Ca Bar: Contracts (2009)

CA Bar Contracts

CA BAR: CONTRACTS Vocab A. Contract: legally enforceable agreement or promise B. Quasi K: equitable remedy 1. K rules of law don’t always apply 2. Elements: a. P has conferred a benefit on D, b. P reasonable expected to be paid c. D realized unjust enrichment if P not compensated 3. Measure of recovery a. K price is not the measure of recovery; focus on the value of the benefit conferred. b. K price is a ceiling if P is in default. C. Unilateral K: results from an offerthat expressly requires performance as the only possible method of acceptance. Doesn’t turn on the response to the offer. D. Bilateral K: all other K’s. 1. Start w/ strong presumption that most K’s are bilateral. 2. It’s always a bilateral K unless: a. Reward, prize or contest (reward for finding dog) b. Offer expressly requires performance for acceptance (every K requires performance.) Part 1: Applicable Law A. Do you apply the C/L or Art 2 of the UCC? 1. C/L: majority rule 2. Art 2 will apply when: a. Type of txn—Art 2 applies to sales b. Subject matter of txn—goods, ie tangible, personal property; not land or real estate, services c. NB: for the purposes of whether Art 2 applies, the dollar amount doesn’t matter, w/ 1 exception only d. NB: for mixed deals that are part goods-part services, it’s all or nothing—you apply Art 2 to all of the deal or to none of the deal. 1) Rule: what is the more important part of the (lump sum)deal, services or goods? If goods, use Art 2. 2) Mixed Deal Exception: If the K divides the payment b/t the sale of the goods and of the services, then apply the UCC to the sale of goods and C/L to the rest. B. No Art 2 A questions in California. Part 2: Formation of a K • Is there a K? If so, is it legally enforceable? • Focus on: the initial communication (the “offer”), whatever happens afterward (“termination of the offer”), and who responds and how she responds (“acceptance”). A. Offers 1. Test for “offers”-manifestation of an intention to K—words or conduct showing commitment. Would a reasonable person in the position of the offeree believe that his assent creates a K? 2. Specific probs to watch for: a. Gen rule: offier is notrequired to contain all material terms. (Offer + acceptance must be “reasonably certain” test—basis for determining existence and breach.) b. Prob: missing price term in sales K’s. 1) C/L Rule: for sales of real estate, offer must state the price term 1

CA Bar Contracts

2) UCC Rule: for sales of goods, offer need not state price if parties so intend c. Prob: vague or ambiguous material terms are not “offers” for both UCC and C/L 1) Key language: If offer contains words “appropriate, fair or reasonable,” then no offer under UCC or C/L. d. Prob: Requirements K’s/Output K’s: K for the sale of goods where amount to be delivered under the K in terms of the buyer’s requirements or seller’s output in terms of exclusivity 1) Key language: if buyer commits to buying “all, only, exclusively or solely,” his goods from this seller, then it’s a valid offer and is not ambiguous or vague 2) Rule: Increase in requirements: buyer can increase requirements so long as the increase is in line w/ prior demands and is not an unreasonably disproportionate increase. (50%+ increase is invalid) 3. Context a. Gen Rule: ads are not “offers” b. Exceptions: it can be an offer if: 1) Rewards 2) Ad = offer if it is specific as to quantity and expressly indicates who can accept. (Ex: Dept Store: 1 fur coat, $10—first come, first served) B. Termination of Offers 1. An offer cannot be accepted if it has been terminated. An offer that has been terminated is “dead.” 2. Lapse of Time a. Rule: Time stated or reasonable time has elapsed b. Tip: If bar prob tells you when offer was made and time of response to the offer, then it may be a lapse of time prob 3. Death of a Party Prior to Acceptance a. Rule: on the death or incapacity of either party after the offer but before acceptance, terminates the offer b. Exceptions 1) Option 2) Part performance of offer to enter into unilateral K 4. Words/Conduct of Offeror = Revocation of an Offer a. Only offeror can revoke. b. How an offer is revoked: 1) Unambiguous statement or conduct by offeror to offeree of unwillingness or inability to K, that offeree is aware of 2) Offeree must be aware of the revocation; if no awareness, there is no revocation 3) Rule: Making multiple offers to diff people isn’t by itself a revocation of earlier offers. But if one of the persons accepts, then offeror must inform all the other offerees. c. When revocation becomes effective 1) Revocation of an offer through the mail  effective upon receipt 2) Can’t revoke after acceptance d. Which offers are irrevocable: 1) Generally, offers can be freely revoked by the offeror. 2) Option: offer cannot be revoked if the offeror has not only made an offer but also i) has promised to keep the offer “open” and ii) promise is supported by consideration. After option has expired, the offer can still be accepted until offeror revokes. 3) UCC Firm Offer Rule: an offer cannot be revoked for up to 3 months if: (i) offer for sale of goods, (ii) signed written promise to keep offer open and (iii) party/offeror is a merchant (generally a person in business or business experience). Unlike options, the Firm Offer Rule requires a promise to hold open but no consideration required. 2

CA Bar Contracts

A) 3 months is a ceiling. A writing that states 6 months will be scaled back to 3. A writing that gives no time frame will be fixed by the court for a reasonable period, not to exceed 3 months. Can be expressly written as less than 3 months though. 4) Through reliance: offer cannot be revoked if there has been (i) reliance that is (ii) reasonably foreseeable and (iii) detrimental 5) Unilateral K Rule: the start of performance pursuant to an offer to enter into a unilateral K (K’s that can only be accepted by performance) makes that offer irrevocable for a reasonable time to complete performance. A) Mere preparation rule: w/ unilateral K’s, mere preparation to perform isn’t enough to tender performance and make the offer irrevocable. But mere preparation also isn’t reliance unless it’s detrimental reliance. 5. Words/Conduct of Offeree = Rejection a. Counteroffer 1) Rule: always kills original offer and becomes a new offer. Offeree cannot go back and try to accept original offer. 2) Bargaining is not a counteroffer; A) Bargaining vs counteroffer: if the response is a question, then bargaining. If response is a statement, then counteroffer. b. Conditional Acceptance 1) Rule: kills original offer and becomes the new offer. 2) Key language: “if,” “only if,” “provided that,” “so long as,” “but” or “on condition that…” c. C/L Mirror Image Rule 1) Rule: a response to an offer that adds new terms is treated like a counteroffer rather than an acceptance. Response must be the mirror image of offer. Counteroffer must be accepted to create K. Original offer is no longer a “live” offer. d. UCC 2-207/Additional Terms 1) Fact Pattern: offer to buy/sell goods + response which adds terms: raises two q’s: A) Is there a K? B) What are its terms? 2) Step 1: Is there a K? A) Yes: if response adds new terms but does not make the new terms a condition of acceptance (“seasonable expression of acceptance”). Go to Step 2 B) No: if response adds new terms and makes them conditions to acceptance  then this is a conditional acceptance and doesn’t create an express K. So check if the conduct of the parties indicates that there is an implied K. C) NB: whether parties are merchants doesn’t matter at this stage 3) Step 2: Are the additional terms part of the K? A) If at least 1 party is not a merchant  additional term is merely a proposal that is to be separately rejected or accepted B) If both parties are merchants  additional terms are part of the K, unless: 1) Additional term materially alters the offer 2) Additional term is not part of the K b/t merchants if the offeror objects to the change C. Acceptance of an Offer 1. Methods of Accepting a. Improper verbal response to an offer then later conduct indicating a K 1) C/L Rule: treat this conduct as acceptance of a counteroffer. 2) UCC 2-207(3): treat this as a K based solely on conduct of S and B. K is limited to the terms on which they had both agreed to and appear in both communications. 3

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b. Offeree fully performs 1) Fact Pattern: there is a verbal offer + no words in response + response is full performance. 2) Rule: Full performance is acceptance but offeror must know that performance has occurred. Thus offeree has a duty to give notice based on either what offer requires or whether offeree has reason to believe that offeror will not learn of the acceptance (ie when events are occurring in two diff states.) If offeror cannot reasonably learn of full performance, then offeror is excused from paying offeree who performed. c. Offeree starts to perform 1) Fact pattern: verbal offer + no words in response + start of performance 2) Rule: Start of performance is acceptance of a bilateral K. But it’s not an acceptance if unilateral K. Unilateral K’s require acceptance by full performance, not partial performance. A) Unilateral K’s: Offers requiring performance as acceptance, and not a promise to perform, are treated as requiring complete performance. But start of performance will obligate the offeror to not revoke before completion whereas offeree is free to not complete performance. d. Words of promise 1) Fact Pattern: words of offer + words of acceptance + but no performance 2) Rule: generally mere promise to perform = acceptance e. Mailbox Rule 1) Fact Pattern: 2 people trying to make a deal but aren’t dealing face-to-face + communicating using methods that involve delays in communications + conflicting communications 2) Rule: all communications other than acceptance, (like a revocation) are effective only when received 3) Rule: acceptance is generally effective when made 4) Rule: if a rejection is mailed before the acceptance is mailed, then neither is effective until received 5) Rule: you cannot use the mailbox rule to meet an option deadline and say that acceptance is effective when made f. Seller of goods sends the “wrong” goods 1) Acceptance + sending wrong goods = acceptance of K and breach 2) Rule: if buyer orders one thing and seller sends something else, then you treat that as an acceptance of the K and breach by the seller. A) Exception: if seller sends the wrong stuff + explanation and attempt to accommodate the buyer, then treat that as not a K and not a breach, but rather a counteroffer. 2. Who can accept? a. Rule: offer can be accepted only by: 1) Someone who knows about the offer A) Ie, in reward cases, if you returned the dog and then later learned of the reward, you cannot collect the reward 2) Who is the person to whom it was made b. Offers cannot be assigned to others. c. But options can be assigned unless the option agreement otherwise provides. Overview: Formation and Reasons Not to Enforce A. Lack of consideration or a consideration substitute for the promise at issue B. Lack of capacity of the person who made the promise C. Statute of frauds D. Existing laws that prohibit the performance of the agreement E. Public policy 4

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F. G. H. I. J. K.

Misrepresentations Nondisclosure Duress Unconscionability Ambiguity in words of agreement and Mistakes at the time of the agreement as to the material facts affecting the agreement

Lack of Consideration A. Approach: 1. ID the promise maker and the promise breaker, ie who is not doing what they promised to do 2. Did the promise breaker ask for something in return, ie bargained for something 3. Did the other person sustain a legal detriment? B. Forms of consideration: 1. Performance (of something not legally obligated to do) or promise to perform 2. Forbearance (of something that you’re legally entitled to do) or promise to forbear C. One promise can be consideration for another promise. 1. Illusory promise: “I make a promise to sell unless I change my mind” ≠ consideration D. Adequacy of consideration is irrelevant. Don’t look at amount of consideration. E. “Past Consideration” 1. Rule: generally not considered consideration 2. Exceptions: a. Express request that someone do something + the act + later promise to pay = proper consideration F. Pre-Existing Duty Rule: 1. C/L: doing what you’re already legally obligated to do isn’t new consideration for a new promise to pay you more to do merely that. a. Exception: adding to or changing performance w/ new consideration is ok b. Exception: unforeseen difficulty so severe as to excuse performance + consideration to do something anyway is ok c. Exception: third party promise to pay or give new consideration for pre-existing duty is ok 2. UCC a. New consideration isn’t required to modify sale of goods K’s. Changing an existing K in food faith is ok. G. Part payment for consideration for release 1. Ie, promise to forgive balance of debt in exchange for some consideration. 2. Rule: if debt is due and undisputed, then part payment is not consideration for release. 3. Rule: if the debt is not yet due or there is disputed debt, then part payment can be consideration for early release from the debt D. Consideration Substitutes 1. Seals: now not a consideration substitute 2. A written promise to satisfy an obligation for which there is a legal defense is enforceable w/o consideration. a. Hypo: an existing obligation is no longer enforceable b/c SoL expired. But the person who is excused by the SoL sends a new written promise to pay. This is not new consideration for a new promise, however the new agreement can be enforced. 3. Promissory Estoppel a. Elements: 1) Words of promise 2) Reliance that is reasonable, detrimental and foreseeable 3) Enforcement is necessary to avoid injustice Defendant Promissor’s Lack of Capacity 5

CA Bar Contracts

A. Who lacks capacity to contract: 1. Infant—under 18 2. Mental incompetence 3. Intoxicated persons—if other party has reason to know B. If promissor has a lack of capacity, then he can disaffirm the K and his obligations. But if promissor does perform, despite his lack of capacity, he can still enforce the K. Only D’s capacity or lack thereof matters; P’s capacity doesn’t matter. C. Ratification: if D lacks age capacity but makes agreement, and then reaches age 18 and has kept the benefits of the K w/o complaint, P-Seller can now sue to enforce the agreement. D. Quasi-K Liability for Necessities: a person who lacks capacity never has contract liability, not even for necessities. But the person lacking capacity still has an obligation to pay the reasonable value of the benefit conferred for the necessities. Statute of Frauds Defense A. Purpose: concerned w/ people making fraudulent claims for enforcing a K when it didn’t exist. SoF thus requires more proof, incl. writings. B. SoF Defense: Defense to enforcement if it’s supposed to be w/in the SoF and isn’t satisfied; if he admits to the existence of a K in his pleadings, testimony etc, then court will ignore the SoF issue and infer a K to the extent of the admissions. C. Vocab 1. “within the SoF”—SoF covers it or it’s subject to the SoF? 2. Has the SoF been satisfied? --Assuming you are in the SoF, has it been satisfied? 3. Is there an SoF defense to the enforcement of a K? D. K’s Within the SoF: (must be in writing to be enforced) 1. Guarantee or Suretyship: a promise to answer for the debts of another a. Cts have read this phrase to limit it to guarantees if the primary promisor fails to pay b. Main purpose exception: if the main purpose of this debt that was guaranteed was to benefit the guarantor, then doesn’t fall in the SoF 2. Promise by an estate representative to pay estates’ debts out of their own funds a. It’s so unusual for the estate rep to incur any kind of personal obligation, that we’re concerned about fraud. 3. Promises in consideration of marriage a. Not merely a promise to marry but rather a promise to do something or refrain from doing something if we marry will fall w/in SoF (prenups and postnups) b. Don’t need SoF for just an alleged promise to marry 4. Service K’s that are not “capable” of being performed w/in 1 year from the time of the K (ie, it’ll take more than one year to perform) a. Rule: a promise that by its terms cannot be performed w/in 1 year is subject to the SoF: 1) Time runs from date of agreement, not date of performance 2) Ex: A enters into employment K on March 15, 2003 and agrees to work from April 2, 2003 until March 31, 2004. Agreement must be in writing. b. If the K has a specific time period of more than 1 year, then SoF applies 1) Test: is there any conceivable way that the K could be completed in 1 year, w/ unlimited resources? If so, then SoF not necessary 2) Tip: prob will give two days that are more than 1 year apart, SoF applies c. K’s not within the statute: 1) SoF never applies to “tasks” where nothing is said about time, b/c they can conceivably be completed in under one year. 2) Hiring someone to “work for the rest of their life,” ie lifetime deals are never an SoF prob 5. Interests in real estate 6

CA Bar Contracts

a. Transfers include sales, leases, easements on land, fixtures, mortgages and other security liens b. Exception for leases of 1 year or less—writing not necessary c. NB: if the seller conveys to the purchaser (ie, fully performs), the seller can enforce the buyer’s oral promise to pay d. NB: part performance doctrine: conduct (ie partial performance) that unequivocally indicates that the parties have contracted for the sale of the land will take the K out of the SoF. Most jurisdictions require two of the following: payment (in whole or in part), possession, and/or valuable improvements. 6. Sale of goods for $500 or more a. Generally requires a writing b. Exceptions: 1) Specially manufactured goods + substantial beginning on their production  oral K can be enforced 2) Written confirmation of an oral agreement b/t merchants unless objecting merchant objects w/in 10 days of receiving the confirmation 3) Admission in pleadings or court that a K for goods existed  K is enforceable 4) Partial payment or delivery made and accepted  K is enforceable to the extent of the goods received and accepted E. How is the SoF satisfied? 1. If SoF defense is asserted and established, there is no legally enforceable agreement and no K liability. 2. Types of Q’s: a. Is the SoF satisfied? b. Is there an SoF defense? c. Is there K liability? 3. Elements: a. Performance (in lieu of writing) b. Writing c. Judicial Admission 4. Performance a. Performance can satisfy the SoF. b. Performance and Service K’s 1) Full performance by either party takes K out of the SoF 2) Partial performance of a services K doesn’t satisfy the SoF c. Sale of Goods K’s 1) Rule: seller’s partial performance of a K for the sale of goods but only to the extent of the part performance. A) Delivered goods: SoF has been satisfied B) Undelivered goods: there is an SoF defense C) Specially manufactured goods: if seller has made a “substantial beginning” on the custom manufacturing of made-to-order/custom goods, then SoF has been satisfied 2) Rule: Buyer’s part performance (ie payment) on multiple items, SoF will be satisfied to the extent of the part performance 3) Rule: Buyer’s part performance (ie payment) on a single item, partial performance satisfies the SoF 5. Writing a. Not every writing will satisfy the SoF and the SoF can be satisfied by performance. b. All Material Terms Test for Writings: Who is a party to the K and what have all the parties agreed to? c. Rule: the writing has to be signed at least by the person asserting the SoF defense 7

CA Bar Contracts

1) Tip: watch out for 2 parties, where only 1 person signs but it’s the other person asserting the SoF defense d. UCC SoF Rule: look at contents of the writing and who signed the writing; writing must indicate that there is a K for the sale of goods and contain the quantity term. Price term need not be stated, though price is important to determine whether it’s an SoF prob. 1) Merchant Failure to Respond Rule: if both parties are merchants, and the person receives a signed writing w/ a quantity term that claims that there is a K, fails to respond w/in 10 days, the failure to respond satisfies the SoF 6. Judicial Admission: to the extent that the party sought to be charged, admits in his pleadings, testimony or otherwise that a K did in fact exist, the Statute doesn’t apply, at least to the extent of the admission F. Other uses for the SoF 1. Authorization to enter into K for someone else a. Rule of law requires that if the contract to be signed is within the SoF, then there must be written authorization to sign the K for someone else 2. Contract Modification a. If the deal w/ the alleged change would fall within the SoF, then the modification agreement must be in writing. b. At C/L, a written K provision stating that K modifications must be in writing is ineffective. Parties may alter their agreement orally in spite of such provisions as long as the modification is otherwise enforceable (ie supported by consideration, not w/in the SoF.) c. Sale of Goods Rule: UCC contract provisions requiring written modifications are effective unless waived; waiver is fact-specific. Other reasons: illegality, public policy, misrepresentation, non disclosure and duress A. Illegality 1. Illegal subject matter vs illegal purpose 2. Illegal subject matter: agreement is not enforceable 3. Illegal purpose: 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 B. Public Policy 1. Cts can refuse to enforce an agreement b/c of public policy. 2. Tip: look for an exculpatory agreement (person seeks to contract away future liability) that exempts intentional or reckless conduct from liability. C. Misrepresentation 1. False assertion of fact that induces the K. No wrongdoing is required for misrepresentations. 2. Even if the person making the assertion “honestly” or “innocently” believes his (mis)representation, under K law, the other party can sue for breach. But for honest and innocent misrepresentations, the remedy is just rescission of the K. 3. Wrongful nondisclosures (ie intentional or affirmative misrepresentation or wrongful withholding of information) can lead to an action for breach. Remedy can be rescission. D. Duress 1. Physical 2. Economic duress: a. Improper threat to breach an existing K b. Need a “bad guy” and a “vulnerable guy” c. NB: is an evolving legal concept so bar exam q’s will be relatively straightforward. Unconscionability A. Is always tested as of the time the agreement was made. 8

CA Bar Contracts

B. Allows a court to refuse to enforce all or part of an agreement; always a q of law, never decided by a jury. C. Test: unfair surprise (procedural) D. Test: oppressive terms (substantive) Ambiguity in Words or Agreement A. There will be no K if: 1. Parties use a material term that is open to at least 2 reasonable interpretations 2. Each party attaches a diff meaning to the term and, 3. Neither party knows or has reason to know the term is open to at least 2 reasonable interpretations B. What if party A (but not B) knows that there are 2 reasonable interpretations? Then interpret the K according to B’s understanding. Mistake of Fact Existing at the Time of K A. This is diff from misrepresentations, which always contains a statement from one party to the other that just isn’t correct. 1. Mistake occurs when one party reaches an incorrect belief not based on what the other party said or what the K said. 2. Misunderstanding is based on the words on the K. B. Mutual Mistake of Material Fact (Rose of Abelone) 1. There will be no K if: a. Both parties are mistaken, and b. Basic assumption of fact and c. It materially affects the agreed exchange and d. It’s not a risk that the party trying to get out of the deal bears 2. It turns on the facts and the wording of the q. 3. If the mistake is about the value of the thing being transacted, that would not be a basic and material mistake. 4. Hypo: S contracts to sell Blackacre to B. Both believe the land is suitable only for farming. S then learns that the land contains valuable mineral deposits. Can S rescind? No!! C. Unilateral Mistake 1. Generally, cts are reluctant to allow a party to avoid a K for a mistake made by only one party. 2. Tip: look for situations in which the other party had reason to know of the mistake, ie palpable mistake. Part 3: Terms of the Contract Parol Evidence Rule A. Overview 1. Treat this as an evidence question. 2. It’s always about the admissibility of evidence and the purpose for which it’s being introduced 3. Key: idea is that the final written version of a deal is more reliable than anything said or written earlier. The essence of the parol evidence rule is the exclusionary effect of written K on earlier (or contemporaneous) agreements as a possible source of terms of the K. B. Vocab 1. Integration: a written agreement that ct finds is the final agreement  triggers the PER a. Partial integration: written and final, but not complete b. Complete integration: written and final and complete 9

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c. NB: these are generally wrong answers b/c for most purposes, it’s totally irrelevant as to whether the integration is partial or complete. What matters is whether there’s integration or not. 2. Merger Clause: K clause such as “This is the complete and final agreement” strengthens presumption that all negotiations are in the writing. 3. Parol Evidence: a. Words of party (or parties), b. Occurring before integration, ie before agreement was put in written form c. Oral or written 4. Reformation: equitable action to modify written K to reflect actual agreement C. Triggering facts: 1. Written K that court finds is the final agreement, and 2. Oral statements made at the time the K was signed OR earlier oral or written statements by the parties to the K. D. Parol evidence fact patterns: 1. Contradicting the written deal a. Rule: PER prevents a court from admitting evidence of earlier agreements for the purpose of contradicting the terms in the written K. b. Rule: A court may consider evidence of such terms for the limited purpose of whether there was a mistake in integration, ie a mistake in reducing the agreement in writing or some kind of clerical error. 2. Getting out of a written deal a. Rule: PER doesn’t prevent a court from admitting evidence of earlier words of the parties for the limited purpose of determining whether there is a defense to the enforcement of the agreement such as misrepresentation, fraud or duress 3. Explaining terms in the written deal a. Rule: PER does not prevent a court from admitting evidence of earlier agreements to resolve ambiguities in the written. Inadmissible to contradict terms in the K. 4. Adding to the written deal a. Rule: PER prevents a court from admitting evidence of earlier agreements as a source of consistent, additional terms unless the court finds: 1) Written agreement was only a partial integration or 2) That the additional terms would ordinarily be in a separate agreement E. Comparing PER and the SoF 1. SoF probs are triggered by: absence of a writing 2. PER probs are triggered by: superior reliability of a written agreement Conduct and Course of Performance A. Conduct can also be a source of K terms. 1. Tip: such conduct takes one of three forms; a. Course of performance b. Course of dealing c. Custom and usage 2. Order matters, performance > dealing > custom and usage B. Course of Performance 1. Same people, same K 2. Base K terms on what has been done by these people under this K C. Course of Dealing 1. Same people, diff but similar K 2. Is less persuasive than course of performance D. Custom and Usage 1. Diff but similar parties, diff but similar K’s 10

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2. Is less persuasive than course of dealing UCC for Terms in Sales of Goods K’s (give “default” terms) A. Offers default terms in the absence of specification by parties B. Delivery obligations of Seller of Goods if Delivery by Common Carrier 1. If there is an agreement to deliver by a common carrier, q is what does the seller have to do to complete its delivery obligation? 2. Type 1: Shipment K’s: a. Seller completes its delivery obligation when i) it gets its goods to the common carrier and ii) makes reasonable arrangements for delivery, and iii) notifies the buyer; seller’s obligation are complete before delivery is complete. b. Tip: most common on bar 3. Type 2: Destination K’s a. Seller completes his delivery obligation when the goods arrive where the buyer’s at 4. Distinguishing Shipment K’s from Destination K’s: a. Most contracts w/ delivery obligations are shipment K’s b. Free on Board (city) where seller is or where goods are = shipment K c. FOB (any other city) = destination K C. Risk of Loss 1. Risk of loss arise where: a. After the K has been formed but before the buyer receives the goods b. The goods are damaged or destroyed c. Neither the buyer nor the seller is to blame 2. Rule: if the risk of loss is on the buyer, he has to pay the full K price for the lost or damaged goods. If the seller has the risk of loss, no obligation on the part of the buyer. a. NB: possible liability on seller for nondelivery. 3. RoL Rules: a. Agreement of the party controls b. Breach: breaching party is liable for any uninsured loss even though breach is unrelated to the problem. c. Delivery by a common carrier other than the seller: risk of loss shifts from seller to buyer at the time that the seller completes its delivery obligation d. No agreement, no breach, no delivery by a carrier: is the seller a merchant? Whether the buyer is a merchant is irrelevant. 1) Risk of loss shifts from the merchant-seller to the buyer on the buyer’s receipt of the goods. 2) Risk of loss shifts from a non-merchant seller when he or she “tenders” the goods. D. Warranties of Quality 1. Express a. A statement of fact or a promise, made by the seller. b. Sales talk and opinion are not warranties. c. Example: 1) “all steel”—warranty 2) Showing buyer a sample: is a warranty by conduct 2. Implied warranty of merchantability a. Def: refers to a “merchant” who is in the business of selling goods of this kind. b. Warranty arises by operation of law and applies to merchants who is in the business of selling goods of that kind c. Warranty: must be “fit for ordinary purposes” 3. Implied warranty of fitness for a particular purpose a. Fact pattern: B has a particular purpose and is relying on S to select suitable goods. Seller has reason to know of purpose and reliance. 11

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b. Tip: q will tell you why product is being bought c. Warranty: goods fit for a particular purpose 4. Privity: Horizontal and Vertical a. Traditional requirement of K law; only refers to warranty issues b. Vertical b/t: Mfr  Wholesaler  Retailer  Customer c. Horizontal b/t: Customer  spouse  neighbor  bystander 1) Refers to suit b/t mfr/wholesaler/retailer and someone other than the customer E. Contractual limitations on warranty liability 1. Disclaimers a. K provision that eliminates implied warranties: 1) General language of disclaimer; must be conspicuous language mentioning merchantability (must be diff font or size) 2) Language: “as is” or “with all faults.” b. Express warranties generally cannot be disclaimed 2. Limitation of remedies a. Does not eliminate warranties but limits or sets recovery for any breach of warranty; affects remedies b. It’s possible to limit remedies for express warranties. c. General test: unconscionability d. Prima facie unconscionable if breach of warranty on consumer goods causes personal injury Part 4: Performance Sale of Goods Performance Concepts A. Perfect Tender 1. Only applies to sales of goods 2. Def: seller’s performance must be perfect 3. Generally, a less than perfect tender by the seller gives the buyer the option of rejection of the delivered goods. B. Rejection of the Goods 1. Rejection of goods vs rejection of offer a. Goods: occurs after K b. Offer: results in no K 2. If seller does not meet perfect tender std, the buyer has the option to retain and sue for damages OR reject “all or any of the commercial unit” and sue for damages. 3. NB: Cure, Installment K’s and Acceptance of Goods limit the perfect tender rule. C. Cure 1. A seller who fails to make perfect tender will be a given a second chance the option to cure the defect. The seller doesn’t always have the opportunity to cure and the buyer cannot compel the seller to cure. 2. Fact Pattern: seller had reasonable grounds to believe that it’d be ok to deliver something that was less than perfect. Look for info about prior deals w/ such an allowance. 3. Fact Pattern: time for performance has not yet expired so S can cure before deadline. Look for stated deadlines and S sold the wrong stuff before the deadline. D. Installment K’s 1. Requires or authorizes: a. Delivery of the goods in separate lots b. To be separately accepted. Buyer has the right to reject an installment that can’t be cured only where there would be substantial impairment. 2. This is a K that provides for multiple deliveries w/ multiple payments. This is diff from buying something on credit and paying for it in installments. 12

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3. Substantial impairment test: if imperfect tender would result in substantial impairment, then buyer can reject. This doesn’t require perfect tender by the seller. E. Acceptance of the Goods 1. Rules: a. If the buyer has accepted the goods, he cannot later reject them. b. Payment: payment w/o opportunity to inspect is not acceptance c. Buyer must keep the goods w/o objection 2. Tip: look for fact pattern where B first received goods and then later complains to S; rule of thumb is that 1 month+ of acceptance means that B can no longer reject. (Though B may be able to revoke acceptance.) F. Revocation of Acceptance of the Goods 1. Rule: if a buyer accepts the goods, he cannot later reject the goods but in limited circumstances, a buyer can cancel the K by revoking his acceptance of the goods, if: a. Nonconformity substantially impairs the value of the goods, and b. Excusable ignorance of grounds for revocation or reasonable reliance on seller’s assurance of satisfaction, and c. Revocation w/in a reasonable time after discovery of noncomformity 2. Watch out for acceptance rule vs revocation of acceptance rule. G. Comparison of Rejection of the Goods and Revocation of Acceptance of Goods 1. See p. 44 2. Buyer vs seller—depends on what’s at issue C/L Performance Concepts A. In a sale of goods K, if the seller makes a perfect tender, then the buyer must perform by paying the contract price. B. At C/L, there is no “perfect tender” concept. If one party substantially performs, then the other party must pay or otherwise perform. Part 5: Remedies for an Unexcused Nonperformance Nonmonetary Remedies (in rem) A. Specific Performance/Injunctions 1. Is an equitable remedy (is gen wrong on the bar) 2. Focus on: a. Adequacy of remedy at law, or b. Unclean hands, or c. Other parties’ equities 3. Rules: is allowed for: a. Occurs primarily for K’s of real estate b. K’s for sale of goods: unique goods (antique, work of art or custom made) or other appropriate circumstances 4. Rule: no S/P for contracts for services (incl. labor K’s) though possible injunctive relief a. Court has the discretion to grant injunctions (or negative S/P) to bar D from doing what he was supposed to do for P B. Reclamation 1. Right of an unpaid seller to get the goods back. Comes up when: a. B must have been insolvent at the time it received the goods b. S demands return goods w/in 10 days of receipt 1) NB: the 10-day rule becomes “reasonable time” if before delivery, there had been an express representation of solvency by B c. B still has the goods at the time of demand 2. 10 Day Rule: starts running from the date that B receives the goods. 13

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3. If B sells the goods before the right to reclamation is asserted, then S cannot reclaim. C. Entrustment 1. If an owner leaves her goods w/ a person who sells goods of that kind and that person wrongfully sells the goods to a third party, then such a good faith purchaser from dealer cuts off rights of the original owner/entruster. Original owner cannot get the goods back b/c it was her choice to entrust to the seller in the first place. 2. But if the sale is due to theft, then original owner can recover the goods b/c can’t transfer bad title. Money Damages: for Breach of K—General Concepts A. Policy: compensate the P, don’t punish the D B. Vocab: 1. Expectation 2. Reliance 3. Restitution 4. Incidental 5. Consequential 6. Avoidable 7. Liquidated C. Expectation Damages 1. All CA money damages rules are premised on protecting P’s expectation interests. 2. Expectation interest: put P in the economic position as if the K had been performed—ie compare money value of D’s performance w/o breach with value of D’s performance w/ the breach 3. Tip: Use expectation damages unless expressly told otherwise. D. Reliance 1. Put P in the same economic position as if the K had never happened 2. “Protecting the reliance interest” E. Restitution 1. Pay P by putting D in the same economic position as if the K had never happened. 2. The money goes to P but you focus on what D got in determining how much P can recover. Look at how much D benefitted from the K. F. Damages Rules for Sales of Goods 1. All of Part 7 of Article 2 are premised on expectation damages. 2. Seller breaches, buyer keeps the goods a. Rule: fair market value if perfect less fair market value as delivered 3. Seller breaches, seller has the goods a. Rule: market price at time of discover of the breach less the contract price or replacement price less the K price 4. Buyer breaches, buyer keeps the goods a. Rule: B owes the K price to S 5. Buyer breaches, seller keeps the goods a. Rule: K price less market price at the time/place of delivery, or b. Rule: K price less resale price c. And in some cases, provable lost profits 6. Lost profits for lost volume seller a. S breaches and keeps the goods and now B is out of the goods and resulting profits he would’ve made on the resale of those goods. b. B can recover the value of provable lost damages. c. Tip: in #171 type probs (w/ provable damages), the S has regular inventory thus S can easily sell more but he instead sells to C what he had contracted to sell to B. G. Additions and Limitations 14

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1. Incidental Damages a. Rule: are costs incurred in finding replacement performance (not the additional costs of replacement)—always recoverable 2. Consequential Damages a. Rule: the kind of loss that is special to this P; arise from P’s special circumstances and recover is limited to the situations where D had reason to know of these special circumstances at the time of the K. b. Tip: the special circumstances will be given to you in the fact pattern and the breaching party will know about these special circumstances 3. Avoidable Damages a. Rule: no recovery for damages that could’ve been avoided w/o undue burden on P. Burden of pleading and proof on D. 4. Certainty limitation a. Rule: damages must be proven w/ reasonable certainty—very much a fact question. b. Tip: look for fact patterns involving a new business or a new business activity where damages might lack certainty. c. Tip: if can’t prove expectation damages w/ reasonable certainty, might be able to nonetheless recover reliance or restitution damages. 5. Liquidated Damages a. Rule: if the K fixes the amount of damages, the issue will be validity. The concern is that it might be too high, especially since the court can only compensate and not punish w/ punitive damages. b. Tests for the validity of liquidated damages: 1) Were damages difficult to forecast at the time the K was made? 2) Is it a reasonable forecast? Part 6: Excuse of Nonperformance Excuse B/c of Other Guy’s Improper Performance A. C/L and Material Breach Rule 1. Rule: Damages can be recovered for any breach. 2. Rule: Only a material breach by one party excuses the other guy from performing. 3. Rule: Whether a breach is material or not is a fact q (and thus unlikely to be a bar q) 4. Rule: if there is substantial performance, then the breach is not material. If the breach is material, then the performance was not substantial. 5. Tip: “substantial performance” usually entails finishing at least 51% of the job; “material breach” will usually entail finishing less than 50% of the job. 6. Divisible K Exception: in a “divisible K,” there can be a contract law recovery for substantial performance of a divisible part even though there has been a material breach of the entire K. a. Tip: look for whether the price term is stated as a lump sum or on a per performance basis. Look for materiality on a per unit basis. B. Article 2 and Perfect Tender Rule 1. Rule: instead of the material breach rule, for sales of goods, the perfect tender rule is required. Excuse B/c of Non-occurrence of a Condition A. “Condition” 1. A mutually agreed upon promise modifier. It is language in the K—not just language in response to an offer—that doesn’t create a new obligation but instead limits the obligations created by other language in the K. 2. Key language: a. If 15

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b. Only if c. Provided that d. So long as e. Subject to f. In the event that g. Unless h. When i. Until j. On the condition that k. In the K B. Std for whether a condition has been satisfied—strict compliance is necessary to “satisfy” a condition C. How can a condition be excused? 1. If the condition doesn’t occur at all, all remaining contract obligations are excused. 2. Sometimes however, even the occurrence of the condition is excused; thus even if the condition didn’t occur, all remaining contract obligations are not necessarily excused. 3. Waiver/Estoppel a. Estoppel: statement by person protected by the condition before the conditioning event was to occur and requires reliance by the other person. b. Waiver: based on a statement by the person protected by the condition after the conditioning event was to occur and doesn’t require reliance. 4. Prevention a. If the party protected by the condition hinders or prevents the occurrence of the condition, then the condition is excused and the K must be performed.l 5. Avoidance of forfeiture: cts will sometimes excuse the non-occurrence of a condition in order to avoid excessive harm to the party not protected by the condition. Excuse of Performance b/c of Other Party’s Anticipatory Repudiation A. Rule: anticipatory repudiation is an unambiguous statement or conduct indicating that: 1. The repudiating party will not perform 2. Made prior to the time that performance was due B. Generally excuses the other party’s duty to perform and also generally gives rise to an immediate claim for damages for breach, unless the claimant has already finished performance. C. If after anticipatory repudiation occurs and the party w/ the claim continues to perform, then he’ll be unlikely to recover as he’s may be running up avoidable damages to increase his recovery. D. If O and P contract w/ a deadline for payment, and P finishes performance before that deadline date and then O repudiates his obligations, P has no cause of action until the deadline comes up. (If P had partially performed and then O anticipatorily repudiated, then P’s claim would rise immediately) E. Anticipatory repudiation can be reversed or retracted or withdrawn so long as there has not been a material change in position by the other party. If the repudiation is retracted in a timely fashion, the duty to perform is re-imposed but performance can be delayed until adequate assurance will be provided by the once-repudiating party. F. Tip: conduct can also be anticipatory repudiation. For example, if two parties exchange a service for a unique photo, and the unique photo is sold to a third party, the party who promised to perform the service is excused as the selling of the photo = anticipatory repudiation. Insecurity A. Anticipatory repudiation requires an unambiguous statement or conduct that a party will not perform. But if the words or conduct merely make performance uncertain, then: 1. Other party has reasonable grounds for insecurity and 2. can in writing demand adequate assurance and 16

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3. if it’s commercially reasonable, can suspend performance until it gets adequate assurance Excuse by Reason of a Later K A. Rescission (cancellation) 1. Key: rescission must occur before either party has finished performance. Rescission not valid if it occurs after one party has tendered performance. B. Accord and Satisfaction (substitute performance) 1. Terms a. Accord: an agreement by the parties to an already existing obligation to accept a diff performance in satisfaction of the existing obligation b. Satisfaction: if the new agreement (the accord) is performed (satisfied), then performance of the original obligation is excused 2. Rule: if the new agreement is satisfied, then performance of the original obligation is excused. 3. Rule: If the accord is not performed, then the other party can sue on either the original obligation or the accord. C. Modification (substituted agreement) 1. Modification: an agreement by the parties to an existing obligation to accept a diff agreement in satisfaction of the existing obligation. 2. If the modification is not satisfied, there is no cause of action on the original agreement but rather, must be on the modified agreement. D. A + S compared to Contract Modification 1. To signal A + S  use “if. . . then” conditional language a. Breach of the changed K  action on the original K or the A + S 2. To signal K modification  no if/then statements a. Breach of the changed K  only action on the changed K, not original E. Novation 1. Def: an agreement b/t BOTH parties to an existing K to the substitution of a new party, ie same performance, diff party 2. Who is liable after novation? a. Novation excuses the contracted for performance of the party who is substituted or replaced 3. How is delegation diff from novation? a. Novation requires the agreement of both parties to the original K and excuses the person replaced from an liability on the original K. b. Delegation: does not require the agreement of both parties and does not excuse. Excuse of Performance by Reason of a Later, Unforeseen Event A. Performance of K duties (other than a contractual duty to pay money) can be excused under impossibility or impracticability or frustration of purpose, if: 1. Something that happens after K is made but before completion of performance 2. That was unforeseen, and 3. That makes performance impossible or commercially impracticable or frustrates the purpose of the performance (this is where the fight happens) a. Impossibility: cannot be done b. Impractical: can be done w/ extreme and unreasonable difficulty and expense c. Tip: bar will focus on whether there is any basis for excusing performance rather than the impossible/impractical distinction B. Damage or destruction of subject matter of K after K 1. Will excuse performance 2. Seller’s risk of loss and destruction of unique goods: will excuse S’s duty to perform 17

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3. Seller’s risk of loss and destruction of high inventory of goods: will not excuse S’s duty to perform b/c S can still perform w/o unreasonable or extreme costs to him 4. Buyer’s risk of loss and destruction after S had performed: doesn’t affect B’s ability to perform C. Death after K 1. Rule: generally, death does not make a person’s K obligations disappear—can still recover from the estate 2. If O and P contract but before either party even begins performance, one party dies, then it is permissible for the surviving party to find a replacement and then sue the estate for the difference in replacement costs. 3. Party to K who is a “special” person a. If one party to the K is a “special person” (ie, unique and irreplaceable in some sense), and that special person, then and only then does death excuse nonperformance. D. Subsequent law or regulation 1. Rule: If the later law or reg makes the K illegal, then the obligations are excused for impossibility. 2. Rule: if the later law or reg makes the mutually understood purpose of the contract illegal, then the parties are excused by frustration of purpose. Part 7: Third Party Problems Third Party Beneficiaries A. ID 3rd party beneficiary probs 1. 2 people make a K w/ the intent to benefit a third-party. a. ID a prob as a third party beneficiary (prob has to involve 3 people) b. Use the vocab of 3rd P beneficiary law c. Deal w/ efforts to cancel or modify a 3PBK d. Figure out who can sue whom e. Assert any available defenses 2. Most common: life insurance policies a. Promisor: insurance company b. Promisee: owner of the policy who pays premiums to the insurance company c. 3rd P beneficiary: the beneficiary of the life insurance policy 3. Vocab: a. 3rd party beneficiary: not a party to the K but can enforce the contracts that others made for her benefit b. Promisor: the person making the promise that benefits the 3rd party c. Promisee: person who obtains the promise that benefits the 3rd party d. Intended/incidental beneficiaries: only intended beneficiaries have K rights. Intent of parties to K determines whether intended or incidental. 1) Tip: on bar, the intended beneficiary will always be named in the contract. If the beneficiary is not named, then it’s incidental. e. Creditor/done: intended beneficiaries are either donees or creditors. Usually they are donees. 1) Tip: if the 3rdparty was already a creditor of the promisee, then he’ll be a creditorbeneficiary. Fact pattern would have to tell you that the promisee was already indebted to the 3rd party beneficiary B. Dealing w/ efforts to cancel or modify 1. Test: does the 3rdparty know of the K and has relied on it? If so, then the beneficiary’s rights have vested and the K cannot be cancelled or modified w/o her consent unless the K otherwise provides. C. Who can sue whom? 18

CA Bar Contracts

1. Beneficiary can recover from the promisor 2. Promisee can recover from promisor but the beneficiary and promise cannot both recover from the promisor. 3. Generally, beneficiary cannot recover from the promise. a. Tip: comes up most often on the bar exam. 3rd party only has K rights against the promisor. b. Limited exception: a creditor-beneficiary can recover from promisee but only on preexisting debt. D. Defenses 1. Rule: if the 3rdparty sues the promisor, the promisor can assert any defenses that he would have if he had been sued by the promisee. Assignment of Rights A. “Assignment”-a transfer of rights under a K in two separate steps; 1. K b/t only two parties 2. One of the parties later transfers rights under that K to a 3rd party B. Vocab 1. Assignor: party to the K who later transfers rights under the K to another 2. Assignee: not a party to the K. Able to enforce the K b/c of assignment. 3. Obligor: other party to the K C. Limitations on Assignment 1. Contract provisions a. Cts are reluctant to read K language as preventing assignments. Determine if the K: 1) Prohibits assignments or 2) Invalidates assignments b. Prohibition: It takes away the right to assign but not the power to assign. Thus if assignor asserts his “power” to assign: 1) Assignee who doesn’t know about the prohibition can still enforce the assignment. 2) Assignor though is still liable for breach of K to the obligor. c. Invalidation: takes both the right and power to assign so that there is a breach by the assignor if he attempts to assign. Assignee has no rights under the K. 1) Language: “all assignments of rights under this K are void.” 2. C/L a. Rule: even if the K doesn’t in any way limit the right to assign, C/L will bar an assignment that substantially changes the duties of the obligor. 1) Assignment of the right to receive payment  always a valid assignment b/c doesn’t change the obligor’s duty to pay 2) Assignment of the right to contract performance other than the right to payment  usually substantial change on the bar D. Requirements for Assignment 1. Generally, don’t need consideration. 2. Gratuitous assignments (and only gratuitous assignments) can be revoked. E. Right of Assignee 1. Assignee can recover from obligor 2. Assignor for consideration cannotrecover from obligor. Consideration isn’t generally required but if assignor gives consideration to assignee, assignor cannot collect from obligor. 3. Obligor has the same defenses against assignee as it would have had against assignor. 4. Payment by obligor (who doesn’t know about the assignment)to assignor is effective until obligor knows of assignment. Similarly, modification agreements b/t obligor and assignor are effective if the obligor did not know of the assignment that assignor made. if obligor 19

CA Bar Contracts

doesn’t know about the assignment, then his payment to assignor is not breach and remains effective; unknown assignee cannot “double collect” from obligor. 5. Implied warranties of assignor in an assignment for value a. In assignments for consideration, the assignor warrants: 1) The right assigned actually exists 2) The right assigned is not subject to any defenses by the obligor, and 3) The assignor will do nothing to impair the value of the assignment. b. Assignor does not warrant what the obligor will do. F. Multiple Assignments 1. Rule: if all are gratuitous assignments, then the last assignee in time generally wins. a. NB: such gift assignments can be freely revoked. Since a later gifting revokes an earlier gifting, the last one generally wins if they are all gratuitous assignments. b. Exceptions: A gratuitous assignment is not revocable if it is the subject matter of a writing delivered to the assignee, the assignee has received some notice of ownership or the assignee has relied on the assignment that is reasonable, foreseeable and detrimental, then assignment isn’t revocable and you don’t do the last in time rule. 2. Rule: first assignee for consideration wins. a. Very limited exception: a subsequent assignee takes priority over an earlier assignee for value only if he: 1) Doesn’t know of the earlier assignment, and 2) Is the first to obtain payment from obligor, judgment, a novation or indicia of ownership. Delegation of Duties A. Delegation: a party to a K transfers the obligation or duties to do the work under that K to a third party. 1. Delegating party: had promised to do the obligation 2. Delegatee: replaces as the new one to do the work 3. Obligee B. Relationship b/t assignment and delegation 1. Assignment: transfers rights 2. Delegations: transfers the obligations 3. Tip: bar uses assignment and delegation loosely C. Which duties are delegable 1. Rule: generally, contractual duties are delegable. 2. Are not permitted if: a. K prohibits delegations or prohibits assignments b. K calls for very special skills c. Person to perform K has a very special reputation 3. If K says: a. No assignment  then also no delegation b. No delegation  then also no assignment D. Nonperformance by the Delegate: what if the third party delegate doesn’t perform? 1. Fact pattern: K + delegation + nonperformance by delegatee 2. Rule: delegating party always remains liable 3. Rule: delegatee liable only if she receives consideration from delegating party a. Rule: if no consideration, obligee and delegating party cannot sue delegatee b. Rule: if yes consideration from delegating party to delegatee, then obligee or delegating party can sue delegatee.

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