Formation

UCC OR COMMON LAW?

UCC governs transactions in goods. Goods are defined as movable tangible objects. Goods includes growing crops and the unborn young of animals. Hybrid contract courts usually use a predominant factor test to determine if UCC applies

IS THERE AN OFFER?
An offer is a clear expression of contractual intent addressed to a specific offeree, which confers upon the offeree the power to create a contract though acceptance. An offer is distinguished from preliminary negotiations by the definiteness of terms, language used, and the context of the relationship between the parties. An advertisement can be an offer if the terms are clear, definite, explicit, and leave nothing open for negotiation.

WAS THE OFFER REQUIRED TO BE OPEN FOR A PERIOD OF TIME?

Options Contracts: Restatement 87 An offer is binding as an option contract if it is in writing signed by the offeror, and is supported by consideration. Firm Offers UCC 2-205 An offer by a merchant to buy or sell goods in a signed writing that states the offer will be held open, is binding as a firm offer for the time stated, or if not time is stated, for a reasonable time, not to exceed three months. Any such assurance on a form supplied by the offeree must be separately signed by the offeror.

Unilateral contracts in which the invited performance has commenced (implied option contract) Restatement 45 Where an offer invites acceptance by performance only, an option contract is created when the offeree begins the invited performance, or tenders a beginning of it. The offerors duty of performance under such an option contract is contingent on the completion of the invited performance. Reliance/Estoppel: Elements of Promissory Estoppel o A promise was made. o Promisor should reasonably expect that the promise would induce action or forbearance. o The promise did in fact induce the promissee's action or forbearance. o The enforcement of the promise is necessary to avoid an injustice.

WAS THE OFFER TERMINATED BEFORE ACCEPTANCE?

Lapse: An offerees power of acceptance expires at the times specified in the offer, or, if not time is specified, after a reasonable time. What is a reasonable time depends on the circumstances of the offer.

Revocation: An offerees power of acceptance terminates when the offeror manifests an intent not to enter into the proposed contract. An offerees power of acceptance terminates when the offeror takes definite action that is inconsistent with an intention to enter into the proposed contract, and the offeree acquires reliable information to that effect. Death of offeror: An offerees power of acceptance terminates upon the death or legal incapacity of the offeror.

Rejection

Outright: the offerees power of acceptance is terminated by his rejection. Counteroffer: The offerees power of acceptance is terminated by a counter-offer, unless a contrary intention is manifested by one of the parties.

ACCEPTANCE:
An acceptance is a definite expression of assent to the terms of the offer such that a binding contract is created. Mutual Assent: Objective standard; based on the outward manifestation of the parties as understood by a reasonable person.

Unilateral vs. Bilateral vs. Hybrid Contr act Offers: Unilateral Contract Offer: Acceptance by performance only; offeror becomes bound when offeree has begun to perform, and must give offeree reasonable time to complete performance. However, offeree is not bound even though performance has begun. Bilateral Contract Offer: Acceptance by return promise; both parties bound upon acceptance. If offeree begins to perform without making a return promise, this may be accepted by the offeror as an implied promise to perform, and both parties are thereby bound. Hybrid Contract Offer: Acceptance may be by return promise, or by performance. Both parties are bound by offerees commencement of performance, regardless whether offeror is aware that performance has begun. Content of Acceptance: Mirror Image Rule: The terms of the acceptance must match the terms of the offer; a response is not an acceptance if the offeree imposes conditions or seeks to change the terms of the offer. UCC 2-207: Applies to the sale of goods when additional or different terms appear in a written acceptance or conformation. Assuming there is a valid offer, establish whether there is a valid acceptance, and then analyze as to compliance with the mirror image rule. If acceptance or confirmation does not conform to mirror image rule, is it definite, seasonable, and not expressly conditioned on the offerors

agreement to the additional or different terms? If not, 2-207(3) applies. If there is a valid acceptance, 2-207(2) applies.

2-207(2) provides that additional terms are proposals, and do not become part of the contract, unless both parties are merchants. Between merchants, the additional terms do become part of the contract, unless: o they materially alter the terms of the contract; o the offer expressly limits acceptance to the offerors terms; or o the offeror objects to the additional terms within a reasonable time. 2-207(2) does not apply to different terms. Different terms either o a) cancel each other out and replaced by applicable gap fillers (majority view); or o b) the different terms are treated the same as additional terms under 2-207(2) (leading minority view); or o c) the different terms are dropped out entirely and offerors terms prevail. 2-207(3) provides that if the parties behave as if there was a contract, then the contract consists of the terms to which both parties agree, plus applicable gap fillers provided by the Code.

Method of Acceptance: As specified in the offer. If not specified, by any manner and medium reasonable under the circumstances.

UCC 2-206 provides that an offer to buy goods for prompt shipment invites an acceptance either by: o a prompt promise to ship the goods; or o a prompt shipment of conforming or non-conforming goods; but: o a shipment of non-conforming goods does not constitute acceptance if the seller seasonably notifies the buyer that the shipment was sent as an accommodation. Notification, Common Law: If the offer invites acceptance by performance, then no notification is necessary, unless the offer requests it, however, If the offeree who accepts by performance has reason to believe that the offeror has no adequate means of learning of the performance, then the offeror is not bound unless:

o The offeree exercises reasonable diligence to notify the offeror of acceptance, or o The offeror learns of the performance within a reasonable time or o The offer indicates that notification is not required. If the offer invites acceptance by return promise, the offeree must exercise reasonable diligence in notifying the offeror of acceptance, or that the offeror receive the acceptance seasonably. Notification, Uniform Commercial Code: The beginning of performance by the offeree is binding on the offeror, provided that such acceptance is followed within a reasonable time by notice to the offeror. Mailbox Rule: Acceptance is effective upon dispatch, as long as expected medium is used. Rejection and revocation are effective upon receipt. An acceptance that is dispatched before a rejection, but received after the rejection is effective, unless the offeror acted in reliance of the rejection. An acceptance that is dispatched and received after a rejection becomes a counteroffer.

Silence as Acceptance: Silence cannot be construed as acceptance, unless: o The offeree takes the benefit of the services offered, or does any act inconsistent with the offerors ownership of the property offered, or o Because of previous dealings, it is reasonable that the offeree should notify the offeror if he does not accept.

Consideration:
Consideration in General: Consideration is a bargained-for exchange of performance, forbearance, or a return promise. The Bargained-For Exchange- To constitute consideration, a performance or return promise must be bargained for. It is bargained for if it is sought or given in exchange for a promise; that is, the consideration induces the making of the promise, and the promise induces the furnishing of the consideration.

 Waiver of legal right (forbearance) may be consideration. Forbearance of a Legal Claim that is without merit is not consideration. Performance of Legal Duty owed to the promisor is not consideration.

A condition of gift is not consideration, nor is an incidental detriment. The court will not inquire into the adequacy of consideration unless there is evidence of sham consideration.

The requirement for Exchange:

Mutuality of Obligation Both parties must assume a legal obligation Past performance is not part of a bargained-for exchange, and therefore is not consideration. Moral obligation arising out of a benefit previously received is not enforceable Exceptions:
o o o o

A promise to pay a debt made after the statutory period for collection has passed. A voidable promise made by a minor, then ratified as an adult; A promise to pay a debt that has been discharged in bankruptcy. A moral obligation arising out of the receipt of an extreme material gain.

The Requirement of Bargain: Consideration is bargained for if it is sought by the promisor, and induces the making of the promise. Incidental Detriment An act necessary to take delivery of a gift is not consideration, since it was not sought by the promisor in exchange for the gift.

Condition of Gift a condition imposed for the acceptance of a gift is not consideration, unless there is more than an incidental burden attached to the acceptance (see King v. Trustees of Boston College 420 Mass. 52 (1995) Employment Agreement Assent to enter into a non-competition agreement (promise), in exchange for the employer not terminating the promisor (forbearance) was held to have been a bargained-for exchange. Employee Handbooks There is a bargained-for exchange when an employee accepts the terms given in an employee handbook and forgoes the right to quit the job. Rewards There is no bargained-for exchange unless the offeree knew of the offer at the time of performance (acceptance).

Promises as Consideration: Conditional Promises A promise is conditional if its performance will become due only if a particular event occurs. Example: insurance policies. A conditional promise is not consideration if the condition could never occur. Illusory Promises A promised that is bargained for is consideration if the promised performance would also be consideration (R 75). Therefore, a promise under which the promisor does not have an obligation to do anything is not consideration (since only the illusion of performance has been promised). o Exceptions: Satisfaction Contracts, Exclusive Dealing Contracts, Requirements/Output Contracts. Satisfaction Contracts fall into two categories: o Satisfaction as to technical, mechanical or commercial fitness dissatisfaction must be objectively reasonable (or commercially reasonable). o Satisfaction involving personal taste or judgment Dissatisfaction must be in good faith.

Output/Requirements Contracts are not illusory, because of an implied good faith requirement inherent in the agreement. o When a contract measures quantity by the seller's output or the buyer's requirements, this means the actual output or requirements that may occur in good faith. (Good faith is implied in the agreement.)

Exclusive Dealing Contracts are not illusory, because of an implied good faith requirement. o Such an agreement implies an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

CONSIDERATION SUBSTITUTES:
Promissory Estoppel Elements: o A promise was made. o Promisor should reasonably expect that the promise would induce action or forbearance. o The promise did in fact induce the promissee's action or forbearance. o The enforcement of the promise is necessary to avoid an injustice. Damages as appropriate to avoid injustice; expectancy or reliance.

Restitution for Unjust Enrichment Provides for recovery in the absence of a contract; no agreement or consideration is necessary. Elements : o The benefit is not conferred gratuitously upon recipient by a volunteer. o The benefit is not imposed upon the recipient by an officious intermeddler. o Exceptions: Professional Services Emergency Services Services provided upon request Services provided upon acceptance of an offer Measuring Enrichment: o Market Value: Market Value of the goods provided (Quantum Valebant). Market Value of the service provided (Quantum Meruit). o Recipients Gain Recipients objective net gain Recipients subjective net gain

PRE-CONTRACTUAL LIABILITY:
Promissory Estoppel Based on an Offer: Sub-contractors bid implies a promise to hold the offer open for a reasonable time.

Promissory Estoppel Based on Preliminary Negotiations: A party that, to their detriment, alters their position in reliance of promises made during preliminary negotiations may seek relief under promissory estoppel.

Contract Formed by Conduct, Performance, or Implied Acceptance : Allied v Ford, UCC 2-207(3), 2-204

Promise to Negotiate in Good Faith: When the parties agree on certain major terms, but leave other terms open for negotiation, there is a mutual commitment to negotiate in good faith in an effort to reach a final agreement.

FORMATION Offer Acceptance Consideration Restatement 90

DEFENCES TO ENFORCEMENT Statute of Frauds Capacity Duress Undue Influence Misrepresentation

(PROCEDURAL defenses)

INTERPRETATION Parol Evidence Ambiguity Implied Warranty

Unconscionability Public Policy

(SUBSTANTIVE Defenses)

End of Formation Section

NEXT: Contracts B: DEFENSES TO ENFORCEMENT

DEFENSES TO ENFORCEMENT

I. Statute of Frauds
To get out of the contract, you must get into the statute.

THREE KEY QUESTIONS: 1. Does the contract fall within the statute? 2. Contract that cannot be performed within one year (one-year provision). Contract for the sale of an interest in land (land contract provision). Contract to answer for the duty of another (suretyship provision). Sale of goods for $500 or more (UCC 2-201)

Is there a sufficient writing to satisfy the statute? TYPE: o Any writing (or electronic record) that meets the minimum requirements for content. o Need not be a joint product of both parties. o May be an internal document. o Need not be a single document; may be series that all refer to the same transaction. o Document may be lost or destroyed, but evidence that proves its existence will satisfy the statute. CONTENT: o Sufficient to show the existence of the contract. o Identifies the parties and the nature of the agreement, and most of the material terms (R 2d 131). OR: o Specifies the quantity of goods and indicates that a contract for sale has been made between the parties (UCC 2-201). Under the UCC, the writing is not insufficient merely because it omits a term besides the quantity, or incorrectly states a term.

SIGNATURE: o Only need the signature of the party against whom enforcement is sought o May be initials, logo, letterhead, or heading on an e-mail, if the party intended the mark as an authentication of the writing. o In a series of documents, there need not be a signature on each, if they all refer to the same transaction. o UCC EXCEPTION BETWEEN MERCHANTS: 2-201 (2) provides that a signature is not necessary when: Both parties are merchants; One party sends to the other a signed, written confirmation of the contract within a reasonable amount of time; The recipient has reason to know of its contents; The recipient does not give objection within 10 days of receipt.

3. Does an exception to the statute apply? PART PERFORMANCE: In general: o part performance may be reliable evidence that a contract was made, but only if the performance is unequivocally referable to the oral agreement. o Court may require some degree of prejudice to have been suffered in reliance of the oral agreement. o May not apply to all contracts under the statute. Sale of real property: o Contract for the sale of land may be enforced if the party seeking enforcement has so changed his position that injustice can be avoided only by specific enforcement (R 2d 129) Sale of goods under the UCC 2-201 (3) provides an exception to the statute when: o The goods are specially manufactured and not suitable for sale to others. o The party against whom enforcement is sought admits that the contract was made (judicial admission). o Payment for the goods was made, or the goods were received and accepted. Reliance: (See R 2d 139) o More stringent standard then for R 2d 90, need to show additional evidence of reasonable reliance SEE RESTATEMENT

LEADING OBJECT or MAIN PURPOSE RULE Provides an exception to the suretyship provision when: o A third party is indebted; o There is no novation; o The main purpose for which the surety makes the promise is to secure an economic advantage for the surety, rather than to provide a benefit for the principal.

PROMMISORY ESTOPPEL: A promise which reasonable should induce action or forbearance is enforceable if injustice can be avoided only by enforcement of the promise. The remedy may be limited as justice requires. In determining whether injustice can be avoided only by enforcement of the promise, the court will consider: o The availability of other remedies, particularly rescission and restitution; o The definite and substantial character of the action or forbearance in relation to the remedy sought. o The extent to which the action or forbearance proves the terms of the promise (unless the terms are proven by other clear and convincing evidence); o The reasonableness of the action or forbearance. o The extent to which the action or forbearance was forseeable.

II. Incapacity
In order to enter into a valid contract, the parties must have sufficient judgment to bind themselves to an enforceable promise. There are two main categories of incapacity: minority and mental infirmity. Minority Contracts made by minor are voidable at the option of the minor. Rule is unaffected by minors emancipated status. Exceptions: o Contracts for necessities o Contracts that the minor ratifies after reaching majority

Ratification upon reaching majority, a minor may ratify the contract, thereby turning a voidable contract into a binding one. Ratification can occur in three ways: o Express ratification the former minor indicates in written or oral communication an intent to be bound by the contract. o Implied ratification the former minor acts in a manner that manifests an intent t be bound by the contract o Ratification by silence if the former minor does nothing after reaching majority, the contract is binding after a reasonable time passes. Restitution upon disaffirmance most states provide for restitution of all economic benefit received by the non-minor party, except payment for necessities.

Mental Incapacity A contract entered into by a person with mental incapacity is voidable, unless ratified. If the person continues to be mentally incapacitated, the contract may be voided or ratified only by a guardian. If the person recovers from their mental incapacity, they may elect to either void or ratify the contract. In either event, avoidance/ratification occurs as with contracts entered into by a minor (above). Two tests for mental incapacity: o Cognitive test (traditional test) ability to understand the nature of the transaction. o Affective test unable to act in a reasonable manner in relation to the transaction, when the other party has reason to know of the incapacity.

III. Duress and/or Undue Influence

Duress by threat: a contract is voidable if a partys assent to its terms is induced by an improper threat that leaves the party with no reasonable alternative. 1. Improper threats include: o A threat to commit a crime or a tort; o A threat of criminal prosecution; o A threat of bad faith civil process; o A threat to breach a duty of good faith or fair dealing under an existing contract.

Elements of Duress: 1. Improper threat 2. No reasonable alternative 3. Induces the manifestation of assent Economic Duress: Modification of an Existing Contract: Under the pre-existing duty rule, a modification will be upheld if it was fairly bargained for, but will be avoidable if one partys assent to the modification was induced by an improper threat to withhold the performance already promised. 2. Thus, modification was avoidable in Alaska Packers when the workers threatened to not work unless modification was agree to, because: o The modification was induced by a threat of a breach of good faith under an existing contract; and, o The employer had no reasonable alternative other than agreeing to the modification. 3. The modification in Austin Instrument was avoidable when Loral threatened to breach an existing contract, for the same reasons as above. 4. The modification in Watkins was upheld when the parties agreed to a modification when rock was found in the excavation, because: o The modification was fairly bargained for between the parties; and, o The property owner was not without reasonable alternatives to the modification.

Undue Influence Undue influence is the unfair persuasion of a party who is under the domination of the other party, or, because of their relationship, is justified in assuming that the other party is acting in a manner consistent with his best interest. Elements: 1. Special relationship: o Dominative o Fiduciary 2. Improper persuasion: o Serious impairment of victims free will

 Indicia of Undue Influence: Discussion at an unusual or inappropriate time; Agreement in an unusual place; Pressure to conclude the agreement at once; Use of multiple persuaders against single party; Exclusion of third-party advisors to the subservient party. Thus in Odorizzi, a resignation was voidable when the school superintendent went to plaintiffs home and pressured him into resigning immediately, while purporting to act in the plaintiffs best interest.

IV. Misrepresentation
A contract may be voidable for misrepresentation when one party makes an assertion not in accord with the facts, and the misrepresentation induces the other party to enter the contract. Elements: 1. Concealment, nondisclosure, or an assertion not in accord with the facts. 2. The misrepresentation was either material or fraudulent. 3. The misrepresentation was relied upon by the other party 4. Such reliance was reasonable First element: misrepresentation of FACT: o Distinguish fact from opinion - if the assertion cannot be proven false, it is probably opinion (as with puffing). A fact-based opinion may be misrepresentation, if the party knows that the opinion is not supported by the facts, or recklessly states the opinion without knowledge of the facts. A contract may be voidable for misrepresentation of an opinion if there is a fiduciary relationship between the parties, or if the parties do not deal at arms length, or if one party has a greater opportunity to learn the truth of the opinion being asserted. o Distinguish fact from prediction of future events an assertion is merely a prediction if it refers to events that are beyond the control of the speaker. o Distinguish fact from intention if the party has no intention of carrying out the promise, there is misrepresentation; if the party intended in good faith to perform, its merely a breach.

o Nondisclosure (silence) is misrepresentation if: The part has taken affirmative action to conceal a fact; The party knows that disclosure is necessary to correct a previous assertion; The party knows that disclosure is necessary to correct the other partys mistake as to a basic assumption of the contract (if nondisclosure would violate good faith and fair dealing); or, There is a relationship of trust between the parties.

o Duty to disclose there is a requirement of disclosure if: 1. The other party is unaware of the fact; and, 2. The knowledge is reasonably likely to influence the other partys decision to enter the contract; and, 3. The information is not readily available through diligent inquiry; and, 4. There is no proprietary interest in the information, as it was not acquired by special efforts or study. Second element: the misrepresentation must be either material or fraudulent. o The misrepresentation is material if would make a difference to a reasonable person in deciding whether or not to enter the contract. o A misrepresentation is fraudulent if the party knows that the assertion is not true, or knows that there is no foundation for the assertion. Third element: the misrepresentation must induce reliance: o The innocent party must show a change in position made in reliance to the misrepresentation. o Entering the contract is sufficient as a change of position, if motivated in part by the misrepresentation. Fourth element: The reliance must be reasonable. The court will generally find the reliance reasonable, unless there was a breach of good faith.

Misrepresentation and the Parol Evidence Rule: Parol evidence rule will not exclude evidence of misrepresentations contained within the writing of the contract. Parol evidence rule will not exclude evidence of fraudulent oral misrepresentations made in conjunction with the written contract.

Unconscionability: Under the common law, a court may refuse to enforce a contract, or any part thereof, that is unconscionable. Unconscionability is not defined, but the court considers such factors as gross disparity in the exchange or gross inequality in the bargaining process. Under the UCC, the court may refuse to enforce any contract found to be unconscionable. When one party claims unconscionability, the court will hear evidence regarding the commercial setting, purpose, and effect of the contract in making its determination. Unconscionability has two aspects: 1. Procedural unconscionability- absence of meaningful choice in the bargaining process due to: Oppression due to unequal bargaining power between parties; Surprise in unconscionable terms hidden in the writing of the agreement 2. Substantive unconscionability terms that are unreasonably favorable to one party. Procedural unconscionability focuses on the bargaining process, especially when there is a disparity of bargaining power. A lack of legally sufficient consideration may be indicative of procedural unconscionability; o thus in McKinnon it was held that the plaintiffs loan of $5000 that enabled defendant to purchase fish camp was not sufficient .consideration for the 25 year forbearance on making improvements, and was therefore unconscionable. o Nevertheless, in Tuckwiller, it was held that an agreement to provide lifetime care for the plaintiffs decent was fair when the contract was made, even though decedent died soon thereafter.

Substantive unconscionability focuses on the terms of the agreement, such as excessive prices, excessive interest rates, waiver of legal protection or claims, unreasonable forum selection clauses, etc. In Walker-Thomas Furniture, the court held that a clause that allowed for the repossession of all items rented was unconscionable. In Jones v. Star Credit, the court held that a contract was unconscionable for putting charging an excessive price for a freezer. In Armendariz, the court held an arbitration clause unconscionable because it mandated arbitration for one party, but not the other (also,

because of a procedural issue: as a contract for employment, it was a contract of adhesion). In Scott v. Cingular, the court held that waiver of class action was unconscionable as oppressive to the vindication of statutory rights.

Contracts of adhesion are often an indication of unequal bargaining power. In general, a contract of adhesion will be enforceable if: It meets the reasonable expectations of the adhering party. It is not substantively oppressive. Two sides to unconscionability: Pro: the doctrine is appropriate in policing both the bargaining process (procedure) and the terms of the contract (substance), since unfair surprises undermine the element of mutual assent, and oppressive terms undermine the element of a bargained-for exchange. Con: use of the doctrine to enforce substantive fairness undermines the parties freedom of contract, while also undercutting the predictability of performance that contracts are meant to avoid.

Public Policy: Contracts that violate public policy fall into two general categories: 1. Contracts that violate specific laws; illegal contracts, including: a. Contracts for the inducement of a public official; b. Contracts to commit illegal acts; c. Contracts that contemplate collusive bidding on public contracts. 2. Contracts that are in violation of policies derived from related legislation, or societal norms.

Interpretation
1. Parol Evidence Rule
When interpreting the contract, the introduction of extrinsic evidence is limited by the Parol Evidence Rule: If the writing is partially integrated, no evidence of an extrinsic term may be admitted that contradicts the writing; evidence of extrinsic terms consistent with the writing may be admitted. Consistent with the writing a term may be found ot be consistent twith the writing if it s one that might naturally have been omitted from the writing, that is, a term that might have been presumed in the contract, because both parties agreed to it, If the writing is completely integrated, no evidence of extrinsic terms may be admitted. Trade usage, course of performance and course of dealing is always admissible to supplement the writing, but not to contradict. Exceptions: Fraud, accident, or mistake. Agreements made after the contract was formed. Evidence showing that no contract was formed. Evidence of a condition precedent. Evidence of failure to pay consideration. Other evidence establishing that the contract is voidable.

2. Ambiguity
Analysis: IS there an ambiguity? NY court uses the plain meaning rule: If the writing is unambiguous on its face, then no other evidence is needed. If the writing is ambiguous, then extrinsic evidence may be allowed to resolve the ambiguity CA court allows extrinsic evidence to determine whether there is ambiguity in the writing: In both courts, evidence of course of performance, course of dealing, and trade usage is admissible to interpret ambigious terms. If the parties each attach different meaning to a term, and there is no rational basis for resolving the ambiguity, then there is no contract; recission is appropriate.

3. Implication
Statutes and courts provide gap fillers for the major omitted terms Filling Common Contractual Gaps by Statute The UCC provides many instances of gap fillers for the sale of goods; among them: tender gap 2-308 price gap 2-305 o

Bases for implication

1. Subjective according to the expectation of the parties. 2. Objective Reasonable under the circumstances (R 204)

Express warranty
UCC 2-313 provides for express warranties when: 1. There is an affirmation or promise made by the seller in relation to the goods, which becomes part of the basis for the bargain; such affirmations create an express warranty that the goods will conform to the affirmation or promise; 2. There is a description of the goods that becomes a basis of the bargain; such description creates an express warranty that the goods will conform to the description; 3. A sample or model is provided by the seller; thus creating an express warranty that the whole of the goods will conform to the sample or model.

Implied Warranties
Article 2 of the UCC provides for several implied warranties, among them: 1. Implied warranty of merchantability, 2-314 2. Implied warranty for fitness for a particular purpose 2-315 3. Implied warranty of title 2-312 For each Article 2 implied warranty, there are three questions: 1. Under what circumstances does the implied warranty become part of the contract? 2. What is the content of the warranty? 3. May the parties exclude the implied warranty by agreement? According to Knish, the analysis is: a) Does the warranty apply? b) Was the warranty disclaimed? c) Was the warranty breached? IMPLIED WARRANTY : MERCHANTABILITY (UCC 2-214) Analysis: 1. Does the warranty apply? Applies when: a) There is a sale of goods b) Seller must be a merchant with respect to the goods of that kind.

 Content of warranty: goods are suitable for the ordinary purpose intended. 1. Was the warranty disclaimed? 2. Was the warranty breached? A recurring question under 2-314 is whether the buyers use of the goods was ordinary, as mentioned in subsection (c). Implied Warranty: Fitness for Particular Purpose (UCC 2 -315) UCC 2-215 provides that, unless otherwise agreed or excluded, that: 1. Where a seller has reason to know of any particular purpose for which the goods are sought; and 2. Where the buyer is relying on the sellers skill or judgment to provide suitable goods, there is an implied warranty that the goods shall be fit for such a purpose. Analysis: Does the warranty apply? Applies when: a) There is a sale of goods (no merchant requirement). b) Buyer has a particular purpose for the goods c) Seller is aware of the particular purpose d) The buyer relies on sellers knowledge Content of warranty: goods are fit for that particular purpose

Excluding Implied Warranties from the Contract

Under certain conditions, the parties may exclude implied warranties from the contract. UCC 2-316 (1) incorporates the parol evidence rule into the analysis of whether there is a warranty [NEED TO DISCUSS THIS FURTHER, WILL APPEAR ON EXAM] UCC 2-316 (2) provides that the parties may exclude an implied warranty of merchantability if: 1. The language of the agreement that excludes the implied warranty specifically mentions merchantability, and 2. Any writing that excludes the implied warranty of merchantability is conspicuous.

UCC 2-316 (2) provides that the parties may exclude the implied warranty of fitness if: 1. He exclusion is made in writing, and 2. The writing is conspicuous. UCC 2-316 (2) provides that the parties may exclude all implied warranties with such language as There are no warranties which extend beyond the description contained herein. UCC 2-316 (3) provides that, unless the circumstances indicate otherwise, all implied warranties may be excluded if: a) The agreement excludes implied warranties with expressions like as is, with all faults, or other language that makes plain that there is no implied warranty. b) The buyer examines or inspects the goods, or refuses to examine the goods, in such case there is no implied warranty in respect to a defect that should have been revealed in such an examination, c) Implied warranties can be modified or excluded by course of dealing, course of performance, or usage of trade. Question: does 2-316 (3) (a) obviate the need for writing when excluding a warranty for fitness?

Limits on Excluding implied Warranties

Courts and legislatures have limited the ability of sellers to exclude implied warranties, when such an exclusion is inconsistent with public policy.

Performance and Breach

Breach Analysis

1. Is there a duty under the contract? (no switch) 2. Is the duty conditional? (open switch) 3. Was the condition satisfied, excused, or did the condition fail? Satisfied (closed switch) o Express Condition satisfied by strict compliance only.

o Constructive Condition may be satisfied by substantial performance. Excused (bypassed switch) o Waiver/Estoppel words or conduct that lead the other party to reasonably believe that the condition will not be enforced. o Prevention conduct that hinders the fulfillment of the condition. Fails (grounded switch)

4. Was the duty breached? 5. Was the breach material? (R 2d 241) If not material, only option is to sue later for loss suffered under the breach. If material but curable, party has the option of suspending performance and waiting for cure. If material and total, party may withhold performance, terminate contract, and claim full expectation damages. 6. How did the aggrieved party elect to proceed? The aggrieved party may elect to terminate, suspend, or continue: A material breach may be treated as immaterial, in which case any condition associated with the breached performance is excused. A party that terminates or suspends for a breach that is found to be immaterial may be themselves in breach.

DEFENSES TO PERFORMANCE Defenses to enforcement are defenses that exist at the time of formation, defenses to performance pertain to facts that did not exist, or were not known, at the time of formation. Anticipatory Repudiation A clear, unequivocal, and voluntary repudiation of the contract by one of the parties is recognized as the equivalent of a material and total breach, provided that: o The threatened action or inaction would be a material and total breach if it occurred at the time due for performance; and, o Both parties have outstanding duties under the contract.

Elements of repudiation:

1. The prospective action or inaction threatened must qualify as a material and total breach (for materiality, see R 2d 241). 2. The promisors words or conduct must indicate to a reasonable person that the promisor intends to breach when the performance becomes due. a. Objective standard b. Unless the expression of repudiation is clear and unequivocal, courts will usually find no repudiation, especially in regards to conduct. 3. The repudiating words or conduct must be deliberate and purposeful, rather than inadvertent or beyond the control of the promisor (see Pittsburgh-Des Moines Steel Co., p.795). 4. (Under the UCC only) substantially impairs the value of the contract.

Response to Repudiation After a party repudiates, the promisee has two options: Accept the repudiation, and treat it as a material and total breach. o The risk: the other party may deny repudiating, thus putting the blame for the breach on the promisee. Delay response, and wait for the repudiator to repent. o May take affirmative steps to encourage retraction of the repudiation. o May set deadline for retraction, and may accept repudiation anytime before the deadline. o The risk: court may find that the promisee aggravated the damages by not accepting repudiation sooner (issue of assessing damages: see Cosden Oil, p.783). o See UCC 2-713, 2-712, 2-610, and 2-611.

Retraction of Repudiation The promisor may retract the repudiation, until such time as: The promisee treats the repudiation as final; or, The promisee acts in reliance of the repudiation; or, The promisee notifies the promisor that the repudiation has been accepted (but the promisor in repudiation is not entitled to notice of acceptance). Assurance of Performance A party having reasonable grounds to believe that another party will commit a material and total breach may demand adequate assurance of due performance.

The obligee may suspend any performance for which the agreed-upon exchange has not been received, if reasonable (R 2d 251), or under the UCC, commercially reasonable (2-609). Failure to provide adequate assurance within a reasonable time may be regarded as repudiation (see Pittsburgh-Des Moines Steel Co., p.795).

Analysis of repudiation 1. Is there an anticipatory repudiation? a. See elements of repudiation 2. What are the options for the aggrieved party? a. Suspend performance AND either: i. Wait for (under UCC, commercially) reasonable time; or: ii. Treat as total, incurable breach.

Applicable Statutes

2-209 Modification, rescission, and waiver: An agreement modifying a contract under article 2 UCC needs no consideration to be binding SoF applies to all modifications ot contracts that are within the statute 2-508 sellers right to cure (1) A seller may cure a tender or delivery rejected for non-conformity if: The time for performance has not expired; and, The seller seasonably notifies the buyer of his intention to cure; and, The seller makes a conforming delivery within the time the performance is due. (2) surprise rejection if the buyer rejects a non-conforming shipment that the seller had reasonable grounds to believe the buyer would accept, the seller may, upon seasonable notice to buyer, have further time to substitute a conforming shipment. Reasonable grounds to believe non-conforming shipment would be accepted include o Course of dealing, o Course of performance, o Usage of trade, o The particular circumstances surrounding the making of the contract. 2-601 Improper delivery (perfect tender rule). If the goods or tender fail to conform to the contract in any respect, the buyer may: Reject the whole; or Accept the whole; or Accept any commercial unit and reject the rest. (see sellers right to cure, 2-508)

2-602 Rejection of Goods must be in a reasonable time after delivery or tender. 2-605 (1) Waiver by failure to specify objection: A buyers failure to specify the reason for rejection precludes him from relying on the unstated defect to justify rejection or establish breach where: The seller could have cured the defect if notified; or Between merchants the seller has requested a written statement of all defects upon which the buyer proposes to rely.

2-606 Acceptance of goods. (1) Acceptance of the goods occurs when the buyer After a reasonable opportunity to inspect the goods, signifies to the seller that the goods are conforming, or that he will take them despite their nonconformity; or Fails to make an effective rejection per 2-602 (but only after buyer has an opportunity to inspect he goods). 2-607 (1) (2) (3) (a) (b) Effect of Acceptance The buyer must pay the contract rate for any goods accepted Acceptance of the goods made with the knowledge of non-conformity cannot be revoked because of the non-conformity unless the acceptance was made on the reasonable assumption that the non-conformity would be seasonably cured. Where a tender has been accepted the buyer must notify the seller of any breach within a reasonable time, or be barred from remedy. 2-608 Revocation of acceptance The buyer may revoke acceptance of goods whose non-conformity substantially impairs its value to him, if he has accepted it o On the reasonable assumption that the non-conformity would be cured; or o If his acceptance was induced by either difficulty of discovery before acceptance or by the sellers assurances. Revocation must occur within a reasonable time after discovery of nonconformity, and before any change in condition of the goods which is not caused by their own defects. (Make sure to distinguish between acceptance of the offer (2-206) and acceptance of the goods (2-600 series). 2-609 Right to Assurance of Performance 1. Reasonable grounds for insecurity 2. Demand in writing for assurance 3. If commercially reasonable, suspension of performance until assurance is given 4. Failure to provide assurance within reasonable time operates as repudiation. Also see: R 2d 251 common law right of assurance.

2-610 Anticipatory Repudiation When either party repudiates a performance due under the contract which will substantially impair the value of the contract to the other, the aggrieved party may o Suspend performance; AND either o Await performance for a commercially reasonable time; or o Resort to any remedy for breach. 2-611 Retraction of Repudiation Until the performance is due, the repudiating party may retract their repudiation, unless the aggrieved party has cancelled, changed his position, or otherwise indicated that he considers the repudiation final Retraction may be by any method which clearly indicates that the repudiating party intends to perform, but must include any assurance justifiably demanded under 2-609 2-612 installment contracts and breach; substantial performance; (exception to perfect tender rule) An installment contract is one that requires or allows the delivery of goods in separate lots to be separately accepted. The buyer may reject any installment which is non-conforming, if the nonconformity cannot be cured; but o If the non-comformity does not constitute a total breach, and the seller gives assurances of a cure, buyer must accept the installment. Non-conformity of one or more installments that substantially impairs the value of the whole contract is a breach of the whole; but the buyer reinstates the contract if he accepts a non-conforming installment without seasonable notification of cancllation; or o Brings an action in respect to previos installments only; or o Demands performance as to future installments 2-616 Impracticability; Sellers failure to deliver is not a breach of his duty if performance has been made impracticable by either: The occurrence of events, the non-occurrence of which was a basic assumption of the contract; or, The sellers good faith compliance with any applicable governmental regulation. 2-716 Buyers Right to Specific Performance or Replevin. Restatement 241 Determining whether breach is material; the following circumstances are significant: The extent to which the injured party will be deprived of the reasonably expected benefit; The extent to which the injured party can be compensated for the breach; The extent to which the party in breach will suffer forfeiture;

The likelihood that the party in breach will cure the breach; The extent to which the party in breach acted in good faith.

89 Modification of Executory Contract 359 Effect of Adequacy of Damages MISTAKE AND IMPRACTICABILITY Mistake almost always applies to facts that exist at the time of formation; Impracticability applies to facts that arise after formation In both cases, the errant facts affect the basic assumptions upon which the contract was made.

ELEMENTS OF MUTUAL MISTAKE: 1. The parties must share an erroneous belief in the facts in existence at the time of formation. 2. The erroneous belief is fundamental to the intent and purpose that form a basic assumption of the parties to the contract. 3. The mistake has a material effect upon the party seeking relief. 4. The adversely affected party was not obligated to bear the risk of the mistake. UNILATERAL MISTAKE same elements as above, and The effect of the mistake is such that enforcement would be unconscionable; or The other party had reason to know of the mistake, or the partys own fault causes the mistake. ELEMENTS OF IMPRACTICABILITY: 1. There is an unforeseen event that affects the basic assumptions upon which the contract is made. 2. The event renders a partys performance unduly burdensome (an extreme hardship). sq 3. The party seeking relief was not obligated to bear the risk of the events occurrence. 4. The party seeking relief did not wrongfully cause the event to occur. 5. [Knish] Foreseeability (the more foreseeable the event, the less protection for the party seeking to avoid performance).

Elements of Frustration of Purpose: 1. There is an unforeseen event that affects the basic assumptions upon which the contract is made. 2. The event destroys the purpose or value of the contract. 3. The party seeking relief was not obligated to bear the risk of the events occurrence.

4. The party seeking relief did not wrongfully cause the event to occur. 5. [Knish] Foreseeability (the more foreseeable the event, the less protection for the party seeking to avoid performance).

Remedies Common Law Remedies: 344 Purpose of Remedies expectation (347) o the loss in value of the other partys performance o plus incidental and consequential damages o minus any costs avoided as a result of the breach Alternatives to loss of value (: o reliance (349) o restitution (371- 374)

359 Specific performance criteria: Adequacy of Money Damages (360) Uncertainty of Terms (362) Fairness (364) Difficulty of enforcement (366) Issue of servitude (Personal service contracts) (367) Buyers remedies under the UCC: UCC 2-711 provides that where a seller: fails to make delivery or repudiates; or where the buyer rightfully rejects or justifiably revokes acceptance; the buyer may cancel & recover price for undelivered goods and: Cover with substitute goods (2-712) o Cover price contract price o Must be without unreasonable delay o Must be reasonable purchase, made in good faith o Damages = the difference between the cover price and the contract price, less any expenses saved as a result of the sellers breach. Seek Damages for Non-Delivery or Repudiation (2-713)

o Market price contract price If the buyer elects not to cover, he may seek damages for the breach: o Damages = market value contract price, plus incidental/consequential damages Seek Specific Performance (2 -716) Specific performance may be appropriate where the goods are unique, or in other proper circumstances (see common law criteria for other proper circumstances).

Breach of Warranty/ non-conformity (2-714) 2-714 provides that where a buyer has accepted goods, but given notice of nonconformity under 2-607, he may recover damages for any non-conformity or breach of warranty: Damages = value of goods as promised or warranted, minus the value of goods delivered; plus incidental/consequential damages (2-715).

Sellers Remedies Under the UCC UCC 2-703 provides that where a buyer: wrongfully rejects or revokes acceptance for goods; or fails to make a payment due on or before delivery; or repudiates; The aggrieved seller may withhold delivery of the goods and: Resell the goods and recover damages (2-706) o Resale must be made in good faith and in a commercially reasonable manner o Damages = the difference between the resale price and the contract price, plus incidental damages under 2-710, minus expenses saved as a result of the buyers breach. Recover damages for buyers breach (2-708) o Damages may be either: The difference between market price and the contract price, plus incidental damages, minus expenses saved as a result of the breach; or The profit the seller would have made from full performance of the buyer, plus incidental damages. Note: see discussion on lost volume seller. Seek specific performance (2-709) Under proper circumstances, the seller may recover the price of:

o Goods accepted, or conforming goods lost or damaged after risk of loss has passed to the buyer; and o Goods identified to the contract that the seller is unable to resell at a reasonable price. Where the seller sues for specific performance, he must hold for the buyer any goods still in his control, or credit the buyer with the proceeds of any subsequent resale.

Lost volume seller: define, discuss, Limitation on Damages Avoidability Applies to all damages Forseeability Usually applies to consequential damages Certainty Applies to remedies that are speculative (such as lost profits for a new business)