Contracts II Outline - Dkent

8/2/2019 Contracts II Outline - Dkent

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Contracts II Outline Sept. 2010

RII 213: Effect of Integrated Agreement on Prior Agreements (Parole Evidence)

(1) A binding integrated agreement discharges prior agreements to the extent that is inconsistent

with them.

(2) A binding completely integrated agreement discharges prior agreements to the extent that they

are within its scope.

Parol Evidence Rule

A. WHAT IS THE PAROL EVIDENCE RULE (PER)? At minimum, it says a writing intended by

the parties to be the final written statement of their agreement (i.e., it is integrated) may not be contradicted

by prior or contemporaneous statements, agreements, negotiations, etc. - - whether oral or written (extrinsic

evidence):

1. TOTAL INTEGRATION: The writing is final, AND is the complete written expression of

the parties agreement.Consequence: The writing not only may not be contradicted by extrinsic evidence, it may

not even be supplemented by consistent, additional terms. [Para 2, p. 451]

2. PARTIAL INTEGRATION: The writing is final, BUT it is NOT the complete written

expression of the parties.

Consequence: You may not contradict the writing, but you may supplement the writing by

extrinsic evidence - - oral or written - - that is, by consistent, additional terms. [Para 2, p

451]

3. UNINTEGRATED WRITING: Not the final, written statement of the parties.

Consequence: The PER does not apply at all.

NOTE: The Judge (not jury) determines which one of these 3 situations exists. [P106, p.443 and cases]

B. HOW DO YOU DETERMINE WHETHER THERE IS A TOTAL OR PARTIAL

INTEGRATION?

#1: Four-Corners Rule - If the Judge (solely by looking at the document) finds that the writing

on its face is complete, the writing is conclusively Atotally@ integrated. Theory on decline [Paras 4& 5, p. 451].

#2 Collateral Contract Concept - Before allowing extrinsic evidence to prove another

agreement to supplement the writing, ask three questions: Is the other agreement (in form)

collateral? Does it contradict an express/implied provision of the writing? Would it be one the

parties would ordinarily have included in the writing? Theory in decline but still alive [Mitchel

(p. 446)(strict use); Lee (467) (liberal use)].


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#3 Willistons View: (1) If merger/integration clause exists [this writing contains all the terms of

the agreement of the parties (see p. 454 (bottom of page) for a more complete example)], presume

integration is TOTAL, unless merger/integration clause obtained by fraud, mistake, etc. (2) Ask

Would it have been natural for the parties to have included the term in the writing? If yes -->

total integration; If no --> partial integration. Ask this Question for each proffered additional

consistent term. Not looking for actual intent of parties, but intent presumed using reasonable

person standard. Contra to Case Book, with respect to the PER (vs. Interpretation see other side),Williston rejected Four-Corners and Collateral Contract as unworkable. His theory was adopted

by R(I) and is majority theory used. [Note: Para 4, p. 451]

#4 Corbins View - Look to true intention of the parties and allow the Judge to look at ALL

relevant extrinsic evidence. Clear that Corbins view undercuts PER, and some say is current trend.

[Para 1, p. 452]

#5 UCC (2-202) - Assumes that a writing is a partial integration (you may not contradict the

writing, but you may explain and supplement it by consistent, additional terms) UNLESS the Judge

finds the writing to be the complete & exclusive statement of the parties terms - -> total integration

[Luria Bros. (p. 465)]. Test: Would the parties certainly have included the term? If yes, tota

integration [Cmt. 3, 2-202, p.473].

#6 R(II) - Mixture of Williston/R(I), UCC, and Corbin [213: p.445; 216: p. 472].

C. CIRCUMSTANCES WHERE PER DOES NOT APPLY (i.e., the evidence/info is admissible):

1) evidence on whether the writing is integrated (final statement of the parties) [Judge

considers ALL relevant evidence to determine whether writing is integrated];2) statements/agreements subsequent to the writing. [P107, p. 445];

3) evidence to interpret a writing [Note, pp. 483, 484] (see other side);

4) evidence to show that a condition to formation of contract exists [Pym (p. 474)]; and

5) evidence toshow matters of avoidance exist, e.g., fraud, duress, mistake, etc. exists [ 1, p

465].

Interpretation

A. If interpretation of an integrated writing requires the introduction of evidence, there are at least

three approaches to determine whether the evidence will be admitted:

1) Four-Corners Approach: In interpreting a writing, the express language found within the four-

corners of the writing, if unambiguous (as read by the Judge), determines the intent of the parties

and parol/extrinsic evidence is inadmissible to expand, vary, or explain the writing unless there has

been fraud, mistake, ambiguity, illegality, duress, or undue influence. [Eichengreen, p.477]

minority view [used by Williston with respect to Interpretation (Note: Para 2, p. 483) but not with

respect to PER (see other side)]


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2) The Two-Step Approach: STEP ONE - Proffer evidence to the Judge to demonstrate that the

writing (or a term) is ambiguous; STEP TWO, if the judge agrees that there is an ambiguity,

introduce evidence into the record to explain the ambiguity. [Pacific Gas & Electric Co. Case: p

484] - most popular view

3) UCC (2-202): Terms in an integrated writing (dealing with GOODS) may be

explained/supplemented (but not contradicted) by, inter alia, course of dealing, course ofperformance, trade usage. [p. 445]

B. If interpretation does not require introduction of evidence, use the following 10 rules of

interpretation, which are not exhaustive, but representative, and not listed in any order of

importance: [pg. 499-502]

1. Take into account the circumstances surrounding the making of the contract.

2. Take into account the principal purpose of the contract.

3. View the contract as a whole.

4. A reasonable, lawful, or effective interpretation is preferred to a literal, illegal, or unusual

interpretation.

5. Favor the public interest.

6. Utterances are to be interpreted most strongly against the party responsible for them.

7. Look at the subsequent conduct of the parties to assist in interpretation.

8. An earlier tentative agreement will be rejected in favor of a later final expression.

9. Absent a contrary intent:

a. Ordinary/popular words are to be given their normal meaning.

b. Technical words orA

terms of art@

are to be given their special meaning.c. Established legal words are to be given their precise meaning.

d. Words of trade, locality, or profession are to be given their particular meaning.

10. Absent contrary intent, inconsistencies in terms are to be resolved by:

a. Specific terms qualify general terms.

b. A word or phrase is to be interpreted in the same way throughout the contract.

c. Correct obvious mistakes of grammar and punctuation.

d. Spelled out numbers take precedence over Arabic numbers. For example, if a contract reads,

twenty-two (20), the number would be interpreted as 22" not 20. This principle is evident when onewrites a check.


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Conditions and Promises

A.Promise is a contractual undertaking, breach of which leads to liability for damages or equitable

relief

B.Condition is a fact or event, the occurrence or non-occurrence of which determines when and if a

party must perform

a. Courts generally do not like forfeiture and will generally try to avoid conditions

C.Promissory Condition

a. Promise that a fact or event will occur

b. Condition no duty arises unless that fact or event occurs

c. Best of both worlds for obligor; allows to avoid contractual duty AND sue for damages

D.Express Conditions:

a. Spelled out by the parties in their contract goes to the intention of the parties

i. Written, oral agreement, conduct of the parties

b. Satisfaction of Express Condition is 100% literal performancec. Conditions of Satisfaction: (Satisfaction clauses)

i. Clause where duty to pay will only arise on the satisfaction of the buyer

ii. Subject matter of K is commercial in nature, and capable of objective evaluation

Use the objective standard, unless it would be impracticable to do so

1. Material in question has defects the can be related to a industry, or usage

standard

2. Need only show that objectively the material would be acceptable

iii. Subject matter of K is personal or not capable of objective evaluation Use

subjective standard in GOOD FAITH1. Personal portrait example in text question

2. Need to show that subjectively the material in question was acceptable

d. Pay when Paid Clauses

i. Is clause determinative of obligation to pay CONDITION or only to as to

PROMISE of when payment is due

ii. Shifting of burden of insolvent party frowned on by court

iii. MUST use very specific language to shift the burden of liability to sub-contrator

1. Clear, unequivocal and expressed agreement between parties

iv. GulfConstruction Co. v Self pg 722e. Time of the essence clause

i. Adherence to performance schedule strictly enforcedii. Inclusion of dates in construction contracts do not make time of the essence

iii. Time of the essencecan be established by express stipulation in contractE.Implied in Fact Conditions:

a. A condition not spelled out by parties in contract, but one that is impliedby their conduct

F. Constructive Conditions (Implied-in-Law)

a. A condition not spelled out by the parties in the contract, but which is imposedby the court

to insure fairness.


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b. Legal fictions to allow court to make sure an unfair advantage of one party

G.Conditions Precedent:a. A fact or event that must occur before duty is activated

b. Burden of prove of condition is on the party which claims duty is present

H.Conditions Subsequent:

a.

Where the duty/performance ceases to exist upon the occurrence of a fact or eventb. Burden of proof on the party that claims duty is extinguished

I. Concurrent Condition:

a. A fact or event that must occur or duty to be performed as the same time as another fact or

event

b. Generally sale of goods are implied to have concurrent condition

i. One selling good must tender goods at the same time the buyer tenders payment

J. Performance and Constructive Conditions:

a. Need for Constructive Conditions of exchange

i. Independent promises: each party must perform regardless of the other party's

performance.ii. Dependent promises:one party's duty to perform is dependent on the performance of

the other party.

1. Kingston v Preston pg 728

iii. Corbain: if one of these promises becomes impossible of performance, the party who

made it may be excused from legal duty. His failure to perform is not a breach of

contract. But the fact that the law excuses him from performance does not justify

him in demanding performance by the other party.

1. Shaw v MobilOilCorp pg 730

b.

Ordering Performance Through Constructive Conditionsi. RS II 234 Order of Performance: Where all or part of the performance to be

exchanged under an exchange of promises can be rendered simultaneously, they are

to that extent due simultaneously, unless the language or the circumstances indicate

to the contrary.

1. Intentions of the party (express or implied) can indicate who is to perform

first

ii. UCC 2-507 Tender of delivery is a condition to the buyers duty to accept the

goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the

seller to acceptance of the goods and to payment according to the contract.

iii. UCC 2-511 Unless otherwise agreedtender of payment is a condition to thesellers duty to tender and complete delivery

iv. In transactions of goods implication of above rules gives rise to the OTHER parties

duty to perform

1. If you tender goods, duty arises to pay

2. It you tender payment, duty arises to deliver goods

c. Substantial Performance of Conditions a promissor who has substantially performed is

entitled to recover even though he/she has failed in some particular way to fully comply with

the terms of the contract


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i. Cannot use the Theory of Substantial performance1. Where the breach is Fraudulent

2. Where the breach is Willful

3. Where the breach is Material

ii. Four Factors for determining when a Breach is Material1. The purpose to be served by the contract

a. Objective of the non-breacher2. The desire to be gratified

a. Source of pleasure or satisfaction

3. The Excuse for the deviation from letter of contracta. Why did the breaching party fail to perform

4. The Cruelty of Enforced adherence

a. What is required of the breachor to fully comply with contract

iii. Remedy under the theory "substantial" performance is difference in value between

the fully performed contract and the Substantial performance

iv. The Theory ofPartial Performance NEVER applies to contractsgoverned by the UCC

d. Tender an unconditional offer to perform coupled with the demonstrated ability to carry out the

offer of performance and to produce the subject matter of the tender

i. RS II 234 Order of Performance: Where all or part of the performance to be exchanged

under an exchange of promises can be rendered simultaneously, they are to that extent due

simultaneously, unless the language or the circumstances indicate to the contrary.

1. Intentions of the party (express or implied) can indicate who is to perform first

ii. UCC 2-507 Tender of delivery is a condition to the buyers duty to accept the goods and,

unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of

the goods and to payment according to the contract.iii. UCC 2-511 Unless otherwise agreedtender of payment is a condition to the sellers duty to

tender and complete delivery

1. To the these two the one that tenders first triggers the other parties duty to perform

iv. UCC 2-309 Absence of Specific Time Provisions; Notice of Termination

1. The time for shipment or delivery or any other action under a contract if not provided in

this Article or agreed upon shall be a reasonable time.

2. If the contract provides for successive performances but is indefinite in duration, it is

valid for a reasonable time but unless otherwise agreed may be terminated at any time by

either party.

3. Termination of a contract by one party except on the happening of an agreed event

requires that reasonable notification be received by the other party and an agreement

dispensing with notification is invalid if its operation would be unconscionable. A term

specifying standards for the nature and timing of notice is enforceable if the standards

are not manifestly unreasonable


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v. UCC 2-307. Delivery in Single Lot or Several Lots

Unless otherwise agreed allgoods called for by a contract for sale must be tendered in asingle delivery and payment is due only on such tender but where the circumstances giveeither party the right to make or demand delivery in lots the price if it can be apportionedmay be demanded for each lot.

e. Perfect Tender Rule (UCC 2-601 Buyers Rights on Improper Delivery)

i. Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and

unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718

and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract,

the buyer may

1. reject the whole; or

2. accept the whole; or

3. accept any commercial unit or units and reject the rest.

ii. 100% Literal performance of the agreed terms

iii.

Commercial Unit base unit of delivered material1. 1 box of lobsters not 1 lobster

f. UCC 2-508. Cure by Seller of Improper Tender or Delivery; Replacement

i. Where any tender or delivery by the seller is rejected because non-conforming and the time for

performance has not yet expired, the seller may seasonably notify the buyer of his intention to

cure and may then within the contract time make a conforming delivery

ii. Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to

believe would be acceptable with or without money allowance the seller may if he seasonably

notifies the buyer have a further reasonable time to substitute a conforming tender

g. UCC 2-602 Manner and Effect of Rightful Rejection

1.Rejection of goods must be within a reasonable time after their delivery or tender. It is

ineffective unless the buyer seasonably notifies the seller.

2.Subject to the provisions of the two following sections on rejected goods (Sections 2-603 and 2-

604),

a) after rejection any exercise of ownership by the buyer with respect to any commercial

unit is wrongful as against the seller; and

b) if the buyer has before rejection taken physical possession of goods in which he does not

have a security interest under the provisions of this Article (subsection (3) of Section 2-

711), he is under a duty after rejection to hold them with reasonable care at the seller's

disposition for a time sufficient to permit the seller to remove them; butc) the buyer has no further obligations with regard to goods rightfully rejected.

3. The seller's rights with respect to goods wrongfully rejected are governed by the provisions of

this Article on seller's remedies in general (Section 2-703).

b. 2-612. "Installment contract"; Breach.

a. An "installment contract" is one which requires or authorizes the delivery of goods inseparate lots to be separately accepted, even though the contract contains a clause"each delivery is a separate contract" or its equivalent.


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b. The buyer may reject any installment which is non-conforming if the non-conformitysubstantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does notfall within subsection (3) and the seller gives adequate assurance of its cure the buyermust accept that installment.

c. Whenever non-conformity or default with respect to one or more installmentssubstantially impairs the value of the whole contract there is a breach of the whole.

But the aggrieved party reinstates the contract if he accepts a non-conforminginstallment without seasonably notifying of cancellation or if he brings an action withrespect only to past installments or demands performance as to future installments.

c. 2-602. Manner and Effect of Rightful Rejection.

a. Rejection of goods must be within a reasonable time after their delivery or tender. Itis ineffective unless the buyer seasonably notifies the seller.

b. Subject to the provisions of the two following sections on rejected goods (Sections 2-603 and 2-604),

1.after rejection any exercise of ownership by the buyer with respect to any

commercial unit is wrongful as against the seller; and2.if the buyer has before rejection taken physical possession of goods in whichhe does not have a security interest under the provisions of this Article(subsection (3) of Section 2-711), he is under a duty after rejection to holdthem with reasonable care at the seller's disposition for a time sufficient topermit the seller to remove them; but

3.the buyer has no further obligations with regard to goods rightfully rejected.

c. The seller's rights with respect to goods wrongfully rejected are governed by theprovisions of this Article on seller's remedies in general (Section 2-703).

d. 2-608. Revocation of Acceptance in Whole or in Part.

e. The buyer may revoke his acceptance of a lot or commercial unit whose non-conformitysubstantially impairs its value to him if he has accepted it

a. (a) on the reasonable assumption that its non-conformity would be cured and it hasnot been seasonably cured; or

b. (b) without discovery of such non-conformity if his acceptance was reasonablyinduced either by the difficulty of discovery before acceptance or by the seller'sassurances.

f. Revocation of acceptance must occur within a reasonable time after the buyer discovers orshould have discovered the ground for it and before any substantial change in condition of thegoods which is not caused by their own defects. It is not effective until the buyer notifies theseller of it.

g. A buyer who so revokes has the same rights and duties with regard to the goods involved as ifhe had rejected them.

h. If a buyer uses the goods after a rightful rejection or justifiable revocation of acceptance, thefollowing rules apply:

a. Any use by the buyer that is unreasonable under the circumstances is wrongful asagainst the seller and is an acceptance only if ratified by the seller.

b. Any use of the goods that is reasonable under the circumstances is not wrongful asagainst the seller and is not an acceptance, but in an appropriate case the buyer isobligated to the seller for the value of the use to the buyer.


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K.Excuse Allows for non-performance under a contract due to specific circumstances

a. Prevention and Cooperation

i. Sullivan v Bullock 1993ii. Implied in every contract is a condition to cooperate

iii. by necessary implication, promises to give this cooperation and if he fails to do so

he is immediately liable, even though his only promise is to pay money at a future

date.iv. To excuse a partys nonperformance the conduct of the party preventing performance

must be wrongful and in excess of their legal rights

1. Good Faith When one party actively attempts to torpedo the contractual

relationship, the court may find a material breach of an implied promise

(covenant)

a. Not to prevent the other party from performing

b. To cooperate in ensuring performance is achieved

c. To act in good faith. Just as the material breach of an express promise

can result in discharge of performance, the material breach of such

and implied promise can provide a viable defense for nonperformance

by the non-breaching party

b. Forfeiture as an Excuse

i. Burger King Corp v Family Dining, Inc. 1977

ii. Where nonperformance of a condition will result in Extreme or DisproportionateForfeiture the court can excuse the non-performance of condition unless its

occurrence was a material part of the agreed exchange

iii. Material part determined by language and intentions of the contracting parties

c. Public Policy

i. Court may excuse nonperformance of a condition, when that condition is deemed tobe against public policy

1. Against a statute or legislation

d. Waiver and Estoppel

i. Waiver: Voluntary relinquish a right

1. Non-material conditions may be waived

a. Time or method of payment

b. Notice requirement

2. Material conditions may not be waived

a. Clear title in sale of home

b. Casualty in death benefits

c. Consideration for sale agreement

3. Anti-wavier clauses of contract may still be waived by conduct of party

a. Where allowing for continued performance not consistent with

condition of contract IMPLIES that performance is satisfactory

i. Require notice that non-performance of condition is no longer

acceptable

ii. Estoppel: The stopping of a person from asserting a legal right

1. Can be used for material and non-material conditions


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a. Example: landlord allowing for late payment cannot evict for failure

to perform to time of the essence condition

e. Election

i. Non-performance of condition may be elected not to be enforced by the conduct of

the party owed the duty to perform

ii. Difference in Waiver verses Election is the time in which the duty arises1. Waiver - occurs prior to condition being failed

2. Election occurs after the condition being failed

f. Impossibility

i. a condition MAY be excused, if there is an unexpected or unforeseen event that

makes performance impossible

ii. May require adjustment of the rights of the other

Anticipatory RepudiationA.Anticipatory Repudiation (AR): A positive expression, either by words or conduct, of onepartys intent not to perform when performance is due.

a. Excuses the condition of being ready, willing and able to performb. May bring suit right away (do not have to wait until time of performance to sue)c. Injured party is required to mitigate damages if possible.d. Doctrine of A/R does not apply if all there is left to perform is the payment of money e. A/R does not apply to unilateral contracts duty to perform is only on one party

B.Prospective Inability to Perform (PIP): Where a party indicates reasonable doubt to whether it

will performa. Excuses the condition of being ready , willing and able pt performb. Requires that partys wait until time of performance is due to bring suit

i. May ask for reasonable assurances from partyii. Both Obligee and Obligor may ask for assurances

iii. Demand for assurances must not be excessive or overly broad1. Only to the extent that the they represent an assurance of performance

iv. A Breaching Party may not ask for assurancesv. UCC2-609: Right to adequate assurance of performance

1. A contract for sale imposes an obligation on each party that the other's expectation

of receiving due performance will not be impaired. When reasonable grounds forinsecurity arise with respect to the performance of either party the other may in

writingdemand adequate assurance of due performance and until he receives such

assurance may if commercially reasonable suspend any performance for which he

has not already received the agreed return2. Between merchants the reasonableness of grounds for insecurity and the adequacy of

any assurance offered shall be determined according to commercial standards

3. Acceptance of any improper delivery or payment does not prejudice theaggrieved party's right to demand adequate assurance of future performance.


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4. After receipt of a justified demand failure to provide within a reasonable time not

exceeding thirty days such assurance of due performance as is adequate under the

circumstances of the particular case is a repudiation of the contractvi. Restatement Second ofContracts 251

1. Where reasonable grounds arise to believe that the obligor will commit a

breach by non performance that would of itself give the obligee a claim for

damages for total breach under 243, the obligee may demand adequateassurance of due performance and may if reasonable suspend any

performance for which he has not already received the agreed exchange until

he receives such assurance.2. The obligee may treat as a repudiation the obligors failure to provide within

reasonable time such assurance of the due performance as is adequate in the

circumstances of the particular casevii. UCC 2-611 :Retracting an Anticipatory Repudiation

1. Until the repudiating party's next performance is due he can retract his

repudiation unless the aggrieved party has since the repudiation cancelled or

materially changed his position or otherwise indicated that he considers therepudiation final

2. Retraction may be by any method which clearly indicates to theaggrieved party that the repudiating party intends to perform, but mustinclude any assurance justifiably demanded under the provisions of thisArticle (Section 2-609).

3. Retraction reinstates the repudiating party's rights under the contract with due

excuse and allowance to the aggrieved party for any delay occasioned by the

repudiation

viii. Nullification of Repudiation or Basis for Repudiation1. The effect of a statement as constituting a repudiation under 250 of the basis

for a repudiation under 251 is nullified by a retraction of the statement in the

notification of the retraction comes to the attention of the injured party before

he materially changes his position in reliance of the repudiation or indicates

to the other party that he considers the repudiation to be final.2. The effects of events other than a statement as constituting a repudiation

under 250 or the basis for a repudiation under 251 is nullified if , to the

knowledge of the injured party, those events have ceased to exist before he

materially changes his position in reliance on the repudiation or indicates the

he considers the repudiation to be final

ix. 252 Effect of Insolvency

1. Where the obligors insolvency gives the obligee reasonable grounds to

believe that the obligor will commit breach un the rule stated in 251, the

obligee may suspend any performance for which he has not already received

the agreed exchange until he receives assurance in the form of performance

itself, an offer of performance, or adequate security

2. A person is insolvent who either has ceased to pay his debts in the ordinary

course of business or cannot pay his debts as they become due or is insolvent

within the meaning of the Federal Bankruptcy law


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Third Party Beneficiaries

A.Types of 3rd Party Beneficiaries

a. Rule: "that where one person makes a promise to another for the benefit of a third person,that third person may maintain an action upon it.

b. Promisor Party making the promise

c. Promisee Party to which the promise is directed

d. Third Party Beneficiary Party to which the promise is to benefit

e. Intent to benefit test

i. Does Promisee intend to provide a benefit to the 3rd partyii. Does 3rd party have rights

1. If incidental beneficiary they have no rights to suit under the promise

f. Third Party Creditor Beneficiary One that is owed a legal obligation by the promisee

g. Third Party Donee/Gift Beneficiary Not owed legal obligation by the promisee

A.Process for solving 3PB problemsOverview of 5 steps

1. Identify players2. determine if TP is a TPB3. is promise enforcable4. determine 3PB class (creditor/donee)5. determine vesting

Step 1: Identify partiesPromisor (PR)Promisee (PE)Third party (TP)Step 2: is TP a TPB?Did the PE INTEND to provide a benefit to the TP

If yes then TPBif not then TP is only an incidential beneficiary, but does not have any rights to enforce

Step 3: is promise enfocablewas there consideration, condition precedent or any avoidance

remember consideration can be as simple as mutual promises

if promise not enforcable then the analysis is dead

Step 4: determine TPB statusdoes the Pe owe some kind of legal obligation to the TPB?

If yes then a CREDITOR TPBif no then a DONEE TPB

Step 5: determine vesting

HYBRID testCreditor TPB rights vest on relianceDonee TPB rights vest when they know or assent to them


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h. Novation: a novation is a substituted contract that includes as a party one who was neither

the obligor or obligee of the original duty

i. happens when all 3 parties get together and release the promisee and replaces it withthe promisor

ii. NOTE: REQUIRES AN AFFIRMITAVE AGREEMENT (i.e. a solid yes). Does not

require that all parties assent at the same time or on the same call, so long as there isa 3 part assent prior to cause of action.

ii. Requires agreement of all parties; used to remove liability of promisee to original

duty

iii. Novation is the act of either replacing an obligation to perform with a new obligation, orreplacing a party to an agreement with a new party

i. Who can Sue?

i. Novation is important when the TPB wants to sue the promisee, not the promissor(above examples involve the TPB suing the PO)

ii. If the TPB is a donee, then TPB cannot sue the promisee because there is no legalobligation between the TPB and the promisee (again we dont enforce gift promises)

iii. If the TPB is a CREDITOR, then TPB can sue either party unless there has been anovation

j. Changing the contract to the detriment of the TPB

i. you can change K depending on if the rights of the TPB have vested

1. if rights of TPB have vested, then the K cannot be changed

2. if rights of TPB have NOT vested, then the Kcan be changed

ii. When do TPB rights vest1. TPB Creditor rights vest on reliance of promise between promisor and

promisee2. TPB Donee rights vest on the knowledge of the promise or assent to the

promise

iii. TPB unidentified / unasertained1. If a TPB has not yet been identified, then the rights to the promise are not

able to vest.

2. Not enough that it is narrowed down to a small group or a few possible

TPB...must be specific to have rights under promise

3. NOTE: there is nothing wrong with multiple TPB, but they must be identified

k. Defenses that P/or can use against TPB claims (TPB v. P/or)

i. Defenses P/or has against P/eeii. Defenses or claims P/or has against the TPB themselves

iii. Defenses or claims the P/ee has against TPB


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l. Defenses against Third Party Beneficiaries- if you can use it against the promise you canuse it against the TPB

i. Defenses of Formation:

1. Consideration, SOF, lack of mutual assent, misunderstanding, mistake,duress, undue influence, illegality, incapacity, unconscionability, capacity

ii. Post-formation defenses

1. Impossibility, frustration of purpose, public policy, non-occurrence of acondition precedent, occurrence of a condition subsequent, material breach,anticipatory repudiation, mutual rescission (until vesting occurs

iii. Multiple transactions: any defense that you have the arise out of separate transactionsif you are asserting a defense as a TPB (thus you have two contracts you owe me 200I owe you 700 and you do a setoff- but you cannot DO that here) you can only use

the same transactions that arise from THIS PARTICULAR transaction

iv. Defenses are derivative rights so long as they flow from the same issue

m. Mortgages and TPBi. Assuming a mortgage: you are taking on all of the duties of the previous party; must

be expressly stated that you are taking it assuming the mortgage

1. Creates a TPB in the bank- can sue both new and old owner assuming nonovation

2. Promise to pay the mortgagor (original owner)

ii. Subject to= means the new buyer is making no promise to the old buyer andtherefore there is no TPB in the mortgage co= incidental beneficiary

1. I will make them if I can- no promise at all- cannot get sued for not paying2. Old owner still liable for the mortgage and the bank can sue old owner3. Likewise the new owner cannot be sued by the older owner when the new

owner fails to pay because there was no promise to pay4. People will take subject to in order to not be liable for mortgage and if they

do make all the payments they will get the land


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Assignments and DelegationsA. General rules

a. you assign rights you delegate dutiesb. assignment is a transfer of an existing right(s)c. rights already exist, but we are transfering them to a TPd. Delegation is a transfer of exisiting duties

e.

duty exists, but want to transfer them to a TPB. Difference between a TP contract and an assignment/delegationa. in a TP K, the rights of the third party is crated in 1Kb. an assignment you have an existing K relationship between th eP/or and P/ee and the

transfer is done via second K.

C.Assignement:a. Assignor (obligor) one who owes a dutyb. Assignee One who the right is assigned toc. Obligee one that is owed a dutyd. Rights are freely assignable UNLESS

i. there is an anti assignment clauseii.

the rights are too personal to be assignede. When are rights too personal to be assigned

i. When they are non-commercial in nature, and unable to be objectively evaluatedf. Obligor must pay assignee once they are notified that there has been an assignment

i. Before notification they can still pay obligeii. ONCE they are notified, if they pay obligee, then they are still liable.

1. Example from Spa questions

D. Delegation:a. Delegator One who delegates a dutyb. Delegatee one who a duty is delegated toc. Obligee One who is owed the original duty

i. Also known as POD person owed dutyd. All successful delegations create a TPB Ksituationi. Delegator is the Promisee

ii. Delegator is the Promisoriii. POD is the TPB (creditor)

e. performance by delegatee is satisfaction of duty by delegator, BUT non performance isa breach ofKby delegator

f. There is no way for delegator to divest themselves of the duty after delegating it to thedelegatee unless there is a novation that is agreed to by ALL parties

E. UCC2-210 (NOTE: ARTICLE 2 only)a. Absent a novation, a duty is delegable unless:

i. anti-delegation clauseii. its too personal

b. Absent an anti-assignment clause, you can freely assign rights excepti. where it materially changes duty of obligor,

ii. increases materially the burden or risk imposed on the obligor, oriii. impairs materially the chance of the obligor obtaining return performance

c. If you have a prohibition against assigning the contract, that only prohibits delegation ofduties, NOT assignment of rights.

i. NOTE: ARTICLE 2 ONLY. See discussion in Anti-assignment clauses about thevalidity of such clauses.


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d. If you assign the contract it is deemed to be an assignment of rights (where allowed) anddelegation of duties (where allowed). Acceptance will be taken as a promise to perform theduties, which creates a TPB contract.

e. If you have a delegation, the POD can demand assurances from the delegator and allsubsequent delegatees.

F. Note: whenever there is a delegation, it always creates reasonable assurances, which CAN invoke2-609 (request for assurances) i.e. you have no clue about the person it was delegated to, so you

should be able to demand assurances in order to feel assuredG.Assignments of gifts

a. gift assignments are automatically revoked upon deathb. revocability of gifts: unless a contrary intention is manifested, a gratutious assignment is

irrevocable if:i. the assignment is in a writing either signed or under seal that is delivered by the

assignor -OR-ii. the assignment is accompanied by delivery of a writing of a type customarilly

asccepted as a symbol or as evidence of the right assigned (bank statement, bankbook, etc)

c. A gift assignment ceases to be REVOCABLE if:

i. it is paidii. judgement against the obligor

iii. new contract of the obligor by novationd. 4 HORSEMEN: a gift assignment is revocable upon the death of the assignor unless any of

the 4 horsemen apply, as follows:i. assignment is accompanied by delivery of a writing that is customarily accepted as a

symbol or as evidence of the right assignedii. a payment or satisfaction of the obligation

1. Cant ask for the gift backiii. judgment against the obligor

1. Court says gift stands

iv. a new contract of the obligor by novationH.Partial assignments

a. Since there is no UCC on partial assignment, we applyRS II 326i. allows for an assignment of a partial right in the same manner as the assignment of

the whole, and subject to the same limitations

I. Limitations on assignments: UCC2-210(2)a. Rights that are no longer executory (i.e. things have already been perfomred) such as

payment or a right to damages for breach may be assigned even if there is an anti-assignment clause

i. i.e. anti-assignment clauses only apply to executory rights, not non-executory rightssuch as the payment

b. IF the right has been unearned, i.e. there is still performance due, and the right is payment,then the right cannot be assigned if there is an anti-asssignment clause. If it has been earned,i.e. the terms of the K have been performance, and only payment is left, then it MAY beassigned, regardless of if there is an anti assignment clause


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J.

$ from Goods sold or

leased,

or for services

rendered

(Accounts Receivable)

Article 9

$ from

Sale of Goods

UCC 2-210(2)

$ from Land, realty,

bank accounts,

insurance policies

Common Law

Assigning Money Rights

Source of Money Rights

Assigning Non-Money Rights

AAC Enforceable

Right to buy

land, goods,

to particular

services

But, consent, if

required,

may not be withheld

in bad faith

Money

Rights

Earned

Money

Rights

Unearned

AAC Invalid AAC Valid AAC Invalid AAC Valid

Conflict occurs between Art 9 and

Art 2 when source of unearned

money rights is sale of goods.

VALIDITY OF ANTI-ASSIGNMENT CLAUSES (AAC)

For exam purposes, assume money rights from the sale

of goods are earned, thus avoiding the conflict.

But, consent, if required,

may not be withheld in

bad faith

K. Anti assignment clauses (AAC)a. UCC ARTICLE 9

i. Applies to :1.

accounts receivable for goods sold2. accounts recievable for goods leased

3. servicesb. Under this anti-assignment clauses are not valid if the right has been earned, but not if it

has not been earned (i.e. if the enforcement has been carried out, and payment is left, thenthe right has been earned)

c. WHAT IS DIFFERENCE BETWEEN MONEY DUE FOR GOODS SOLD ANDARTICLE 9 A/R FOR GOODS SOLD

d. if there is an actual A/R relationship set up then article 9 applies... if it is just payment duefor goods delivered then article 2

i. i.e. I will buy your car for $500 tomorrow (article 2) vs. I will buy your car for $500payable at $100 per week (article 9)e. If AAC relates to article 9, then AAC is ineffective

f. If AAC relates to article 2, then AAC may or may not be effective depending on if it isexecutory (has already been earned)

g. Approaching an AAC problemi. Step 1: does the AAC deal with a non-monitory right (i.e. the right to buy land, right

to buy goods, right to particular services)1. if YES then AAC is enforcable, however if there is a consent clause then

obligor must act in good faith2. If NO- then article 2 and article 9 do not apply

ii. Step 2- does the AAC involve the right to money


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iii. NOTE: FOR EXAM AACARE NOT EFFECTIVE FOR BOTH ARTICLE 9AND 2 UNLESSOTHERWISE SPECIFICALLY STATED (I.e we can assume

that the rights to money have been earned for article 2 issues).

h. AAC when there is an option to waivei. party governing ability to assign must use good faith

1. credit issues, reputation issues2. NOT: holding out for more money in order to assign, racial motives,

religious motivesi. Defenses

i. A Promisor may assert agents a TPB any defenses they would have had against theoriginal promisee

ii. A promisor may NOT assert a defense the Promisee has against the TPBiii. Setoff/ recoupment

1. Recoupment- arises from the assigned K.a. Example from Spa problems weight dropped on foot at spa

2. Setoff- a defense that does not arise from the assigned K, but from another Kbetween the obligor and the assignor

a. Example Spa owner running over dog with carb. Allowed against original K holder if accrues prior to knowledge ofassignment by the POD


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Avoidance Doctrines10 types of avoidance

a. Mistake

b. Fraud

c. Duress

d. Undue Influence

e. Illegality

f. Incapacity

g. Unconscionability

h. Impossibility

i. Frustration of purpose

j. Reformation

k.

A.Mistakea. A belief that is NOT in accord with the facts at the time of contracting with respect to a

basic (material) assumption on which the contract was madei. Mutual Mistake:

1. Both parties are mistaken about the same thing

2. Both parties must be equally innocent as to the mistake

a. (each having the same knowledge or lack of knowledge about the

mistake)

3. Mistake in expression (misunderstanding)a. Pure mutual mistake no mutual assent, put the K aside

4. Court Allocated Risk

a. Mistake as to the existence or identity of the subject matter

i. (put the K aside)

b. Mistake in value of subject matter

i. (do NOT put K aside)

c. Mistake in operation of the subject matter (put the Kaside)

i. VERY RARE NOT COVERED

ii. Unilateral Mistake:

1. Mistake in identity of Offeree (may get relief)

2. Mistake in computation or calculation (may get relief)

3. Mistake in judgment (no relief)

a.

Means to how contract will be performed4. TEST: Did the non-erring party know or should have known of the

error?

a. Yes- Set aside Contract

b. No Let Contract Stand

iii. Conscious Ignorance

1. If A enters into a contract knowing that he has not sufficient or exact

knowledge of a material fact, he can not avoid such contract on the ground of

mistake because such fact turns out differently from what he had hoped.


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iv. No Snapping up Rule1. Party can not snap up on an offer that is obviously in error2. HYPO: Contractor mistakenly adds up their estimate, and the client snapps it

up, even though they know that the contractor made a mistakev. Note: parties can agree to continue the Keven though there is a mistake

B. Frauda. With Fraud/Misrepresentation, we have an ASSERTION that is not in accord with the

facts.

b. Fraud in factum/execution (rare)

i. misrepresenting party misrepresents the nature of the document itself

ii. HYPO: Insurance agent tells customer that they are signing a form for medical

records, and in reality it was a release

c. Fraud in the inducement (more frequent)

i. Element 1: There was, in fact, a misrepresentation

(an assertion that is not in accord with the facts)

ii. Element 2: The misrepresentation was EITHER material OR fraudulentiii. Element 3: The misrepresentation induced the person to make the K, AND

iv. Element 4: The person was justified in relying on the misrepresentation (material or

fraudulent)

1. Material misrepresentation

a. ELEMENT 2

i. The misrepresentation would cause a reasonable person to

enter into the K

ii. OR

iii. The misrepresenter knows (or should know) that the

misrepresentation will cause THIS particular person to enter

into the K

b. ELEMENT 4

i. Reliance is judged by whether a reasonable person would have

known that the assertion does not comport with the facts

1. Allowable Sales Puffery

2. Fraudulent misrepresentation: involves concept of Scienter: Bad intent

a. ELEMENT 2

i. The misrepresenter knows the assertion is false, and intended

to cause the other to rely on it and enter into the K.ii. OR

iii. The misrepresenter makes an assertion of fact knowing that he

does not have an actual basis for doing so, and intended to

cause the other party to rely on it and enter into the K.

b. ELEMENT 4

i. Reliance is judged by a subjective test it doesnt matter how

bizarre the scheme, so long as there was reliance by THIS

person.

ii.


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3. RULE: opinions are not Facts

a. EXCEPTION: a statement of a party having superior knowledge,

especially when there is confidentiality or fiducary relationship, may

be regarded as a statement of fact although it would be considered as

opinion if the parties were dealing on equal terms.

C.Duressa. Has a wrongful act OR threat of a wrongful act overcome the free will of a party?

i. Wrongful act (or threat of one)1. Violence or threat of violence.

2. Impairment or threat of impairment

3. Wrongfully seizing or withholding goods

4. Other wrongful acts (extortion or blackmail)

ii. Free Will1. normally asubjective testunless dealing with economic duress in which a

reasonable person would apply

2. A Decision that would not have been made EXCEPT for the DuressD.Undue Influence

a. A combination of the victims weakness

i. AND

b. Another partys taking advantage of those weaknesses

c. Weakness can be from

i. Illness

ii. Age

iii. Immaturity (apart from age)

iv. Trauma (death of a child/spouse)

v. Substance Abuse

d. Confidential Relationship

i. Common Theme but not strictly required1. Based on Fiduciary relationship: Duty to act in the best interest of the other

party

E.Illegalitya. Violation of a regulatory scheme

i. 2 types of regulatory schemes1. consumer protection2. licensing of professions and trades

ii. We ask ourselves what is the purpose of the regulatory scheme?1. if goal is to regulate conduct, more likely to set aside the K2. if goal is to raise revenue, more likely uphold the K and impose a fine

iii. Licensing1. R2181 if a party is prohibited from doing an act because of his failure to

comply with a licensing, registration or similar requirement, a promise in

consideration of his doing that act or his promise to do it is unenforceable on

the grounds of public policy if:


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a. Requirement had a regulatory purposeb. the interest in enforcement of the promise is clearly outweighed by

the public policy behind the requirementb. K affecting marrage relationships

i. Meretricious Relationships no rights under statute; not recognizedc. K's in restraint of trade

i. Non-compete clauses1. In sales of existing business2. In Employment K

ii. General rule is that these K's are illegal except:1. there is a legitimate need for protection FIRST AND IMPORTANT2. the employee has unique talents, knowledge or abilities (i.e. no non-compete

for janitors) Reasons for Restriction3. the area of the injunction is reasonable Geographical limitation4. the time period is reasonable Spatial limitation

d. not limited to criminal contractse. also applies to K that should be void a s a matter of public policy, regardless of if they are

actually criminal or not.

F.Incapacitya. Minors

i. Most states: lack of capacity to contract if under the age of 18

ii. Policy: Bright line rule; dont mess with our children

1. Minority rule: minor can disaffirm but have to pay restitution

2. Majority rule: Minor can dissaffirm and DOES NOT have to pay restitution--

- other party is the stuckee.

iii. Exception: Necessaries (A minor may not disaffirm a K for necessaries)1. Necessities are things like food, clothing, shelter, etc

iv. NOTE: including a clause that the person is over 18 is ineffective

1. if they lack capacity to contract, they cant agree to that clause

v. NOTE: if a parent co-signs, the kid can disaffirm, but suit can be brought against

parents

b. Mental Infirmityi. Look to 4 factors:

1. How necessary is the K?

2. How fair is the K?

3. Did the other side know or should have known of the incompetence?

4. How great is the hardship if the disaffirmence is allowed?

ii. Note if you are infirm and get cured, but did not get declared legally compentant you

need to look at the state statute

1. some states have a rebuttable presumption of remaining infirmity

2. some states REQUIRE that they go through legal proceedings

c. Guardianshipi. If a person is under Guardianship then Guardian must be informed of and agree to K

formation


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ii. A person cannot actively seek K, then hide behind Guardianship when result is ntofavorable

d. Intoxication

i. K's voidable if:1. there is EXTREME intoxication2. there is IMMEDIATE dissaffirnment when person becomes sober3. We wont forgive you if you are a little drunk... you have to be

EXTREMELYdrunk

G.Unconscionabilitya. 2-302 - Unconscionable Contract orClause

i. (1) If the court as a matter of law finds that contract or any clause of the contract tohave been unconscionable at the time it was made the court may refuse to enforce thecontract, or it may enforce the remainder of the contract without the unconscionableclause, or it may so limit the application of any unconscionable clause to avoid anyunconscionable result

ii. (2) When it is claimed or appears to the court that the contract of any clause thereof

may be unconscionable the parties shall be afforded a reasonable opportunity topresent evidence as to its' commercial setting, purpose and effect to aid the court inmaking the determination

b. RS II 208 - Unconscionable contract or termi. If a contract or term thereof is unconscionable at the time the contract is made a

court may refuse to enforce the contract, or may enforce the remainder of thecontract without the unconscionable term, or may so limit the application of anyunconscionable term as to avoid any unconscionable result.

c. Upon Determination thatKor term is unconscionable 3 choices

i. Throw out contract

ii. Delete the unconscionable language

iii. Modify the unconscionable term or languaged. DefiningUnconscionable Ks or Terms-

i. Professor Leffs Test - MUST FIND BOTH TO STAND

1. Procedural

a. Unequal bargaining power

b. Unfairness in bargaining process

i. Superior position/knowledge

2. Substantive

a. Harshness of the terms

i. Language of K itself

3. Defining unconscionable K or term is a matter of LAW

a. Left to decision of judge


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b.

H.Impossibility and Frustration of Purposea. Perform

b. Or Pay - no matter the circumstances

i. a. When a unforeseen, unexpected event, which occurs after formation of the K but

before time when performance is due, makes performance impossible, e.g.

ii. Except

1. Destruction of a thing essential to the K

2. Death or incapacity of a person essential to the K

Documents

Contracts II Outline - Dkent