Contracts

Contracts

Contracts Start essay with: UCC and *MD contracts law applies. Summary of most commonly tested issues: Contract formation requires a valid offer, acceptance, consideration, legal capacity of the parties, legal subject matter, and compliance with the statute of frauds if the contract involves marriage, over one year to perform, $500 or more under the UCC, land transfers or leases over one year, and suretyship promises to answer for the debts of another. Excuses for nonperformance include: Incapacity, impossibility, impartibility, frustration of purpose, and subsequent illegality.

Contracts

Contracts Check List I

Contracts

Contracts Check List II

Contracts

I. Applicable Law A. Article II of the UCC applies to contracts for the sale of goods (tangible personal

property other than land)

B. Common law applies to all other contracts (service contracts and contracts for the

sale of land)

C. Mixed Deals (contracts involving both the sale of goods and services)

1. Entire contract is governed by Article II if the most important part of the deal is

the goods purchased

2. Entire contract is governed by common law if the most important part of the

deal is the service.

3. Exception: If the contract itself specifically divides the payment for the goods

and the services (e.g. $10.00 for a yo-yo and $399.99 for lessons), then Article

II applies to the provisions regarding the goods and common law applies to the

services portion

II. Contract: Agreement Plus A. Types of Contracts

1. Express Contract (agreement is found in the words)

2. Implied Contract (requires conduct; cant find agreement just from words)

3. Quasi-Contract (equitable remedy)

a) Elements:

(1) Plaintiff has conferred a benefit on the defendant;

(2) Plaintiff reasonably expected to be paid

(3) And Defendant would be unjustly enriched if plaintiff is not compensated

b) Contract law does not apply, and the contract price is not the measure of

recovery (but it does set the ceiling if plaintiff is in default or contract

recovery is barred by the statute of frauds)

c) May apply anytime contract law produces an unfair result

4. Bilateral Contract: Contract resulting from an offer that is open as to the method

of acceptance

5. Unilateral Contract

a) Contract resulting from an offer that expressly requires performance as the

only possible method of acceptance

Contracts

b) Contracts resulting from the performance required to win rewards, prizes,

and/or contests

III. Contract Formation A. Offer (offer used as a verb is not conclusive of an offer, but offer used as a noun

is conclusive that an offer has been made)

1. An offer is a manifestation of an intention to contract (first show of commitment

by a party). The basic test is whether a reasonable person in the position of the

offeree would believe that his assent creates a contract

2. An offer is not required to contain all material terms

3. Price Terms

a) Missing Price Terms (nothing is said about price in the offer)

(1) Common law rule: An offer must include a price term

(a) Example: If O sends a letter to A offering to sell property to A, but

nothing is said about price, this is not an offer

(2) Article II rule: An offer does not have to include a price term

(a) The parties may omit any specification of price, agree to agree to

price later, or link price to an objective standard; and if price is

omitted or cannot be determined under the terms of the contract, the

price shall be a reasonable one at the time of delivery (court may

determine if necessary)

(b) The parties may also contract to leave the price term to be fixed by

the seller, but this requires the seller to fix the price in good faith

(i) If the seller acts in bad faith, the buyer may himself set a

reasonable price

b) Vague or Ambiguous Material Terms (e.g. where price is described in the

initial communication as reasonable, fair, appropriate)

(1) Common law/Article II: Offers containing ambiguous price terms are not

offers

4. Requirement Contracts/Output Contracts

a) A contract for the sale of goods can state the quantity of goods to be

delivered under the contract in terms of the buyers requirements

(requirements contract) or the sellers output (output contract) or in terms of

Contracts

exclusivity

b) A buyer in a requirements contract can increase requirements as long as

the increase is in line with prior demands (a modest increase; not

unreasonably disproportionate)

5. Context : An advertisement or price quote is not an offer, but is an invitation to

offer

a) Exceptions:

(1) A price quotation can be an offer if it is in response to a specific inquiry

(2) An advertisement can be an offer if it is in the nature of a reward (e.g.

Smoke Ball Co. promises $100 reward to anyone who catches the flu

after using its smoke ball as directed)

(3) An advertisement can be an offer if it is specific as to quantity and

expressly indicates who can accept

6. Terminating Offers (an offer cannot be accepted after termination; offer is

dead)

a) Lapse of time

(1) Offer must be accepted within the contracts stated time frame; or

(2) Within a reasonable time frame (within a month)

b) Revocation (words or conduct of offeror)

(1) Unambiguous statement by the offeror to the offeree of unwillingness or

inability to contract; or

(2) Unambiguous conduct by the offeror indicating an unwillingness or

inability to contract that the offeree is aware of

(a) Later conduct (e.g. selling the good to someone else unbeknownst to

the offeree) or later desire to terminate the offer does not qualify as a

valid revocation unless communicated to the offeree

(3) An offer made to more than one party is not a valid revocation (as long

as no party has accepted)

(4) Timing of Revocation

(a) Revocation of an offer sent through the mail is not effective until

received

(b) An offer cannot be revoked after acceptance

Contracts

(5) Offers that Cannot Be Revoked

(a) Any offer cannot be revoked if the offeror has:

(i) Promised to keep the offer open; and

(ii) This promise is supported by consideration (option)

(a) A subsequent counteroffer by the offeree does not terminate

the offer or option, unless the offeror changes his position in

reasonable reliance on the counteroffer

(b) e.g. the offeree claims he wont be able to accept the offer

unless the price comes down and then the offeror relies on

that comment and sells the goods to someone else

(b) An offer for the sale of goods cannot be revoked for the time

specified or for a reasonable time ( up to three months) if (Firm Offer

Rule/Article II):

(i) A merchant (person in business who deals regularly in the kinds

of goods offered);

(ii) Makes a written, signed offer to sell goods and includes a

promise to hold the offer open

(a) The offer must remain open for the specified/reasonable time,

even if the offeree attempts to negotiate better terms

(b) If the written promise is to keep an offer open for longer than

three months, there is no punishment, but the offeror can

revoke after three months

(c) Consideration is not required

(c) An offer cannot be revoked if the offeree has detrimentally relied

upon the offer and this reliance was reasonably foreseeable

(i) Examples: Subcontractor makes a bid that the general contractor

relies on; Buying paint in reliance on an offer to paint someones

house

(d) An offer to enter into a unilateral contract is irrevocable after

performance (not mere preparation) has begun (offeree, however, is

not obligated to complete performance)

(i) Example: O offers P $1,000 to paint his house and the offer

Contracts

states it can be accepted only by performance. As soon as P

starts to paint (not merely buying paint) he has begun

performance and the offer cannot be revoked.

c) Rejection (words or conduct of the offeree)

(1) A counteroffer terminates the original offer (and becomes a new offer)

(e.g. I will only pay $9,000)

(a) Mere bargaining is not a counteroffer (e.g. Will you take $9,000

instead of $10,000?)

(2) Conditional acceptance terminates the original offer (and becomes a

new offer): Where the response to an offer is not simply yes, but insists

on some additional term (makes it a deal breaker) (if; provided that;

so long as; on condition that)

(a) If there is an offer with conditional acceptance, but the parties

continue to act like there is a contract, it could be an implied contract.

(3) Adding Additional Terms:

(a) Common Law Contract (Mirror Image Rule): An acceptance that

adds new terms is treated like a counteroffer rather than an

acceptance (can only respond yes, or I accept)

(b) Contract for the Sale of Goods (Article 2 ( 2-207))

(i) An acceptance that adds new terms is effective as long as the

response does not insist on the new terms (doesnt make

acceptance conditional on the new terms) (seasonable

expression of acceptance)

(ii) If both parties are merchants, the additional term becomes part of

the contract, unless:

(a) It materially changes the offer; or

(b) The offeror objects to the change

(iii) If one of the parties is not a merchant, the additional term will only

become a part of the contract if accepted by the offeror

(4) Death/Incapacity of a Party Prior to Acceptance

(a) Death or incapacity of either party before acceptance terminates the

offer, even if the surviving party does not know of the

Contracts

death/incapacity

(i) Exceptions

(a) When there is an option (promise to keep the offer open made

in exchange for consideration)

(b) When the offer is for a unilateral contract and the offeree has

already performed (the contract survives the decedent, and

the right to receive performance from the offeror passes to the

offerees estate)

B. Acceptance

1. Who Can Accept

a) An offer can be accepted only by:

(1) A person who knows about the offer and who is the person to whom it

was made

(a) Example: If a reward is offered for a missing dog and someone

returns the dog without knowledge of the offer, he is not entitled to

the reward

b) Offers cannot be assigned/transferred, but options can be

(1) Example: If O offers to sell X a car, X cannot sell the offer to Y so that Y

can accept it; If O offers to sell X a car and X pays O $10 for a ten-day

option, X can sell the option to Y so that Y can accept

2. Methods of Acceptance

a) The agreement can state the method of acceptance;

b) Offeree Fully Performs

(1) Advance notice of performance is required if the offeree has reason to

believe that the offeror will not learn of the acceptance (e.g. if in different

locations)

(a) Exception: No advance notice is required if there is a reward or

contest and the rules do not require it

3. Offeree Starts to Perform: Start of performance is acceptance of an offer to

enter into a bilateral contract, but not a unilateral contract (acceptance requires

full performance)

4. Offeree Promises to Perform: A promise to perform is acceptance of an offer to

Contracts

enter into a bilateral contract, but not a unilateral contract (e.g. sending a note

promising to ship goods)

5. Offeror and Offeree are at different places and there are conflicting

communications

a) If an offeree is invited to accept by mail, acceptance is effective when post

marked (when sent) (Mail Box Rule)

(1) B (offeree) receives a letter from A (the offeror) offering to sell him his

car. On January 10th, B (offeree) mails his letter of acceptance (effective

when mailed). On January 11th, B (offeree) receives a letter from A (the

offeror) revoking. The acceptance controls and a contract is formed

(2) Exception: Where a rejection to an offer is mailed first and then an

acceptance is mailed, whichever document is received first controls

6. Seller of Goods Sends the Wrong Goods: Sending the wrong item in

response to an order creates a contract and then breaches that contract

a) Accommodation Exception:

(1) When the seller sends the wrong goods with an explanation, a contract

is not created, and it is merely a counteroffer

7. Silence is not acceptance

a) Exception: If the offeree, by words or conduct, agrees that silence is

acceptance

(1) Example: A offers to sell B his car. B replies, If you dont hear from me

by Friday, I accept.

IV. Legal Reasons for Not Enforcing a Contract A. Lack of Consideration (or a consideration substitute)

1. Definition of Consideration (each party to the transaction is motivated to make

a promise or complete a performance by the prospect of receiving a promise or

performance from the other party)

a) Elements:

(1) Bargained-for exchange: What is being exchanged between the parties

(promises or acts)

(2) And Legal Value

(a) The parties incur a legal detriment (majority rule)

Contracts

(i) Example: Jeff contracted with Kristen to sell her his TV for $100.

The detriment to Jeff is the transfer of ownership of the television,

and the detriment to Kristen is the payment of $100 to Jeff; OR

(b) A legal benefit is conferred on the parties (minority rule)

2. Forms of Valid Consideration

a) Promises to perform or forbear

(1) Exception: An illusory promise is not valid consideration

(a) Illusory Promise: Words of promise where essentially there is no

detriment or commitment at all (e.g. I promise I will buy your car,

unless I change my mind)

b) Performance (e.g. doing something not legally obligated to do)

c) Forbearance (e.g. not doing something legally entitled to do)

(1) Modern courts uphold as legally sufficient consideration the promise not

to pursue a claim which is either reasonable or objectively unreasonable

but held in good faith

d) A mere peppercorn is sufficient to be consideration

3. Modification of Contract

a) Common Law Contracts: There must be new consideration to change or

modify a contract (does not have to be written unless modification brings

contract within statute of frauds)

b) Article II Contracts: No consideration is required for modification, as long as

there is good faith (must be written only if modification brings it into the

statute of frauds or contract provisions requires modifications to be in

writing)

4. Past Consideration Doctrine

a) Promise to pay for past requested act, if performed at the request of the

promisor, is not enforceable.

b) Things that happen before the promise is made cannot serve as valid

consideration

(1) Example: A saves Bs life. Bs mother is so happy that she promises to

pay A. If Bs mother changes her mind later, the promise is not

enforceable because it was based on past consideration (Bs mother

Contracts

didnt bargain for A to save Bs life and A didnt save Bs life based on

any promise by Bs mother)

(2) Exception: If someone expressly requests some conduct and the other

party has an expectation of payment, a later promise to pay is valid

consideration

(a) Example: Bs mother sees B in danger and asks A to save him,

knowing that A would expect to be paid. After A saves B, Bs mother

promises to pay A. This promise is legally enforceable.

5. Pre-Existing Contractual or Statutory Duty Rule

a) Common Law Contracts

(1) There must be new consideration to change or modify a contract

(2) Doing what you are already legally obligated to do is not valid

consideration for a promise to pay you more money for merely doing it

(a) Example: A contracts to perform at Town Hall for $15,000. He later

refuses to sing unless he is paid $20,000. The promoter promises to

pay the additional money and A performs. The promoter then only

pays A $15,000. The promise to pay the additional $5,000 is not

enforceable.

(b) Exceptions:

(i) If the performance is changed or added to in any way, then the

new performance is valid consideration for a promise to pay more

money for that performance

(ii) If there is an unforeseen difficulty that is so severe as to excuse

performance, then performance can be valid consideration for

paying more money for the performance (minority rule only)

(iii) A third partys promise to pay additional money for a performance

is valid consideration for that performance

(a) Example: C, not the promoter, promises to pay the additional

$5,000. Cs promise to pay the additional $5,000 is

enforceable.

b) Article II Contracts

(1) There is no pre-existing legal duty rule and you dont need consideration

Contracts

to modify or change a contract, so long as there is good faith

(a) Example: S contracts to sell grits to B for $1000. S subsequently tells

B that he cannot deliver them for less than $1300. B promises to pay

the additional $300 and S delivers. There is valid consideration and

B must pay the additional $300.

6. Part Payment as Consideration for Release (e.g. promise to forgive a balance

of debt)

a) If debt is due and undisputed, part payment is not valid consideration for

release from the debt (there can be no accord and satisfaction)

(1) Example: D owes C $3,000 (undisputed and due). C agrees to take

$2,000 in full satisfaction of the debt, and D pays the $2,000. C did not

receive valid consideration for his promise to release the balance of the

debt, and C can now sue for the remaining $1,000, even though he

agreed he would not

(a) This is true because D suffered no detriment (he owes $3,000

already)

b) If a debt is not yet due or is in dispute, part payment is valid consideration

for a release from the debt (there can be an accord and satisfaction)

(1) This is so because paying earlier than legally required is a detriment

(2) Most courts treat a full payment statement on a check for less than the

disputed amount as an accord; if the payee cashes the check, she is

held to have agree to accept the lesser payment in satisfaction of her

contractual rights and cannot thereafter seek to enforce the full contract

price

7. Valid Consideration Substitutes

a) A written promise to pay a debt for which there is a legal defense (e.g.

statute of limitations) is enforceable without consideration

(1) Example: D owes C $1,000. Legal action to collect this debt is barred by

the statute of limitations. D writes C, I know that I owe you $1,000, but I

will pay you $600. C can collect $600.

b) A written release of all or part of a claim for breach of a sale of goods

contract is enforceable without consideration

Contracts

c) Promissory Estoppel (Detrimental Reliance)

(1) Applies when parties promise to do something they were never asked to

do (there is no consideration at all) and there is reliance on the promise

(2) Elements

(a) A Promise;

(b) Reliance on that promise that is reasonable, detrimental, and

foreseeable; AND

(c) Enforcement is necessary to avoid injustice

(3) Example: After a car accident, one party promises to pay the other

partys bills. The promising party was not asked to do this, there was no

threat to sue, and the car accident occurred before the promise was

made.

B. Lack of Capacity (of the Person Who Made the Promise The Defendant)

1. Those Who Lack Capacity

a) Infancy (under age 18)

b) Mental incompetence (lacks ability to understand agreement)

c) Intoxicated persons if the other party has reason to know

2. Consequences of Incapacity

a) Person without capacity has a right to disaffirm the contract (contract is

voidable at his election)

(1) Example: A hires B, a minor, to give a lecture. If B refuses to do the

lecture, A cannot sue B for breach, even if he didnt know that B was a

minor.

b) Implied Affirmation By Retaining Benefits After Gaining Capacity

(1) When an agreement is made at a time when one party does not have

capacity, but the person eventually comes to have capacity and then

continues to keep the benefits of the contract, there will be contract

liability through implied affirmation

(a) Example: S sells B a car on credit, but B is only 17. B refuses to pay

S but retains the car until he turns 18. If B continues to keep the car

without complaint or objection, S can now enforce the agreement.

c) Liability for Necessaries: A person who does not have capacity is legally

Contracts

obligated to pay for necessaries furnished to them (food, clothing, medical

care, or shelter), but that liability is based on quasi-contract law, not contract

law.

C. Statute of Frauds Defense

1. Seven Contracts That Are Within the Statute of Frauds (and, therefore, oral

agreements by themselves are not sufficient to create an enforceable contract)

a) Promises made in consideration of marriage (e.g. pre-nuptial agreements,

anti-nuptial agreements);

(1) Does not include promises to marry

b) Promises by an executor to pay expenses/obligations of an estate from his

own funds

(1) s not include promises to pay made by the estate

c) Promises to answer for the debts of another (to guarantee the debt)

(1) A promise to pay anothers debt by itself is not within the statue of frauds

(can be oral), but a promise to pay anothers debt if he does not pay is a

guarantee and is within the statute of frauds

(a) Main Purpose Exception: If someone guarantees to pay the debt of

another, but the main purpose for the underlying contract is to benefit

the guaranteeing party, then the promise does not have to be in

writing

(i) Example: S sells P paint on credit. S claims that O promised to

pay for the paint if P did not. Ps purpose for buying the paint was

to paint Os house. This promise by O is not within the statute of

frauds and can be oral

d) Services contracts that are not capable of being performed within a year

from the time of entering into the contract (e.g. employment contracts to

work for three years)

(1) The possibility for early termination is irrelevant (it is irrelevant if the

contract can be terminated before a year is up)

(2) A contract that is made for someone to perform on a date over a year

later is within the statue of frauds and must be in writing (actual time it

will take for performance is irrelevant)

Contracts

(3) Contracts for tasks (where nothing is said about timeframe) are not

within the statue of frauds because any task could theoretically be

completed within a year with unlimited resources (even something

ridiculous like moving pyramids from Egypt to America)

(a) This is true even if it does actually take the person longer than a year

to complete

(4) Life time deals are not within the statute of frauds because one of the

parties could die within a year

e) Contracts transferring interests in real estate of a term of more than a year

(sales, easements, etc.)

f) Contracts for the sale of goods for $500 or more

g) Leases of goods with the payments totaling $1,000 or more

2. Satisfying the statute of frauds (if the statute is not satisfied, party being sued

can raise the statute of frauds as a defense to contract liability; may still be

liable under quasi-contract principles though)

a) Written Agreement

(1) For all agreements other than those for the sale of goods for $500 or

more or leases of goods with the payments totaling $1,000 or more:

(a) Writing must contain (all material terms test):

(i) Who (every party involved); AND

(ii) What (what the contract is for)

(b) Writing must be signed by the person you are trying to sue

(2) For contracts for the sale of goods for $500 or more (Article II):

(a) Writing must contain:

(i) How many (quantity being sold)

(b) Writing must be signed by the person you are trying to sue

(i) Exception: If both parties are merchants and the party being sued

received a signed writing containing a quantity term and failed to

respond within 10 days of receipt, the writing is sufficient and

does not have to be signed by the person you are trying to sue

(c) Leases of goods with payments totaling $1,000 or more:

(i) Writing must:

Contracts

(a) Indicate that it is a lease;

(b) Describe what is being leased; And

(c) State the duration of the lease

b) Oral agreement + _______:

(1) Full performance by either party to a services contract

(2) Part performance of a contract for the sale of ordinary goods (however,

this satisfies the statute of frauds only to the extent of the part

performance)

(a) If the lawsuit is regarding goods that have already been delivered,

there is no statute of frauds defense (e.g. seller can prevail in a suit

for payment for the goods that were delivered)

(b) If the lawsuit is regarding goods that have not yet been delivered,

there is a statute of frauds defense (e.g. when buyer sues seller for

the goods that were not delivered, seller can raise a statute of frauds

defense)

(3) Substantial beginning of making or obtaining specially manufactured or

custom goods in a contract for the sale of specially

manufactured/custom goods

(4) Full or partial payment, possession, and/or improvements (at least 2 of

the 3) for a contract involving real estate transfers

c) Judicial Admission: If the party sought to be charged admits in his pleadings

(answer to a complaint), testimony (transcripts of direct/cross examination),

or responses to discovery (depositions, etc.) that a contract was formed, the

statute of frauds does not apply (at least to the extent of the admission)

3. Two Theories Related to the Statute of Frauds

a) Written Authorization to Enter Into a Contract for Another

(1) The authorization must be in writing if the contract to be signed is within

the statute of frauds (e.g. the authorization must be of equal dignity)

(a) Example: A wants an apartment so she arranges for B to sign the

lease for her. If the lease is for two months, there doesnt have to be

written authorization. But, if the lease is for two years, B would need

written authorization to sign for A.

Contracts

b) Contract Modification

(1) Modification of a contract

(a) Must be in writing when the deal with the alleged change would be

within the statute of frauds

(b) If a contract expressly states that any modification must be made in

writing:

(i) Under common law, these provisions are ignored, and an oral

modification may be valid if the contract with the alleged change

would not be within the statute of frauds.

(ii) Under Article II, these provisions are effective and enforced,

unless they are waived

(a) The mere fact that there is a later oral modification is not

sufficient to constitute a waiver.

D. Existing Laws That Prohibit Performance of the Agreement (Illegality)

1. If the contracts subject matter is illegal, the agreement is void

a) Example: A pays B to cause physical injury to X. Subject matter is to injure

X and it is against the law to injure people. Illegal subject matter and so the

agreement is void (no one can sue anyone under the contract)

2. If the subject matter is legal, but the purpose is illegal, the agreement is

enforceable only by the person who did not know of the illegal purpose

a) Example: A buys a ticket from B to fly from Minnesota to Colorado. This is

legal. The reason he is buying the ticket is to go and kill X. B can sue A if he

refuses to pay, so long as he didnt know of As illegal purpose

E. Misrepresentation

1. A false assertion of fact (e.g. S tells B that the house has no termites when it

does) or concealment of facts (e.g. S puts carpet over termite damage)

2. When there is a fraudulent misrepresentation, or an innocent misrepresentation

as to the material terms of a contract (e.g. S tells B the house has no termites),

the contract is voidable (other party can rescind) if the misrepresentation

induced the other party to enter into the contract.

3. When there is misrepresentation as to the nature of a contract (e.g. S tells B

this is just a lease agreement when it is really a purchase agreement), the

Contracts

contract is void

F. Duress

1. Elements:

a) Bad guy who improperly threats the other party; and

b) Vulnerable guy who is given no reasonable alternative

2. Examples: Physical duress (gun to the head) or economic duress (an obvious

bad guy who improperly threatens someone with breaching an existing contract

unless he is paid more and a vulnerable guy who has no other source of supply)

G. Unconscionability

1. A court is empowered to refuse to enforce all or part of any agreement when

there is:

a) Unfair surprise and/or oppressive terms as of the time the agreement was

made; or

b) A consumer lease that was enforced or induced through unconscionable

conduct (even if no provision of the lease is unconscionable)

H. Ambiguity in the Words of the Agreement

1. There will be no contract if:

a) Parties use a material term that is open to at least two reasonable

interpretations;

b) Each party attaches different meaning to the term; and

c) Neither party knows, or has reason to know, the term is open to at least two

reasonable interpretations

(1) If one party knows of the ambiguity, the agreement will be legally

enforceable with the terms as understood by the other innocent party

2. Example: B and S contract for cotton to be delivered on the Peerless. B intends

the October Peerless; S intends the December Peerless. Neither B nor S

knows that there are two ships named Peerless. No contract.

I. Mistake of Fact

1. Mutual Mistake

a) There will be no contract if:

(1) Both parties are mistaken;

(2) As to a basic assumption of fact;

Contracts

(3) That materially affects the agreed upon exchange

b) If the mistake is about what something is, this is material and basic

(1) Example: S contracts to sell B a painting for $50,000. Both believe that it

is a genuine Warhol, but it is not.

c) If the mistake is about what something is worth, this is not material and

basic

(1) Example: The painting is a Warhol but is really worth only $1,000, not

the $50,000 that both S and B believed

2. Unilateral Mistakes (mistakes by only one party)

a) Courts are reluctant to allow a party to avoid a contract for a mistake made

by only one party

(1) Exceptions:

(a) If a unilateral mistake is palpable (obvious to the other party), then

the contract may be avoided by the mistaken party

(b) If a unilateral mistake is discovered before there has been significant

reliance by the other party, the contract may be avoided

V. Parties Words and the Parol Evidence Rule A. Vocabulary

1. Integration: Written agreement that the court has found to be final agreement

between the parties (triggers the parol evidence rule)

2. Partial Integration: The agreement is written and final, but not complete (does

not cover everything contained in the agreement)

3. Complete Integration: The written agreement is final and complete (contains

everything contained in the agreement)

4. Merger Clause: Contract clause stating that this writing is the complete and

final agreement (strengthens the presumption that a writing is complete and

final)

B. Parol Evidence Rule Is Triggered When:

1. There is a written contract that the court finds is the final agreement; and

2. A party wants to introduce either an oral statement made at the time the

contract was signed (contemporaneous) or earlier oral or written statements by

the parties

Contracts

a) Does not apply to exclude evidence of subsequent agreements or changes

C. Four Possible Fact Patterns

1. A party wants to prove what was meant by terms used in the writing

a) Regardless of whether the writing is a complete or partial integration, a

party can always introduce parol evidence to explain the words or terms

used in the writing

2. A party wants to prove an agreement is not enforceable (or wants to establish a

defense to the contract)

a) Regardless of whether the writing is a complete or partial integration, the

parol evidence rule never prohibits the court from considering evidence of a

defense to the enforceability of an agreement (whether a contract was

validly formed)

3. A party wants to change the written agreement

a) Regardless of whether the writing is a complete or partial integration, the

parol evidence rule prohibits a court from considering earlier agreements as

a source of terms that are inconsistent with the terms in the written contract

(1) A court may, however, consider evidence of such terms for the limited

purpose of determining whether there was a mistake in integration (e.g.

a clerical error or mistake in reducing the agreement to writing)

4. A Party Wants to Add to a Written Agreement (claims the writing left something

out) (only fact pattern where type of integration matters)

a) If a writing is a partial integration, the court can consider earlier agreements

as a source of consistent, additional terms

b) If a writing is a complete integration, court can only consider parol evidence

if it regards something that would naturally and normally not be included in

the integrated writing (a collateral agreement)

(1) Example: S contracts in writing to sell chickens to B. The contract makes

no mention of advertising. S claims that there was an earlier oral

agreement that B would mention S in its advertising. The court can

consider evidence of the earlier agreement relating to the advertising

D. Admissible Evidence of the Terms of an Agreement (if parol evidence is allowed)

(in order of preference)

Contracts

1. Words of the parties;

2. Course of Performance (what the parties have already done under the existing

agreement)

3. Course of Dealing (what the parties have done under other similar agreements

in the past)

4. Custom or Usage (what other similar people have done in similar agreements)

E. Terms of an Agreement under Article II

1. Delivery Obligation of a Seller of Goods

a) No Place of Delivery Has Been Agreed On

(1) Absent an agreement as to place of delivery, then the place of delivery is

the sellers place of business, unless both parties know that the goods

are someplace else, in which case that place is the place of delivery.

b) Place of Delivery By a Common Carrier Has Been Agreed Upon

(1) Shipment Contract

(a) Seller completes his delivery obligation when:

(i) He delivers the goods to a common carrier (a third party in the

business of transporting goods);

(ii) He makes reasonable arrangements for delivery; and

(iii) He notifies the buyer

(b) Free of Board (FOB) (city where seller is located) = shipment

contract

(2) Destination Contract

(a) Seller does not complete his delivery obligation until the goods are

actually delivered to the buyer

(b) Free of Board (FOB) (city where buyer is located) = destination

contract

2. Risk of Loss

a) Where after the contract has been formed, but before the buyer receives the

goods, the goods are damaged or destroyed and neither the buyer nor the

seller is to blame

b) Five Rules (in order of preference):

(1) Agreement of the party controls;

Contracts

(2) If there is a breach, the breaching party is liable for any uninsured loss,

even if the breach is unrelated to the problem or loss;

(3) If there is no controlling agreement or breach, but there is a common

carrier involved:

(a) If you have a shipment contract where the seller has met his delivery

obligation, the buyer assumes the risk of loss.

(b) If you have a destination contract, the seller assumes the risk of loss

until the goods are delivered to the buyer

(4) If there is no controlling agreement, breach, or common carrier (the

buyer is picking up the goods himself):

(a) If the seller is a merchant, he assumes the risk of loss until the buyer

takes receipt (actual physical possession) of the goods

(b) If the seller is not a merchant, he assumes the risk of loss until he

tenders the goods to the buyer (e.g. tells buyer he can pick up the

goods; tells buyer the keys are behind the front bumper; etc.)

3. Warranties of Quality (words/conduct that promise something or factually

describe the goods, not opinion/sales talk)

a) Express Warranty (by conduct or words): Use of a sample or model creates

a warranty that the goods the buyer receives will be like the sample or

model

b) Implied Warranty (based on statute)

(1) Implied Warranty of Merchantability

(a) When any person buys goods from a merchant who regularly sells

goods of this kind, a term is automatically added to the contract, by

operation of law, that the goods are fit for the ordinary purpose for

which such goods are used

(2) Implied Warranty of Fitness for a Particular Purpose

(a) When a buyer has a particular purpose of which the seller is aware

and relies on the seller to select suitable goods for that purpose, the

goods must be fit for that particular purpose

c) Contractual Limitations of Warranty Liability

(1) Disclaimers (provisions that attempt to eliminate warranties)

Contracts

(a) Can be used to eliminate implied warranties, but not express

warranties

(b) Can take the form of as is, with all faults, or conspicuous language

of disclaimer mentioning merchantability (e.g. different size type, bold

letters, etc.)

(2) Limitations of Remedies Clauses (provisions that limit the remedies

available to the buyer in case of a breach of warranty)

(a) Remedies can be limited for express or implied warranties, as long

as the limitations are not unconscionable (at the time the contract

was entered into)

(i) It is prima facie unconscionable if a breach of warranty on

consumer goods causes personal injury

VI. Performance A. Rules apply when one party did not do what they were supposed to do under the

contract

B. Sale of Goods (Article II)

1. Perfect Tender: The seller is obligated to deliver perfect goods

2. Cure: A seller who fails to make a perfect tender will be given a second chance

to cure when

a) When there is a delivery deadline and the wrong goods are delivered early

(time for performance has not yet expired);

b) When the seller had reasonable grounds for believing that an improper

tender would be acceptable, perhaps with a money allowance (possible

reduction in price) (e.g. if the buyer had accepted substitutes in the past)

3. Acceptance of the Goods (once a buyer has accepted the goods, he cannot

later reject them)

a) Express Acceptance: If a contract requires for payment on delivery,

payment for goods without an opportunity for inspection neither constitutes

acceptance of the goods nor affects the buyers right to inspect and reject

them, if appropriate (buyer has a reasonable time to inspect, which would

include performing tests)

(1) However, if the buyer unreasonably exercises his right to test (e.g.

Contracts

conducts a test and realizes the product does not conform to the needs

expressed in the contract, but then continues to use the product anyway),

it will constitute an acceptance of the product used unreasonably (and

buyer will have to pay for the amounts used in excess of reasonable

testing)

b) Implied Acceptance: When the buyer keeps the goods after an opportunity

for inspection without objection (when buyer keeps goods for a month

without objecting).

4. Rejection of the Goods

a) If the goods delivered are rejected after an acceptance has occurred, the

contract has been breached and the seller can sue (once the goods have

been accepted, the buyer cannot then reject them)

(1) Exceptions: Buyer Can Reject Goods Without Being in Breach When:

(a) Rejection occurs before acceptance of the goods;

(b) The goods are less than perfect, unless it is an installment sales

contract

(i) Installment Sales Contract

(a) A contract requiring or authorizing delivery in separate lots to

be separately accepted

(b) If there is an installment sales contract, the buyer has a right

to reject an installment only where there is a substantial

impairment in the installment that cannot be cured

(2) A buyer who rejects nonconforming goods is entitled to:

(a) Recover any payment he already made for the rejected goods;

(b) Resell any nonconforming accepted goods under his duty to mitigate

damages and then apply the proceeds toward the amount owed to

him by the seller for the nonconformity

b) If the buyer properly rejects goods, he must seasonably notify the seller,

hold any unaccepted/rejected goods for the seller, and follow reasonable

seller instructions

c) An aggrieved buyer may also recover (in addition to any refund of payments

made by him) incidental damages resulting from a sellers breach (e.g.

Contracts

expenses reasonably occurred in the inspection, receipt, transportation, and

care/custody of the goods that have been rightfully rejected)

5. Revocation of Acceptance of the Goods

a) A buyer can effect a cancellation of the contract by revoking its acceptance

of the goods if:

(1) There is a nonconformity that substantially impairs the value of the

goods;

(2) There is an excusable ignorance of the grounds for revocation or

reasonable reliance on the sellers assurance of satisfaction (some valid

reason for delayed action); and

(3) Revocation is made within a reasonable time after discovery of the

nonconformity

b) If the buyer properly revokes acceptance, he must seasonably notify the

seller, hold the goods for the seller, and follow reasonable seller instructions

6. Payment

a) Cash or check must be used, unless the parties agree otherwise

(1) If a buyer pays by check, the seller does not have to accept the check;

however, if the seller does not accept the check, the buyer is given

additional reasonable time to pay

VII. Conditions of Performance A. Definition: A mutually agreed upon promise modifier

B. Forms of Conditions

1. True Condition

a) An event beyond the control of either of the parties to the contract that

affects the duty to perform

2. Condition Coupled With a Covenant

a) An event that is to some extent within the influence of one of the parties to

the contract that affects the duty to perform

(1) If the conditioning event is subject to the influence of one of the

contracting parties, that party has an implied obligation to use

reasonable efforts to meet the condition

C. Express Conditions

Contracts

1. Language that limits obligations already created. Only words such as if;

provided that; so long as; subject to; in the event that; until; and on

condition that.

2. Express conditions must be strictly complied with

a) Exception: A condition that is based on approval of one of the contracting

parties is treated as satisfied if a reasonable person would approve, unless

the subject is art or other matters that are inherently discretionary

(1) Example: A contracts with B for B to paint As house. The contract

provides that A will pay $4,000 subject to As approval of the work. Even

though expert painters compliment Bs work, A does not approve. The

condition has been satisfied

3. If the condition is not met, there is no breach of contract and the parties can

back out of the agreement

a) Example: B contracts to buy a painting from A if a gallery verifies it is

authentic. Verification limits the obligation to buy/sell because if the gallery

claims it is not authentic, B does not have to buy. B cannot sue A for breach

of contract, however, because there was no promise the painting was

authentic.

4. How an Express Condition Can Be Excused (not satisfied)

a) Estoppel: When the person protected by, or benefiting from, the condition

makes a statement changing their position BEFORE the conditioning event

was to occur (e.g. he claims he wont require the condition to be fulfilled or

will excuse the condition)

b) Waiver: When the person protected by, or benefiting from, the condition

makes a statement excusing the condition AFTER the conditioning event

was supposed to occur (e.g. after the fact, the person excuses the condition)

D. Constructive Conditions

1. Where there is no express language of condition, but one party must do some

work, the other party is to pay for, and nothing is said about when payment is

due (silent as to time payment). Doing the work is a constructive condition

precedent to the obligation to pay.

2. Satisfaction of Constructive Conditions

Contracts

a) Constructive conditions only have to be substantially performed. Once there

has been any substantial performance, the other party is obligated to pay

for the work that has been done.

(1) If the constructive condition has not been substantially performed, there

is no contract law right to recover for the work that was done (may be

able to recover under quasi-contract, though)

b) Divisible Contract: If the contract itself divides the performance of each

party into the same number of parts, with each part performance by one

party serving as consideration for the corresponding part performance by

the other, then the contract is a divisible contract and the substantial

performance test is applied to each divisible part of the contract

(1) Example: P contracts to paint 20 apartments for $500 each. If there is

substantial performance on any divisible part, then performance has

occurred sufficient to create a contract law right to recovery for the work

that has been done.

VIII. Excuse of Non-Performance A. Performance is excused because of something that happens after the agreement

is made

B. A party may suspend his own performance under a contract where the other party

acts to prevent that performance (e.g. interferes)

1. However, the aggrieved party must give the wrongdoer/interferer time to cure

or correct the interference

C. Excuse by Reason of Other Partys Breach

1. Sale of Imperfect Goods (Article II)

a) In a sale of goods contract, the buyer can reject the goods and withhold

payment if the tender is less than perfect

2. Material Breach in Common Law Contracts (any breach gives rise for a claim

of damages, but only a material breach excuses performance)

a) Example: P contracts to paint Os house white for $1,000, but paints it

purple instead. This is a material breach that excuses O from performing

(paying).

D. Excuse by Reason of the Other Partys Anticipatory Repudiation

Contracts

1. An unambiguous statement that the repudiating party will not perform that is

made prior to the time that performance was due

2. Anticipatory repudiation by one party excuses the other partys duty to perform

and generally gives rise to an immediate claim for damages for breach, unless

the non-repudiator has already finished her performance (e.g. if non-

repudiating party has already completed performance when the other party

repudiates, the non-repudiation party may not sue until the time for the others

performance has passed with no performance)

a) Example: P contracts to paint Os house for $1,000 with payment to be

made on April 5. On March 13, before P has finished painting the house, O

tells P that she is doing a great job, but that O is not going to pay. P stops

painting. O cannot sue P for breach, but P can sue O for breach.

3. Retraction

a) Anticipatory repudiations can effectively be reversed or retracted if:

(1) It is done so in a timely manner; and

(2) There has been no material change by the non-repudiating party made

in reliance on the repudiation (e.g. retracted before the non-repudiating

party removes all of their supplies and/or takes a new job).

b) If a timely retraction is made, the other partys duty to perform is re-imposed,

but the other party can delay the start of performance until he is sure that

the repudiating party will actually follow through this time.

E. Excuse by the Other Partys Inability to Perform: When someone agrees to do

something in exchange for something other than money (e.g. property), but prior to

completion of performance the item is sold or is no longer in the hands of the

original owner, the owner becomes unable to perform. The other partys

performance is excused.

F. Excuse by Reason of a Later Contract

1. Rescission (cancellation)

a) Available if some performance remains for each of the parties involved (if

any party has already fully performed, it is too late to rescind and suits can

be brought for breach of the contract).

b) Once there is rescission, the contract no longer exists and you cannot sue

Contracts

under contract law for the part performance that has occurred (quasi-

contract rules may apply though)

2. Accord and Satisfaction (substituted performance)

a) Definitions

(1) Accord: An agreement by the parties to an already existing obligation to

accept a different performance in satisfaction of the existing obligation

(a) The accord suspends legal enforcement of the original obligation to

provide time to perform the accord

(2) Satisfaction

(a) Performance of the newly agreed upon performance

(b) If the accord is not performed, then the other party can sue on either

the original obligation or the accord

3. Modification (substituted agreement): An agreement by the parties to an

existing obligation to accept a different agreement in satisfaction of the existing

obligation

4. Novation (substituted person):

a) An agreement between both parties to an existing contract to the

substitution of a new third party (e.g. same performance, different party)

(1) If one party is not in agreement or is not aware of the substitution, this is

a delegation, not a novation (in delegations, the party being replaced

remains liable)

b) Novation excuses the party who is replaced from further obligation

G. Excuse of Performance by Reason of a Later, Unforeseen Event (impracticality,

impossibility)

1. Performance of contractual duties (other than a contractual duty to pay money)

can be excused under impossibility or impracticality or frustration of purpose if:

a) Something happens after contract formation, but before the completion of

contract performance;

b) That was unforeseen; and

c) That makes performance objectively impossible (cant be done) or

subjectively commercially impracticable (can only be done with extreme and

unreasonable difficulty and expense) or frustrates the purpose of the

Contracts

performance

(1) Performance is objectively impossible so as to discharge the promisor

from performance only when no one could render performance

(2) Subjective impossibility (e.g. this particular promisor is unable to perform,

but someone else may be able to perform), however, does not operate

as a discharge of the promisors duty to perform (e.g. the promisor can

delegate the work to someone else)

2. Examples:

a) Damage or destruction of the subject matter of the contract

(1) P contracts to paint Os house. During the job, Os house burns down. P

can then be released and take on a new job because it is impossible for

P to continue to paint the house (O cannot sue P for non-performance)

(2) P contracts to build a house for O. During the building, it burns down.

This doesnt excuse P because performance is still possiblehe can still

build a house.

(3) A contracts to sell B his car for $300. After the contract, but before the

risk of loss has passed to B, the car is destroyed by an unseasonable

flood. As performance is excused.

(a) If the flood occurred after the risk of loss had passed to B, however,

Bs performance will never be excused by impracticality because he

can always pay for the item, even if it is washed away

b) Death

(1) If a party to the contract who is special person dies prior to performance,

then the deceaseds partys performance is excused. Examples:

(a) O contracts with F (a special, famous architect) to design his house.

If F dies before designing it, F is excused

(b) O contracts for P to paint his house for $3,000. If P dies during

performance, P is not excused from performance because he wasnt

special and Ps estate would have to find another painter and charge

O only $3,000

c) Subsequent Law or Regulation

(1) A later law makes performance of the contract illegal (excuse by

Contracts

impossibility)

(a) Example: A contracts with the Gold Club to be the featured dancer in

the clubs Naked Review. After the contract, but before performance,

the town passes a law outlawing nude dancing. Gold Club and/or A

are excused from performing

(2) A later law makes the mutually understood purpose of the contract illegal

(excuse by frustration of purpose)

(a) Example: A tells his plastic surgeon that he needs plastic surgery so

he can be a lean, mean nude dancer. The plastic surgeon and A

agree that A will pay the surgeon for liposuction. After the agreement,

but before the surgery, the town passes a law outlawing nude

dancing. A and/or the surgeon are excused from performing the

surgery contract

IX. Breach Remedies for an Unexcused Non-Performance A. General Measure of Money Damages for All Contracts (no punitive damages are

recoverable in contract law)

1. Expectation Interest (to protect the plaintiffs interest)

a) Injured party is entitled to recover an amount that would put him in as good

a position as if the contract has been performed (if there had been no

breach)

(1) Examples: P contracts to paint Os house for $1,000 and then P

breaches. O hires another painter for $1,400. O can recover the

additional $400 he had to pay to hire another painter. If, instead, P

started to paint and spent $100 when O breached, P can recover costs

actually incurred ($100) plus the lost profits he was expecting to receive.

2. Plus Incidental Damages (always recoverable): Recovery of the cost of finding

a replacement (employment agency fees for hiring a replacement, re-

advertising costs, etc.).

3. Plus Consequential Damages (special damages)

a) Damages that are unique to the particular plaintiff involved (not damages

everyone would suffer under the circumstances)

b) Only recoverable if in the reasonable contemplation of each party at the

Contracts

time the contract was formed (foreseeable by the breaching party)

4. Minus Avoidable Damages: No recovery is available for loss that could have

been avoided by appropriate steps (burden of proof of avoidability is on the

defendant)

a) Example: L Law School wrongfully dismisses Professor P with one year

remaining in his $100,000 per year contract. P sues L. If L shows that P

turned down an offer to teach at X Law School (a school in the same city)

for $80,000 per year, P will only be able to recover $20,000.

(1) However, P would only have to accept a comparable job (law school

professor) in the same city. He wouldnt have to accept a completely

different position or a position that is far away from his residence.

5. Restitution

a) Restitution by the Non-Breaching Party: Where the non-breaching party to a

contract has conferred a benefit on the breaching party, the aggrieved party

is entitled to restitution of the benefit conferred

b) Restitution by the Breaching Party

(1) Majority Rule: A willful breachor cannot recover anything in restitution

(2) Minority Rule: A breaching party may seek restitution and recover the

reasonable value of his services from the aggrieved party to prevent

unjust enrichment

B. Four Specific Article II Rules for Contracts Involving the Sale of Goods

1. Seller Breaches (doesnt make a perfect tender) and Buyer Keeps the Goods:

Buyer receives fair market value at a perfect tender minus market value of what

was actually delivered

2. Seller Breaches and Seller Keeps Goods: Buyer receives market value at time

of discovery of the breach minus contract price (or what it would cost to replace

the goods minus contract price)

3. Buyer Breaches and Buyer Keeps the Goods: Seller receives contract price

4. Buyer Breaches and Seller Keeps the Goods: Seller receives the contract price

minus market value at time and place of delivery (or contract price minus resale

price if he was able to resell the item)

a) Additionally, a volume/retail seller can recover provable lost profits

Contracts

(retail/contract price minus the cost the company had to pay to get the item,

from the factory for example), even if the seller has already sold the item to

another party, because he could have made two separate sales if the

purchaser had not breached (applies whenever there is a breach of a

contract to sell regular inventory and the breach is followed by a resale to a

third party at exactly the same price).

C. Liquidated Damages Provisions

1. Contracts can validly stipulate damages or a method of fixing damages if:

a) The amount of possible damages from any later breach of contract is

difficult to determine; and

b) The contract provision is a reasonable forecast of possible damages

2. Liquidated damages provisions cannot provide for a penalty

3. Strategy: A provision that provides for a single number/lump sum for any

breach (whether the breaching party is a day late or a year late) is invalid; A

provision that provides for fluctuating damages depending on the magnitude of

the breach is valid

D. Non-Monetary Recovery (quasi-contract remedies)

1. Specific Performance (on multi-state almost always the wrong answer)

a) Historically, this remedy is in equity, so it is available only if money

damages are inadequate.

(1) Exceptions:

(a) A non-breaching party can get special performance in contracts for

the sale of real estate (because land is unique)

(b) In CA, there are recent reported cases that suggest a greater

flexibility in judicial discretion in deciding whether specific

performance is appropriate, even if monetary damages are adequate.

b) Under Article II, you can get specific performance for contracts involving

goods that are unique, but goods are only unique if they are:

(1) Antiques;

(2) Works of Art; or

(3) Custom made

c) Services/Employment Contracts

Contracts

(1) No specific performance is available for breach of a services contract

(cannot force people to work)

(a) However, sometimes you can get an injunction barring the breaching

party from working for a competitor (negative specific performance)

2. Reformation: A party to a contract can seek a judicial changing (reforming) of a

written contract when

a) There was a clerical mistake or omission in writing down the contract; or

b) There was a fraudulent (not innocent) misrepresentation (you dont want out

of the deal, you want the deal to be changed to include what you were told)

3. Adequate Assurance of Future Performance: When one party to the contract

learns something troublesome after making the contract that gives him

reasonable grounds for insecurity about the other partys performance, he can

stop performance and submit to that party a written demand for adequate

assurance

4. Reclamation: An unpaid seller can get his goods back when:

a) The buyer is insolvent at the time he received the goods;

b) The seller demands return of the goods within 10 days of receipt (or within a

reasonable time if before delivery the buyer made an express

representation of solvency); and

c) The buyer still has the goods when the seller demands return

5. Rights of a Good Faith Purchaser in Entrustment: If an owner of goods leaves

her goods with a person who sells goods of that kind (for repair or service) and

that person wrongfully sells the goods to a third party bona fide purchaser for

value, then such a good faith purchaser cuts off the rights of the original

owner/entruster

a) Original owner could sue in tort for conversion though

X. Third Party Problems/Rights A. Where fraud was not intended, a subsequent delivery of the goods to the buyer

validates toe sales as to subsequent creditors and purchasers.

B. Third Party Beneficiaries

1. A third party beneficiary problem arises when A (promisee) contracts with B

(promisor) for B to render some performance or benefit to C (third party

Contracts

beneficiary) (e.g. life insurance policies (contract between the holder and the

insurance company, with a designated beneficiary); contracting with a bagel

shop to deliver bagels to a third party)

2. An intended third party beneficiary (e.g. a named beneficiary, a beneficiary

receiving performance directly from the promisor, or a beneficiary with a

relationship to the promisee) can sue the original parties to the contract if the

contract is not performed, even though he was not a party to the original

contract (third party beneficiaries have contract rights)

a) Intended Beneficiaries Are Either Donees or Creditors:

(1) Donee Beneficiary: A third party the promisee intends to benefit

gratuitously

(2) Creditor Beneficiary: A person to whom a debt is owed by the promisee

(promisee owes some obligation to the third party beneficiary)

3. Efforts to Cancel or Modify the Contract

a) A third party beneficiarys rights vest when he:

(1) Learns about the contract and assents to it in a manner invited or

requested by the parties;

(2) Materially changes his position in justified reliance on the contract; or

(3) Brings suit to enforce the promise

b) Once a beneficiarys rights have vested, the contract cannot be canceled or

modified without his consent (unless the contract otherwise provides, like

provides that the promisee may change beneficiaries)

4. Who Can Sue Who

a) An intended third party beneficiary can sue the promisor to enforce the

agreement

(1) Exception: Creditor beneficiaries can sue the promisee on the pre-

existing obligation (but not on the new contract)

b) Promisee can sue the promisor to enforce the contract

5. Defenses: If the third party beneficiary sues the promisor (one who was

supposed to perform for the third partys benefit), the promisor can assert any

defenses he (the promisor) would have been able to raise if he had been sued

by the promisee (the other party to the original contract)

Contracts

a) However, where the third party beneficiary is a creditor beneficiary (is a

creditor of the promisee), and the promisors duty is to pay money to the

beneficiary, the promisor, when sued, may not raise any defenses that the

promisee could have raised against the third party beneficiary had she sued

him for the money owed under the debt (e.g. that the statute of limitations

had run on the debt owed by the promisee to the third party beneficiary)

C. Assignment of Rights

1. A contract between only two parties (assignor and obligor) (which does not

mention a third party), where one of the parties (assignor) later transfers their

rights under that contract to a third party (assignee) (occurs in two steps)

2. Requirements for Making An Assignment

a) Assigning language must be in present form (I assign, not I will assign or

I promise to assign)

b) Consideration is not required

3. Limitations on Assignments

a) Contract Provisions

(1) Invalidation Provisions

(a) Takes away both the right to assign and the power to assign so that

there is a breach by the would-be assignor and no rights in the

assignee

(i) All assignments are void, Assignments have no legal effect,

Assignments have no force and effect

(2) Prohibition Provisions

(a) Takes away the right to assign, but not the power to assign, which

means that the assignor is liable for breach of contract, but an

assignee who does not know of the prohibition can still enforce the

assignment

(i) Rights cannot be assigned, Do not assign rights

b) Even if a contract does not limit the right to assign, common law bars an

assignment if it substantially changes the duties of the obligor

(1) An assignment of a right to a money payment is never a problem

(2) Assigning a right to a performance (someones services) will

Contracts

substantially change the obligors duties and will be invalid

4. Rights that Come from an Assignment

a) Assignee can sue the obligor (even though assignee wasnt a party to the

original contract)

b) Obligor has the same defenses against the assignee as he would have in a

suit by the assignor.

c) Payment by the obligor to the assignor is effective until the obligor knows of

the assignment

d) Modification agreements between the obligor and the assignor are effective

if the obligor does not know of the assignment

5. Multiple Assignments

a) Gratuitous Assignments (without consideration; can be revoked)

(1) The assignment made last in time controls (most recent assignment

controls)

(a) Exception: A gratuitous assignment cannot be revoked or reassigned

if it is the subject matter of a writing delivered to the assignee, the

assignee has received some sort of indicia of ownership, or the

assignee has relied on the assignment in a way that is reasonable,

foreseeable, and detrimental

b) If the assignment is not revocable, it will take priority over a later

assignment

(1) Assignments for Consideration

(a) The assignment made first in time for consideration controls (earliest

assignment controls)

(i) Example: A promise to assign made in exchange for valid

consideration is valid consideration

(a) Example: Batman promises to assign his rights under the

contract with Gotham to Anne for $100.

(2) Very Limited Exception

(a) A later assignee takes priority over an earlier assignee for value only

if he both:

(i) Does not know of the earlier assignment; and

Contracts

(ii) Is the first to actually obtain payment, a judgment, a novation, or

an indicia of ownership

(3) Multiple Assignments for Consideration as Breach of Warranty: Anytime

there is an assignment for consideration, the assignor makes an implied

warranty that the rights assigned are assignable and enforceable (which

means that even though the assignee may not be able to collect from

the obligor because he is not first in time, he can sue the assignor for

breach of this warranty)

D. Delegation

1. When a party to a contract later transfers a duty or work under that contract to a

third party

a) Example: P contracts to paint Os house for $1,000. P (delegating party)

and X (delegate) agree that X will paint Os (obligee) house

2. All duties are delegable (even over an objection by the obligee), unless:

a) The contract prohibits delegations;

b) The contract prohibits assignments;

c) The contract calls for very special skills; or

d) The person originally to perform the contract has a very special reputation;

or

e) Delegation would change the obligees expectancy (e.g. requirements and

output contracts)

3. Consequences of Delegation

a) The delegating party always remains liable on the contract (if the delegate

fails to do the work, for example)

b) The delegate (new party) is liable only if there has been an assumption (e.g.

she promises to perform and this promise is supported by consideration

from the delegating party)

(1) This promise by the delegate creates a contract between the delegate

and the delegating party in which the obligee is a third-party beneficiary

c) The obligor must still pay the original party to the contract (the delegating

party), unless there has been an assignment as well