REG - Notes Chapter 5

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Contracts
Express contract – formed by oral or written agreement
Implied-in-fact contract – formed by conduct
Implied in law contract/Quasi contract – not a contract at all. It’s a remedy to prevent unjust enrichment

Unilateral contract – one promise, accept with complete performance (Ann promises to give Barb $ if Barb
washes Ann’s car)
Bilateral contract – two promises, a promise is exchanged for a promise, accept with a promise (Barb promises
to watch Ann’s car if Ann promises to pay Barb $)

Executory contract – duties remain to be performed

Executed contract – all the duties under the contract have been performed

Sources of contract law

• Common law – derived from courts
- Apply when non-sale of goods, real estate, insurance, services, employment law (RISE)
• Uniform commercial code (UCC)
- Apply when sale of goods

3 elements for a legally enforceable contract

1. An agreement made up of both an offer and an acceptance
2. An exchange of consideration (something of legal value), and
3. A lack of defenses (on part of the defendant)

Agreement of mutual assent (offer and acceptance) – agreeing to the same bargain at the same time, a meeting
of the minds

The offer can be express or implied

• To be an offer, the communication must create a reasonable expectation in the offeree that the offeror
intends to make a contract
• There must be intent to make a contract
- Obvious jokes are not an offer
- Most advertisements are not offers they are invitations (some can be offers if they specify)
• Terms must be definite and certain
- Common law – must specify Parties, Price, Quantity, Type, and Time (PPQTT)
- UCC – must specify Quantity
• There must be a communication – offeree must have knowledge of the offer

Termination of offer – to create a contract, an offer must be accepted before it’s terminated, otherwise it’s
merely a counter offer. An offer can be terminated in 3 ways
• Revocation – offeror revokes the offer anytime before acceptance
- Exception: Irrevocable offers – options contract, merchant offer under UCC sales, unilateral contracts
• Rejection – offeree expressively rejects or counteroffers, silence generally means rejection
• Operation of law – terminated due to the law such as death of a party, insanity, destruction of subject
matter, or illegality

The acceptance is the offeree’s assent to enter into a contact either by express or implied

Offers are not assignable (only the person to whom the offer was made may accept), unless its an option
contract

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Under common law – Mirror image rule applies – acceptance must be unequivocal. An attempted acceptance
that changes some of the terms or adds new terms is not valid acceptance, but rather a counter offer.
Mailbox rule – acceptances are effective when they are dispatch (mailed), So you have until the 1st to accept
and you mail your acceptance on the 1st, you have a deal (doesn’t matter if mail is lost or delayed)
- Exception: can state in offer that acceptances must be received to be effective

Revocations, rejections and counteroffers are effective when received.

Both sides of the contract must be supported by legally sufficient consideration.

There must be something of legal value given by each party and there must be a bargained for exchange
• The promise can not agree to so something that the party is already obligated to do
• Need not have monetary value - “giving up smoking” or “graduating with a 4.0”
• Fairness generally not required, consideration does not have to be of near equal value

Bargained for exchange – something is not consideration unless it was given in exchange for other
consideration (your promise induced my promise)
• Gifts – promises to make gifts are unenforceable because the lack of consideration
• Past/moral consideration – if someone already gives or performs, before the promise was made, can not
enforce later. (I gave you CPR to save your life, now give me a reward)
• Exception: Doctrine of promissory estoppel or detrimental reliance – a promise made by one party and
detrimentally relied upon by another can be enforced without consideration. For the doctrine to apply the
promise must be reasonably relied upon and detrimental

Defenses
Defenses can make a contract unenforceable (innocent parties duty to perform –discharged
Void – unenforceable by either party (few options make contract void)
Voidable – contract my be avoided at the option of the party adversely affected

Party can establish the defense of fraud if they party can prove: MAIDS
• Misrepresentation of material fact
• Actual and justifiable reliance by the plaintiff on the misrepresentation
• Intent to induce reliance on misrepresentation
• Damages were caused
• Scienter – intent to deceive with a false statement or reckless disregard for the truth

Fraud in execution – deceived into signing something – void

Fraud in the inducement – terms are materially misrepresented – voidable

Innocent/negligent misrepresentation – all the elements of fraud except scienter (MAID)

Duress – use the threat of harm to induce contract

• Physical force – contract is void
• Economic or social force – contract is voidable

Undue influence – abusing a position of trust or confidence

Mutual mistake – voidable

Non-existent subject matter – stolen or destroyed – contract void

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Unilateral mistake – mistake by one party is not a defense to a contract
• Major exception: the other party knew or should have known of the mistake (obvious math errors)

Illegality – contract void (gambling contracts, usurious contracts - very high interest rates)

Failure to have a license required to protect the public makes a contract void (CPA, doctors, lawyers)
Failure to have a license merely to raise revenue, the contract is enforceable (vendors at a fair pay 25 licence
fee)

Most promises to not compete are illegal because they violate antitrust law
• Exception: meet three tests of reasonableness:
- protect legitimate business interest
- reasonable in duration
- reasonable as to distance (geographic scope)

Minors may disaffirm/cancel a contract anytime while a minor or even a reasonable time after becoming an
adult
• Exception: minors will be bound to contracts for life necessities including food, clothing and shelter
• Minor can become bound to contract if ratify the contract as an adult

Intoxication is a defense only if the intoxication prevents one party from knowing the nature and significance of
the contract and the other party knew of the impairment

Insanity – incapable of understanding the contract – voidable

• If adjudicated (pronounced by court) insane – contract is void

Statue of limitations – 4 to 6 years to sue from time of breach

Statue of frauds – 6 contract types require the defendant to sign (person being sued) in order to be enforceable:
MYLEGS
• Marriage
• Cannot be performed within 1 Year
- Exception: contract to work for an employer for life need not be in writing since the employee could
die the next day
- If one party fully performed the contract, even if it was impossible to person in 1 year, no writing
needed
• Land, sale or leases of real property for over 1 yr
• Executors – pay estate debts out of personal funds
• Goods of $500 or more for sale
• Surety – to pay the debt of another

Contracts for services can be oral regardless of price as long as its possible to complete within 1 year

Under common law, the writing must include all essential terms (PPQTT)
Contracts for goods need only have a quantity term and a signature
The terms may be stated in more than one document. There is no requirement that all terms be stated in a single
writing

An accord – an agreement to substitute one contract for another

Satisfaction – the execution of the accord
Accord and satisfaction discharges the original duty

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Substituted contract – very similar to an accord and satisfaction, but the duties under the original contract are
discharged immediately

Novation – substitute a new party for an old party and release the old party from the contract. All parties must
agree to the release.

Permissible conditions that affect a party’s duty to perform

• Condition precedent – condition must occur before the other party must perform
- I’ll buy the house if the inspection passes
• Condition concurrent – conditions that must occur simultaneously
- When you purchase good for money
• Condition subsequent – condition that will occur after a party’s duty to perform as risen and will cut of that
duty
- Marriage – engagement ring

Parol evidence rule – prohibits the admission or evidence to contradict the terms of the contract you signed

Remedies – what to do when a party fails to perform something he or she is contractually obligated to do

Material/substantial breach – under common law, the nonbreaching party can be discharged from the contract

Minor breach – the nonbreaching party is not discharged, but is entitled to damages

Anticipatory repudiation/early breach – one person unequivocally indicated in advance that he/she will not
perform contractual duties when the time comes. The non-repudiating party (good guy) has the following
options:
• Immediately sue
• Await the time for performance
• Cancel the contract

Damages – purpose it to get money or property to put the nonbreaching party in as good a position as he would
have been had there been no breach

Compensatory damages – awards the nonbreaching party enough money to obtain substitute performance

Consequential damages – collect damages that are reasonably foreseeable as a result of the breach (extra costs
to store goods because warehouse wasn’t built in time)

Specific performance – used with land or unique items

• Cannot be used for personal service contracts
• No specific performance and compensatory damages, have to choose one

Liquidating damages – a clause in the contract that specifies what damages will be if there is a breach,
enforceable is the amount is reasonable in relation to the actual harm done and not a penalty

Punitive damages – meant to punish, only get is there is fraud involved

Rescission or cancellation – restores the parties to their former position

• Doctrine of substantial performance – under common law, a party cannot rescind or cancel if a contract has
been substantially performed

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Quasi-contract damages – when there is no contract, a court will sometimes act as if there were a contract to
prevent unjust enrichment when one party confers the benefit on another

Privity of contract – only the parties to the contract have rights under the contract. However/exception, there
may be intended third party beneficiaries
Intended beneficiary (can enforce contract) – purpose of the contract is to give benefit directly to third person
• Donee beneficiary – receive their interest as a gift. (The reason I’m painting your house is so I can buy my
mom a gift)
• Creditor beneficiary – receive their interest because a party owes them something
An intended beneficiary can sue the promisor if they fail to perform

Incidental beneficiary (can’t enforce contract) – no intent to directly confer benefits to third party

Rights are assignable

Duties are delegatable

In general any right may be assigned and any duty may be delegated.
Exceptions:
• When the assignment will change the obligors risk (insurance)
• The delegated duties involves specialized skills or relies heavily on the person performing

Unless there is a Novation both the delegator and delegate are liable

When a mortgage is assumed both the mortgagor/assignor and the assignee are personally liable

If a person takes subject to the mortgage, it is not an assignment. Upon default, only the mortgagor/assignor is
liable. Not the person who took subject to the mortgage

Implied warranties of assignor – impliedly warrants that he has the rights assigned assigned and that he will not
do anything to interfere with those rights

An assignment need not be in writing and need not supported by consideration. Notice must be given to the
third party

Sales
The Sales Article of the UCC in Article 2 applies only to sale of goods, regardless of price

Goods – defined as all things moveable and most tangible property (cars, cows, groceries)

Merchants that deal in goods of the kind are generally held to a higher standard

The UCC imposes an obligation of good faith on both parties to a sales contract

Under common law, consideration is needed to make an offer irrevocable. However, certain offers by
merchants are irrevocable without consideration. To qualify as a merchants firm offer:
• Seller must be a merchant (regularly deals in goods of the kind sold)
• Offer must be in writing and signed by the merchant (could be a rain check)
• Offer must give assurances it will be kept open for a certain time

Merchants offers are irrevocable for the time stated, or if not time is stated for a reasonable time but in no event
longer than 3 months.
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R5-29 great pass key on Merchants firm offer rule

Mirror image rule does not apply under UCC – Under the Sales Article an acceptance will be effective even if
it states new or different terms

Prompt shipment (unilateral) or promise to ship (bilateral) – valid acceptance

Shipment of nonconforming goods is both an acceptance and a breach of contract

• Exception: Seller notifies the buyer than the nonconforming goods are shipped only as an accomadation to
the buyer, then the shipment is not an acceptance but a counter offer

Accommodation rule applies only when shipment is used as means of acceptance.

Exam trick: If a party accepts an order by promising to ship, then discovers he lacks the goods and ships
nonconforming goods as accommodation, it’s a breach not accommodation.

Auctions
With reserve – seller does not have to sell unless an adequate bid is made
Without reserve – the goods must be sold to the highest bidder

Exception: quantity does not have to be stated in a UCC contract if the contract is:
• Output contract – a buyer agrees to buy the entire output of the seller
• Requirement contract – seller agrees to supply a buyer with all of her requirements for a stated period of
time

Under UCC, a modification of a contract for the sale of goods is enforceable, even without consideration, as
long as the modification is sought in good faith

Statue of limitation is 4 years from time of breach

Statue of frauds – MYLEGS

Contracts for the sale of goods of $500 or more must be evidenced by writing signed by the party being sued.
There are four exceptions: SWAP
• Specially manufactured goods
• Written confirmation – will bind the recipient if they do not object within 10 days
• Admitted in court
• Performance – contracts have already been performed

If the method of transportation called for in the contract is unavailable or commercially unreasonable can’t use
as a defense, the seller may use alternative methods and the buyer must accept.

As a general rule, the seller’s basic duty is to hold conforming goods for the buyer and give the buyer
reasonable notice to enable the buyer to take delivery. If the goods are nonconforming, risk is always on seller
regardless of shipping terms

For risk of loss to pass to buyer, goods must be segregated or identified as goods for the specific buyer

When there is no specific agreement on delivery or risk of loss, divide into two broad catergories
• Noncarrier case – buyer will pick up goods at the seller’s place of business. If the seller is a
- Nonmerchant – risk of loss passes to the buyer upon tender of delivery of goods to the buyer
- Merchant – risk of loss passes only upon actual delivery to the buyer (takes physical possession)
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• Carrier case – common carrier is used and risk of loss depends on
- Shipment contract – risk passes on delivery to carrier
- Free Along Side (F.A.S) – requires seller to deliver goods along side a specified vessel
- Cost, Insurance and Freight (C.I.F) – contract price includes all three
- Free On Board (F.O.B.) – the sellers place
- Destination contract – risk passes when goods reach destination
- Free On Board (F.O.B.) – the buyers place (where the buyer is located)
Sale on approval – risk on seller until approval (a sale with a trail period)

Both parties can have an insurable interest in the same good simultaneously

So risk of loss in not determined by who has title

Title is ownership
Title can generally pass as parties agreed in the contract
If parties didn’t agree, title passes upon delivery (shipment or destination)

If buyer rejects goods the title revests with seller

2 types of warranties: Express (those in the contract) and Implied

Seller must make a perfect tender (delivery is perfect without defects), to do so, the goods must conform to all
warranties.
• Express warranties (oral or written per the contract)
• Implied warranty of title
• Implied warranty of merchantability
• Implied warranty of fitness for a particular purpose

Express warranties – made by seller to induce purchase

• Must be part of the basis of bargain (played some part in the buyers decision to buy)
• Statements of value or opinions do not generally create an express warranty

Implied warranty of title – implied in every sales contract is the warranty that the seller has good title and the
right to transfer that title (no unstated liens or attachments on the goods)
• Can only be disclaimed specifically with “I do not warrant title” not with a general disclaimer “as is” or
with all faults”

Implied warranty of merchantability – in every sale by a merchant who deals in goods of the kind being sold,
there is an implied warranty that the goods are fit for ordinary purposes
• This implied warranty is made only in sales by merchants
• Merchantability can be disclaimed with “as is” or “with all faults”

Implied warranty of fitness for particular purpose – When the buyer relies on seller (need not be a merchant),
the seller must know of the particular purpose and that the buyer is relying on him to select the goods
• Can be disclaimed with “as is” or “with all faults”

General disclaimers like “we hereby disclaim any and all warranties” won’t work

Things to remember about implied warranties

• Any implied warranty can be disclaimed, if the correct words are used (even by merchants)
• Implied warranties do not need writing. They are automatically implied in a sales contract
• Warranty of merchantability can only be made by merchants and is a warranty only that the goods will be
fit for ordinary purposes
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• Warranty of fitness can be made by any seller, and is in effect when the buyer relies on the seller to pick
goods suitable for a particular purpose and that the goods will be fit for that purpose
• Warranties are independent from tort liability (negligence or strict liability)

Under the UCC, warranty liability is not limited to privity. It extends to those in the buyers household and those
who use the product

Tort Liability – wrongful act either intentional (fraud) or unintentional (negligence)

Negligence – failure to use reasonable care, focus on sellers conduct. Those injured by goods can sue negligent
sellers if they can prove:
• Seller owed them duty of care
• Seller breached the duty
• Plaintiff suffered damages
• Damages were caused by the sellers negligence

Strict product liability – focus on product, sellers conduct is irrelevant, to sue must prove:
• Product was defective when it left the sellers hands
• Defect caused injury
• Defect made the product unreasonably dangerous
• Seller is a merchant or dealer (in the business of selling the good)
• Product reached the user without substantial change
Privity is not required
Negligence is not required. Sellers are strictly liable

Remedies
Punitive damages are not available under the sales articles
Duty to mitigate damages – can not recover for damages that could have been avoided

Sellers remedies
If the buyer breaches, the seller has right to resell the goods and sue for damages (usually difference between
contract price and additional or incidental (foreseeable) damages)

Even if there is no liquidating damage clause, if the buyer has made a down payment and breaches, the seller
may keep the lesser of $500 or 20% of the price

Buyers remedies
Under the UCC, the seller must make a “perfect tender” – a delivery free from any defects. If the goods do not
conform to the contract, the buyer may reject all, some or none of the goods. The buyer may also sue for
damages.

Formal requirements for rejection – Within a reasonable time and buyer must notify the seller

Right to cure – after the buyer rejects – the seller has a right to cure the defect if there is any time remaining
under the contract for the sellers performance

If the buyer has paid for part or all the goods and the seller is insolvent, the buyer may recover the goods from
the seller if the goods are identified

As a general rule the seller cannot transfer any better title than the seller has (a thief who has no title, generally
has no power to transfer good title to stolen goods. Exception:
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• Entrusting – owner of goods entrusts them to a merchant (not a bank). Merchant sells them in the ordinary
course of business (not a bulk sale) to a bona fide purchaser for value, the purchaser gets good title, even
though the merchant did not have good title
• Voidable title – owner is defrauded/tricked into giving a thief title. If the defrauder has since sold the goods
to a bona fide purchaser, the purchaser gets good title

What income is subject to FICA

• Employee’s gross wages
• Self-employed persons net profits are subject
About social security
• The employer must pay the tax and collect an employees portion of the tax
• All income derived from labor is taxed; unearned income is not taxed
• All employees are subject to the tax up to a maximum dollar amount for social security with no limit on
the Medicare; self employment income is subject to both employer and employee taxation for income over
$400

FUTA (federal unemployment tax act)

• The employer must pay tax if he employs an employee for at least 20 weeks in a year or paid $1,500 in
wages in a quarter. The employee does not pay.
• Because the employer pays, the tax is deductible as a business expense. The employee can’t deduct
• If an employers claims rate is low, he may get a deduction for state unemployment tax
• The employee’s benefits are not limited to the contributions made on his behalf

Workers compensation – enables employees to recover for work related injuries regardless of negligence
• An employee can collect whether he was negligent, grossly negligent or assumed risk
• Can not recover for injuries – resulting from intoxication, fighting or self inflicted wounds

Step 1 – what law applies? Common law or UCC?