Complete subject outline

Contracts outline for the bar exam

This outline follows a contract from beginning to end: formation, consideration and its substitutes, defenses, interpretation and the parol evidence rule, performance and conditions, breach, remedies, and the rights of third parties. Each module lists the propositions to memorize, the attack sequence, the exceptions and traps, and a short worked application, and the common-law and UCC rules are set beside each other where they diverge. The MBE asks 25 scored questions on Contracts and the MEE frequently pairs it with a sale of goods, so the outline is written to be reread quickly. A question that looks like a formation issue often turns out to be a modification or Statute of Frauds issue instead, so check both. Mark every place the UCC changes a common-law answer as you reread, since that difference is the most common source of wrong choices.

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Contracts outline coverage by unit
Unit	Modules	Propositions
Governing law	1	4
Formation	3	14
Bargain	1	4
Defenses	1	6
Writing and terms	1	5
UCC formation	1	5
Performance	1	5
Sales performance	1	5
Breach and excuse	1	5
Remedies	2	11
Third parties	1	5
Sales of goods	4	47
Defenses to enforceability	2	20
Formation of contracts	2	22
Breach and discharge	1	10
Third-party rights and obligations	1	10

01 · Governing law

Common law, UCC Article 2, and mixed contracts

Common law governs services and real estate, while UCC Article 2 governs transactions in goods; mixed contracts ordinarily use the predominant-purpose test.

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Black-letter propositions

Goods are movable, identified things; services and interests in land are not goods.
Predominant purpose considers contract language, supplier's business, intrinsic worth of materials, and the transaction's thrust.
Some courts use a gravamen approach for the particular portion causing injury, but the exam usually signals the governing method.
UCC rules can modify formation, terms, performance, and remedies, so governing law should be decided first.

Attack sequence

1Classify the transaction and each promised performance.

2Apply predominant purpose to the whole agreement unless instructed otherwise.

3State which body of law governs before applying formation or breach rules.

Traps and exceptions

!A tangible item supplied incidentally during a service does not necessarily convert the agreement into a sale of goods.

!Software and specially manufactured items require attention to facts and the tested rule.

WORKED APPLICATION

A contractor agrees to design and install a custom heating system; most of the price pays for engineering and labor.

The predominant purpose is likely services, so common law governs despite transfer of equipment. The contract's language, price allocation, and supplier role support that conclusion.

Essay-ready formulationThe predominant purpose of a mixed transaction determines whether common law or Article 2 governs, and that choice controls the remaining analysis.

02 · Formation

Offer, preliminary negotiation, and indefiniteness

An offer is an objective present commitment communicated to an identified or objectively identifiable offeree with sufficiently certain terms.

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Black-letter propositions

Advertisements, catalogs, price quotes, and invitations to bid ordinarily solicit offers unless clear, definite, explicit, and leaving nothing open.
Common law generally requires essential terms capable of enforcement; the UCC can form a sales contract despite open terms if intent and a remedy basis exist.
Requirements and output quantities are measured by actual good faith and cannot be unreasonably disproportionate to stated estimates or prior output.
An offer can invite promise, performance, or either, and the invited mode affects acceptance.

Attack sequence

1Find objective commitment, not subjective intent.

2Identify offeree and essential terms.

3Apply common-law or UCC certainty.

4Determine invited acceptance method.

Traps and exceptions

!A stated price alone is often not an offer.

!Vagueness about an immaterial term is different from no basis for a remedy.

!Courts do not enforce an agreement to agree without a workable standard.

WORKED APPLICATION

A store posts: 'One new laptop, serial 44, $300, first customer at 9 a.m.'

The unusually specific advertisement identifies the item, price, quantity, and acceptance method and leaves little to negotiate, so it may be an offer rather than a mere invitation.

Essay-ready formulationAn offer is an objectively definite present commitment that gives the offeree power to conclude the bargain by the invited acceptance.

03 · Formation

Termination of offers and option protection

An offeree's power of acceptance ends by revocation, rejection, counteroffer, lapse, death or incapacity, or destruction or illegality, unless protected by an option or related doctrine.

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Black-letter propositions

Revocation is ordinarily effective on receipt, directly or through reliable information of inconsistent action.
A common-law option generally requires consideration; a merchant's signed UCC firm offer can be irrevocable without consideration for the stated or reasonable period, not over three months under the statute.
Beginning invited performance makes a unilateral offer temporarily irrevocable, but the offeree must receive reasonable time to complete.
Detrimental reliance reasonably induced by an offer can create option-like protection.
A rejection or counteroffer terminates an unprotected offer when received, but a mere inquiry does not.

Attack sequence

1List every termination event chronologically.

2Determine when each communication became effective.

3Check consideration, merchant firm offer, performance, and reliance.

4Distinguish counteroffer from inquiry.

Traps and exceptions

!The mailbox rule generally does not apply to revocations.

!Death terminates an ordinary offer even without notice, but not an option contract.

!A firm offer's assurance must be signed; on the offeree's form, the assurance term may require separate signature.

WORKED APPLICATION

A merchant signs a promise to keep an offer to sell goods open for six months, without consideration.

The UCC firm-offer rule can make the offer irrevocable without consideration, but statutory irrevocability is capped at three months. Continued protection afterward needs consideration or another doctrine.

Essay-ready formulationOffers are revocable until an effective termination or acceptance unless consideration, a merchant's firm offer, beginning performance, or reliance creates protection.

04 · Formation

Acceptance, mailbox rule, and unilateral performance

Acceptance is an objective manifestation of assent in the manner invited by the offer, with timing governed by communication and option rules.

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Black-letter propositions

Common-law acceptance generally must mirror the offer; conditional or materially different assent may be a counteroffer.
Unless the offer provides otherwise, acceptance by an authorized noninstantaneous method is effective on dispatch.
Option-contract acceptance is generally effective on receipt.
A unilateral offer is accepted by completed performance, although beginning performance creates protection and notice may be required when the offeror would not reasonably learn of completion.
Silence is ordinarily not acceptance except through benefit-taking with reason to know payment is expected, prior dealings, or invited silence.

Attack sequence

1Identify invited mode and deadline.

2Ask whether response is unequivocal or conditional.

3Apply dispatch or receipt rule.

4For performance, determine beginning, completion, and notice.

Traps and exceptions

!A misaddressed acceptance may lose mailbox protection.

!An acceptance following a rejection sent first creates a race: the first received ordinarily controls.

!Acceptance under an option is not protected on dispatch.

WORKED APPLICATION

An offeree mails a proper acceptance on Monday and receives a revocation on Tuesday.

If mail was authorized and no exception applies, the acceptance became effective on Monday's dispatch, forming a contract before the Tuesday revocation was received.

Essay-ready formulationAn authorized acceptance ordinarily forms a contract when dispatched, except where the offer, an option, or another rule requires receipt or completed performance.

05 · Bargain

Consideration, modification, and promissory estoppel

A bargained-for exchange of legal value supports a promise, while reliance can sometimes substitute for consideration to avoid injustice.

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Black-letter propositions

Adequacy is generally irrelevant, but nominal sham recitals, past consideration, and illusory promises are not bargained-for value.
A promise to perform an existing legal duty is not new common-law consideration, subject to unforeseen difficulty, third-party, and honest-dispute principles.
UCC modifications require good faith rather than consideration but must satisfy the Statute of Frauds when the modified contract falls within it.
Promissory estoppel requires a promise, foreseeable and actual reliance, and enforcement necessary to avoid injustice; remedy may be limited as justice requires.

Attack sequence

1Identify the promise and requested return.

2Ask whether exchange was bargained for and legally sufficient.

3For modification, choose common law or UCC and test writing requirements.

4If consideration fails, test reliance and remedy.

Traps and exceptions

!Motive is not the same as bargain.

!A condition on a gift does not necessarily supply consideration.

!Good faith does not rescue a coerced UCC modification.

WORKED APPLICATION

A builder demands more money to perform exactly the original duty because material prices predictably rose.

Under common law, the modification lacks new consideration unless an exception applies; ordinary predictable cost changes may not qualify as unforeseen. Duress should also be considered if the owner had no practical alternative.

Essay-ready formulationConsideration requires bargained-for legal value; modifications use governing-law-specific rules, and serious foreseeable reliance may support limited enforcement without consideration.

06 · Defenses

Capacity, mistake, misrepresentation, duress, and unconscionability

A contract may be void or voidable when assent is impaired, information is materially false, bargaining is improperly coerced, or terms and process are unconscionable.

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Black-letter propositions

Minors ordinarily may disaffirm, subject to necessities and statutory rules; mental incapacity depends on cognitive or volitional inability and the other party's knowledge in some settings.
Mutual mistake permits avoidance when both parties err about a basic material assumption and the claimant did not bear the risk.
Unilateral mistake ordinarily requires knowledge, fault, or extreme unfairness plus no allocated risk.
Fraudulent or material misrepresentation inducing justified reliance makes a contract voidable; fraud in the execution can prevent formation.
Improper threat plus no reasonable alternative supports duress.
Unconscionability examines procedural unfairness and substantively oppressive terms at formation.

Attack sequence

1Identify the impaired party and formation moment.

2State each element of the specific defense.

3Determine who bore the risk.

4Distinguish void from voidable.

5Address restitution after avoidance.

Traps and exceptions

!A bad bargain alone is not unconscionable.

!Mistake about future market value is usually a prediction, not an existing fact.

!Economic pressure is not duress without an improper threat and lack of reasonable alternative.

WORKED APPLICATION

Both parties contract for a painting believing it is an original; neither assumed authenticity risk, and it is a copy.

The shared authenticity error concerns a basic material assumption. If the buyer did not bear the risk, the contract is voidable for mutual mistake, with restitution to unwind performance.

Essay-ready formulationAvoidance for mistake, misrepresentation, duress, incapacity, or unconscionability requires the doctrine's specific impairment, materiality, reliance, risk, and remedy elements.

07 · Writing and terms

Statute of Frauds and parol evidence

Certain agreements require a signed writing, while the parol-evidence rule limits prior or contemporaneous terms that contradict or supplement a final integrated writing.

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Black-letter propositions

Traditional Statute of Frauds categories include suretyship, marriage consideration, interests in land, inability to perform within one year, and UCC goods at $500 or more.
A memorandum must identify parties, subject, and essential terms and be signed by the party to be charged; the UCC generally requires quantity.
Exceptions include part performance for land, specially manufactured goods, admissions, payment or acceptance of goods, and main-purpose suretyship.
A completely integrated writing excludes prior contradictory and additional terms; a partially integrated writing excludes contradiction but may admit consistent additions.
Evidence remains admissible for interpretation, validity defenses, condition precedent, reformation, and later modification.

Attack sequence

1Classify the contract and applicable writing rule.

2Identify signed memorandum and missing terms.

3Test all exceptions and remedy limits.

4For outside terms, find timing and integration level.

5State whether the evidence changes, supplements, or explains.

Traps and exceptions

!One-year analysis asks whether performance was possible within a year, not likely.

!The parol-evidence rule does not bar later agreements.

!The UCC merchant-confirmation exception has specific knowledge and objection requirements.

WORKED APPLICATION

A signed complete sales contract omits an earlier oral warranty but contains no clause disclaiming it.

If the writing is completely integrated, the consistent additional warranty may be excluded; if only partial, it may be admitted. The court must decide integration using the applicable evidence rules.

Essay-ready formulationThe Statute of Frauds determines enforceability without a writing; the parol-evidence rule determines the effect of earlier terms on an integrated writing.

08 · UCC formation

Battle of the forms and gap fillers

Under Article 2, a definite and seasonable expression of acceptance can form a contract despite additional or different terms unless acceptance is expressly conditional.

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Black-letter propositions

Between merchants, additional terms may enter automatically unless the offer limits acceptance, the term materially alters, or timely objection occurs.
For a nonmerchant, additional terms are proposals requiring assent.
Different terms receive varying approaches; the exam may specify knockout or offer-controls treatment.
If writings do not form a contract but conduct recognizes one, agreed terms plus UCC gap fillers govern.
Open price, delivery, and time terms can be supplied, but quantity usually cannot except through requirements or output language.

Attack sequence

1Find offer and responsive document.

2Is response definite and expressly conditional?

3Classify parties as merchants for the transaction.

4Classify term as additional or different and test material alteration.

5If no writings contract, test conduct and knockout.

Traps and exceptions

!A boilerplate statement that terms are 'subject to' conditions may not be expressly conditional.

!Warranty disclaimer, arbitration, and substantial-remedy changes often materially alter.

!Merchant status is issue specific, not merely business ownership.

WORKED APPLICATION

A merchant buyer orders 100 widgets. The seller promptly accepts but adds an unexpected clause eliminating all consequential damages.

A contract forms. The added clause likely materially alters the bargain and therefore does not automatically enter between merchants absent express assent.

Essay-ready formulationA UCC acceptance can form a contract despite variant terms; merchant status, express conditionality, material alteration, objection, and conduct determine the operative terms.

09 · Performance

Conditions, substantial performance, and material breach

Contract duties can be expressly or constructively conditioned; failure of a condition may excuse performance, while breach creates remedial liability.

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Black-letter propositions

Express conditions generally require strict compliance unless excused by waiver, prevention, estoppel, or disproportionate forfeiture in appropriate cases.
Constructive conditions use substantial performance; a material breach suspends the other party's remaining performance.
Materiality considers benefit deprivation, compensation, forfeiture, cure likelihood, and good faith.
An uncured material breach can become total; a minor breach supports damages but not termination.
A party benefiting from a condition may waive it and sometimes retract waiver before reliance and before the condition is due.

Attack sequence

1Identify promise versus condition.

2Classify express or constructive.

3Determine compliance and possible excuse.

4If breached, assess materiality and cure.

5State performance and damages consequences separately.

Traps and exceptions

!Failure of a condition is not itself necessarily a breach.

!Substantial performance does not satisfy an express condition requiring exactness.

!A party that prevents a condition cannot rely on its failure.

WORKED APPLICATION

An owner promises payment 'only if' an independent architect issues a certificate, then blocks the architect's inspection.

The owner likely prevented the express condition and may not rely on its nonoccurrence. The builder's performance and any breach must still be assessed.

Essay-ready formulationExpress conditions require strict compliance unless excused; constructive conditions use substantial performance and material-breach principles to determine whether counterperformance is due.

10 · Sales performance

Perfect tender, cure, installment contracts, and risk of loss

Article 2 permits rejection for nonconforming goods subject to cure, installment-contract, acceptance, revocation, and risk-allocation rules.

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Black-letter propositions

Before acceptance, a buyer may reject a nonconforming single delivery, but the seller may cure within contract time or sometimes beyond it with reasonable grounds.
An installment may be rejected only for substantial impairment that cannot be cured; the whole contract is breached only if impairment substantially affects the whole.
Acceptance occurs after reasonable inspection or failure to reject and limits remedies; revocation requires substantial impairment plus qualifying assumption or difficulty discovering.
Risk of loss follows agreement, breach rules, shipment or destination terms, and merchant or nonmerchant delivery rules.
A shipment contract requires proper carrier delivery and notice; a destination contract requires tender at destination.

Attack sequence

1Identify goods, delivery term, and conformity.

2Determine tender, inspection, rejection, acceptance, and notice chronologically.

3Test seller's right to cure.

4Classify installment or single delivery.

5Allocate risk before identifying the casualty bearer.

Traps and exceptions

!Perfect tender is not absolute after acceptance.

!FOB location determines shipment versus destination.

!Risk of loss is not the same as title.

WORKED APPLICATION

A seller ships conforming goods FOB seller's city. They are destroyed in transit without fault after proper carrier delivery.

This is a shipment contract; risk generally passed to the buyer when the seller properly delivered to the carrier and satisfied shipment duties.

Essay-ready formulationUCC sales analysis follows tender, inspection, rejection or acceptance, cure, and risk-of-loss rules rather than common-law substantial performance alone.

11 · Breach and excuse

Anticipatory repudiation, assurance, impracticability, and frustration

A clear preperformance refusal can create immediate breach, while supervening events may excuse duties under narrowly defined doctrines.

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Black-letter propositions

Anticipatory repudiation requires an unequivocal indication of nonperformance while material duties remain; the aggrieved party may await or treat it as breach.
Repudiation may be retracted before cancellation, material change, or indication that it is final.
Under the UCC, reasonable insecurity permits written demand for adequate assurance and suspension; failure to assure within a reasonable time, up to 30 days, is repudiation.
Impossibility or impracticability requires an unforeseen event, no fault, and a basic assumption, without allocated risk.
Frustration requires substantial destruction of the party's principal known purpose even though performance remains possible.

Attack sequence

1State the promised future performance and timing.

2Distinguish unequivocal repudiation from insecurity.

3Track assurance and retraction.

4For excuse, identify event, basic assumption, fault, risk allocation, and effect.

5Consider partial or temporary excuse and restitution.

Traps and exceptions

!Increased expense alone rarely proves impracticability.

!A party cannot claim frustration when its purpose was not mutually understood.

!Repudiation does not apply when the only remaining duty is payment for completed performance.

WORKED APPLICATION

A venue burns down before a one-night concert for which that specific hall was an assumed essential subject.

Destruction without fault may make performance impossible or impracticable because the specific venue's continued existence was a basic assumption. Allocation of casualty risk and available substitutes remain important.

Essay-ready formulationFuture duties may be discharged by unequivocal repudiation or narrowly excused when an unallocated, unforeseen event destroys a basic assumption or the known principal purpose.

12 · Remedies

Expectation, reliance, restitution, and limitations

Contract remedies protect expectation, reliance, or restitution interests, subject to proof, foreseeability, causation, certainty, and mitigation.

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Black-letter propositions

Expectation equals loss in value plus incidental and consequential loss minus costs and loss avoided.
Consequential loss must have been foreseeable at contracting through ordinary course or special notice.
Lost profits require reasonable certainty, not mathematical precision.
The injured party must take reasonable mitigation steps but need not assume undue risk or humiliation.
Reliance reimburses foreseeable wasted expenditure, potentially reduced by loss the breacher proves would have occurred.
Restitution measures unjust enrichment and may be available to an injured party and sometimes a breacher less damages.

Attack sequence

1Choose protected interest.

2Calculate baseline and each addition or subtraction.

3Apply causation, foreseeability, certainty, and mitigation.

4Avoid double recovery.

5Consider restitution and agreed remedies.

Traps and exceptions

!Punitive damages ordinarily are unavailable for pure breach.

!Emotional-distress damages are exceptional.

!Mitigation limits recovery; it does not create an affirmative claim against the injured party.

WORKED APPLICATION

A carrier is told before contracting that delay will shut down the buyer's only factory, then delivers late, causing proven lost production.

The specially communicated shutdown loss may be foreseeable consequential damage if causation, certainty, and reasonable mitigation are shown.

Essay-ready formulationExpectation puts the injured party in the performance position but only for losses caused, foreseeable at formation, reasonably certain, and not reasonably avoidable.

13 · Remedies

Specific performance, liquidated damages, and UCC remedies

Equitable and agreed remedies supplement money damages when their specialized requirements are met.

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Black-letter propositions

Specific performance requires inadequate legal remedy, sufficiently certain terms, feasible enforcement, and equitable conduct; land and unique goods often qualify.
Personal services are not specifically enforced, but a valid negative covenant may sometimes be enjoined without coercing service.
Liquidated damages are enforceable when actual loss was difficult to estimate and the amount was a reasonable forecast or measure under the governing test, not a penalty.
A UCC buyer may cover, recover market damages, obtain identified goods in limited cases, or seek specific performance for unique goods.
A UCC seller may resell, recover market damages, sometimes recover the price, or obtain lost-volume profit when ordinary resale does not replace the lost sale.

Attack sequence

1Explain why damages are adequate or inadequate.

2Check certainty, feasibility, mutuality concerns, and defenses.

3For liquidated damages, identify estimation difficulty and proportionality.

4For sales, choose buyer or seller formula and relevant market time and place.

Traps and exceptions

!A high stipulated sum triggered by any breach is likely a penalty.

!Specific performance is discretionary, not automatic for every land contract.

!Seller resale proceeds do not necessarily eliminate lost-volume profit.

WORKED APPLICATION

A contract sets $100,000 damages for any breach, including one-day delay, when likely losses were easy to estimate at $500 per day.

The clause is punitive rather than a reasonable estimate and likely unenforceable. The injured party may recover proven actual damages instead.

Essay-ready formulationSpecific performance addresses inadequate damages, while liquidated damages must reasonably estimate difficult loss rather than punish, and Article 2 supplies transaction-specific buyer and seller remedies.

14 · Third parties

Beneficiaries, assignment, delegation, and novation

Contract rights and duties may affect third parties through intended-beneficiary, assignment, delegation, and substitution doctrines.

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Black-letter propositions

An intended beneficiary may enforce once rights vest through assent, reliance, or suit; an incidental beneficiary cannot.
Most rights are assignable unless assignment materially changes duty or risk, is prohibited by law, or a valid clause restricts it.
A gratuitous assignment is generally revocable unless delivered through a protected form; an assignment for value is ordinarily irrevocable.
Duties may be delegated unless personal skill, trust, contract, or law forbids; the delegator remains liable absent novation.
Novation is an agreement among relevant parties substituting a new obligor and releasing the original.

Attack sequence

1Identify promisee, promisor, and third person.

2Determine intended versus incidental benefit and vesting.

3For assignment, identify right, restriction, consideration, notice, and defenses.

4For delegation, test personal nature and continuing liability.

5Find express release for novation.

Traps and exceptions

!Assignment of 'the contract' often assigns rights and delegates duties but does not itself create a novation.

!A clause prohibiting assignment may be construed differently from one making assignment void.

!The obligor may assert defenses arising before notice against the assignee.

WORKED APPLICATION

A contractor delegates all work to another builder, and the owner never agrees to release the original contractor.

Delegation may be permissible if performance is not uniquely personal, but the original contractor remains liable for defective performance because no novation released it.

Essay-ready formulationThird-party enforcement depends on intended benefit or valid transfer, and delegating performance does not discharge the original obligor without novation.

15 · Sales of goods

UCC warranties: express, merchantability, fitness, disclaimers, and remedy limits

In a sale of goods, express and implied warranties can arise without any formal promise, and the seller can disclaim or limit them only in the ways UCC Article 2 allows.

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Black-letter propositions

Any affirmation of fact or promise by the seller that relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods will conform to it; so does any description of the goods or any sample or model that becomes part of the basis of the bargain.
A seller need not use formal words such as warrant or guarantee, or intend to make a warranty, but an affirmation merely of the value of the goods, or a statement of the seller's opinion or commendation, does not create a warranty.
Unless excluded or modified, a warranty of merchantability is implied in a contract for the sale of goods if the seller is a merchant with respect to goods of that kind, and serving food or drink for value is a sale.
Merchantable goods must at least pass without objection in the trade under the contract description, be fit for the ordinary purposes for which such goods are used, be adequately contained, packaged and labeled as the agreement may require, and conform to promises or affirmations of fact on the container or label.
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, an implied warranty of fitness for that purpose arises unless excluded or modified.
To exclude or modify the implied warranty of merchantability the language must mention merchantability and, in a writing, be conspicuous; to exclude any implied warranty of fitness the exclusion must be in a writing and be conspicuous.
Unless the circumstances indicate otherwise, expressions like as is or with all faults exclude all implied warranties, and there is no implied warranty as to defects that an examination the buyer made, or refused to make, ought to have revealed.
Warranties, whether express or implied, are construed as consistent with each other and as cumulative, but if that is unreasonable the parties' intention decides which is dominant; exact or technical specifications displace an inconsistent sample or general description, and express warranties displace inconsistent implied warranties other than fitness for a particular purpose.
After the buyer has accepted goods, the buyer must within a reasonable time after it discovers or should have discovered any breach notify the seller of the breach or be barred from any remedy, and the buyer has the burden of establishing any breach with respect to accepted goods.
The measure of damages for breach of warranty is the difference, at the time and place of acceptance, between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount; incidental and consequential damages may also be recovered in a proper case.
An agreement may limit the buyer's remedies to return of the goods and repayment of the price or to repair and replacement, and such a remedy is exclusive if expressly agreed to be; where an exclusive or limited remedy fails of its essential purpose, remedy may be had as provided in the Code.
Consequential damages may be limited or excluded unless the limitation is unconscionable; limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, while limitation where the loss is commercial is not.

Attack sequence

1Look for statements, descriptions, samples or models by the seller that formed part of the basis of the bargain.

2Decide whether the seller is a merchant, and whether the buyer relied on the seller to select goods for a particular purpose.

3Check any disclaimer for the required words, conspicuousness and writing, or for language like as is.

4Check the buyer's notice, the damages measure, and any contractual limit on remedies.

Traps and exceptions

!Sales talk about value or the seller's opinion does not create an express warranty.

!The merchantability disclaimer must use the word merchantability, while as is language can disclaim all implied warranties.

!A remedy limit that fails of its essential purpose does not shield the seller from the ordinary Code remedies.

WORKED APPLICATION

A retailer tells a buyer, who says she needs a saw for cutting wet stone, that a certain saw will do the job. The buyer relies on the retailer, and the saw fails when cutting wet stone.

The retailer had reason to know the particular purpose and that the buyer was relying on its judgment, so an implied warranty of fitness for a particular purpose arose unless properly excluded, and the statement may also be an express warranty.

Essay-ready formulationIdentify the warranty source (express, merchantability, fitness), test any disclaimer under section 2-316, give notice under section 2-607, and measure damages under section 2-714.

16 · Sales of goods

Buyer's rights on nonconforming goods: rejection, acceptance, revocation, cure, cover, and damages

A buyer faced with nonconforming goods must choose among rejecting, accepting, or revoking acceptance, and the choice controls the remedies: cover, market-price damages, or damages for accepted goods.

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Black-letter propositions

If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole, accept the whole, or accept any commercial unit or units and reject the rest, subject to the rules on installment contracts and on contractual limits of remedy.
Rejection must occur within a reasonable time after delivery or tender and is ineffective unless the buyer seasonably notifies the seller; after rejection any exercise of ownership by the buyer is wrongful as against the seller.
Acceptance occurs when the buyer, after a reasonable opportunity to inspect, signifies that the goods are conforming or that it will take or retain them despite nonconformity, or fails to make an effective rejection, or does any act inconsistent with the seller's ownership.
Acceptance of goods with knowledge of a nonconformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the nonconformity would be seasonably cured, and acceptance does not of itself impair any other remedy for nonconformity.
The buyer must pay at the contract rate for any goods accepted.
The buyer may revoke acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to the buyer if it accepted on the reasonable assumption the nonconformity would be cured and it was not seasonably cured, or without discovery of the nonconformity because acceptance was reasonably induced by the difficulty of discovery or by the seller's assurances.
Revocation must occur within a reasonable time after the buyer discovers or should have discovered the ground and before any substantial change in the condition of the goods not caused by their own defects, and it is not effective until the buyer notifies the seller.
When a tender is rejected as nonconforming and the time for performance has not expired, the seller may seasonably notify the buyer of its intention to cure and make a conforming delivery within the contract time; if the seller had reasonable grounds to believe the tender would be acceptable, it may have a further reasonable time to substitute a conforming tender.
In an installment contract, the buyer may reject an installment whose nonconformity substantially impairs its value and cannot be cured, and there is a breach of the whole contract when nonconformity in one or more installments substantially impairs the value of the whole.
On the seller's failure to deliver or repudiation, or on the buyer's rightful rejection or justifiable revocation, the buyer may cancel and recover the price paid and either cover and recover damages or recover damages for nondelivery.
A buyer who covers, by a good-faith and reasonable purchase of substitute goods without unreasonable delay, recovers the cost of cover minus the contract price, plus incidental and consequential damages, less expenses saved; failure to cover does not bar other remedies.
Damages for nondelivery or repudiation are the market price at the time the buyer learned of the breach minus the contract price, plus incidental and consequential damages, less expenses saved; consequential damages include losses from needs of which the seller had reason to know that could not reasonably be prevented by cover, and injury to person or property proximately resulting from breach of warranty.

Attack sequence

1Decide whether the buyer rejected, accepted, or revoked, and whether notice was given in time.

2Check whether any act after delivery was inconsistent with the seller's ownership.

3For revocation, test substantial impairment, the reason for acceptance, and reasonable time.

4Choose the damages measure: cover, market price, or accepted-goods warranty damages, and add incidental and foreseeable consequential damages.

Traps and exceptions

!A buyer who accepts must pay the contract rate for the goods, and its remedy is damages.

!A buyer who uses rejected goods in a way inconsistent with the seller's ownership may be treated as having accepted them.

!Cover is optional, and failure to cover does not bar market-price damages.

WORKED APPLICATION

A buyer orders 100 machines at $1,000 each, and the seller delivers machines with defects that cannot be cured. The buyer rejects them in a timely way and buys substitute machines for $1,150 each.

The buyer rightfully rejected and may cover. Damages are the difference between the cost of cover ($1,150) and the contract price ($1,000) per machine, $15,000 in all, plus incidental damages.

Essay-ready formulationSay whether the buyer rejected, accepted or revoked, apply the notice and timing rules, then choose the remedy and compute damages.

17 · Sales of goods

Sales contracts with open terms: formation, price, delivery, time, and cooperation

Article 2 lets parties form a contract for the sale of goods even when terms are missing, and it supplies gap fillers for price, place, time, and payment.

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Black-letter propositions

A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties that recognizes the existence of a contract, even though the moment of its making is undetermined.
Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
If the price is not settled, the price is a reasonable price at the time for delivery when nothing is said as to price, when the price is left to be agreed and the parties fail to agree, or when a price fixed by a market or standard set by a third person is not set.
A price to be fixed by the seller or the buyer means a price for that party to fix in good faith; if a price to be fixed otherwise than by agreement fails to be fixed through the fault of one party, the other may cancel or fix a reasonable price.
If the parties intend not to be bound unless the price is fixed or agreed and it is not, there is no contract, and the buyer must return goods received or pay their reasonable value at delivery.
Unless otherwise agreed, the place for delivery of goods is the seller's place of business or, if none, the seller's residence, but in a contract for identified goods known to the parties to be elsewhere, that place is the place for delivery.
The time for shipment, delivery or any other action, if not agreed, is a reasonable time.
A contract with successive performances that is indefinite in duration is valid for a reasonable time but, unless otherwise agreed, may be terminated at any time by either party, and termination other than on an agreed event requires reasonable notification received by the other party.
Unless otherwise agreed, payment is due at the time and place at which the buyer is to receive the goods.
An agreement that leaves particulars of performance to be specified by one party is not invalid for that reason, but the specification must be made in good faith and within limits set by commercial reasonableness.
Unless otherwise agreed, specifications relating to assortment of the goods are at the buyer's option and specifications relating to shipment are at the seller's option.
If a specification that would materially affect the other party's performance is not seasonably made, or cooperation necessary to the other party's performance is not seasonably forthcoming, the other party is excused for any resulting delay and may proceed to perform in any reasonable manner or, after the time for a material part of its own performance, treat the failure as a breach.

Attack sequence

1Ask whether the parties intended a contract and whether there is a reasonably certain basis for a remedy.

2For a missing term, find the Article 2 gap filler for price, place, time or payment.

3Check whether the parties intended not to be bound unless the open term is settled.

4If one party had to specify or cooperate, ask whether it did so in good faith and on time.

Traps and exceptions

!Silence on price does not defeat a contract when the parties intended to be bound, because a reasonable price fills the gap.

!If the parties do not intend to be bound unless a price is agreed, there is no contract even though goods were delivered.

!A party that fixes the price must do so in good faith, so the price is not unlimited.

WORKED APPLICATION

A buyer and a seller agree to the sale of 500 tons of steel, delivery next month, and say nothing about the price. The seller delivers and the buyer refuses to pay any price.

The parties intended a contract, so the missing price does not defeat it, and the price is a reasonable price at the time for delivery under section 2-305.

Essay-ready formulationState the open-term rule of section 2-204(3), identify the gap filler, then test good faith for any term left to one party and the excuse rules for failed cooperation.

18 · Sales of goods

Modification, waiver, no-oral-modification clauses, and accord and satisfaction by check

Under Article 2 a modification needs no consideration, a signed no-oral-modification clause has limits, an ineffective modification can still be a waiver, and a check marked as full payment can discharge a disputed debt.

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Black-letter propositions

An agreement modifying a contract within Article 2 needs no consideration to be binding; the modification must still meet the good faith obligation that every contract within the Code imposes on its performance and enforcement.
A signed agreement that excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by a merchant must be separately signed by the other party.
The statute of frauds must be satisfied if the contract as modified is within its provisions, so a modification that brings a contract to $500 or more of goods needs a signed writing unless an exception applies.
Although an attempt at modification or rescission does not satisfy the signed-writing requirements, it can operate as a waiver.
A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification that strict performance will be required, unless retraction would be unjust in view of a material change of position in reliance on the waiver.
A contract for the sale of goods for the price of $500 or more is not enforceable unless there is a writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought; a writing is not insufficient because it omits or incorrectly states a term, but the contract is not enforceable beyond the quantity shown in the writing.
Between merchants, a written confirmation sufficient against the sender and received within a reasonable time satisfies the statute of frauds against the receiver unless written notice of objection is given within 10 days after it is received.
A claim is discharged by accord and satisfaction through an instrument if the debtor proves that it tendered the instrument in good faith as full satisfaction, the claim was unliquidated or subject to a bona fide dispute, and the claimant obtained payment of the instrument.
In that case the claim is discharged if the instrument or an accompanying written communication contained a conspicuous statement that the instrument was tendered as full satisfaction of the claim.
A claim is not discharged if the claimant proves it tendered repayment of the amount of the instrument within 90 days after payment, or, if the claimant is an organization, proves it had sent a conspicuous statement designating a person or place for communications about disputed debts and the instrument was not received there.
A claim is nevertheless discharged if the debtor proves that within a reasonable time before collection of the instrument was initiated the claimant, or an agent with direct responsibility for the obligation, knew the instrument was tendered in full satisfaction.

Attack sequence

1Confirm the contract is a sale of goods, so section 2-209 rather than common-law consideration governs modification.

2Check for a signed no-oral-modification clause and whether a merchant's form clause was separately signed.

3Ask whether the modified contract needs a writing under the statute of frauds, and whether a waiver can be retracted.

4For a check marked full payment, test good faith, a bona fide dispute, a conspicuous statement, and repayment within 90 days.

Traps and exceptions

!A sales modification needs no new consideration, so a common-law preexisting-duty argument does not defeat it.

!A merchant's form clause against oral modification must be separately signed by a non-merchant party.

!Cashing a check marked full satisfaction discharges only a disputed or unliquidated claim, and a claimant may undo it by repaying within 90 days.

WORKED APPLICATION

A seller and buyer of goods agree in a signed contract that changes must be in a signed writing. Later the buyer orally agrees to accept delivery two weeks late and the seller relies on it, then the buyer demands strict on-time delivery.

The oral change may not be an effective modification, but it operates as a waiver, and the buyer may retract only on reasonable notice and only if that would not be unjust in view of the seller's reliance.

Essay-ready formulationState that a sales modification needs no consideration, apply the signed-writing and statute-of-frauds limits, treat a failed modification as a possible waiver, and handle accord and satisfaction under section 3-311.

19 · Defenses to enforceability

Electronic signatures and records: the federal E-SIGN Act and its exceptions

Federal law provides that a signature, contract, or record in a transaction in or affecting interstate commerce cannot be denied legal effect solely because it is electronic, subject to consumer-consent conditions and to listed exceptions such as wills, family-law matters, and certain notices.

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Black-letter propositions

For a transaction in or affecting interstate or foreign commerce, a signature, contract, or other record may not be denied legal effect, validity, or enforceability solely because it is in electronic form.
A contract relating to such a transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.
An electronic signature is an electronic sound, symbol, or process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.
The statute does not require any person to agree to use or accept electronic records or electronic signatures, apart from a governmental agency with respect to certain records.
When a law requires that information be given to a consumer in writing, an electronic record satisfies the requirement only if the consumer affirmatively consented and has not withdrawn consent, received a clear and conspicuous statement of the consumer's rights, and consented electronically in a way that reasonably demonstrates access to the electronic form.
The federal statute does not apply to a contract or record to the extent it is governed by a law on the creation and execution of wills, codicils, or testamentary trusts, or by a state law on adoption, divorce, or other family-law matters.
The federal statute does not apply to the Uniform Commercial Code other than sections 1-107 and 1-206 and Articles 2 and 2A, so a sale of goods contract falls within it.
The federal statute does not apply to court orders or official court documents, to notices of cancellation of utility services, to notices of default, acceleration, repossession, foreclosure, or eviction concerning a primary residence, to notices of cancellation of health or life insurance benefits, or to product-recall notices.
A record retention requirement is met by an electronic record that accurately reflects the information and remains accessible to entitled persons in a form capable of being accurately reproduced for later reference.
A contract may not be denied legal effect solely because its formation involved an electronic agent, so long as the electronic agent's action is legally attributable to the person to be bound.

Attack sequence

1Confirm the transaction is in or affecting interstate or foreign commerce.

2Check whether the subject matter falls within an excluded category such as wills, family law, or listed notices.

3Find the intent to sign, which is part of the definition of an electronic signature.

4For consumer disclosures required in writing, confirm the consumer's affirmative consent and the required statements.

5For an automated system, ask whether the electronic agent's action is attributable to the person to be bound.

Traps and exceptions

!The statute makes electronic form not a ground for denying validity, and it does not validate a contract that fails for another reason such as lack of consideration.

!Nobody has to accept electronic records or signatures, so a party may insist on paper.

!Wills, testamentary trusts, and family-law matters are outside the federal statute, and eviction and foreclosure notices for a primary residence are outside it too.

!A sale of goods is within the federal statute because Article 2 is carved back in.

WORKED APPLICATION

Ravi, in another state, clicks an 'I agree and sign' button on an online form to buy $8,000 of equipment from a seller in Ohio. Later he claims he is not bound because he never signed on paper.

The transaction affects interstate commerce, and a signature or contract may not be denied effect solely because it is electronic. Clicking to sign, with intent to sign, is an electronic signature, and Article 2 sales are within the statute, so Ravi cannot avoid the contract on that ground alone.

Essay-ready formulationState the general validity rule, check the exceptions, and apply the definition of electronic signature including intent to sign, then address any consumer-consent requirement.

20 · Formation of contracts

Consideration, forbearance, moral obligation, and promissory estoppel: Hamer, Kirksey, Webb, Red Owl, and Drennan

A promise is enforceable as a bargain when something is promised, done, or given up in exchange for it, including a waiver of a legal right, and a promise without consideration can still be enforced when the promisor should expect and gets substantial reliance and injustice can be avoided only by enforcement, or in some states when it is a promise to pay for a past material benefit.

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Black-letter propositions

Consideration may consist of some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other, and a waiver of a legal right at the request of the other party is sufficient.
Courts do not ask whether the thing given as consideration actually benefits the promisee or anyone else, and it is enough that something is promised, done, forborne, or suffered in exchange for the promise.
A promisee who gave up a legal right, such as refraining from drinking liquor, using tobacco, swearing, and playing cards for money until age 21 in exchange for a promised $5,000, supplied consideration even though the abstention benefited him and not the promisor.
A promise to give land or a house that is a mere gratuity is not supported by consideration, even if the promisee incurred inconvenience or expense in moving in reliance on it, in the view of the majority in Kirksey v. Kirksey.
A promise to pay for a past service can be enforceable when the promisor received a material benefit, such as being saved from death or grievous bodily harm, and the promisor afterward promised to pay, though a moral obligation without a material benefit is not enough.
Promissory estoppel makes a promise binding when the promisor should reasonably expect it to induce action or forbearance of a definite and substantial character, the promise does induce that action or forbearance, and injustice can be avoided only by enforcement of the promise.
Promissory estoppel does not require a promise so comprehensive that it would ripen into a contract if accepted, and an action on it is not the equivalent of a breach-of-contract action, so a court may fashion relief to fit the reliance.
A person who was not the promisee may recover under promissory estoppel if the promisor actually foresaw, or had reason to foresee, that person's action in reliance on the promise.
A general contractor who reasonably relies on a subcontractor's bid in computing its own bid may enforce the subcontractor's bid, because reliance makes the offer irrevocable.
Reliance that is only preparation or expected profit, rather than a definite and substantial action or forbearance induced by the promise, does not by itself support promissory estoppel.

Attack sequence

1Look for a bargained-for exchange: something promised, done, or given up in exchange for the promise.

2If the only thing given up is a legal right, treat that as consideration and do not weigh its benefit.

3If there is no bargain, ask whether the promisor should expect and did induce substantial reliance and whether injustice requires enforcement.

4For a promise to pay for past services, ask whether there was a material benefit and a later promise.

5For a bid or offer that someone relied on, consider whether reliance made it irrevocable.

Traps and exceptions

!A promise that is a mere gratuity is not a contract even when the promisee incurred some inconvenience.

!The adequacy of consideration and the benefit to the promisor are not examined, so giving up a legal right suffices.

!Promissory estoppel needs definite and substantial reliance and a showing that injustice can be avoided only by enforcement.

!A moral obligation alone is not consideration, but a promise to pay for a material benefit already received may be enforceable.

WORKED APPLICATION

An uncle promises his nephew $5,000 if the nephew refrains from drinking, smoking, and gambling until age 21. The nephew complies, and the uncle's estate refuses to pay, saying the uncle received no benefit.

The nephew gave up legal rights at the uncle's request, which is consideration, and the court does not ask whether the promisor benefited, so the promise is enforceable.

Essay-ready formulationAsk whether there is a bargained-for exchange, apply the forbearance and past-benefit rules, and if not, test promissory estoppel by its three conditions.

21 · Defenses to enforceability

Minors, undue influence, mutual mistake, reformation, and nondisclosure (Dodson, Odorizzi, MacKay, Hylton, Laidlaw)

A minor may generally disaffirm a contract, though some states let the seller deduct for use, a contract obtained by excessive pressure on a vulnerable person may be rescinded for undue influence, a mutual mistake about a basic existing fact can avoid a contract, a writing that misstates the parties' agreement can be reformed, and a buyer generally has no duty to volunteer facts affecting price.

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Black-letter propositions

A minor's contract is voidable at the minor's election, and the common-law rule protects minors from squandering their wealth through improvident contracts with adults.
In Tennessee, when a minor has not been overreached, there has been no undue influence, the contract is fair and reasonable, and the minor has paid money and used the item, the minor may not recover the amount paid without allowing the seller reasonable compensation for use, depreciation, and willful or negligent damage.
That modified rule does not apply if the seller committed fraud or imposition, the contract is unfair, or unfair advantage was taken of the minor, and whether there was overreaching is a question of fact.
Undue influence is the use of excessive pressure to persuade a person vulnerable to it, so that the apparent will of the influenced person is in fact the will of the dominant person, and it combines undue susceptibility with excessive pressure.
Undue susceptibility need not be total incapacity and may be a lesser weakness, such as a lack of full vigor from age, physical condition, or emotional anguish, and a confidential relationship is not required when unfair advantage is taken of another's weakness or distress.
A contract may be avoided for mutual mistake of fact when the mistake is common to both parties and each has done what neither intended, and the mistake must be of an existing or past material fact that enters into and forms the basis of the contract.
The parol evidence rule does not bar proof of facts that render a writing inoperative, so it may be shown that there was a mutual mistake preventing formation of a contract or making the writing subject to reformation or rescission.
A written instrument may be reformed for mutual mistake or inadvertence, including a scrivener's or clerical error, when the writing does not state the agreement the parties actually made, and the evidence of the mistake must be clear, strong, and convincing.
A vendee is not bound to communicate to the vendor intelligence of extrinsic circumstances within the vendee's exclusive knowledge that may affect the price, when the means of intelligence are equally accessible to both.
A party who has no duty to speak must still take care not to say anything tending to impose on the other party, so an affirmative misrepresentation differs from silence.

Attack sequence

1Identify the defense: capacity (minority), undue influence, mistake, or nondisclosure.

2For minority, ask whether the minor was overreached and whether the state allows a deduction for use.

3For undue influence, find both the vulnerability and the excessive pressure.

4For mistake, ask whether it was mutual, about an existing fact, and material to the basis of the contract.

5For a writing that misstates the deal, ask whether reformation is available and whether the proof is clear, strong, and convincing.

Traps and exceptions

!A minor may disaffirm even after the purchased item has been damaged, but some states reduce the refund for use.

!Silence is not misrepresentation, though an affirmative false statement is.

!A mistake about an expected future event or about mere value is not the existing-fact mistake that avoids a contract.

!The parol evidence rule does not stop proof of mutual mistake that supports reformation.

WORKED APPLICATION

A seller sells a used truck to a 16-year-old for $4,900 cash. The engine fails nine months later, and the minor tries to rescind and demand a full refund, though the seller made no misrepresentation.

In a state following the modified rule, the minor may rescind but the seller may deduct reasonable compensation for the minor's use and the truck's depreciation, because the contract was fair and no one overreached.

Essay-ready formulationIdentify which defense is raised, state its elements, and apply it, noting whether the party seeking relief acted fairly and whether the proof meets the required standard.

22 · Breach and discharge

Liquidated damages, excuse by impracticability under the UCC, and wrongful discharge of at-will employees

Liquidated damages are enforceable only if reasonable in light of anticipated or actual harm, a seller is excused from delivery when a basic assumption fails and performance becomes impracticable but must allocate and notify, and an employee at will generally may be discharged for any reason except one that violates a well-established public policy.

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Black-letter propositions

Under the UCC, damages for breach by either party may be liquidated in the agreement but only at an amount reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
A term fixing unreasonably large liquidated damages is void as a penalty.
A stipulated damages clause must be a reasonable forecast of the provable injury resulting from breach or it is unenforceable as a penalty, and it is presumptively reasonable, so the party challenging it bears the burden of proof.
Damages calculated from a party's gross receipts run the risk of being found unreasonable, because gross receipts do not generally reflect the actual loss caused by breach.
When the buyer breaches and the seller justifiably withholds delivery, the buyer is entitled to restitution of any amount by which the payments exceed the amount fixed by the liquidating terms or, absent such terms, twenty percent of the value of the total performance or $500, whichever is smaller.
A seller's delay or nondelivery is not a breach if performance as agreed has been made impracticable by a contingency whose nonoccurrence was a basic assumption on which the contract was made, or by good-faith compliance with a governmental regulation, unless the seller assumed a greater obligation.
If the excusing cause affects only part of the seller's capacity, the seller must allocate production and deliveries among its customers in a fair and reasonable manner, and the seller must seasonably notify the buyer of the delay or nondelivery and of the estimated quota.
A buyer who receives notice of a material delay or an allocation may, by written notification, terminate the unexecuted portion of the contract or modify it to take the available quota, and the contract lapses if the buyer does not modify it within a reasonable time not exceeding 30 days.
An employee at will may be discharged for no reason or an arbitrary or irrational reason but not for an unlawful reason or purpose that contravenes public policy, and North Carolina recognizes a wrongful discharge claim on that ground.
A discharge violates public policy when the employer fires a driver who refuses to falsify records to show compliance with safety regulations, because highway safety is a well-established public policy.

Attack sequence

1For a liquidated damages clause, ask whether the amount is a reasonable forecast of harm and difficult-to-prove loss, and who bears the burden.

2For an excuse defense, identify the contingency, whether nonoccurrence was a basic assumption, and whether the seller assumed a greater duty.

3If only part of capacity is affected, look for allocation and notice.

4For the buyer, look for the written election to terminate or accept the quota within 30 days.

5For an at-will discharge, ask whether the reason contravenes a well-established public policy.

Traps and exceptions

!A clause that sets damages far above the probable loss is a penalty and is void.

!Ordinary cost increases do not by themselves make performance impracticable.

!A seller who claims excuse must still allocate fairly and give timely notice.

!An at-will employee may be fired for no reason but not for refusing to violate the law.

WORKED APPLICATION

A lease says that if the tenant breaches, it must pay a fixed sum equal to 25 percent of the tenant's gross receipts for a year, regardless of the actual rent lost. The landlord's actual loss is much smaller.

A clause based on gross receipts runs the risk of being unreasonable because gross receipts do not reflect the loss caused by the breach, so the court may treat it as a penalty and award only conventional damages.

Essay-ready formulationClassify the clause or excuse claim, test it under the reasonableness standard or the basic-assumption standard, and check the required procedure such as allocation and notice.

23 · Third-party rights and obligations

Third-party beneficiaries, delegation and assignment under the UCC, and the scope of Article 2

Article 2 applies to transactions in goods, meaning movable things other than money, investment securities, and things in action, a party may generally delegate performance and assign rights unless the other party has a substantial interest or the change is material, general assignment language is both an assignment and a delegation, third parties beneficiaries can enforce some warranties, and third parties generally cannot enforce government contracts that merely incorporate statutory duties.

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Black-letter propositions

Unless the context otherwise requires, Article 2 applies to transactions in goods and does not apply to a transaction that, though in the form of a sale, is intended to operate only as a security transaction.
Goods means all things that are movable at the time of identification to the contract for sale other than the money in which the price is paid, investment securities, and things in action, and includes growing crops and the unborn young of animals.
A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having the original promisor perform or control the acts required, and delegation does not relieve the delegating party of any duty to perform or any liability for breach.
Unless otherwise agreed, all rights of a seller or buyer can be assigned except where the assignment would materially change the duty of the other party, materially increase the burden or risk imposed on him, or materially impair his chance of obtaining return performance.
A prohibition of assignment of the contract is construed, unless the circumstances indicate otherwise, as barring only the delegation to the assignee of the assignor's performance.
An assignment of the contract or of all rights under the contract is an assignment of rights and, unless the language or circumstances indicate otherwise, a delegation of the assignor's duties, and the assignee's acceptance is a promise to perform them that either the assignor or the other party can enforce.
The other party may treat an assignment that delegates performance as creating reasonable grounds for insecurity and may demand assurances from the assignee.
A seller's warranty, express or implied, extends under the state's chosen alternative to designated third parties, such as members of the buyer's family or household or guests in his home, or to any person reasonably expected to use, consume, or be affected by the goods, and the seller may not exclude or limit this extension.
A taxpayer or resident generally cannot sue a company for breach of its contract with a municipality to supply water, because for omissions and breaches of contract the company is responsible only to the municipality.
Third parties cannot sue as beneficiaries of a government agreement that simply incorporates statutory obligations, because such a suit is in essence a suit to enforce the statute, which the statute assigns to the agency.

Attack sequence

1Decide whether the contract is for goods, and if so apply Article 2.

2Ask whether a delegation is barred because the other party has a substantial interest in the original promisor's performance.

3Ask whether an assignment materially changes the other party's duty, burden, or chance of return performance.

4For a general assignment, treat it as both an assignment and a delegation unless the language indicates otherwise.

5For third-party claims, look for a statute or contract that supports the claim, and see whether the contract merely incorporates statutory duties.

Traps and exceptions

!Delegating performance does not relieve the delegating party of liability.

!A clause barring assignment of the contract usually bars only delegation.

!A sale of shares or of a right to payment is a sale of investment securities or things in action, which are not goods.

!A beneficiary of a government contract that merely restates a statute usually cannot sue for breach.

WORKED APPLICATION

A widget supplier agrees to sell 500 widgets and later assigns all of its rights under the contract to a distributor. The buyer says it never agreed to have the distributor perform.

A general assignment of the contract is an assignment of rights and a delegation of duties, and the assignee's acceptance is a promise to perform them, unless the buyer has a substantial interest in the original supplier's performance, and the supplier remains liable in any case.

Essay-ready formulationIdentify whether Article 2 applies, then analyze delegation, assignment, and third-party claims under the statute and the cases, noting who remains liable.

24 · Formation of contracts

Employment agreements: written restraints on trade, wage payment, deductions, and final pay under North Carolina law

A North Carolina agreement limiting a person's right to do business in the State must be in writing and signed by the party who agrees not to compete, an employer must pay all wages accruing on the regular payday and must pay a separated employee all wages due by the next regular payday, an employer may withhold wages only when required by law or authorized in writing in the way the statute requires, bonus and commission wages cannot be forfeited unless the employee was notified of the policy, and an employer who violates the wage provisions owes the unpaid wages, interest, and liquidated damages equal to the amount due unless it shows good faith and reasonable grounds.

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Black-letter propositions

Under North Carolina General Statutes section 75-4, no contract limiting the right of any person to do business anywhere in the State is enforceable unless it is in writing and signed by the party who agrees not to enter into the business within the territory.
An agreement in writing that satisfies the statute must still be reasonable in the scope of what it restrains, and the writing requirement is a minimum, not a guarantee of enforceability.
Every employer must pay every employee all wages and tips accruing to the employee on the regular payday, and pay periods may be daily, weekly, biweekly, semimonthly, or monthly.
Wages based on bonuses, commissions, or other forms of calculation may be paid as infrequently as annually if that is prescribed in advance.
An employee whose employment is discontinued for any reason must be paid all wages due on or before the next regular payday, and wages based on bonuses or commissions must be paid on the first regular payday after the amount becomes calculable.
Bonus, commission, and similar wages may not be forfeited on separation unless the employee was notified, as the statute requires, of the employer's policy or practice that results in forfeiture, and employees not notified are not subject to the forfeiture.
An employer may withhold or divert wages only when required or empowered to do so by law, or when the employee has given written authorization signed on or before the payday that states the reason and the amount or percentage of the deduction.
When the amount of a deduction is not known and agreed upon in advance, the employer must have a signed written authorization stating the reason and, before deducting, must give advance written notice of the amount, notice of the right to withdraw the authorization, and a reasonable opportunity to withdraw it.
An employer must notify employees in writing at hiring of the promised wages and the day and place of payment, notify them in writing at least one pay period before a change in promised wages, and furnish an itemized statement of deductions each pay period in which they are made.
An employer who violates the minimum wage, overtime, or wage payment provisions is liable for the unpaid amounts plus interest from the date each amount came due.
The court must also award liquidated damages equal to the amount due, unless the employer shows to the court's satisfaction that the act or omission was in good faith and that it had reasonable grounds to believe it was not a violation, in which case the court may award no liquidated damages or any amount up to the amount due.
An action to recover unpaid wages may be maintained in court by one or more employees, and also by the Commissioner of Labor at the request of the affected employees.

Attack sequence

1Ask whether an agreement restraining competition is in writing and signed by the person who promised not to compete.

2Ask separately whether the restraint is reasonable, because the writing requirement is only one requirement.

3Identify the regular payday and the date the wages accrued or, for commissions and bonuses, the date the amount became calculable.

4For a final paycheck apply the next-regular-payday rule to all wages due.

5For a deduction, look for a signed written authorization stating the reason and the amount, and for the advance notice when the amount is not known.

6Check whether the employee was notified of any forfeiture policy before a bonus or commission was withheld.

7Compute the remedy: unpaid wages, interest, and liquidated damages, and test the good-faith defense.

Traps and exceptions

!A noncompetition promise that is unsigned or oral cannot be enforced under section 75-4, however reasonable it is.

!Departing employees must be paid all wages due by the next regular payday, not on the day of separation.

!A commission or bonus can be forfeited only if the employee was notified of the forfeiture policy.

!An oral promise by the employee that the employer may deduct is not the signed written authorization the statute requires.

!Liquidated damages are mandatory equal to the amount due unless the employer proves good faith and reasonable grounds.

WORKED APPLICATION

An employee who sold insurance in North Carolina signed an offer letter that promised a monthly salary and said she would not compete for two years, but she never signed the letter. She was fired, and her employer did not pay her final salary or a commission she had earned until three weeks after the next regular payday, and it deducted the price of a company phone from her final check without her signature.

The noncompetition promise is unenforceable because section 75-4 requires a writing signed by the party who agrees not to compete and she never signed. The employer violated the final-pay rule by paying the salary and commission after the next regular payday, and a commission is payable on the first payday after it becomes calculable unless she was notified of a forfeiture policy. The deduction for the phone was unlawful without a signed authorization stating the reason and amount. The employer owes the unpaid wages, interest, and liquidated damages equal to the amount due unless it proves good faith and reasonable grounds.

Essay-ready formulationState the writing and signature requirement for restraints, decide whether the promise is enforceable, apply the wage payment, final pay, and deduction rules, and compute the remedy including the liquidated damages and the good-faith defense.

QUICK ANSWERS

What NCBE lists for Contracts

What does the formation category include?+

Mutual assent, indefiniteness and absence of terms, consideration, obligations enforceable without a bargained-for exchange including reliance and restitution, and modification.

What defenses does NCBE list?+

Incapacity, duress and undue influence, mistake and misunderstanding, fraud and misrepresentation, illegality and unconscionability, and the statute of frauds.

What does contract content and meaning cover?+

The parol evidence rule, interpretation, and omitted and implied terms. NCBE lists these as category III of the six Contracts categories.

What performance topics are in the outline?+

Conditions, excuse of conditions, breach, good faith and fair dealing, warranties in sale-of-goods contracts, other performance matters, impracticability and frustration, and discharge of duties.

What remedies topics does NCBE list?+

Expectation interest, causation, certainty and foreseeability, liquidated damages and penalties, limitation of remedies, and avoidable consequences and mitigation.

What is the sixth category of the Contracts outline?+

Third-party rights. It follows formation, defenses, content and meaning, performance and remedies in NCBE's six-category Contracts outline.

Which sale-of-goods topics appear?+

Express and implied warranties in sale-of-goods contracts and other performance matters such as cure, identification, notice and risk of loss.

Does the UCC apply to every Contracts question?+

No. NCBE says approximately one-fourth of the Contracts questions are based on the Official Text of Articles 1 and 2.

SOURCE DESK

Official NCBE sources

NCBE: MBE subject matter outline↗NCBE: preparing for the MBE↗

Governing text

Contracts questions on the sale of goods are governed by the Uniform Commercial Code, whose official text and drafting history the Uniform Law Commission keeps. Uniform Commercial Code (Uniform Law Commission) ↗