New York Bar Exam Preparation Condensed Revision Notes for Contracts
KEY ISSUE 1 – APPLICABLE LAW
MBE Test on 2 sources of Law
Article 2 – Sale of Goods
Common Law – All other contracts
Article 2 – Sales of Goods
Article 2A – A lease of Goods
Common Law / NY Distinctions– All other contracts
KEY ISSUE 2 – CONTRACT FORMATION
- CONTRACTS– a legally enforceable agreement
- Express Contract – created by the parties’ words (written or oral)
- Implied Contract – created by the parties conduct
B.Quasi-Contract – protects against unjust enrichment when contract law yields an unfair result.
- Bilateral Contracts – offer can be accepted either by promise or performance.
- Unilateral Contracts – offer can be accepted only by complete performance.
First step of agreement process: was there an offer?
- OFFER – a manifestation of an intention to be bound.
- Advertisements – are generally not offers, specific quantity than yes it is an offer.
- Indefiniteness – any terms too indefinite to be enforced, signals lack of commitment
- Open price term – No problem in most cases. Courts will infer a reasonable price except in a contract for the sale of real property.
- Requirements and Output Contracts – Okay under Article 2 despite uncertainty. Quantity will be measured by the buyer’s/sellers good faith requirement. However cannot take the seller/buyer by surprise, not good faith if asks for a quantity that is out of line.
Second step of agreement process: was the offer terminated?
- Lapse – offer lapses after a stated term or a reasonable time has passed.
Revocation – an offer terminates when the offeror revokes the offer.
Direct Revocation – offeror indicates directly to offeree that offeror has changed his mind about the deal.
Indirect Revocation – Offeror engages in conduct that indicates that offeror has changed his mind and offeree is aware of the conduct.
- Option – an option is a promise which is paid for, to keep the offer open.
Offer revocable if the promise has not been paid for, merely promising to keep the offer open does not make it irrevocable.
Promise to keep the offer open is in writing and signed
MBE – Still revocable
NY- writing and signs the offer would be irrevocable.
- Foreseeable reliance before acceptance e.g. contractor submits a bid relying on a subcontractors bid.
- Starting to perform in a unilateral contract
(Preparing to perform not enough)
MBE – Once performance begins by offeree – Offeree can revoke, Offeror cannot.
NY- Offeror may revoke his offer until performance is complete
- Firm Offer (Article 2): If a merchant promises in a signed writing to keep an offer open, the offer is irrevocable. Under Article 2 – almost every business is a merchant.
Time period – reasonable time, not to exceed 3 months (after that it may still be open but the offer will become revocable)
Revocation – is effective only when it has been received
Rejection – an offer terminates when offeree rejects it
- Counteroffer – operates as a rejection, but mere bargaining does not.
- Conditional acceptance – not an acceptance at all.
- Acceptance Varying Offer – Common Law differs from Article 2
- Common Law- acceptance must mirror offer (Mirror Image Rule)
- Sale of Goods (Article 2) – acceptance need not mirror offer.
No mirror image rule – offerees adding or changing a term does not prevent acceptance under article 2. HOWEVER
Offerees Term is included only if:
- Both parties are merchants
- The terms is not a material (hardship or surprise) change and
- No objection within a reasonable time
- Death of a party before acceptance – terminates a revocable offer but not an irrevocable offer.
Third Stage of agreement process: has the offer been accepted?
- Language of the offer controls
- Starting performance
Bilateral Contract = acceptance of an offer + implied promise to finish the job
Unilateral Contract = not acceptance of an offer, only completing performance is acceptance
MBE – Staring Performance = Make the offer irrevocable
NY – Starting Performance – offer Revocable
- Improper Performance
Common Law = Simultaneous acceptance & Breach
Sale of Goods = Simultaneous acceptance & breach UNLESS S send the goods as an accommodation to B
- Offeree’s silence – generally not acceptance
MBE – Acceptance= Unsolicited goods silently take offered benefits
NY – Unsolicited goods =are considered unconditional gifts
- Timing of Acceptance
Mailbox Rule = acceptance effective when mailed
- Offer provides otherwise
- Irrevocable offer
- Offeror relies on overtaking rejection
- Rejection sent first
Is an agreement legally-enforceable? Defect in formation
- Lack of Capacity
Minors, intoxicated, mentally incompetent
An incapacitated D = may disaffirm the contract
Minor = may disaffirm or enforce the contract
- Implied Affirmation = retaining the benefit of the contract without complain after gaining or regaining capacity
An incapacitated = liable for necessaries only on a quasi-contract basis.
- Economic Duress
- Misrepresentation of material fact – no matter if innocent/honest
- Misunderstanding (ambiguity)
One party knows about the ambiguity or has reasons know = contract on the other parties terms
- Mistake = facts as they exist when parties make contract
Mutual mistake = about material fact allows the adversely affected party to avoid the contract.
Unilateral mistake = usually not an effective defence
- Lack of consideration
- Consideration = Bargain (promise, performance or forbearance) + legal detriment
- Past Consideration
MBE – is not a consideration at all
NY – Is considerations, if expressly stated in a signed writing & can be proven
- Adequacy of consideration (value) – irrelevant if there is a bargain.
- Illusory promise – unenforceable
- Contract Modification – Common law & Article 2 differ
Pre-existing duty not enough – new consideration is required
If In witting? – No difference
3rd party – cannot rely on pre-existing duty
NY – Signed & writing – no need for new consideration
Sale of Goods (Article 2)
Consideration not required BUT must show good faith
Partial Payment of debt
Undisputed debt – pre-existing duty to pay
If In writing? – No difference
NY – Signed & writing – no need for new consideration
Disputed – there is consideration for promise to forgive the remainder of the debt
Time-Barred debt – written promise to pay a debt, collection which is barred by SOL =enforceable even without consideration
Promissory estoppel as a substitute for consideration – foreseeable reliance makes a promise enforceable even without consideration
- Covenant not to compete – court will invalidate/narrow that operates as a restraint of trade.
- scope of the covenant (duration & geography)
- need for the covenant (uniqueness of services)
- Exculpatory Clause –eliminates liability for negligence NOT gross negligence or intentional torts
- Unconscionability - not valid defence against enforcement
Unless you have Procedural (inequality bargaining power) & Substantive (terms favouring one side)
KEY ISSUE THREE – STATUTE OF FRAUDS
- When is writing required?
- Transfer of an interest in real property
Equal dignity rule – agents authorization must also be in writing
- Performance cannot be completed within a year – from the date it was made
MBE – life contract not within the statute
NY – Life contract is within the statute – must be in writing
- Sale of Goods (Article 2) for $500 or more
- Lease of Goods (Article 2A) FOR $1000 or more
- Suretyship = promise to answer for the debt of another
- Contract modification – must be in writing if the contract as modified is within the statute
Prohibition on oral modification:
Article 2 – contract controls
Common Law – not enforceable
- NY Provisions- these contracts are within the statute:
Assignment of insurance policy
Promise to pay a discharged debt
An agreement to pay finder’s fee/brokers commission (except attorney, actioner, real estate)
- Is the writing satisfactory?
- Sale of Goods (Article 2) – quantity term & signed by party against whom enforcement is sought
- Lease of Goods (Article 2A) – it’s a lease + quantity + duration + rental payment &signed by D
- Other Contracts – all material terms & singed by D
- Real property
- leases of 1 year or less
- part performance – 2/3 facts – B in possession of property, made some payment or improvement to the property.
- One year contract – full performance
- Sale of Good (Article 2) for $500 or more
- goods accepted or paid for by B
- custom made goods = S makes substantial start & not suitable for sale
- judicial admission = deposition , testimony
- merchant’s confirmatory memo = one party use this to satisfy SOF against the other party if:
- Both parties are merchants
- The writing claims a prior agreement
iii. The writing is signed and has a quantity
- There is no written objection within 10 days
- Suretyship – main purpose exception =making a promise for your own benefit
MBE – Enforceable
NY – WRITITNG still required
KEY ISSUE 4 – CONTRACT TERMS
- words of the parties
- Parol evidence rule = excludes prior or contemporaneous negotiations or agreements (oral or written) that vary the terms of a later WRITING.
- to correct a clerical error
- to establish a defence against formation
- to interpret a vague or ambiguous term
- to supplement partial integrated writing (final statement but not complete statement)
Merger clause – The contract limited to the terms herein – that is final, cannot be supplemented
- Subsequent developments – PER nothing to do after the agreement is reduced in writing.
- Course of performance
- Course of dealing
- Usage of trade
- S’ warranties of quality on in a sale of goods (article 2)
- Express Warranties
- statement of fact, description, sample, model
- opinion – is not
- must be a basis of the bargain
- Implied Warranties
- Implied warranty of merchantability – goods fit for their ordinary purpose & dealer
- Implied warranty of fitness for a particular purpose – goods are fit for B’s particular purpose & relies on S to pick out suitable goods & S know it (S does not have to be a merchant)
- Lessors warranties in a lease of goods (article 2a)
Same warranties as under article 2
Exception – finance lease =no implied warranties
- Limitations on warranties in sales and leases of Goods.
- Disclaimer – S can disclaim implied but not express warranties
Note to disclaim warranty of merchantability - use the word MERCHANTABILITY
- Limitation of B’s remedies
- S can limit B’s remedies for breach of warranty IF limitation not unconscionable.
- limiting remedies for personal injury in consumer goods presumed unconscionable
- failure of limited remedy - than remedy provision of Article 2 apply
- Risk of loss (ROL) in sales of goods (article 2)
- Who bears the risk?
- ROL on S = S must provide new goods to B at no extra cost
- ROL on B = B must still pay the contract price
- agreement – controls
- breach – breaching party bears ROL, even if loss unrelated to breach.
- delivery by common carrier – ROL shifts to B when S completes its delivery obligations
- Shipment Contract – requires S to get the goods to the carrier
- Destinations contract – requires S to get the goods to specific destination.
FOB- Free on Board (followed by the name of place/city) = ROL passes to B at the named location.
- Non –carrier cases – buyer to pick up/seller to deliver. Depends if S is merchant
- S is a merchant – S bears ROL until B takes possession
- S not a merchant – S bears ROL until it tenders (makes available) the goods to B.
- ROL in a lease of goods (Article 2a)
- ROL is on the lessor
- Exception – Financial lease = ROL is on the lessee.
KEY ISSUE 5: PERFOMANCE
- performance of contracts or a sale of goods (article 2)
- Perfect tender rule – if not perfect, B may reject
- Option to cure
- time has not expired – S has the option to cure
- time has expired – S no option to cure
- Instalment Contracts
- requires or authorizes delivery in separate instalments
- B may reject only for substantial impairment - assume S will cure next instalment
- B acceptance of goods
- implied acceptance = B keeps goods without objection after having an opportunity to inspect
- consequences of accepting goods
- timing – once B accepts cannot reject
- Damages – b who accepts non-conforming goods can still get damages.
- B’s revocation of acceptance of goods
- B cannot revoke acceptance of goods
- substantial impairment AND
- Difficulty to discover
- Consequences of rejection/revocation of acceptance
- return – b can return at s expense
- damages – for breach of contract
- B’s payment obligation under Article 2
- check – its fine but S does not have to take it
- refusal – B has reasonable time within which to get cash
- performance of Common law contracts
- Does not have to be perfect, substantial performance is all that required (i.e. no material breach)
KEY ISSUE 6: EXCUSE FOR NON-PERFOMANCE
- Other party’s breach
- Sale of Goods (Article 2) – perfect tender rule applies (B can accept, reject, accept some reject others, and B can get damages)
- Common Law Contracts
- damages – for any breach of contract
- excuse – only for material breach
- divisible contract – payment made per unit basis, breaching party recover contract price for any unit on which he has substantially performed.
- Anticipatory repudiation (before the time performance is due)
Other party can stop and sue for damages
Note; if has not relied on it can retract anticipatory repudiation and reinstate the contract.
- Failure to give adequate assurance (Article 2)
- Party with reasonable ground for being insecure about other party’s performance, in writing can request adequate assurance.
- If the party does not provide adequate assurance – than the other party can treat it as anticipatory repudiation
- Can ask for adequate assurance not specific assurance!
- Later agreement
- Rescission – to cancel the contract
- Modification – replace an existing one with new one, takes effect immediately.
- Accord and Satisfaction – accord: an agreement to accept performance in future satisfaction of an existing duty: satisfaction is performance of the accord.
- Novation – substitute a new party for an existing one.
- Impossibility - S’s excuse for non-performance
Article 2 called it impracticability
- Destruction of something necessary for performance
- common law – provides an excuse for non-performance
- Sales of Goods (article 2) – depends
- unidentified goods – s only excused if the damages/destroyed goods have been identified to the contract.
- ROL: S who bore ROL when goods destroyed is excused by impracticability BUT B is NOT
- Death/incapacity of an essential person
- Supervening Governmental regulation – made after contract but before performance is due
- Increase in the cost of seller’s performance
MBE- S not excused
- absolute increase ??
- the relative or percentage increase ??
- Frustration of purpose – B’s excuse
B’s principle purpose-seller knows about it –it has been frustrated
- Failure of an Express Condition
- Definition – an event, not certain to occur, which must occur, unless occurrence is excused, before a duty to perform arises.
- Strict compliance required – almost not good enough
- Satisfactory clause – measured by reasonable person standard unless art or matters of personal taste.
- Types of express conditions
Precedent - satisfied before the condition arises (if)
Concurrent – runs with the obligation (as long as)
Subsequent – cuts off the duty (until)
- Excusing the occurrence of a condition
By the later action or inaction of the person whom the condition protects
- failure to cooperate provides an excuse
- waiver provides an excuse
KEY ISSUE 7: REMEDIES
- Non-Monetary Remedies
- Specific Performance – equitable remedy, only if monetary damages are inadequate to compensate.
- real property – usual remedy because considered unique
- Sale of Goods Act (Article 2) – only if the goods are unique or there are “other proper circumstances”
- Service Contracts – specific performance not available, but injunctive relief maybe.
- Unpaid Sellers right to reclaim goods (article 2)
- general rule – not available under Article 2
- Exception – if buyer was insolvent when it received the goods and seller makes a demand within 10 days after buyer received them.
S has No right to redeem from 3rd party
- S has the right to reclaim goods at any time if buyer misrepresented its solvency in writing within 3 months before delivery.
- Monetary Remedies
- Punitive damages – not awarded for breach of contract because the purpose of contract damages is to compensate not punish.
- Liquidated damages – upheld if damages difficult to estimate and are reasonable forecast of probable damages, but cannot operate as a penalty.
Not reasonable forecast of probable damages but turn out to be actual damages?
MBE – Not enforceable, looks at probable
NY – Enforceable as Looks at Probable or Actual
If liquidated damage is struck down as a penalty – P will get his actual damages
- Expectation damages – put an injured party in the position she would be in had the contract been performed.
- Common law = paid –expected to pay = recovery damages or
Spent + expected profit =recovery damages
- Sale of Goods (Article 2)
- B’s damages
- Cover damages = cover price –contract price (if b covers in good faith)
- Market damages = market price – contract price (if B does not cover in good faith or does not cover at all (Note: B does not have to cover)).
- Loss in value = value as promised – value delivered (if B keeps non-conforming goods)
- S’s damages
- Resale damages = contract price – resale price (if S sells in good faith)
- Market damages = contract price – market price (if S does not sell in good faith or does not resell at all (Note: S does not have to resell)
- Lost Profit = If S is a loss volume dealer
- Contract Price = If S cannot resell the goods
- Incidental damages- cost to the injured B or S of transporting/caring for goods after a breach and of arranging a substitute transaction.
- Consequential damages = special to this P that were reasonably foreseeable to the breaching party at the time of the contract. NOTE; NOT available to S under Article 2
- Avoidable damages: an injured party cannot recover damages he could have avoided with reasonable effort. NOTE; DOES NOT apply under Article 2.
KEY ISSUE 8: THIRD-PARTY PROBLEMS
- Entrustment (Article 2): An owner who entrusts goods to a merchant who deals in goods of that kind (i.e. a dealer) has no rights against a bona fide purchaser (BFP).
- Third-Party Beneficiary (TPB)
- Basic Vocab
- Third-part beneficiary – a person who is not party to a contract, but has rights because the contract was intended to benefit her.
- promisor – a party who promises to perform for TPB.
- promisee – the party who secures the promise.
- Intended vs. Incidental beneficiary – only an intended beneficiary has legal rights.
- Intended Beneficiary – the person to whom performance is to be given.
- Incidental Beneficiary – someone who just happens to benefit from performance of the contract.
- Donee Beneficiary – If the promisee’s purpose was to confer a gift on the TPB, the TBP, is a donee beneficiary, if to pay off a debt to the TPB, the TPB is a creditor beneficiary.
- Rescission and Modification
- the promisor or promisee can rescind or modify the contract until the rights of the TPB have vested.
VESTED = learns of it & materially relies on the contract & thereafter the contract cannot be rescinded or modified.
- Exception – Contrary language in the contract controls
- Promisor liable to TPB
Note – 3rd party rights are subject to the defences that the promisor has against the promisee.
- Promisee liable to a creditor beneficiary
- Promisor liable to promisee – like any other contract
- Delegation of duties
- Contractual duties may be delegated without the consent of the person to whom performance is owed (the “obligee”). The person making the delegation called “delegating party”. The person to whom the delegation is made is called “delegate”
- contract language controls
- Personal skills or reputation
- Rights of the obligee
- delegating party remains liable
- a delegate who receives consideration is liable.
- Assignment of rights
- Two people make a contract: later one of them (assignor) transfers his rights to a 3rd party (assignee). The party who owes the duty is the obligor.
An assignment of rights transfers only rights
An assignments of an entire contract transfers rights and obligations
- Note; in an assignment 3rd person (assignee) appears later on, with 3rd party beneficiary all 3 are present from the beginning.
- Must have language of present transfer
- Consideration is not required (note gift assignments are valid but easily revoked)
- Restrictions of assignments
- contract language controls
- cannot substantially change duties of obligor
(Requirements contracts are assignable as long as they are not out of line)
- Obligor is liable to assignee
Notes; the assignee stands in the shoes of the assignor
Obligor only liable once he is aware of the assignment.
- Multiple Assignments
- Gratuitous “gift” assignment are easily revoked – the last gratuitous assignee in time prevails over the earlier gratuitous assignees because a later gift assignment revokes an earlier one.
NY- A gratuitous assignment is irrevocable if it is in writing and signed
- Assignments for consideration are more durable
- First assignee for consideration prevails over all subsequent assignees as well as prior gratuitous assignees.
- Exception – A later assignee for consideration prevails if he does not know of the earlier & is the first to get payment from or judgement against the obligor.