Contracts—Highly Tested MBE Topics, Charts, and a Checklist!

Article 2 applies to the sale of goods. Common law applies to services and everything else.

2. Contract Formation

A contract has three elements: offer + acceptance + consideration.

Elements of a Contract

Offer creation

- Termination of an offer: There are four ways to terminate an offer:
- - - Lapse of time: an offer lapses after a reasonable time.
    - Rejection (including a counteroffer)
    - Revocation of an offer: An offer can be revoked before acceptance unless it is FOUR:
      - Firm offer (by a merchant in a signed writing under Article 2)
      - Option contract (promise + consideration)
      - Unilateral contract (beginning performance on a unilateral contract)
      - Reasonably foreseeable substantial reliance on the offer
      - Acceptance
        
        Look at type of contract
        
        Bilateral contracts (most contracts) are accepted by promise or beginning performance.
        
        Unilateral contracts (rewards, prize, or offers that specify they are unilateral) can only be accepted by full performance.
        
        Article 2 —an offer for goods can be accepted by promising to ship, or shipping goods.
        
        When acceptance is effective
        
        Generally, acceptance is effective when sent (mailbox rule). Exceptions:
        
        an option contract, or
        
        if a rejection then acceptance is mailed (the one received first controls).
        
        If an acceptance then rejection is mailed (the mailbox rule applies)
        
        Terms of acceptance
        
        Common law: acceptance must be mirror image of offer or it is not an acceptance (it is a counteroffer).
        
        UCC: Acceptance does not need to mirror the offer. An acceptance may have an additional or different term (UCC 2-207). Between merchants, the additional term will be a part of the contract unless it materially alters it, the offeror objects within a reasonable time, or the offer limits acceptance to the terms of the offer.
        
        Consideration
        
        “Bargained-for exchange”
        
        Things that do not constitute consideration: a promise to make a gift, past consideration, moral obligation, and illusory promise.
        
        Modifications
        
        Common law: there needs to be consideration to modify a contract (preexisting legal duty rule), unless there is a lawsuit settlement/release, unforeseen difficulty, preexisting duty to a third person, a written promise to pay a debt barred by the statute of limitations, or a payment in full/good faith dispute of a debt.
        
        UCC: Only goodfaith is needed. One does not need consideration to modify a contract.
        
        3. Contract Interpretation
        
        General rule: Express terms control. Then courts look to course of performance, course of dealing, and trade usage.
        
        Keeping terms out: theparol evidencerule
        
        Applies when one wants to add a term from preliminary negotiations to a final written agreement.
        
        If there is a completeintegration (usually a merger clause), nothing comes in.
        
        If there is a partialintegration, consistentadditional terms are allowed in.
        
        The parol evidence rule does not apply to FICCL: formation defenses, interpretation of a contract term, failure of a conditionprecedent, clerical errors or a latermodification.
        
        Warranties
        
        Expresswarranties (affirmation of fact or a sample) cannot be disclaimed.
        
        Impliedwarrantyofmerchantability is made by a merchant that goods are fit for their ordinary purpose. It can be disclaimed.
        
        Implied warranty of fitness for a particular purpose can be made by any seller who knows of the buyer’s specific purpose. It can be disclaimed.
        
        4. Performance obligations
        
        Common law: one has to substantially perform one’s duties in order for the other person’s duty (usually a duty to pay) to arise.
        
        Exception: Express condition (e.g., “I will buy it if I like it” or “I will buy it if I can get a 10% interest rate.”). An express condition needs to be complied with exactly.
        
        UCC: the seller has to provide perfect tender of the goods (or the buyer can reject the goods).
        
        Exception: Installment contract. The buyer cannot reject unless there is a “substantial impairment,” and even then, the seller may cure.
        
        A buyer may accept or reject nonconforming goods. If he accepts goods, he may later revoke his acceptance, but revocation is a higher standard than rejection.
        
        Delivery obligations
        
        Carrier cases: Most are shipment contracts, and the seller only has to get the goods to the “shipper” and the risk of loss (ROL) passes to the buyer. For destination contracts (limited to when the contract says “FOB Buyer’s Place of Business” or “Ex-Ship”), the seller has to get it tothe destination.
        
        If the other party breaches (i.e., an anticipatory repudiation vs. a prospective inability to perform)
        
        Waiver of condition
        
        Performance
        
        Occurrence of a conditionsubsequent
        
        Agreement (novation, modification, accord and satisfaction, rescission, release)
        
        Changed circumstances so it becomes impossible or the purpose is frustrated
        
        5. Defenses
        
        The Statute of Frauds (SoF)
        
        Satisfaction of SoF: you need a writing signed by the defendant that evidences a contract.
        
        Exceptions
        
        Land: part performance (two of the following three: moving in, paying a substantial amount of the purchase price, or improving the land a significant amount).
        
        Sale of goods (mnemonic = MAPS)
        
        Confirmatory memo between merchants: if one sends another a writing signed by him within a reasonable time showing there is a contract and the other fails to object in writing to the contents of the writing within 10 days of receipt.
        
        Judicial admissions: if one admits a contract in a pleading or testimony.
        
        Part performance: if one pays for or accepts a part of a contract, it is enforceable up to that amount.
        
        Specially manufactured goods: goods that are specially manufactured for the buyer and not suitable for sale to others in the seller’s ordinary course of business and the seller has made a substantial beginning, then the entire contract is enforceable.
        
        Legal incapacity for minors, mentally incompetent persons, or intoxicated persons.
        
        Duress: This is a high bar. The contract is voidable.
        
        Undueinfluence: Unfair persuasion from a person in a position of trust, confidence, or dominance. The contract is voidable.
        
        Mutual mistake: if both parties are mistaken about a basic assumption of fact that materially affects the agreed upon exchange and neither bears the risk, the contract is voidable.
        
        Unilateral mistake: if one party is mistaken and the other person knew or had reason to know, then the contract is voidable.
        
        Mutual misunderstanding: if both parties have a different understanding of a material term that is open to at least two reasonable interpretations and neither party has any reason to know the meaning attached by the other— no contract.
        
        Fraud, misrepresentation, or nondisclosure
        
        Illegality or publicpolicy
        
        6. Remedies
        
        General rule: you get expectation damages.
        
        Incidental damages are those related to avoiding the loss from the breach.
        
        Consequential damages are those that are foreseen at the time the contract is entered into.
        
        Mitigation of damages is required.
        
        UCC formulas
        
        Seller breaches and buyer has goods: buyer gets the value of the goods as contracted for – the value of the goods as delivered + incidentals and consequentials.
        
        Seller breaches and seller has goods: buyer gets the difference between the market price (or replacement price) and contract price + incidentals and consequentials – expenses saved.
        
        Buyer breaches and buyer has goods: seller gets the contract price.
        
        Buyer breaches and seller has the goods: seller gets the difference between the contract price and market price (or resale price) + incidentals – expenses saved.
        
        Lost volume seller: seller gets lost profits plus incidentals.
        
        Damages summary chart
        
        7. Third-party rights
        
        Third parties
        
        Intended third-party beneficiaries have rights under a contract assuming their rights vest.
        
        Is the third-party beneficiary (TPB) intended or incidental? Look at four factors:
        
        Is the TPB expresslydesignated in the contract?
        
        Is performance directly to the TPB?
        
        Does the TPB have any rights under the contract?
        
        What is the relationshipbetween the TPB and the promisee?
        
        Incidental third-party beneficiaries do not have rights under a contract.
        
        Delegation
        
        One can generally delegate a contract unless the contract prohibits it (by saying “no delegation” or “no assignments”) or if the contract involves skill, judgment, or trust.
        
        You do not need consent, consideration, or a writing to delegate duties.
        
        The delegator is always liable. The delegatee is liable if consideration was paid.
        
        Generally, rights can be assigned unless the assignment substantially changes the obligor’s duties or the contract prohibits it.
        
        An assignment may be revoked if there was no consideration for it. An assignor may not revoke an assignment if there is consideration or if it is payment for a preexisting debt.
        
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