimer

An implied warranty of fitness for a particular purpose can be disclaimed by general language
(e.g., “as is”), but the disclaimer MUST be in writing AND conspicuous.

DISCLAIMER OF IMPLIED WARRANTIES BY INSPECTION

If the buyer, before entering into the contract, has examined the goods or a sample as fully as the
buyer desires, or has refused to examine the goods, then there is NO implied warranties with
respect to defects that an examination ought to have revealed to the buyer. UCC § 2-316(3)(b).
 Conditions, Excuses, and Anticipatory
Repudiation
PERFORMANCE

Conditions

To understand conditions, we must distinguish them from promises:

 A promise is an expression of an intention to act or refrain from acting in a specified way

such that it justifies another person in understanding that a commitment has been made
(e.g., "I promise to pay you $200,000 for your house.").
o Effect: A promise creates a legal duty. The nonperformance of a promise results
in breach of contract.
 A condition is an event, which is uncertain to occur, upon which a duty of one of the
parties depends. In other words, a condition is a term that limits or qualifies a promise
(e.g., "I promise to pay you $200,000 for your house on the condition that I get approved
for a loan.").
o Effect: A condition limits or qualifies a legal duty. The nonoccurrence of a
condition results in performance discharge.

An express condition is one that is stated in the terms of the agreement. Look for conditional
language to indicate an express condition:
 "X only if Y . . ."
 "X provided that Y . . ."
 "X on the condition that Y . . ."
 "X in the event that Y . . ."
 "X subject to Y . . ."

A constructive condition is not expressly stated in the terms of the agreement, but is implied by
the nature of the agreement. The most common constructive condition is the constructive
condition of exchange.

 For example, suppose I agree to sell my niece an ice cream bar for $5. Here, I am
promising to deliver my niece the ice cream bar and she is promising to pay me $5.
Although our contract does not contain any language that expressly makes our respective
duties conditional on the performance of the other, the law construes our promises as
dependent on one another. Thus, my delivery of the ice cream bar is a constructive
condition of my niece's duty to pay $5, and my niece's payment of $5 is a constructive
condition of my duty to deliver the ice cream bar.

If the law construes reciprocal promises under a contract as dependent on one another, which
party is required to perform first?
 Where all or part of the performances to be exchanged under an exchange of promises
can be rendered simultaneously, they are to that extent due simultaneously, unless the
language or the circumstances indicate the contrary. Restatement (Second) Contracts §
234(1).
  Where the performance of only one party under such an exchange requires a period of
time, his performance is due at an earlier time than that of the other party, unless the
language or the circumstances indicate the contrary. Restatement (Second) Contracts §
234(2).

To avoid performance discharge, a condition must be satisfied unless the condition is excused.
 Contracts may make a duty conditional on one party's personal satisfaction or approval of
the other party's performance.
o Under the traditional approach, the satisfaction of a condition based on personal
satisfaction is determined purely by the party's subjective satisfaction with the
performance rendered by the other party, limited only by the obligation of good
faith.
o Under the modern approach, the satisfaction of a condition based on personal
satisfaction depends on whether a reasonable person in the position of the party
would have been satisfied with the performance rendered by the other party.

Excuses

Doctrine of Impracticability/Impossibility

A party's duty to perform under a contract is discharged if:

1. An unforeseeable event occurs that makes performance extremely and unreasonably
difficult or impossible;
2. The nonoccurrence of the event was a basic assumption of the contract; AND
3. The party seeking discharge was NOT at fault.
Restatement (Second) Contracts § 261.

Doctrine of Frustration of Purpose

A party's duty to perform under a contract is discharged if:

1. An unforeseeable event occurs that destroys one party's principal purpose for entering
into the contract (even if performance is not rendered impossible);
2. The nonoccurrence of the event was a basic assumption of the contract; AND
3. The party seeking discharge was NOT at fault.
Restatement (Second) Contracts § 265.

Anticipatory Repudiation

Under the common law, anticipatory repudiation occurs when a

promisor unequivocally repudiates a promise before the time for performance is due (by words
or conduct).
Under the UCC, anticipatory repudiation occurs when:
 When a buyer or seller unequivocally repudiates a promise before the time for
performance is due (by words or conduct); OR
 Reasonable grounds for insecurity arise regarding either party's ability or willingness
to perform, and the repudiating party fails to provide adequate assurances within a
reasonable amount of time (not to exceed 30 days) upon the non-repudiating party's
demand for adequate assurances.
When an anticipatory repudiation occurs, the non-repudiating party may:
 Treat the repudiation as a breach of contract and sue immediately for damages;
 Suspend their own performance and wait to sue until the repudiating party's performance
is due under the contract;
 Treat the repudiation as an offer to rescind the contract and treat performance as
discharged; OR
 Ignore the repudiation and urge the repudiating party to perform.

o However, if the repudiation is ignored, then continued performance by the non-

repudiating party must be suspended if the performance would increase the
amount of damages.
o
A repudiating party may retract their repudiation at any time before the non-repudiating party
cancels the contract or materially changes his position.
 Monetary Damages, Equitable Relief, and
Mitigation of Damages
REMEDIES

PURPOSE

Remedies for breach of contract generally serve to protect one or more of the following interests
of a promisee:

 His "expectation interest," which is his interest in having the benefit of his bargain by
being put in as good a position as he would have been in had the contract been
performed;
 His "reliance interest," which is his interest in being reimbursed for loss caused by
reliance on the contract by being put in as good a position as he would have been in had
the contract not been made; OR
 His "restitution interest," which is his interest in having restored to him any benefit that
he has conferred on the other party.
Restatement (Second) Contracts § 344.

MONETARY DAMAGES

The default or normal remedy available to the plaintiff for breach of contract is money damages:
 Expectation Damages;
 Reliance Damages; OR
 Restitution.
Money damages are designed primarily to compensate the injured party for the harm it suffered
as a result of the breach. As such, the plaintiff cannot recover both expectation damages and
reliance damages.

Expectation Damages

The most common type of remedy available for breach of contract is an award for money
damages based on the plaintiff's lost expectations. Courts use the following formula to calculate
the monetary value available to the plaintiff for expectation damages:
Expectation Damages = (Loss in Value) + (Other Loss) - (Cost Avoided) - (Loss Avoided)
 Loss in Value = (The value that the plaintiff should have received under the contract) -
(the value that the plaintiff did receive)
 Other Loss = (Incidental Costs) + (Consequential Costs)
o "Incidental Costs" are costs, typically associated with breach of contract actions,
incurred in a reasonable attempt to avoid loss even if unsuccessful (e.g., cost of
storing rejected goods, finding a new buyer, finding a replacement vendor, etc.).
o "Consequential Costs" are foreseeable costs unique to the plaintiff incurred as a
result of the breach.
 Unforeseeable consequential costs are NOT recoverable unless the
breaching party had some reason to know about the possibility of the
unforeseeable damages. See Hadley v Baxendale (1854) 9 Exch 341.
  Cost Avoided = The value that the plaintiff saves by not having to perform any further
(e.g., Estimated Expenses - Amount Spent)
 Loss Avoided = The value that the plaintiff recovers by salvaging or relocating resources
that would have been used for performance of the contract
Restatement (Second) Contracts § 347.

Problem 1: A hires B to build a house for $100,000. B buys $20,000 worth of materials and
does $15,000 worth of labor that uses up $19,000 in materials. A pays B $5,000 for the work
completed. Then A breaches the contract. B is able to salvage and relocate the $1,000 worth of
unused materials to a different project. However, it costs B $200 to transport the materials to the
new project. The house would have cost B $90,000 to build. What are B's expectation damages?
Loss in Value = $95,000
 Here, B should have received $100,000 under the contract. However, B only received
$5,000 for his performance. Therefore, B's Loss in Value = $95,000

o $100,000 - $5,000 = $95,000

Other Loss = $200
 Here, B incurs $200 in incidental costs for transporting the unused materials in a
reasonable attempt to avoid loss.
 B does not incur any additional foreseeable costs as a result of the breach.
Cost Avoided = $55,000
 It was going to cost B $90,000 to build the house. B incurred $35,000 in expenses
($15,000 in labor and $20,000 in materials). Therefore, B saves $55,000 by not having to
perform any further.
o $90,000 - $35,000 = $55,000
Loss Avoided = $1,000
 B salvages $1,000 worth of unused materials by relocating the materials to a different
construction project.
Expectation Damages Calculation: ($95,000) + ($200) - ($55,000) - ($1,000) = $39,200

Reliance Damages

As an alternative to expectation damages, the plaintiff may recover reliance damages, which
includes expenditures made in preparation for performance or in performance, less any loss that
the breaching party can prove with reasonable certainty the plaintiff would have suffered had the
contract been performed. Restatement (Second) Contracts § 349.
In other words, reliance damages usually consist of nothing more than the expenses that the
plaintiff incurred in reliance on the contract. Generally, a plaintiff seeks reliance damages when
calculating expectation damages is too speculative (e.g., lost profits of an unproven business
venture is often too speculative).

Problem 2: A wishes to sell his truck for $10,000. In an effort to sell his truck, A enters into a
contract with B, a local television station, to air a 30-second advertisement for his truck. After
the contract is formed, A pays an ad agency $1,000 to produce a video ad for B to air on their
network. However, B refuses to air the ad resulting in breach of contract. Is A entitled to money
damages?
Here, A probably could not recover expectation damages for the potential sale price of the truck,
because it is too speculative as to whether the ad would have resulted in the sale of his truck.
However, A could recover the $1,000 he spent in reliance on his contract with B.
Restitution

The goal of restitution is to prevent unjust enrichment. Damages in restitution award the plaintiff
an amount equal to the economic benefit that the plaintiff has conferred on the defendant. In
contract law, restitution may be available:
 As a remedy for breach of contract;
 To prevent unjust enrichment when the parties have rendered part performance pursuant
to an unenforceable contract; AND
 As a remedy for a breaching party who has partially performed before the breach
occurred.
Unlike reliance damages, to be entitled to restitution, the plaintiff must have conferred a benefit
on the defendant. In Problem 2 (above), A could not recover $1,000 in restitution, because A did
not confer an economic benefit to B. If A had paid $2,500 to B for the advertising time slot, then
A would be entitled to recover $2,500 in restitution for the economic benefit conferred.

EQUITABLE RELIEF

When monetary damages are inadequate, a plaintiff may pursue equitable relief. If successful,
the court will generally compel the breaching party to take an action or refrain from taking an
action. In determining whether monetary damages are adequate, courts consider:
 The difficulty of proving damages with reasonable certainty (i.e., calculation is too
speculative);
 Hardship to the defendant;
 Balance of equities;
 Practicality of enforcement; AND
 Mutuality of the agreement.

Specific Performance

In contract law, specific performance compels a defendant to perform their legal duties under the
contract through the threat of imprisonment for contempt. Specific performance is commonly
available when unique/rare goods or transfers of real estate are involved in the breach of contract
action.

Right of Reclamation (Replevin)

Under UCC § 2-702, a seller may reclaim the goods she sent to the buyer if either of the
following circumstances apply:
 When an insolvent buyer receives goods on credit, and the seller learns that the buyer is
insolvent, the seller may reclaim the goods if a demand is made within 10 days after the
buyer's receipt of the goods. However, the 10-day limitation does NOT apply if the buyer
misrepresented his solvency to the seller in writing within 3 months before delivery.
 If the buyer pays with a check that is subsequently dishonored, then the seller may
reclaim the goods following a demand made within a reasonable amount of time.
MITIGATION OF DAMAGES

The plaintiff has a duty to take reasonable steps to mitigate his losses. If the plaintiff fails to do
so, the court will reduce the total damages by the amount that could have been avoided had the
plaintiff taken reasonable steps to mitigate his losses.