Formation of a Contract

The Components of a Legally Enforceable Contract

FORMATION OF A CONTRACT
A contract is an agreement that is legally enforceable.
OVERVIEW OF Contract Formation
 Offer
 Termination of the Offer
 Revocation of the Offer: Irrevocable Offers & Option K
 Rejection of the Offer by Offeree
 Acceptance
 Mailbox Rules
 Acceptance by Performance
 Consideration & Substitutes for Consideration
FIRST POSSIBLE AGREEMENT ISSUE: IS THE INITIAL COMMUNICATION AN OFFER.
Fact patterns dealing with initial communication between parties. The issue will be whether it is an offer. General test
for OFFER:
 Manifestation of commitment. An offer is a manifestation of an intention of one person to contract – words or
conduct showing commitment by one person.
 Offer creates a legal obligation on the person making that offer. The person to whom the offer is made does not
have an obligation, rather than opportunity.
 The basic test is whether a reasonable person in the position of the offeree would believe that his or her assent
creates a contract.
Specific problems to watch for in Formation: Content, Context
 Formation: Content
1. Missing price term in sales contract
o (i) Sale of real estate – common law – price and description required, not an offer
o (ii) Sale of goods – Article 2 – no price requirement
2. Vague or ambiguous material terms not an offer under either common law or UCC
o [Look for any of these terms on the bar exam to trigger this rule: Appropriate, fair, reasonable].
3. Requirements contracts/output contracts: A contract for the sale of goods can state the quantity of goods to
be delivered under the contract in terms of the buyer’s requirements or seller’s output.[All, only,
exclusively, solely equals real commitment]
4. (i) Requirements or output contracts are not vague or ambiguous and are valid.
5. (ii) Increase in requirements. Buyer can increase requirements so long as the increase is in line with prior
demands. No unreasonably disproportionate limitation on increases.

1
 Formation of a Contract
The Components of a Legally Enforceable Contract

 Formation: Context
o General rules: An advertisement or price quotation is not an Offer.
o Exceptions
 (i) An advertisement can be a unilateral offer if it is in the nature of a reward.
 (ii)  An advertisement can be an offer if it specifies quantity and expressly indicates who can
accept. “First come, first served.”
 (iii)  Price quotation can be an offer if sent in response to an inquiry.

SECOND POSSIBLE AGREEMENT ISSUE: WAS THE OFFER TERMINATED?

Offers generally create the power of acceptance in the person to whom the offer was made (the “offeree”), creating a contract.
However, an offer cannot be accepted if it has been terminated.
 1. Revocation by Offeror: Words or conduct of offeror; i.e., revocation of an offer makes the offer die. The
offeror is the only one that can be revoked.
o Later unambiguous statement by offeror to offeree of unwillingness or inability to contract, or
o Later unambiguous conduct by offeror indicating an unwillingness or inability to contract that offeree is
aware of.
 2. Irrevocable Offers
o Option Contract with consideration in exchange for the option
 Promise not to revoke (promised to keep offer open) AND

2
 Formation of a Contract
The Components of a Legally Enforceable Contract

 Promise was supported by Payment

o UCC “Firm Offer Rule”: An offer cannot be revoked for up to three months if
 (i) offer to buy or sell goods,
 (ii) signed, written promise to keep the offer open, and
 (iii) party is a merchant. (Merchant is GENERALLY a person in business.)
o Detrimental reliance by offeree that is reasonable and foreseeable
o Start of performance in a unilateral contract that goes beyond mere preparation
 3. Rejection of the Acceptance by the offeree
o Express: Words or conduct of the offeree
o Lapse of time – time stated or reasonable time
 When you get a date of when it was offered and then when it was responded to, it’s usually a
lapse problem.
o Indirect rejection of the offeree
 Counteroffer of the offeree (Common law and sale of Goods)
 Terminates the original offer and becomes a new offer
 Bargaining and inquiring does not create a counteroffer or terminate the offer.
 Conditional acceptance by the of the offeree (Common law and sale of Goods)
 Terminates the original offer and becomes a new offer
 Language such as: If, only if, but, provided, so long as, on condition that…
 Additional terms:
 Mirror Image Rule:Under common law, a response to an offer that adds new terms
(rather than conditional) is treated like a counteroffer rather than an acceptance.
 UCC: Additional terms are a “seasonable expression of acceptance.” It is an
enforceable contract.

3
 Formation of a Contract
The Components of a Legally Enforceable Contract

 The additional term is a part of the contract only if:

o (i) both parties are merchants AND
o (ii) additional term is not “material” [generally, anything that
changes a party’s legal rights IS material] AND
o (iii) the additional term is not objected to by original offeror.
o 4. Revocation by Operation of Law [Death]
 Death of a party prior to acceptance. Death or incapacity of either party after the offer, but
before acceptance, terminates offer unless it is an option K or K for land.

THIRD POSSIBLE AGREEMENT ISSUE: ACCEPTANCE OF AN OFFER:

Look at the offer for information about how the offer was accepted and who accepted.
Methods of Acceptance
A. The offeror can control the method of acceptance or whether the offeree must give notice that it has accepted by
performance in the Contract
B. When the offer is silent as to the method of acceptance, time of acceptance or notice of acceptance, it may be
accepted by Performance or Mailbox.
 1. Performance
o Common Law: Start of performance
 Starting to perform is treated as an implied promise to perform and so there is a bilateral
contract.
 Exception: UNILATERAL K. Start of performance is not acceptance of unilateral contract
offers. Completion of performance is required.
o UCC: Providing a promise to ship goods in writing or promptly shipping conforming goods
 Exception: The seller of goods that promptly sends the "wrong" goods has acceptance and
breached the K.
 However, an Accommodation (i.e., explanation) is a counteroffer and no breach.
 “out of red, hope that you can use blue instead = counteroffer and no breach.
 2. Mailbox Rule
o All communications OTHER THAN ACCEPTANCE are effective only when received.
o Acceptance is GENERALLY effective when mailed (i.e., the “mailbox rule”).
o If a rejection is mailed before an acceptance is mailed, then neither is effective until received.
o You cannot use the mailbox rule to meet an option deadline. Acceptance effective upon RECEIPT, not
dispatch.
C. Generally, an offer can be accepted only by:
 A person who knows about the offer at the time she accepts;
 Who is the person to whom it was made;
o Offers cannot be assigned; however, options can be assigned unless the option otherwise provides.

4
 Formation of a Contract
Consideration & Substitutes for Consideration

Consideration & Substitutes for Consideration

A legally enforceable contract must be supported by consideration, which is a bargained for legal detriment incurred bye ach
party to the K by promise, forbearance or performance.

A. Consideration Approach
 First, identify the promise breaker, i.e., the person who is not doing what she promised to do.
 Second, ask whether that person asked for something in return for her promise, i.e., bargained for something.
 Third, look at the person who is trying to enforce the promise and ask what requested legal detriment that
person sustained. In sum, look for bargained-for legal detriment.
B. What are possible consideration issues?
1. “Bargained for:”Asked for by the promisor IN EXCHANGE for her promises.
o The promise must induce the detriment and the detriment must induce the promise
o Consideration fact patterns have people doing stuff that they were asked to do.
 2. “Legal detriment:”
o Obligation to do or refrain from doing something one would not otherwise be obligated to do or refrain
from doing.
 3. Promise as consideration:
o One promise can be consideration for another promise.
o Illusory promise exception: Promising to do something unless she changes her mind.
 4. Adequacy of consideration: Not relevant in contract law.
C. Failed Consideration
 1. "Past consideration” is not consideration
o Exception: expressly requested by promisor and expectation of payment by promisee:
 2. “Pre-existing contractual or statutory duty rule” [Common law different from Article 2]:
o (a) Common law: doing what you are already legally obligated to do is not new consideration for a
new promise to pay you more to do merely that. Under common law new consideration is required
for contract modification.
 Exceptions
 addition to or change in performance:
 unforeseen difficulty so severe as to excuse performance:
 third-party promises to pay on a preexisting contractual duty
o (b) Article 2:Article 2 does not have a pre-existing legal duty rule. New consideration is not required
to modify a sale of goods contract. Good faith is the test for changes to an existing sale of goods
contract.
 3. Part payment as consideration for release, i.e., promise to forgive balance of debt:
o Key is whether debt is due and undisputed
 If debt is due and undisputed, then part payment is not consideration for release.
 Not yet due (or disputed), new promise can be consideration.

Consideration substitutes
A promise is legally enforceable even though there is no consideration if there is one of the following consideration substitutes:
 Formation of a Contract
Consideration & Substitutes for Consideration

 1. A written promise to satisfy an obligation for which there is a legal defense is enforceable without
consideration.
o For example, if a debt barred by SOL, new written promise to fulfill debt is enforceable without
consideration, but only according to the written new terms.
 2. Promissory estoppel (detrimental reliance):
o Elements:
 (i)  Promise,
 (ii)  Reliance that is reasonable, detrimental, and foreseeable, and
 (iii)  Enforcement necessary to avoid injustice.
o Use Promissory Estoppel if there is no consideration.
 Consideration is a story about people promising to do something, forbearing, promising to
forebear, when it’s been asked.
 Promissory is when they do something that they weren’t asked to do.
 Formation of a Contract
Defenses to Contract Formation

REASON FOR NOT ENFORCING AGREEMENT

A. Incapacity
 infant – under 18,
 mental incompetents – lacks ability to understand agreement, or
 intoxicated persons if other party has reason to know.
1. Consequences of incapacity:
a. Right to disaffirm by person without capacity:
b. Implied affirmation by retaining benefits after gaining capacity (ratification): 3 elements
 Agreement entered into before capacity
 Capacity has since been gained
 Benefits have been retained
c. Quasi-contract liability for necessaries:A person who does not have capacity is legally obligated to pay
for things that are necessary such as food, clothing, medical care or shelter, but that liability is based on
quasi-contract law, not contract law.
B. Statute of Fraud Defense
 Designed to prevent fraudulent claims of the existence of a contract.
 Makes it harder to make such a false or fraudulent claim
 Requires the claimant to have proof other than just testimony that a contract exists before the claimant gets its day in
court.
(1) performance OR
(2) a writing signed by the person who is asserting that there was no such agreement.

Four contracts within the Statute of Frauds

1. Guarantee: Promises to answer for the debts of another [suretyship]:
a. Not merely a promise to pay but rather a promise to pay if someone else does not. B. b. LOOK FOR A
GUARANTEE. LOOK ALSO FOR THE MAIN PURPOSE
 EXCEPTION. If the “main purpose” of the obligation allegedly guaranteed was to benefit the
guarantor, then that guarantee is not within the Statute of Frauds. Enforceable K. No defense.
2. Service contract not “capable” of being performed within a year from the time of the contract (i.e., more than one
year):
a. Specific time period, more than a year – S/F applies.
b. Specific time, more than a year from date of contract – S/F applies
c. Task (nothing said about time) – S/F does not apply.
 “Capable,” in essence, means theoretically possible with unlimited resources; ignore what
actually happens; key is what might have happened with unlimited resources.
d. “Rest of your Life” – S/F does not apply.
3. Transfers of interest in real estate (with exception for leases of year or less):
4. Sale of goods for $500 or more:
How is Statute of Frauds satisfied? Get fence lifted.
1. Writing
a. Common Law
 Look at the contents of the writing OR WRITINGS – all material terms test [who and what].
 Look also at who signed the writing. Satisfies SOF and no defense if the writing has been signed
only by the defendant, i.e., person who is asserting the Statute of Frauds defense.
b. UCC
 Formation of a Contract
Defenses to Contract Formation

 The writing must simply indicate that there is a contract for the sale of goods and contain the
quantity term [how many].
 Signed writing is not required if both parties are merchants and the party asserting the SOF
received a signed writing memorializing the agreement and failed to respond within 10 days.
2. Performance
a. Service K - Full performance by either party satisfies the Statute of Frauds
b. Real Estate - Part performance satisfies the Statute of if any TWO of the following THREE present:
 improvements to the land,
 payment, and
 possession.
6. Sale of Goods K:
 Delivery of goods satisfies SOF.
 Once seller makes a substantial beginning toward performance of custom made goods, SOF
satisfied
3. Judicial Admission
 If the defendant asserting a Statute of Frauds defense admits in a pleading or testimony that he had
entered into an agreement with the plaintiff, the purpose of the Statute of Frauds – protection against
fraudulent or otherwise false claims of an agreement – is fulfilled and so the Statute of Frauds is
satisfied – no Statute of Frauds defense.
4. Estoppel
 Some cases hold that the plaintiff’s reliance on the defendant’s oral promise can estop the defendant
from asserting a Statute of Frauds defense. This won’t be a multiple choice question. Law is too
divided.
 Formation of a Contract
SOF Showing Up in Other K Issues

USE OF STATUTE OF FRAUDS ON THE BAR EXAM FOR QUESTIONS OTHER THAN WHETHER THERE IS A
STATUTE OF FRAUDS DEFENSE TO ENFORCEMENT OF AGREEMENT
A. Written proof of authorization to enter into contract for someone else:
 Issue is when do RULES OF LAW REQUIRE that a person have written authorization in order to
execute a contract for someone else.
 RULES OF LAW REQUIRE that the authorization must be in writing only if the contract to be signed is
within the Statute of Frauds, i.e., the authorization must be of “equal dignity” with the contract.
B. Sometimes there is no LEGAL requirement of written evidence of an alleged modification of a written contract. Resolve
any LEGAL issue of whether such written evidence of the modification is needed by
 looking at the deal with the alleged change and
 determining whether the deal with the alleged change would be within the Statute of Frauds.
 If the deal with the alleged change would be within the Statute of Frauds, then the alleged modification agreement
must be in writing.
C. Contract provisions requiring written modification:
This is the only place in which you ignore what the parties agreed to.
1. Common law: contract provisions requiring that all modifications be in writing are not effective – ignore
contract language.
7. UCC: contract provisions requiring written modifications are effective unless waived
 Formation of a Contract
Illegality, Misrepresentation, Duress, Unconscionability

 
I. MORE REASONS FOR NOT ENFORCING AN AGREEMENT
A. Illegality (Legality determined by la existing at time of K formation)
1. Illegal subject matter: K not enforceable
2. Legal subject matter but illegal purpose: K enforceable by one who did not know about its legal
purpose
B. Public Policy
1. Courts can refuse to enforce an agreement because of public policy.
2. Look for an exculpatory agreement [K provision eliminating liability for wrong] that exempts
intentional or reckless conduct from liability or a covenant not to compete without a reasonable need or
reasonable time and place limits.
C. Misrepresentation
1. a statement of “fact” before the contract,
2. by one of the contracting parties or her agent,
3. that is false [factually incorrect], and
4. induces the contract [relied on]. No wrongdoing required for material misrepresentations.
D. Nondisclosure: Generally, a person making a contract has no duty to disclose what she
knows.
E. Duress or Undue Influence
1. Physical duress.
2. Economic duress.
a) Elements of economic duress:
(1) “bad guy” – improper threat which is usually threat to breach existing contract,
AND
(2) “vulnerable guy” – no reasonable alternative.
F. Undue influence:
1. special relationship between the parties and
2. improper persuasion of the weaker by the stronge
G. UNCONSCIONABILITY
1. unfair surprise (procedural) and oppressive terms (substantive) are,
2. tested as of the time the agreement was made
3. by the court.
H. AMBIGUITY IN WORDS OF AGREEMENT.There will be no contract if:
1. parties use a material term that is open to at least two reasonable interpretations, and
2. each party attaches different meaning to the term, and
3. neither party knows or has reason to know the term is open to at least two reasonable interpretations.

I. MISTAKE OF FACT EXISTING AT TIME OF CONTRACT.

 Advice: Be reluctant to choose, no K because of mistake.
1. Mutual, material mistake of existing fact: Mutual mistake going to the substance of the agreement, no
agreement.
2. Unilateral mistake of material fact: Generally, courts have been reluctant to allow a party to avoid a
contract for a mistake made by only one party. There will be relief for situations in which the other
party had reason to know of the mistake, i.e., palpable mistake.
 Terms of the Contract
Parole, Risk of Loss, Warranties

I. Parole Evidence Rule

A. Parole Evidence Rule: Extrinsic evidence to a written agreement (e.g. Prior contemporaneous agreements) is not
admissible to supplement or contradict the written agreement.
 Applies when the writing is a complete integration. Parties ust intend the writing to express their final agreement.

B. Bars evidence of:

 Negotiation before K becomes integrated
 Agreements before K becomes integrated (written or oral)

C. Exceptions to Parole Evidence Rule:

 A court find the agreement was only partially integrated or
 Addiitonal terms would ordinarily be in a separate agreement

D. Parole evidence rule does not apply nor does it bar admission of
 Post agreements. Evidence of oral agreements made after writings
 Clerical. Evidence necessary to determine if there was a mistake in the process of reducing an agreement to
writing.
 No formation. Evidence concerning a party’s defense based on misrepresentation, fraud or duress
 Ambiguities. Evidence used to resolve ambiguities about the meaning parties intended to give particular terms in
the writing.

E. Conduct can also be a source of contract terms.

 Forms of conduct:
o Course of performance – same people, same contract
o Course of dealing – same people, different but similar contract
o Custom and usage - different but similar people, different but similar contract - to explain words in
contracts or to fill gaps in contracts
 Words always better, but afterward, within conduct, 1 is better than 2, 1 and 2 is better than 3.

11
 Terms of the Contract
Parole, Risk of Loss, Warranties

II. Deliveries and Risk of Loss

A. UCC FOR TERMS IN SALES OF GOODS CONTRACTS (“default” terms) GAP FILLING
1. Destination Contracts arises for anything not “FOB – seller’s city”
Delivery obligations of seller of goods if delivery by common carrier [the in betweener: Matson]:
2. Shipment Contracts are indicated by “FOB – seller’s city”
a. Sellers obligations are satisfied when seller:
i. gets the goods to a common carrier, and
ii. makes reasonable arrangements for delivery, and
iii. notifies the buyer.
B. Risk of loss arises if goods are lost or destroyed by no fault by either party after K formation but before buyer receives the
goods.

Factors for determining risk of loss

1. Agreement: agreement of the parties controls.
2. Breach: breaching party is liable for any uninsured loss even though breach is unrelated to problem. UNRELATED
BREACH.
3. Common carrier delivery: risk of loss shifts from seller to buyer at the time the seller completes its delivery
obligations.
4. Default (no agreement, no breach, no delivery by a carrier): the determining factor is whether the seller is a merchant.
WHETHER THE BUYER IS A MERCHANT IS IRRELEVANT.
5. Merchant Seller – risk of loss shift to buyer on the buyer’s “receipt” of the goods
6. Nonmerchant seller - risk of loss shifts from a to buyer when he or she “tenders” the goods. Tender = Making the
goods available.

12
 Terms of the Contract
Parole, Risk of Loss, Warranties

III. Warranties
A. Warranties of quality. Quality problems.
1. Express: Seller makes promises or describes facts about a product or its use that is more than mere opinion or
commercial puffery (“top quality.” NOT AN EXPRESS WARRANTY; opinion)
(a) “all steel.”
(b) guaranteed to operate for two years.
(c) seller’s showing buyer a sample.
2. Implied warranty of merchantability:When any person buys any goods from any merchant, a term is
automatically added to the contract by operation of law – that the goods are fit for the ordinary purpose for which
such goods are used. Here and here alone, merchants are limited to a person selling the goods of the kind
purchased.
3. Implied warranty of fitness for a particular purpose: Seller warrants that goods are fit for buyers purpose if
a. Buyer has a particular purpose
b. Buyer relies on seller to select suitable goods
c. Seller has reason to know of buyer’s purpose and reliance

B. Limitations on warranty liability:

1. Statute of limitations:There is a four-year statute of limitations, and generally the statute starts running on
possible warranty actions when the “tender of delivery is made,” not when the buyer learns that the product is
defective.
2. Privity:If the plaintiff did not buy the goods from the defendant, there is a possible privity issue. There is a
division among states as to how to resolve privity issues. Your state materials will explain the privity law in your
state if lack of privity is a possible state essay issue. Generally, what is required is that the plaintiff actually
contracted with that defendant.
3. Buyer’s examination of the goods:Look for a fact pattern that tells you that the buyer has examined the goods.
There are no implied warranties as to defects which would be obvious on examination.
4. Disclaimer – e.g., “there are no warranties:”
a. Express warranties generally cannot be disclaimed.
b. implied warranties of merchantability and fitness can be disclaimed in EITHER of the following ways:
i. CONSPICUOUS language of disclaimer, mentioning merchantability, OR
ii. “as is” or “with all faults.” Doesn’t make express warranties disappear.

C. Limitation of remedies: Provision that limit or sets recovery for any breach of warranty: Valid for all warranties, unless
unconscionable (e.g. limiting for breaches that cause serious injury.

13
 Perfect Tender

A. PERFECT TENDER
1. Applies to sale of goods
2. Goods and delivery must conform to contract terms You need to know three things about “perfect tender” for the bar
exam.
3. A less than “perfect tender” by the seller generally gives the buyer the option of rejection of the delivered goods, so
long as the buyer acts in good faith. First, “perfect tender” only applies to sales of goods.

B. REJECTION OF THE GOODS: Distinguish rejection of goods (breach) vs. rejection of offer (no breach)
1. Imperfect tender - Buyer has option to retain or reject nonconforming goods.
a. If the seller does not meet the perfect tender standard, the buyer has the option to retain and sue for damages
OR
b. reject “all or any commercial unit” and sue for damages.
2. Buyer must take reasonable care of the rejected goods.
3. Buyer must give seller reasonable time to arrange for removal of the goods.
4. If seller gives no info regarding removal, buyer can return good, store them for seller, or resell on behalf of seller and
give seller the profit.

C. Rejection alternative is limited by CURE, INSTALLMENT CONTRACT, and ACCEPTANCE.

1. CURE: If a buyer has notified seller of her imperfect tender, seller may have opportunity to cure if:
a. Time for perf not expired
b. Seller has rsx grounds to believe the nonconforming goods sent would be acceptable based on prior dealings
with buyer
c. Seller give buyer rsx notice of intent to cure and must then deliver the conforming goods.
 Note that a seller does not always have the opportunity to "cure," and that the buyer cannot compel the seller
to cure.
2. INSTALLMENT CONTRACTS :An installment contract REQUIRES or AUTHORIZES delivery of the goods in
separate lots and are to be separately accepted. The buyer has the right to reject an installment only where there is a
substantial impairment in that installment that can't be cured. Something really bad wrong in the installment.
a. Rejection is limited to that installment
b. Cannot can cancel entire K based on nonconforming installment if that installment substantially impairs the
value of the entire K.
3. ACCEPTANCE OF THE GOODS : If the buyer accepts the goods, it cannot later reject them.
a. Acceptance Avenue [it’s a one way street, you can’t get off] or Rejection Road.
b. Payment and acceptance:Payment without opportunity for inspection is not acceptance.
c. Rejection must be timely. Failure to reject after the buyer had reasonable time to reject is acceptance.
d. Retention as acceptance:
i. Effect of buyer’s keeping goods is implied acceptance – LOOK FOR THE BUYER'S KEEPING
THE GOODS WITHOUT OBJECTION: more specifically look for a fact pattern that states when
buyer first received goods and when buyer first complained to seller.

D. REVOCATION OF ACCEPTANCE OF THE GOODS: In limited circumstances, a buyer can effect a

cancellation of the contract by revoking its acceptance of the goods.
Requirements
1. nonconformity substantially impairs the value of the goods, and
2. excusable ignorance of grounds for revocation or reasonable reliance on seller's assurance of satisfaction, and
3. revocation within a reasonable time after discovery of nonconformity. .

Comparison of rejection of the goods and revocation of the goods (two different ways of buyer’s returning the goods and
recovering any payment):
 Perfect Tender

You’ll see this on the exam with these facts: Sale of goods where buyer has the goods, unhappy, and wants her money back.
 REMEDIES FOR AN UNEXCUSED NONPERFORMANCE

Non-Monetary
A. Specific performance/injunction (it’s almost never the wrong answer on the MBE). Be reluctant to raise this as a remedy
for an essay.
Equitable remedy: Look for adequacy of remedy at law or unclean hands, or other parties’ equities.
1. Contracts for sale of real estate
2. Contract for sale of goods: Unique goods: antiques, art, custom- made or other appropriate circumstances.
3. Contract for services: No specific performance, possible injunctive relief.
B. Seller’s reclamation from an insolvent buyer of goods: Right of an unpaid seller to get its goods back. Key facts are that
1. buyer must have been insolvent at the time that it received the goods, and
2. seller demands return of goods within 10 days of receipt (this “10- day rule” becomes a “reasonable time rule” if,
before delivery, there had been an express representation of solvency by the buyer), and
3. buyer still has goods at time of demand.
C. Buyer’s recovery of identified, paid for goods from a seller who becomes insolvent within 10 days:

MONEY DAMAGES FOR BREACH OF CONTRACT: GENERAL CONCEPTS

A. Overview
1. Policy: Compensate plaintiff, not punish defendant.
2. Essay Advice: Start an essay regarding $ damages: the purpose of money damages in Hawai i is to compensate the
plaintiff. Hawaii’s money damages rule compensates the plaintiff by protecting his/her expectation interest.

B. Vocabulary:
1. EXPECTATION
2. Incidental
3. CONSEQUENTIAL
4. Avoidable
5. Certainty
6. Reliance
7. Liquidated

C. Measure of damages:
1. General approach – protection of expectation:Expectation simply means that people who contract expect that the other
person will not breach. Expectation damages protect that expectation.
Accordingly,
(1) look to facts for dollar value of performance without breach,
(2) look to facts for dollar value of performance with breach, and
(3) compare the two to determine the amount of damages.

2. Damages rules for sales of goods:Part 7 of Article 2 reflects the general contract damages policy of putting the
innocent party where it would have been had the contract been performed, i.e., expectation.
a. Damages for seller’s breach:
i. Seller breaches, buyer keeps the goods
 [Fair market value if perfect – fair market value as delivered] or [cost of repair].
ii. Seller breaches, seller has the goods:
 [market price at time of discovery of the breach – contract price] or [reasonable replacement
price – contract price].
b. Damages for buyer’s breach
i. Buyer breaches, buyer keeps the goods
 The K price.
ii. Buyer breaches, seller has the goods
 [contract price – resale unless seller cannot resell in which case the seller can recover the
contract price and in some situations provable lost profits].
c. Volume Seller.
i. Lost profits for lost volume seller
ii. Provable lost profit. Not 0 and not the K price.

Additions and limitationsof Damages

A. Additions
 REMEDIES FOR AN UNEXCUSED NONPERFORMANCE

1.INCIDENTAL damages.
 They are always recoverable. Without qualification or limitation. Storing rejected goods, advertising to have to
resell.
2. Plus foreseeable CONSEQUENTIAL (special) damages.
 Second in importance to expectation.The term “consequential damages” is very important. And very confusing.
Consequential damages does not mean all damages caused as a consequence of the breach.
3. Think of damages as being either
 general damages, i.e., kind of loss that any person would sustain or
 consequential damages, i.e., kind of loss that is special to this plaintiff.
i. Consequential damages are limited to damages arising from P’s special circumstances and
ii. recovery of consequential damages is limited to situations in which D had reason to know of these
special circumstances at the time of the contract.
B. Limitations
1. AVOIDABLE damages:
a. No recovery for damages that could have been avoided without undue burden on plaintiff. Burdens of
pleading and proof on defendant.
b. This is a partial defense for the defendant being sued so he doesn’t have to pay the full contract price.
2. Less damages that cannot be established with reasonable certainty:
a. Look for fact pattern involving a services contract and plaintiff engaged in new business or a new business
activity.
b. Consider reliance recovery as an alternative to expectation.
c. On bar, where expectation damages cannot be proved with necessary certainty because it’s new, we still
permit recovery on some kind of quasi K theory or reliance.

C. LIQUIDATED damages: Look for contract provision fixing amount of damages. Issue will be validity: concern is
whether provision is too high – a penalty.
1. Tests are
a. damages were difficult to forecast at time contract was made and
b. provision is a reasonable forecast.
 Excuses for Breaching a Contract

EXCUSE OF NONPERFORMANCE OF CONTRACT BECAUSE OF SOMETHING THAT

HAPPENED AFTER CONTRACT WAS MADE

A. Approach: Look for information in fact pattern about

1. nonperformance of contract and
2. something happening after contract.
B. Excuses that discharge duties to perform under Contract
1. Nonperformance
2. Anticipatory Repudiation
a. Unambiguous conduct or statement made by the repudiating party, prior to the time
performance was due
b. Anticipatory repudiation generally gives rise to an immediate claim for damages for
breach unless the claimant has already finished her performance. Then, you have to wait
until contract date.
c. Retraction of anticipatory repudiation: Anticipatory repudiation can be withdrawn
(retracted) so long as there has not been a material change in position by the other party. If
the repudiation is timely retracted, the duty to perform is reimposed but performance can
be delayed until adequate assurance is provided.
3. Insecurity: conduct indicating that a party will not perform. What if the words or conduct of a party
merely makes performance uncertain? Look for this in sale of goods problems.
a. If the words or conduct of one party give “reasonable grounds for insecurity,” then the
other party can, in writing, demand adequate assurance and if it is “commercially
reasonable,” can suspend performance until it gets adequate assurance.
b. The three concepts again are
i. reasonable grounds for insecurity, and
ii. written demand for adequate assurance, and
iii. commercially reasonable to stop performance.
4. Improper Performance
a. Article 2 and perfect tender rule:
b. Common law and material breach [think of this in the context of EXCUSES] rule:
i. Usually is a quality or quantity breach.
1) First, damages can be recovered for any breach.
2) Second, only a material breach by one guy excuses the other guy from
performing a contract governed by common law.
3) Third, whether a breach is material is a fact question (and so whether a
breach is material is not likely to be a bar exam question).
4) Fourth, if there is substantial performance then the breach is not material. If
the breach is material, then the performance was not substantial. Can’t have
both!
ii. Material breach because of the quality of performance:
iii. Material breach because of the quantity (amount) of performance:
 Divisible contract corollary:Divisible contract exception. In a “divisible
contract” there can be a contract law recovery for substantial performance
of a divisible part even though there has been a material breach of entire
contract. On the bar, look at whether price is stated as a lump sum or on a
per performance basis.
5. NONOCCURRENCE OF AN EXPRESS CONDITION. Limits Obligations.
a. Conditions are agreed upon limitations on performance. They make an obligation to
perform contingent on the occurrence of some specific event. Different than conditional
acceptance.
 triggering words: “if,” “only if,” “provided that,” “so long as,” “subject to,” “in the
event that,” “unless,” “when,” “until,” and “on condition that” in the contract.
b. What is the standard for determining whether an express condition has occurred, i.e.,
been “satisfied”?
 General rule – strict compliance is required for “satisfaction” of a condition

18
 Excuses for Breaching a Contract

 Exception: Condition of personal satisfaction of one of theparties – honest and good

faith dissatisfaction: courts simply look to whether a reasonable person would be
satisfied.
c. Elimination of condition
i. Waiver
1) Identify the person who benefits from or is protected by the express
condition. Then look for a statement by that person giving up the benefits
and protection of the express condition.
2) Payments are conditioned. O is the one being protected by the condition. O
can give up that condition because the person being protected by it, O,
waived it. Only O can waive it.
ii. Prevention:Look for the person protected by the express condition hindering or
preventing the occurrence of the express condition.
d. What is the difference between conditions precedent and conditions subsequent?
i. “conditions precedent” – conditions that excuse performance until and unless
they occur.
ii. Conditions subsequent occur subsequent to the start of performance and excuse
performance when they occur.
1) Conditions subsequent, like conditions precedent, do not create new
performance obligations but instead merely limit performance obligations
otherwise created.
6. EXCUSE BY REASON OF A LATER CONTRACT
a. Rescission (cancellation): The key is whether performance is still remaining from
each of the contract parties. (executory).
b. What if P had already finished the work before P and O agreed to rescind? Rescission
invalid if one person has already completely performance. Not legally enforceable.

19
 Excuses for Breaching a Contract

C. Accord and satisfaction (substituted performance):

1. An agreement by the parties to an already existing obligation to accept a different performance in
satisfaction of the existing obligation.
2. Effect of accord AND SATISFACTION:
a. If the new agreement (“the accord”) is performed (satisfaction), then performance of
the original obligation is excused.
b. If the accord is not performed, then the other party can recover on either the original
obligation or the accord.

D. Modification (substituted agreement):Modification is an agreement by parties to an existing obligation to accept

a different agreement in satisfaction of the existing obligation.
1. Performance is excused immediately at the time of the modification.
2. Intent is going to matter. Did they intend the old obligation to go away (modification)? Or did they
intend for a new agreement in which the old agreement could be excused only upon satisfying the new
agreement?

E. Novation: A novation is an agreement between BOTH parties to an existing contract to the substitution of a new
party, i.e., same performance, different party.
1. Novation excuses the contracted for performance of the party who is substituted for or replaced.
2. Note: Novation requires the agreement of BOTH parties to the original contract, and excuses the
person replaced from any liability for nonperformance. Delegation does not require the agreement of
both parties and does not excuse.

20
 Excuses for Breaching a Contract

F. EXCUSE OF PERFORMANCE BY REASON OF A LATER, UNANTICIPATED EVENT.

1. Approach
a. which party is arguing that her performance is excused,
b. what her performance is,
c. whether post- contract occurrence affected her ability to perform, not just the cost of
her performance.
2. Damage or destruction of subject matter of contract:
a. Common law. Look at whether the party accused of breaching can still perform.
b. Article 2If sale of goods, do risk of loss first.
i. Risk of loss on the buyer:If risk of loss is on the buyer, then the buyer pays.
ii. Risk of loss on the seller:If the risk of loss is on the seller, then the buyer does
not have to pay. Whether the buyer can recover damages from the seller depends on
the facts.
G. Death AFTER contract:
1. General effect of death on contract obligations:Death does not make a person’s contract obligations
disappear.
2. Exception:Death or injury of a party to contract who is “special” person excuses performance.

H. Subsequent law or regulation:

1. Later law makes performance of contract illegal – excuse by impossibility.
2. Later law makes mutually understood purpose of contract illegal – excuse by frustration of purpose.
 Third Party Issues: Third party beneficiaries

A. Third-party beneficiary:Not a party to the contract. Able to enforce contract others made for her benefit.
1. Parties
a. Promisor:Look for person who is making the promise that benefits the third party
b. Promisee:Look for person who obtains the promise that benefits the third party.
c. Intended/incidental:
i. Only intended beneficiaries have contract law rights. Intent of the two parties to contract
determines whether intended or incidental. On the bar exam, intended beneficiaries will
always be named in the contract [remember, this is just for the bar exam. Not in real life.
Otherwise, it’s just too hard to figure out if they were an intended beneficiary
ii. Creditor/donee:Intended beneficiaries are either donees or creditors. Usually,
presumptively, donees. Look at whether third-party beneficiary was already a creditor of
the promisee before the contract.
2. Dealing with efforts to cancel or modify:
a. Rights are vested and the contract cannot be canceled or modified without her consent unless the
contract otherwise provides, when one of the following present:
i. third party knows of
ii. has relied on or assented as requested.
iii. Sued
b. If so, her rights have vested
3. Who can sue whom? (Four bar exam important rules):
a. Beneficiary can recover from promisor [person that had to do something for promisee who is doing it
for the benefit of the third party]:
b. Promisee can recover from promisor:
c. General rule: Beneficiary cannot recover from promisee:
 Limited exception: Creditor beneficiary can recover from promisee BUT ONLY on pre-existing
debt
4. Defenses: If the third-party beneficiary sues the promisor, the promisor can assert any defense that he
would have had if sued by the promisee.

22
 Third Party Issues: Assignments

B. A PERSON TRYING TO ENFORCE A CONTRACT SHE DID NOT MAKE: ASSIGNMENT OF RIGHTS
1. Assignment is a transfer of rights under a contract. Has to be a valid K, not an offer. K between only two
parties and one of the parties later transfers rights under that contract to a third party.
a. Need to see the difference between assignment of an offer and assignment of a contract.
b. Need to see the difference between assignment of a contract and third-party beneficiary.
2. Vocabulary:
a. Assignor: Party to the contract who later transfers rights under the contract to another. [Batman in
(H206)].
b. Assignee: Not a party to the contract. Able to enforce the contract because of the assignment.
[Robin in (H206)].
c. Obligor: Other party to the contract. [Gotham in (H206)].
3. Limitations on assignment
a. 1. If there is a contract provision regarding assignment:If the fact pattern includes language of
contract regarding assignability, determine whether the contract (a) prohibits assignments or (b)
invalidates assignments. Far more likely to see Prohibits.
i. Prohibition: Language of prohibition takes away the right to assign but not the power to
assign, which means that the assignor is liable for breach of contract, but an assignee
(Robin, the one that got assigned the contract) who does not know of the prohibition can
still enforce the assignment.
ii. Invalidation: Language of invalidation [void] takes away both the right to assign and the
power to assign so that there is a breach by the assignor and no rights in the assignee.
iii. IF ANY DOUBT IN YOUR MIND AS TO WHETHER PROHIBITION OR
INVALIDATION, THEN PROHIBITION.
iv. If there is nothing in fact pattern about contract language regarding assignability:
1. Even if a contract does not in any way limit the right to assign, common law
bars an assignment that substantially changes the duties of the obligor.
a. Assignment of right to payment (never substantial change):
b. Assignment of right to contract performance other than right to
payment (usually substantial change on bar):
4. Requirements for assignment:
a. General rule is that consideration is not required, but gratuitous assignments (and only gratuitous
assignments) can be revoked.
5. Who can sue whom?
a. Assignee can recover from the obligor.
b. Assignor for consideration cannot recover from obligor:
o An assignment is a transfer of K rights.
 Third Party Issues: Assignments

o After an assignment, the assignor has no K rights.

o Assignment for considerations cannot be revoked.
6. Defenses: Obligor has same defenses against assignee as it would have against assignor.
7. Payment by obligor to assignor is effective until obligor knows of assignment. Similarly, modification
agreements between obligor and assignor are effective if the obligor did not know of the assignment.
8. Implied warranties of assignor in an assignment for consideration: In an assignment for consideration, the
assignor warrants
a. the right assigned actually exists, and
b. the right assigned is not subject to any then existing defenses by the obligor, and
c. the assignor will do nothing after the assignment to impair the value of the assignment. Assignor,
however, does not warrant what the obligor will do after the assignment
9. Multiple assignments
a. All gratuitous assignments:General rule: Last assignee generally wins
b. Multiple assignments for consideration:
c. Very, very, very, limited exception:
i. A subsequent assignee takes priority over an earlier assignee for value only if he both
1. (i) does not know of the earlier assignment and
2. (ii) is the first to obtain
a. (1) payment, (2) a judgment, (3) a novation, OR (4) indicia of
ownership [“four horsemen” rule].
 Third Party Issues: Delegation

C. DISPUTES ARISING FROM A PERSON’S PERFORMING A CONTRACT SHE DID NOT MAKE:
DELEGATION OF DUTIES. Transferring work, not rights. The burdens, the duties.
1. Delegation: Party to a contract transferring work under that contract to third party. For example, P contracts
to paint O's house for $1,000. P (delegating party) and X (delegatee) agree that X will paint O's (obligee)
house.
2. Relationship of assignment and delegation: A contract creates both rights and duties.
a. Assignment is the transfer by a party to a contract of his rights or benefits under the contract to a
third party who was not a party to the contract.
b. Delegation is the transfer by a party to a contract of his duties or burdens under the contract to a
third party who was not a party to the contract.
i. Often a contracting party makes both an assignment and a delegation of his rights and
duties under the contract to a third party. Often multistate examiners use the term
“assignment” in a problem involving an assignment and a delegation and even in a
problem involving only a delegation.
ii. Delegation for consideration. No assignment.
3. Which duties are delegable?
a. Generally, contractual duties are freely delegable. The limitations on delegation are very limited.
b. Delegations are permitted unless either
i. contract prohibits delegations or prohibits assignments or
ii. “personal services contract” that calls for VERY SPECIAL skills.
4. Nonperformance by delegatee. K between 2 people. Valid delegation. Non performance by the delegatee.
a. Delegating party always remains liable.
b. Delegatee liable only if she receives consideration from delegating party.