Risk of Loss (Carrier Cases and Noncarrier Cases)

Risk of loss is an issue that, if it shows up, will show up in Contracts questions involving the sale of goods.  The delivery terms of a contract are important because they determine when the risk of loss passes from the seller to the buyer if the goods are damaged or destroyed.

Before highlighting the specific rules involving risk of loss, it's important to understand a few general principles. If the seller ships defective goods to the buyer, the risk of loss will remain on the seller until the defects are cured or until the buyer accepts the goods in spite of the defects. Similarly, if the buyer accepts goods from the seller but then rightfully revokes that acceptance, the risk of loss is treated as having remained with the seller to the extent of any deficiencies in the buyer's insurance coverage. 

Along with those general principles, there are some specific rules to know well, and these rules are dependent upon whether or not the contract calls for a carrier to deliver the goods. A noncarrier case is a sale in which the parties did not intend that the goods would be moved by a carrier. An example would be a situation in which the buyer has the obligation to pick up the goods at the seller's place of business. 

In such cases, if the seller is a merchant, risk of loss passes to the buyer only when the buyer takes physical possession of the goods. If the seller is not a merchant, risk of loss passes to the buyer upon tender of delivery (generally, the seller holding the goods for the buyer and notifying the buyer that the buyer can take possession). 

Carrier cases (contracts in which goods are to be shipped by a carrier) are further subdivided into shipment contracts and destination contracts. A shipment contract requires the seller to ship the goods by a carrier but does not require the seller to deliver the goods at a particular destination. The risk of loss in shipment contracts passes to the buyer when the goods are delivered to the carrier. The seller must, however, make a reasonable contract with the carrier to deliver the goods to the carrier, notify the buyer of the shipment, and provide the buyer with any documents necessary to receive the goods. 

Destination contracts, in contrast, do require the seller to deliver the goods at a particular destination. The risk of loss passes to the buyer only once the goods are delivered at that destination. 

With certain contracts, the buyer takes the goods for the purpose of re-selling them but also reserves the right to return them if not re-sold. The rules as sated apply, and if the buyer does return the goods, the risk of loss remains on the buyer until the goods have been returned to the seller. In other contracts, the buyer takes goods but reserves the right to return them even if they conform to the contracts. Here, risk of loss does not pass to the buyer until the buyer accepts the goods. 

An additional point to consider is whether obligations to perform are affected by loss of the goods. We know from the above that in a destination contract, the risk of loss passes to the buyer only upon delivery of the goods at the stated destination. And so, assume the goods are destroyed (through no fault of either party) in a destination contract while en route to the buyer. We know that the risk of loss has not passed to the buyer (so the buyer need not pay for the goods), but is the seller excused from having to ship new goods to to the buyer? Said otherwise, is seller's performance excused, since the seller was not at fault?

This will depend on whether the goods were identified when the contract were made. If the goods were identified when the contract was made, the contract is avoided (seller's performance is excused). If the goods were not identified until after the contract was made, the seller would need a defense (for example, impracticability) to avoid having to perform. 

Contract Law Tip

x owes money to y.

y forgets to collect, such that the statute of limitations has run. x, for moral reasons or otherwise, puts in writing that he’ll pay the debt even though he’s no longer legally obligated to do so. You might be thinking that x owes nothing to y. The theory might be that when x promised to pay a debt he no longer owed, that was a gift, not a contract. Everything you’ve ever learned about consideration in contract law would lead you to that result. Not so much. If a debtor promises to pay a debt that’s been barred by the statute of limitations, the debtor will be bound to pay the amount promised (which could differ from the amount of the original debt) provided the promise is in writing. Filed under “contract law is weird.”

Compensatory Damages

Damages in Contract Law can be confusing. It's worth memorizing the following:

The goal of compensatory damages is to put the non-breaching party into the position that party would have been in had the contract not been breached. By memorizing that line, it's just some simple math that'll guide you to the correct answer. X contracted to do some work for y and the contract called for x to be paid $1,000. Y breached and x found similar work for z at a price of $700. X now has $700 from z. If x were to collect $1,000 from y, x would have $1,700. That would put x in a better position than x would have been in if the contract hadn't been breached. Too much for x, so you don't want to choose that answer. If x collects $300 from y, x will have $700 from z, and 300 y. X will have $1,000, the exact amount x would have had had there been no breach. The math checks out and you're done at least for compensatory damages.

Peel Back the Onion

One thing about the MBE, it's going to test the exceptions. Think of studying for the MBE like peeling back an onion (and not just because of the crying thing). The first layer is the general rule, and sometimes that's as far as you'll need to go. But, mostly, you'll need to peel back layer 2 (the exception), layer 3 (the exception to the exception), etc. Most will know that under the UCC, a contract for the sale of goods priced at $500 or more is not enforceable without a writing. Layer 1. But instead of just knowing that, you need to know when a contract priced at $500 or more is enforceable without a writing at the time of agreement (deeper layers). There are 4 circumstances: ~if a merchant sends a written confirmation memo to another merchant stating the terms of the previous oral agreement, and the recipient does not object to that written memo within 10 days of receipt. ~if the goods are specially manufactured for the buyer, and not suitable for sale to others, provided that there has been a substantial beginning to the manufacturing of the goods, or substantial commitments for their procurement. ~if a party against whom enforcement is sought admits in pleadings, testimony, or etc., that a contract has been entered (not enforceable beyond the quantity admitted). ~if the goods were received and accepted, or if payment has been made and the goods were accepted. Under none of the 4 above circumstances is a writing required at the time of agreement even if the agreement is for goods priced at $500 or more. Peel back the .

MBE Tip: Compensatory Damages

Compensatory damages in contract law requires, as the outlines all say, to put the non-breaching party back into the position that that party would have been in had the contract not been breached. That's correct, and worth memorizing, but understanding what it all means will make it easier to apply.

Imagine seller contracts to sell widgets (law tests love widgets) for x dollars. Buyer breaches the contract and seller finds another buyer who will purchase the widgets for .7x dollars.

The compensatory damages here (there may also be other damages) is simply x - .7x = .3x.

The reason for this is that if the non breaching party has already received .7x dollars from buyer 2, and then receives .3x in damages from buyer 1, the seller now has .7x + .3x = x. The seller bargained for x and the seller now has x dollars.

The same analysis holds true if the seller breaches. The seller contracts with the buyer to sell widgets to the buyer for n dollars. The seller breaches and the buyer is now required to purchase those widgets for 1.2n dollars. The buyer should get from the seller 1.2n - n = .2n in compensatory damages.

The buyer has spent 1.2n dollars; if the buyer receives back .2n dollars from seller 1, buyer has spent 1.2n - .2n dollars = n dollars, the amount of the original bargain.

In short, if you get back to the original number, you've gotten to the correct amount of compensatory damages.

MBE Trap: Consideration

You'll come across fact patterns in which one party to a contract gets a great deal, maybe even a deal that appears unrealistic. For example, an aunt and her nephew enter into a contract for the aunt to sell her house worth $500,000 to the nephew for $50,000. Maybe the facts will throw in that the great deal is because of the love and affection the aunt feels for the nephew.

Aunt then decides to instead sell the house for more money to a purchaser who had no notice of the contract between the aunt and the nephew. Don't fall for the "inadequate consideration" trap which will imply that the nephew has no claim against the aunt. Just because one party to a contract gets a great bargain doesn't mean that there isn't a valid contract. To the contrary, contract law is intended to ensure that people get the benefit of those great bargains. And that others are bound by them. Nephew might not be able to recover the property from the purchaser of the home, but will likely have a claim for damages against the aunt for breaching the contract.

MBE Trap: Option Contracts

There's a trap that appears with relative frequency on the MBE involving option contracts both under the common law and under the UCC. The idea is that for some reason an attempted option never comes about. Under the common law, it's generally because consideration isn't paid for the option. Under the UCC, the time limit for exercising the option has expired. The offeror, thinking that there is no option, then goes ahead and makes that same offer to another (usually someone who is not on notice of the original offer: a "BFP").

The key to not falling for this trap is to remember the following: there is a difference between a revoked offer and a revocable offer.

So, for example, imagine a situation under the common law in which the offeror promises to hold open the offer for x amount of time provided that the offeree give the offeror $100 to hold the offer open. The money is never paid. 

All this means is that the offeror is not bound to hold the offer open: it's revocable. But the fact that the offer is revocable does not mean that the offer is revoked. The offeree, even though no consideration was paid to effectuate the option, can still accept the offer, and if the offeror makes the same offer to another without first revoking the initial offer, the original offeree can accept that initial offer and then potentially sue for breach. 

The same holds for a UCC "firm offer" which is the equivalent of an option contract under the common law. Once that time has run (3 months if not modified downward by the parties) the offer becomes revocable. But it's not revoked. The offeror still must revoke the offer even when the option fails. The key difference is that the offeror is not bound to hold that offer open if no option is involved: the offeror is free to revoke, but still must do so. 

The Merchant's Firm Offer Rule

The firm offer rule for merchants under the UCC is one that you need to know well. It's just the kind of issue that bar examiners love to test. And the best way to understand the rule is to contrast it with similar rules that apply under the common law of contracts.  

Generally speaking, and this applies both under the common law and the UCC, an offeror can revoke an offer any time prior to the offeree accepting that offer. It's sometimes even stated that the offeror is the "master of the offer." 

Under the common law of contracts, however, the offeree can get a bit more security by preventing the offeror from revoking even prior to acceptance by the offeree. To do so, however, requires that the offeree give consideration to the offeror in exchange for the offeror's promise not to revoke the offer for a stated period of time. This agreement not to revoke the offer is itself a contract: it's called an option contract. The most important thing to remember here is that if the question involves a service (as opposed to the sale of goods) consideration must be exchanged for an option contract to apply. 

Things change with the UCC. As with the common law, an offeree might want that extra bit of security. The offeree may not want the offeror to be the master of the offer; he may want to dictate how long that offer will remain open. Under the UCC, this is still possible, and consideration is not required. 

Specifically, in limited circumstances, the merchant's firm offer rule under the UCC replaces the rule as outlined above for service contracts. Under the merchant's firm offer rule, if a merchant (one who deals in goods of a certain kind) offers in a signed writing to buy or sell goods, and the writing gives assurances to the offeree that the offer will remain open, then the offer will remain open for the time period stated. If no time period is stated in the firm offer, then the offer will remain open for a reasonable period of time not to exceed 3 months. 

A bit to remember for the firm offer rule: 

~ no consideration required

~ must be a merchant (the offeror, not the offeree)

~ must be in writing

~ offer will remain open for the time period stated in the offer

~ if no time period is stated in the offer, the offer will stay open for a reasonable time which cannot exceed 3 months. 

I've noticed over the years a slight preference for testing rules that contrast between the common law and the UCC. This would be one of them, so it's a good idea to get it down well. 

The Statute of Frauds under the Common Law of Contracts

There's a lot to know about the Statute of Frauds for the MBE. For the relevant info on how it applies to the UCC see the post @ http://mbetutorial.blogspot.com/2018/12/the-statute-of-frauds-under-ucc.html. This post will focus on how this defense applies to the common law.

Certain agreements must be evidenced by a writing, but that writing need not be a formal contract. The writing can be a receipt, a letter, a check, etc. In general, under certain circumstances, a writing is required  that reasonably identifies the subject matter of the contract, indicates that a contract has been made, and states with reasonable certainty the essential terms of the contract. 

It's important to understand what is meant by "essential terms." It's flexible, but there must be enough in the writing to enable the court to enforce the contract. For example, in a land sale contract, a description of the land is essential, and in an employment contract the length of employment is essential. In other words, context matters. 

In addition to essential terms, a signature is required. A signature is any mark or symbol made with the intention to authenticate the writing as that of the signer. An electronic signature is sufficient.

It's worth remembering that in most instances, an oral contract is valid. But not all. The following are the agreements for which the Statute of Frauds requires a writing:

Executor or Administrator Promises to Pay Debts of the Estate: A promise by an executor or administrator to pay the estate's debts out of his/her own funds requires a writing.

Promises to Pay the Debt of Another: Careful with this one as there are a lot of angles that can get tested. A promise to answer for the debt of another requires a writing. If the main purpose, though, is to serve the interest of the promisor (as opposed to the interest of another) then the contract is not within the statute and a writing is not required. 

Promises in Consideration of Marriage: A promise the consideration of which is marriage must be in writing.

Interest in Land: This is probably the most important in the group since these contracts show up constantly in Property questions. A promise creating an interest in land requires a writing. This includes the sale of real property but also includes leases of real property for more than one year, easements involving real property of more than one year, and mortgages/other liens. Also included are fixtures and minerals or structures if they are to be severed by the buyer. 

Performance Not Within One Year from the Date of Contract: A promise that by its terms cannot be performed within one year requires a writing. Importantly, the date runs from the date of the agreement and not from the date of performance. 

Implied Warranties and Disclaimers

Questions on implied warranties and how each type of implied warranty may be disclaimed show up often on the MBE. As such, it's good to understand this topic well.

The first of the implied warranties is the warranty of merchantability. Implied in every contract for a sale by a merchant who deals in goods of the kind sold is a warranty that the goods are merchantable. And to be merchantable, the goods must be fit for the ordinary purpose for which the goods are used. 

Also important is the implied warranty of fitness for a particular purpose. This warranty will be be implied whenever any seller (merchant or non-merchant) has reason to know of the particular purpose for which the goods are to be used and that the buyer is relying on the seller's skill and judgment to select suitable goods. 

Importantly, it makes no difference that the seller did not know of the defect that breaches either of these implied warranties, nor does it matter that the seller could not have discovered it. Implied warranties do not look towards fault; they are an absolute liability imposed on sellers!

Both the implied warranty of merchantability and the implied warranty of fitness for a particular purpose may be disclaimed. These warranties are disclaimed by either specific disclaimers or general disclaimers.  To disclaim the warranty of merchantability with a specific disclaimer, the word "merchantability" must be mentioned within the disclaimer. And if this disclaimer is in writing, the disclaimer must be conspicuous such that a reasonable person against whom it is to operate ought to have noticed it. 

Unlike the optional writing to specifically disclaim a warranty of merchantability, to specifically disclaim the warranty of fitness for a particular purpose requires a conspicuous writing.

More general disclaimers are allowable for both the warranty of merchantability and the warranty of fitness for a particular purpose. One such disclaimer is an "as is" clause. These clauses are valid if they call to the buyer's attention that there are no implied warranties. The words "as is" need not appear; "with all fault" or other common expressions will suffice. Although these need not be conspicuous, they shouldn't be hidden in the fine print. 

Another general disclaimer to consider involves the ability of the buyer to examine the goods. If the buyer before entering into the contract has examined the goods or a sample of the goods as fully as the buyer has desired to do so or if the buyer has been given the option to examine and has refused to do so, then there is no implied warranty as to any defect that a reasonable examination would have revealed. In other words, the buyer won't benefit from his own mistake.

Lastly, implied warranties may be disclaimed by the course of dealing, course of performance between the parties, and by usage of trade. Look towards the past to determine whether the parties (or the trade in which the parties are dealing) have chosen to ignore these warranties consistently. If so, they may forever lose the ability to rely on them.

The Perfect Tender Rule

Whenever the common law of Contracts differs from the Uniform Commercial Code ("UCC"), there's a good chance that the difference will be tested on the MBE. The UCC generally does not follow the common law doctrine of substantial performance. Instead it follows the "perfect tender rule." The perfect tender rule requires a strict adherence to the terms of the offer; if goods or their delivery fail to conform to the contract in any way the buyer can generally reject the goods, accept the goods, or accept some of the goods and reject the rest.

Although the buyer under the perfect tender rule has the right to reject the goods as stated above, that right is cut off once the buyer has accepted the goods. A buyer accepts the goods if the buyer after a reasonable opportunity to inspect the goods indicates to the seller that the goods conform to the contract or that they are accepted even though they don't conform. In addition, the buyer accepts the goods if the buyer fails to reject them within a reasonable time after they've been tendered or if the buyer acts in a way inconsistent with the seller's ownership. 

Although acceptance generally does cut off the right to reject, under limited circumstances, a buyer may revoke acceptance which will then equate to a rejection. The buyer may revoke acceptance if the goods have a defect that substantially impairs their value and the buyer accepted the goods on the reasonable belief that the defect would be cured (and it's not cured), or the buyer accepted the goods because of the difficulty of discovering the defects. In addition, the buyer can revoke acceptance if the buyer accepted because of the seller's assurance that the goods conformed to the contract (and they didn't). In any case, revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the defects and before any substantial change in the goods occurs.

There's a very commonly tested exception to the perfect tender rule to keep in mind. The buyer's right to reject (which would be absolute under the perfect tender rule) is limited when the contract is an installment contract. In an installment contract, an installment can be rejected only if the nonconformity substantially impairs the value of that installment. And the entire installment contract is breached only if the nonconformity substantially imparts the value of the entire contract. 

Further, even if the buyer has properly rejected as per the perfect tender rule, the seller might have the right to "cure." It's important to understand, though, that the seller generally can only cure within the time originally provided for in the contract. The seller can cure within that time by giving reasonable notice to the buyer of an intention to do so and then by making a new tender of conforming goods. 

Under very limited circumstances, the seller might even have an opportunity to cure beyond the time originally provided for in the contract. If the buyer rejects a tender of nonconforming goods that the seller reasonably believed would be acceptable, then the seller, upon reasonable notification to the buyer, will have a reasonable amount of time beyond the original contract time to cure by sending to the buyer conforming goods. Look for situations in which prior dealings with the buyer led the seller to believe that the goods would be acceptable or situations in which it would have been impossible or nearly so for the seller to have known that the goods were defective.

The Parol Evidence Rule

There are few certainties on the MBE. But it's pretty close to certain you'll see one and probably more than one question in Contracts that requires an understanding of the parol evidence rule. Before getting into some of the exceptions, first the rule:

If the parties to a contract express their agreement in writing with the intent that the contract reflect the final expression of their agreement then any other written or oral statement made prior to the contract or contemporaneous with the contract will not be admissible to vary the terms of the contract. This rule does not apply to statements that are made after the contract has been created; those statement should instead be analyzed as contract modifications. Importantly, the rule as stated here applies only when the intent of the parties is that the contract reflect the final expression of their agreement. It's often said that for the rule to apply, the parties must intend that the contract is a final integration of their agreed upon terms.

An integration can be either complete or partial. If an integration is complete, the contract cannot be contradicted or supplemented with oral or written statements made prior to the contract or contemporaneous with it. But if the integration is partial, the contract cannot be contradicted with such statements but it may be supplemented with terms that are consistent with those in the contract. A merger clause is one way to indicate that the integration is intended as complete rather than partial, though a merger clause alone may not entirely answer that question. Another way I've seen this stated is that if the contract it completely integrated then parol evidence will be excluded if it is within the scope of the contract. If it's partially integrated, then the evidence will only be excluded if it contradicts the contract. 

The MBE is often a test of exceptions and there are quite a few here. Even if the parol evidence rule would generally apply to prevent the admissibility of certain statements, those statements may still be admissible if offered to prove that the contract was never formed due to formation defects (fraud, duress, mistake, illegality, etc.). In addition, if a party asserts that the contract was dependent upon an oral condition precedent, evidence of that condition precedent will be admissible even if the contract is deemed completely integrated.

Further, if there is uncertainty or ambiguity in the terms of the contract, evidence that will assist in interpreting those ambiguous terms will not be excluded by the parol evidence rule. And because consideration is such a vital component of a contract, the parol evidence rule will not bar evidence intending to prove that the consideration stated in the contract was not in fact paid.

The Restatement of Contracts provides for another exception worth noting. Sometimes called the "naturally omitted terms doctrine," it provides that evidence of terms that would naturally be omitted from the written agreement may be admissible notwithstanding the parol evidence rule. A term would naturally be omitted if it does not conflict with the contract and if it concerns a subject that similarly situated parties would not ordinarily be expected to include in the contract.

Lastly, there are a few points to note that are specific to the sale of goods. For the most part, Article 2 of the UCC follows the general rule: unless one of the above exceptions applies, parties cannot contradict a completely integrated written contract with prior or contemporaneous oral or written statements but they may supplement a partially integrated contract with the same. Article 2 also provides, though, that a written contract's terms may be explained or supplemented by evidence of course of performance, course of dealing, and usage of trade.

Seller's Right to Cure

Quite a few options are available for the MBE writers to test the right to cure in Contracts.  In explaining this further it's important to note a few differences between installment contracts and single-delivery contracts.

The right to reject performance is far more limited in an installment contract than it is in a single-delivery contract.  Under the UCC, the traditional rule is the "perfect tender rule" whereby the buyer can choose to reject performance if the goods or delivery fail in any way to conform to the agreement. Not so in installment contracts. In installment contracts, an installment can be rejected only if the nonconformity substantially impairs the value of that installment and if the installment cannot be cured.  The entire installment contract is breached only if the nonconformity substantially impairs the value of the entire contact.

Let's first address the topic of cure in the context of single-delivery contracts. If the buyer has rejected goods because of defects in a single-delivery contract, the seller may within the time originally provided for performance cure by giving reasonable notice of the intention to cure and by then making a new tender of conforming goods that the buyer must then accept.

On the MBE, though, it's important to note when the seller can cure even beyond the original contract time in single-delivery contracts. If the buyer rejects a tender of nonconforming goods that the seller reasonably believed would be acceptable, then the seller upon reasonable notice to the buyer will have a reasonable amount of time beyond the original contract time to tender conforming goods to the buyer. A seller will generally have had reasonable cause to believe that its tender of nonconforming goods would be acceptable if the seller is able to show that trade practices or prior dealings with the buyer led the seller to that belief or if the seller could not have known of the defect even upon reasonable care to discover any defects.

The seller's right to cure in an installment contract differs from the seller's right to cure in a single-delivery contract. It's a bit simpler here: in an installment contract, a defective shipment cannot be rejected if the defect can be cured.

The Statute of Frauds Under the UCC

It seems to me that generally those preparing for the bar exam have a pretty good feel for the Statute of Frauds. In most instances, oral contracts are valid, but there are some types of contracts that require a writing to be enforceable. One type of contract that requires a writing is a contract for the sale of goods for a price of $500 or more.

A contract for the sale of goods for a price of $500 or more generally requires a writing to evidence that the agreement actually took place. The writing will be sufficient even if it omits terms or incorrectly states terms, but if quantity is incorrectly stated then the contract will only be enforceable as to the quantity stated. As a general point, it should be noted that quantity is an essential term under the UCC.

But it's not the rule itself that trips people up on these questions. There are times when even though a contract for the sale of goods is for a price of $500 or more, a writing is not required. The MBE is often a test of exceptions, and so knowing these exceptions may be more important than knowing the rule.

The first exception is for specially manufactured goods. If goods are to be specially manufactured for the buyer and are not suitable for sale to others by the seller in the ordinary course of business, the contract is enforceable even without a writing but only if the seller has made a substantial beginning in the manufacturer of the goods or commits for their purchase prior to the buyer repudiating.

Next, a party might claim that the contract should not be enforced because there is no writing but that party has already admitted in the pleading, testimony, or otherwise, that the contract for sale was made. Here, the contract will be enforceable without a writing but only for an amount that was previously admitted.

It's also possible that a buyer might accept and pay for goods, but then later claim that the contract for those goods is not enforceable because it wasn't in writing. The contract will be enforceable, but not beyond the quantity of goods accepted and paid for.

Lastly, and an exception that shows up often on the MBE, is the merchant's confirmatory memo rule. In contracts between merchants, if one party within a reasonable time after an oral agreement sends to the other party a written confirmation of the oral agreement and if the written confirmation satisfies the Statute of Frauds, then the contract will be enforceable even though the original agreement between the parties was not in writing. The party receiving the memo will now be bound by the contract if that party has reason to know of the confirmation's contents, and does not object to it within 10 days of receipt.

MBE Fast Fact: Modification of Contracts

Whenever the rules differ between the common law of contracts and the UCC, an added level of difficulty exists within the question.  One topic that stands out in this regard deals with modification of contracts, and two types of questions that show up quite a lot within this topic deal with the need for consideration to modify a contract and the need for a writing to modify a contract

Consideration:  Under the common law of contracts, a contract cannot be modified unless the modification is supported by new consideration.  The UCC, however, differs.  Under the UCC, good faith promises of new and different terms than were stated in the original contract between the parties are valid even if those new and different terms are not supported by any additional consideration.

Writing:  Generally, and under the common law of contracts, a written contract can be modified orally.  And furthermore, under the common law, even if a written contract expressly provides that a contract may be modified only by a writing, the parties may still orally modify the contract. Under the UCC, though, any modification must be in writing if the contract as modified falls within the Statute of Frauds.  What this means is that if the contract as modified is for $500 or more (thereby falling within the UCC Statute of Frauds), the modification must be evidenced by a writing.  If, however, the contract as modified is for less than $500, then no writing is required.

One other point worth noting is that the parole evidence rule will not prevent the admissibility of evidence dealing with the modification of a contract.  This is because the parole evidence rule only applies to exclude from evidence written or oral statements made prior to the writing as well as oral statements made contemporaneously with the writing if those statements are going to contradict the writing and if the writing was intended as the final expression of the bargain between the parties.  But modifications fall outside the scope of the parole evidence rule because by their nature they occur after the written agreement has already taken place (as opposed to prior to or contemporaneously with the writing).

UCC Acceptance and Accommodation

A common question that tends to trip up students when we're working together on practice questions deals with the concept of accommodation under the UCC.  To understand these rules it's important to first understand that there are multiple methods of accepting an offer when the contract is for the sale of goods under the UCC.   If the seller chooses to accept in a method other than by shipment of the goods (for example, by directly notifying the buyer that the seller accepts) then the rules regarding accommodation do not apply. And if the goods are later sent and do not conform to the contract then that is a breach of contract and the buyer will have a variety of options, one of which is to sue for breach.

If the seller chooses to ship the goods without first notifying the buyer that the seller has accepted prior to shipment then that, too, might constitute an acceptance of the offer.  But if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer, such a shipment will not be treated as an acceptance.  Rather, the shipment will be treated as a counter-offer.

The buyer will then have a few options if the seller has shipped nonconforming goods.  The buyer can keep the non-conforming goods in which case there is a contract for the goods as they are at the price the seller has indicated.  The buyer can also reject the shipment thereby preventing a contract from forming.  Importantly, however, the option is not available here for the buyer to hold the seller in breach because without an acceptance of an offer by the seller there can be no breach of contract.

Illusory Promises

What is an illusory promise? In Contract Law consideration must exist on both sides of a contract if the parties are to be bound to perform their promises. And so if two people promise to perform for each other but only one party is actually bound to perform, then there is an illusory promise involved which will prevent the formation of the contract. So, for example, assume x tells y that x will purchase a product from y if x decides to first apply for a loan from a bank. Because x is not obligated to apply for the loan, x has taken on no additional burden in making that promise and as such the promise is illusory.

As important as it is to recognize illusory promises, it's also important to be able to spot promises that may seem illusory but are not. The following is not an exhaustive list but contains examples that are not illusory and therefore satisfy the mutuality requirement necessary to form a valid contract:

--Requirement and output contracts under the UCC. Claiming that you will purchase all the widgets that you require (not illusory) is different than claiming that you will purchase all the widgets that you want (illusory).

--Conditional promises unless the condition is entirely within the promisor's control.

--Contracts where a party has the right to cancel if that right is somehow restricted (for example if it is stated that cancellation requires notice).

--Voidable promises (such as those made by an infant).

MBE Fast Fact: Misrepresentation

In Contracts there are two types of misrepresentation to keep in mind, and the fine distinctions between them are exactly the type that the writers of the MBE are likely to test:

Fraudulent Misrepresentation: In this type of misrepresentation one party to the contract induces another to enter into the contract by asserting information that s/he knows is untrue. Here, if a contract is formed, the contract is voidable by the innocent party provided that the innocent party justifiably relied on the fraudulent misrepresentation. This is sometimes referred to as fraud in the inducement.

Nonfraudulent Misrepresentation: There can be a misrepresentation even if that misrepresentation is not fraudulent. In other words, a false statement is made by a party to the contract but that party does not know that the statement is false when the statement is made and there is not necessarily an intent to defraud. Here, again, the contract is voidable by the innocent party but only if the innocent party justifiably relied on the misrepresentation, and the misrepresentation was material. A misrepresentation is material if it would induce a reasonable person to enter into a contract, or if the person who made the misrepresentation knew that due to special circumstances the statement would be likely to induce the innocent party, even if it would not induce a reasonable person.

MBE Fast Fact: Notice of Assignments

Let's take a common situation where x enters into a contract with y whereby x will be providing a product to y, and y will be paying x for that product. Prior to payment x assigns his right to payment to z, and further provides y with notice of the assignment to z. Y submits payment to x rather than to z, and then claims its obligations under the contract have been fulfilled. Z, who never receives payment because payment went to x, sues y for payment. What should result?

The key to understanding such an issue is to understand that (provided the right was assignable, and it almost always is), the assignee (here, z) becomes the real party in interest and is therefore entitled to performance under the contract. Further, once the obligor (here, y) has notice of the assignment he is bound to render performance to the assignee. If after receiving adequate notice the obligor pays the assignor (here, x) instead of the assignee, then the obligor will be required to pay the assignee even though payment has already been submitted to the assignor.

All that said, here y will be required to submit payment to z as the right to payment was assigned to z, and y was on notice of the assignment.

MBE Fast Fact: The Mailbox Rule

The mailbox rule (under the common law of contracts) has the potential to be very confusing. But if you note the following, then questions testing this concept shouldn't be too bad:

The rule is meant to set forth a determination as to whether acceptance of an offer is effective. The simplest situation is where the acceptance is by mail, and only an acceptance is mailed. In such a case, the acceptance becomes effective at the moment of dispatch, unless the offeror has expressly stated that acceptance will become effective only once it is received. (And on the MBE, the offeror does sometimes state that!) As is often the case in contract law, the offeror has the final word, so if the offeror states that the mailbox rule does not apply (by claiming acceptance is only valid upon receipt,) then don't apply the rule for that particular question. Note, also, that the mailbox rule does not apply in the case of an option contract (when consideration has been provided to hold the offer open). In an option contract, acceptance is effective upon receipt by the offeror rather than dispatch by the offeree.

A second scenario involves the offeree dispatching a rejection in the mail, and then changing his mind and dispatching an acceptance before the rejection is received by the offeror. Here, the rejection will be effective, unless the acceptance is received first.

Lastly is the situation in which the offeree sends an acceptance and then sends a rejection. Because acceptance was first dispatched you should merely apply the general mailbox rule that acceptance is effective upon dispatch. But there is one twist: If the rejection arrives prior to the acceptance (unlikely), then the rejection will be effective.