DISCUSSION by liaoqinmei


1.      What is the objective theory of contracts? Intent to enter into a contract is important in
the contract’s formation. Intent is determined by the objective theory of contracts. That is, it is
judged by outward, objective facts as they would be interpreted by a reasonable person, rather than
by the party’s own secret, subjective intentions. These facts include what the party said, how he or
she acted or appeared, and the circumstances surrounding the transaction. Generally, courts
examine objective facts, conduct, and circumstances surrounding a particular transaction to
determine whether the parties made a contract and what its terms are.

2.     What is the difference between express and implied contracts? An express contract is
one in which the terms are expressed in words, oral or written. An implied contract is one that is
implied from the conduct of the parties—the parties’ conduct reveals their intent to form a contract
and creates and defines its terms. To create an implied contract: (1) one party must furnish a service
or property; (2) the party must do so expecting to be paid and the other party must or should know
that payment is expected; and (3) the other party must have a chance to reject the service or
property and not reject it.

3.      How does a quasi contract differ from an express or an implied-in-fact contract? A
quasi contract is not based on an express promise or on conduct implying a promise; in other words,
a quasi contract is not based on a contract. Quasi contracts are imposed by courts to avoid unjust
enrichment. The doctrine under which the court imposes a quasi contract is called quantum meruit,
or “as much as he deserves,” and that also describes the extent of compensation that a court will
award. The recipient of a benefit does not have to pay for it if it was thrust on him or her. A quasi
contract will not normally be imposed when there is a contract that covers the matter.

4.        How does a party distinguish between an executed and an executory contract? This
is a contract classification based on performance. An executed contract is one that has been
performed. An executory contract is one that has not been performed. If a contract is executed on
one side and executory on the other (that is, if one party has fully performed and the other has not),
it is classified as executory.

5.      What are the differences among valid, void, voidable, and unenforceable contracts?
A valid contract results when all elements of contract formation exist—through an offer and an
acceptance, two or more parties agree to form a contract; the parties have capacity to contract; the
contract is supported by consideration; and the contract is for a legal purpose. A void contract (such
as an illegal contract) is no contract—it gives rise to no obligation on the part of any party. A
voidable contract is a valid contract under which one or both of the parties has the option of avoiding
his or her obligations—if the contract is avoided, both parties are released; if it is ratified, both
parties must perform. An unenforceable contract is a valid contract that cannot be enforced due to
certain defenses (such as a statute of limitations).

6.      Why must a contract have “reasonably definite terms” and how “definite” must the
terms be? A contract must have reasonably definite terms so that a court can determine if a breach
has occurred and can give an appropriate remedy. Courts may supply a missing term when the
parties have clearly manifested an intent to form a contract, but they will not do so if the parties’
expression of intent is too vague or uncertain (an employer’s promise that an employee will “share in
the profits of the business”). An offer may invite an acceptance to be worded in specific terms so that
the contract is made definite. If the acceptance is not so specifically worded, there may be no
enforceable contract. The UCC requires less specificity in a contract for the sale of goods. Specificity
is more important in an international sales contract.

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7.       How do the parties terminate an offer? The parties can terminate an offer by: (1)
revocation, (2) rejection, or (3) a counteroffer. Revocation is withdrawal of the offer by the offeror.
Generally, an offer may be revoked any time before acceptance, even if the offeror agreed to hold it
open, but revocation is effective only on receipt (thus a letter of revocation is not effective until the
offeree receives it). Revocation can be express (“I withdraw my offer”) or implied by conduct
inconsistent with the offer (property that would be the subject of the contract is sold to a third party).
Revocation of an offer made to the general public must be communicated in the same manner in
which the offer was communicated. An offeree may reject an offer, expressly (“I don’t need what
you’re selling”) or impliedly (by conduct showing an intent not to accept). Rejection is effective only
on receipt. Asking about an offer (“Is that your best offer?”) is not rejection, but an ambiguous
response may be construed as a rejection (“The price seems low. I’ll bet you can do better than
that.”). A subsequent attempt to accept will be construed as a new offer. A counteroffer is a rejection
and a simultaneous making of a new offer. The mirror image rule requires that the acceptance
match the offer—any material change in the terms automatically terminates the offer and
substitutes a counteroffer. An offeree may make an offer without rejecting the original offer, in
which case two offers exist, each capable of acceptance (“I don’t have the price that you ask but will
try to raise it. I will offer to buy your goods for the amount that I do have.”).

8.      What is unequivocal acceptance? Unequivocal acceptance is acceptance that adds no new
terms or terms that materially change the offer (“I accept the offer, but only if I can pay on ninety
days’ credit”). Under the mirror image rule, an acceptance subject to new conditions or with terms
that materially change the offer may be considered a counteroffer. An acceptance may be
unequivocal even though the offeree expresses dissatisfaction (“I accept the offer, but I wish I’d
gotten a better deal”). An acceptance that is made conditional is a rejection (“I accept if you send a
written contract”). Under the UCC, acceptance is valid even if terms are added.

9.      In situations requiring the communication of acceptance, when and how must
acceptance be communicated? Acceptance is timely if it is made before the offer is terminated.
Acceptance is effective when it is sent by whatever means is authorized by the offeror; this is the
mailbox rule. Specific means can be stated in the offer or authorized by facts or by law. If an offeror
specifies an exclusive means, the contract is not formed unless the offeree uses that means. If the
offeror does not specify a certain means, the offeree is impliedly authorized to accept by: (1) the
same means as the offeror used to communicate the offer or a faster means; (2) mail, if the parties
are at a distance; or (3) any medium reasonable under the circumstances. An acceptance sent by
unauthorized means may not be effective until it is received. Exceptions to the rule that a contract is
formed when acceptance is sent by authorized means are: (1) if the acceptance is not properly dis-
patched, in most states it will not be effective until it is received (unless it is timely sent and
received); (2) acceptance may be conditioned on its receipt, in which case it is not effective until
received; and (3) if a rejection is received first, regardless of whether the acceptance or the rejection
was sent first.

10.     What is “adequacy of consideration”? Adequacy of consideration refers to the fairness of
the bargain. (Usually, a court will not evaluate the adequacy of consideration, unless it is so grossly
inadequate as to “shock the conscience” of the court, because under the doctrine of freedom of
contract parties are ordinarily free to bargain as they wish.)

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1.       What is the minor’s right to disaffirm a contract? A minor can make any contract,
except one prohibited by law for minors (the sale of alcoholic beverages, for example). Generally,
minors can also disaffirm any contract. This means that they can legally avoid their contractual
obligations. To avoid a contract, a minor need show only an intent not to be bound, whether by
words (telling the other party) or conduct (acting inconsistently with contractual duties). Ordinarily,
a contract can be disaffirmed any time during minority or within a reasonable time after attaining
majority. Disaffirmance of certain contracts is prohibited in some states. Some states prohibit
avoidance of contracts for student loans, contracts for medical care, contracts for insurance, and
contracts made in running a business. On grounds of public policy, other promises may be enforced,
particularly when they entail something that the law would compel anyway (supporting an
illegitimate child, for instance). If a contract is not disaffirmed within a reasonable time after at-
taining majority, it must be determined whether the contract is ratified. Generally, if there has been
full performance, a contract is presumed ratified.

2.       What is a minor’s obligation on disaffirmance? A duty of restitution arises when a
contract has been executed—a minor can disaffirm but must return whatever he or she received or
pay for its reasonable value. Generally, a minor need only return whatever he or she received, if it is
still in his or her possession or control. If it has been damaged, a minor’s right to disaffirm is not
affected. In a few states, minors have a duty of restitution to return the other party to the position
he or she was in before the contract was made. Some states do not require full restitution but only
that it be reasonable. The minor may recover whatever he or she transferred as consideration, even
if it is in the possession of a third party. If the consideration cannot be returned, the minor is
entitled to its value. Under the UCC, however, a minor cannot recover goods transferred to a third
party who is a “good faith purchaser for value.”

3.      Why are some contracts unenforceable as contrary to public policy? Some contracts
are contrary to public policy and unenforceable, because of their negative impact on society.

4.      What is the legal significance of the difference between a mistake in judgment as to
market conditions and a mistake of fact? Mistakes in judgment as to market conditions involve
believing something is worth more than it ultimately proves to be. Mistakes of fact involve believing
something is other than what it is. The legal significance of the difference between a mistake in
judgment as to market conditions and mistakes of fact is that only under a mistake of fact can a
contract be avoided.

5.      Does a unilaterally mistaken party have any right to relief? Generally, no, but there
are exceptions. Relief may be granted if the other party knew or should have known that a mistake
was made (a bid well below other bidders’ figures). Some states will not enforce a contract against a
mistaken party if an error was due to a mathematical mistake and it was done inadvertently and
without gross negligence (a typographical error).

6.      The elements of fraudulent misrepresentation include misrepresentation of a
material fact. Discuss this element. Misrepresentation can be in words (“this is a Warhol,” if the
work is by another artist). Misrepresentation can occur through conduct (concealment by showing
samples that differ markedly from actual goods). All of us are expected to use care and judgment
when entering into contracts, however—predictions (“this land will be worth twice as much next
year”) or statements of opinion (“this car will last for years”) are ordinarily not subject to claims of
fraud. A seller can use puffery without liability for fraud, but an expert’s statement of opinion to a
layperson is treated as fact. As regards the law, at common law people are assumed to know the law
where they live. A layperson should not rely on a statement made by a nonlawyer about a point of

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law. A misrepresentation of law (“you can build anything you want here”) does not normally entitle
a party to relief from a contract.         There is an exception if the person who makes the
misrepresentation is a member of a profession that is known to require greater knowledge of the law
than a layperson possesses (realtors are expected to know the law governing land sales and use).
Disclosing some, but not all, of the facts can be deceitful. Nevertheless, normally, a contract cannot
be set aside because certain pertinent information (a used car was in an accident) is not volunteered.
That is, under normal circumstances, no party to a contract has a duty to disclose. If a serious
potential problem or latent defect (a crack in a building’s foundation) is known to the seller but
cannot reasonably be suspected by the buyer, however, the seller may have a duty to speak. Also, in
a fiduciary relationship, one party’s failure to disclose facts that materially affect the other’s
interests may constitute fraud. There are other exceptions. If circumstances change so that what
once was true is now false, the party aware of the change has a duty to inform the other. Other
exceptions are provided by statutes (the Truth-in-Lending Act).

7.      In what circumstance does undue influence occur? Undue influence occurs in
relationships in which one party can greatly influence another, thus overcoming the other’s free will
(an attorney’s inducing a client to enter into a contract that benefits the attorney may indicate undue
influence). When a contract enriches one party at the expense of another who is in a fiduciary
relationship with or who is dominated by the enriched party, it may be presumed that the contract
was made under undue influence. To rebut the presumption, the enriched party must show that
there was full disclosure, that consideration was adequate, and that the other party received
independent and competent advice before completing the transaction. A contract entered into under
undue influence is voidable.

8.      Why do certain contracts have to be written to be enforceable? The primary purpose of
requiring a writing is to provide reliable evidence—a writing signed by the party against whom en-
forcement is sought.

9.      Explain the one-year rule. A contract that cannot, by its own terms, be performed within
one year from the date it was formed must be in writing to be enforceable. The one-year period
begins the day after the contract is made. A contract for a one-year term that begins the day the
contract is made is enforceable whether or not it is in writing. A contract for a nine-month term that
starts six months later is not enforceable unless it is in writing. The performance must be
objectively impossible. Even if improbable, if performance within a year is possible, a contract need
not be in writing. Thus, an oral contract to do something “as long as the promisor remains in
business” is enforceable—the promisor could go out of business in less than a year.

10.      What is a collateral promise? A collateral promise is a secondary promise, a promise that
is ancillary to a principal transaction or primary contractual relationship. There are three elements
to a collateral promise: (1) three parties, (2) two promises, and (3) a promise to pay a debt or fulfill a
duty only if the first promisor fails to do so. A collateral promise is a suretyship or guaranty
contract. The key point is that the obligation of the guarantor is secondary. Included in this
category are promises made by the administrator or executor of an estate to pay personally the debts
of the estate (for example, to pay legal fees out of his or her own pocket).

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1. What are the factors indicating that a third party beneficiary is an intended benefi-
ciary? The presence of one or more of the following indicates a third party is an intended
beneficiary: (1) performance is rendered directly to the third party; (2) the third party has rights to
control the details of performance; or (3) there is an express designation in the contract.

2. When do the rights of a third party beneficiary vest? When the rights of a third party vest
(become fixed or take effect), he or she can enforce the contract. The rights vest when the original
parties cannot rescind or change the contract without the third party’s consent. This happens when
the beneficiary (1) learns of the contract and manifests assent to it at the request of the promisor and
promisee, (2) sues on the contract, or (3) materially alters his or her position in detrimental reliance
on the contract. If a contract expressly reserves to the contracting parties the right to cancel,
rescind, or modify the contract, the rights of the beneficiary are subject to those changes (under most
life insurance contracts, for instance, the insured reserves the right to change the beneficiary).

3. How do assignments function? Assignments are involved in many business financing
devices. Assignments may involve accounts receivable, proceeds from executory contracts, or general
intangibles (property that is a right rather than a physical object—for example, the goodwill of a
business). Assignments act as assurances of payment for millions of dollars of loans every day. The
most commonly assigned contractual right is the right to the payment of money (for example, a
retailer who sells on credit has the right to the installment payments from her customers; to obtain
funds to buy more inventory, the retailer can assign the right to the payments to a financing agency,
which will pay the retailer for the right).

4. What rights cannot be assigned? Generally, all rights can be assigned, unless: (1) a statute
expressly prohibits assignment (assignments of future rights to workers’ compensation are
statutorily prohibited, for instance); (2) a contract expressly prohibits assignment; (3) the right is
uniquely personal (for example, attorneys’ services); or (4) assignment would materially alter the
risk of the obligor (for instance, a right under an insurance policy cannot be assigned because it
would substantially alter the insurer’s risk).

5. Discuss the degrees of performance. Complete performance requires the occurrence of all
conditions expressly stated in the contract. Substantial performance is performance that does not
vary greatly from the performance promised in the contract and must create substantially the same
benefits as those promised. Complete performance. Generally, express or implied-in-fact conditions
must be fully complied with for complete performance to occur. Any deviation operates as a
discharge (substituting for stipulated materials without a promisee’s required permission may
discharge the promisee from the obligation to pay). Substantial performance. As long as a party
fulfills his or her obligation with substantial performance, the other party may be required to
perform (less damages for the deviations). To qualify as substantial, performance must not vary
greatly from what was promised (substituting materials of similar quality for specified materials
may not discharge the promisee’s obligation to pay). The deviation must not involve gross negli-
gence. Some courts require that it not be intentional.

6.      For what do compensatory damages compensate? Compensatory damages compensate
a nonbreaching party for the loss of a bargain (for injuries proved to have arisen directly from the
loss). On an employer’s breach of an employment contract, for instance, the employee would be
entitled to the salary that was promised.

7.      What are consequential damages? Consequential damages are foreseeable damages that
flow from the consequences of a breach but that are caused by circumstances beyond the contract (for
instance, a loss of profit from a planned, immediate resale of undelivered goods). The breaching

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party must know, or have reason to know, of the circumstances that will cause the nonbreaching
party to suffer an additional loss. Consequential damages give the innocent party the whole benefit
of the bargain.

8.      Does an injured party have a duty to mitigate damages? Generally, an injured party
has a duty to mitigate (reduce) the damages that he or she suffers. The duty owed depends on the
nature of the breached contract. On breach of a lease, a landlord may be required to take reasonable
steps to find a new tenant and thereby mitigate damages recoverable from the tenant who breached
the lease. An award of damages may be reduced by the amount that could have been mitigated. A
wrongfully terminated employee who fails unjustifiably to use reasonable means to obtain a similar
job may receive an award reduced by the amount of income that he or she might have received.

9.      Will specific performance be granted on a breach of contract for a sale of land?
Specific performance is granted to a buyer on breach of a contract for the sale of land. The legal
remedy is inadequate because every piece of land is considered unique. Only when specific
performance is unavailable (for example, if the seller has sold the property to someone else) are
damages awarded.

10.     What is the purpose of the election of remedies doctrine? The purpose of the election of
remedies doctrine (that is, that a nonbreaching party must choose which remedy to pursue) is to
prevent double recovery—if a party could recover compensatory damages and specific performance,
he or she would recover twice for the same breach. The doctrine is an embodiment of the adage “you
can’t have your cake and eat it, too.”

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1.   What is a shrink-wrap agreement? A shrink-wrap agreement is an agreement whose terms are
     expressed inside a box in which computer hardware or software is packaged. The terms generally
     concern warranties, remedies, and issues associated with the product’s use.

2.   Why is a court likely to enforce a shrink-wrap agreement? A court is likely to enforce a shrink-
     wrap agreement partly because it is more practical, from a business’s perspective, to enclose the full
     terms of a sale in a box. The court may reason that the seller proposed an offer the buyer accepted
     after an opportunity to read the terms.

     3.        On what reasoning might a court refuse to enforce a shrink-wrap agreement? A court may reason that a
     buyer learned of the shrink-wrap terms after the parties entered into their contract. On this basis, the court might
     conclude that the terms were proposals for an addition to the contract, which means that they were not part of the
     contract unless the buyer expressly agreed to them.

     4.      What is a click-on agreement? A click-on agreement takes place when a buyer, to complete a transaction
     on a computer, must indicate his or her assent to be bound by the terms of an offer by clicking on a button that says,
     for example, “I assent.”

     5.       Is a court likely to enforce a click-on agreement? Yes, unless the agreement is objectionable on grounds
     that apply to contracts generally. This is if the party who agrees to the terms has an opportunity to read them before
     the contract is made.

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     6.        When does the UETA apply, and what is its effect? The UETA supports all electronic transactions, but it
     does not create rules for them. The UETA does not apply unless the contracting parties agree to use e-commerce in
     their transactions.

7.   Can parties to a contract that would otherwise be covered by the UETA choose to waive its
     provisions? Yes, contracting parties can waive or change for their contract any or all of the UETA
     provisions (except for the rules that concern good faith, diligence, public policy, and
     unconscionability, which cover all contracts). Parties whose contracts would not otherwise be subject
     to the UETA can also bring their contracts within its provisions. The UETA applies in the absence of
     an agreement to the contrary.

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1.       Is a contract in which a sale of services and goods combined subject to the UCC?
Under some interpretations, yes. Serving food or drink to be consumed either on or off restaurant
premises involves a sale of goods, at least for the purpose of an implied warranty of merchantability.
But courts have disagreed over whether other mixed transactions are subject to the UCC. (For
instance, some courts say blood furnished to a patient during an operation is goods; some say a
medical service.) The UCC does not provide the answer. Generally, courts try to determine which
factor is predominant—the good or the service.

2.      How do the common law and the UCC differ regarding an offeree’s acceptance that
includes terms in addition to or different from the offer? At common law, acceptance must
exactly mirror the offer—any difference in terms constitutes a rejection and a counteroffer. Under
the UCC, if an offeree’s response indicates a definite acceptance, a contract is formed, even if the
acceptance includes terms in addition to or different from the offer. The response does not constitute
an acceptance if the modifications are conditional on the offeror’s assent. (For example, accepting an
offer to sell 1,000 pounds of beef by saying, “I accept, and I want that evidenced by a city scale
weight certificate,” would make a contract, but responding by saying, “I accept on condition that the
weight is evidenced by a city scale weight certificate” would not, unless the offeror agreed.)

3.      How do UCC provisions differ from the common law regarding modification of
contracts? Unlike the common law rule that contract modification must be supported by new
consideration, the UCC requires no consideration for an agreement modifying a contract.
Modification must be sought in good faith (a shift in the market making a seller unable to sell goods
without suffering a loss would be a good faith reason for modification). Under some circumstances, a
writing may be required. The contract may prohibit its modification except by signed writing. (If a
nonmerchant is dealing with a merchant who supplies the form that contains this prohibition, the
nonmerchant must sign a separate acknowledgment.) A modification that brings a contract under
the Statute of Frauds must usually be in writing to be enforceable (an oral contract for a sale of
goods originally priced at $450 modified so that the price is $550 would have to be in writing to be
enforceable, for example—if the buyer accepts delivery after the modification, however, he or she is
bound to the $550 price).

4.      Discuss unconscionability under the UCC. Unconscionability was a pre-UCC doctrine
codified by the UCC. An unconscionable contract is one that is so unfair and one-sided that
enforcing it would be unreasonable. If a court finds a contract or any clause in a contract to be
unconscionable at the time it was made, in light of general commercial practice and the needs of the
trade involved, the court can (1) refuse to enforce the contract, or (2) enforce the remainder of the
contract without the unconscionable clause, or (3) limit the application of any unconscionable clauses
to avoid an unconscionable result. Generally, an unconscionable contract will be found to result from
unequal bargaining power and unscrupulous dealings by one party (uneducated consumers subjected
to high-pressure sales tactics, for instance).

5.      How do Article 2A’s provisions differ from Article 2’s? Article 2A applies to leases of
goods. Article 2A does not provide for acceptance by shipment of goods or for additional terms in an
acceptance or confirmation. Under Article 2A, an oral lease is enforceable if the lease payments are
less than $1,000. Article 2A does not say whether a lease as modified needs to satisfy the Statute of
Frauds. Article 2A replaces Article 2’s implied warranty of title with an implied warranty of quiet
possession. Article 2A extends protection against unconscionability to leases and expands it in cases
concerning consumer leases. (A consumer lease involves a lessor who regularly engages in the
business of leasing or selling, a lessee who leases the goods “primarily for a personal, family, or
household purpose,” and total lease payments that are less than $25,000.) If unconscionable conduct
induced the consumer to enter the lease or occurred in the collection of a claim under it, courts can

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grant relief, even if the lease itself is not unconscionable. Many leases are based on the parties’
ability to provide for the measure of damages if there is a default or other act or omission. Article 2A
allows greater flexibility in liquidation of damages with respect to leases than Article 2 does with
respect to sales.

6. What is identification? For title to pass from seller to buyer, goods must be distinguished
from similar goods—that is, they must be identified. Frequently, identification is only a matter of
designating specific items (for example, by serial number), but when goods exist in a larger mass
(1,000-case lots, for instance), identification can be made only by separating goods from the mass.
There are exceptions. An agreement to buy “all [of a seller’s] hen chickens” would likely be held
sufficient, for example, to pass title without the hens being separated from other chickens (roosters).
If fungible goods (goods that are alike by physical nature, agreement, or trade usage) are held by
owners in common, separation is unnecessary—a buyer becomes an owner in common with the other
owners. Identification gives a buyer a right to obtain insurance on goods and to recover from third
parties who damage the goods. Identification may allow a buyer to take the goods from the seller. If
identification is not specified in a contract, additional rules apply: (1) identification occurs when a
contract is made if the contract calls for a sale of goods already existing; (2) if a sale involves unborn
animals that will be born within twelve months, identification occurs when the young are conceived
(if it involves crops to be harvested within twelve months or during the next season, identification
occurs when they are planted or begin to grow); and (3) in other cases, identification occurs when
goods are marked, shipped, or otherwise designated by the seller as the goods to pass under the
contract (the seller can delegate the right to identify goods to the buyer).

7. When and where does title pass? Parties can expressly agree to when and under what
conditions title will pass. If they do not, title passes when and where the seller delivers the goods,
according to the contractual delivery terms. Under a shipment contract, a seller is to ship goods by
carrier (a trucking company, a railroad), and title passes at the time and place of shipment. Under a
destination contract, a seller is to deliver goods to a specific destination (designated by the buyer),
and title passes when goods are tendered at there. When a buyer is to pick up goods, passage of title
depends on whether the seller must deliver to the buyer a document of title (a bill of lading, a
warehouse receipt). When a document of title is required, title passes when and where the document
is delivered. The goods need not move. When a document of title is not required, title passes at the
time and place of contracting, if the goods have been identified; if the goods have not been identified,
title passes when they are identified.

8. When does risk of loss pass from seller to buyer? Risk does not necessarily pass with title.
The parties can generally control when risk passes from seller to buyer by agreement (if goods exist
and have been identified). Otherwise, risk generally passes when a seller delivers, or tenders
delivery. Under a shipment contract, risk passes when goods are delivered to a carrier. (Generally,
all contracts are assumed to be shipment contracts if nothing to the contrary is stated in the
contract.) Under a destination contract, risk passes when goods are tendered to a buyer at a
specified destination. When goods are to be picked up by a buyer, if the seller is a merchant, risk
passes only on a buyer’s taking possession of the goods. If the seller is a nonmerchant, risk passes on
the seller’s tender of delivery. (For example, if goods bought on Tuesday are to be picked up on
Thursday but are destroyed on Wednesday, the seller suffers the loss if he or she is a merchant. If
the seller is not a merchant, the buyer suffers the loss.) If a bailee holds the goods, risk passes when:
(1) the buyer receives a negotiable document of title (for instance, a negotiable warehouse receipt
that the seller has indorsed) for the goods, (2) the bailee acknowledges the buyer’s right to possess
the goods, or (3) the buyer receives a nonnegotiable document of title and has had a reasonable time
to present the document to the bailee and demand the goods. If the bailee refuses to honor the
document, the risk remains the seller’s.

9. Who bears the risk of loss when a contract is breached? Generally, the party in breach
bears the risk. If a seller breaches by delivering goods so nonconforming that a buyer has the right

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to reject them (red flags instead of yellow ones, for example), risk will not pass until the defects are
cured or the buyer accepts the defective goods. (If a buyer accepts and later discovers a latent defect,
acceptance can be revoked, at which time risk passes back to the seller, to the extent that the buyer’s
insurance does not cover the loss.) When a buyer breaches, risk immediately shifts to the buyer if
the seller has identified the goods. (The buyer bears the risk for only a commercially reasonable time
after the seller learns of the breach, however, but the buyer is liable to the extent of any deficiency in
the seller’s insurance.)

10. When does a buyer have an insurable interest in goods? A buyer has an insurable interest
in goods the moment they are identified to the contract by the seller. (For example, a crop is
identified to a contract when it is planted or begins to grow, and thus, a buyer who contracts in
March to buy a crop to be harvested in October obtains an insurable interest in the crop when it is
planted in April.)

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1. What does “good faith” mean under the UCC? Good faith means honesty in fact. The
obligations of good faith and commercial reasonableness apply to all parties throughout performance
and enforcement of every contract within the UCC. Good faith can mean that a party cannot
manipulate contract terms to take advantage of another party. If a contract leaves open some
particulars of performance and permits one of the parties to specify them, the specification must be
made in good faith and within commercially reasonable limits. Thus, if one party delays specifying
particulars of performance for an unreasonable period or otherwise fails to cooperate, an innocent
party who has performed as far as is reasonably possible under the circumstances can treat the
other’s failure as a breach of contract.

2. What are a seller’s and a buyer’s general obligations under a contract within the UCC?
Under a contract within the UCC, a seller is obligated to transfer and deliver conforming goods, and
a buyer is obligated to accept and pay for conforming goods. (The parties’ performance is subject to
their agreement; the UCC provides rules for interpreting unclear terms.)

3. What are the exceptions to the perfect tender rule? Agreement of the parties. The parties
can agree that, for example, defective goods will not be rejected if the seller is able to repair or
replace them within a reasonable time. Cure. Cure is a seller’s right to repair, adjust, or replace
nonconforming goods. If tender is rejected because goods are nonconforming, a seller has within the
contract time for performance to cure (provided the seller promptly notifies the buyer that he or she
intends to cure) (delivering, for example, red ribbon on March 4, under a contract for delivery of
yellow ribbon by March 8, gives the seller four days to notify the buyer and cure). If the time for
performance has expired, a seller still has the right to cure if he or she reasonably believed that the
buyer would accept the nonconforming tender (if, for example, the buyer had accepted reasonable
substitutes before). If a seller offers a price allowance with tender of nonconforming goods (for
instance, tendering more expensive goods at the same price), a presumption may be created that the
buyer will accept, and this may extend the time to cure. A seller’s right to cure substantially
restricts a buyer’s right to reject. (Also, if a buyer refuses a tender of goods as nonconforming
without disclosing the nature of the defect to the seller, the buyer cannot later use the defect as a
defense if the defect is one that the seller could have cured.) Substitution of carriers. When an
agreed-on manner of delivery becomes impracticable or unavailable through no fault of either party
(a labor strike, for instance), and a commercially reasonable substitute is available, the substitute is
sufficient tender. Installment contracts. Under an installment contract, a buyer can reject an
installment only if a nonconformity substantially impairs the value of the installment and cannot be
cured. The contract is breached only if one or more nonconforming installments substantially impair
the value of the whole contract. After a breach, if the buyer accepts a nonconforming installment
without canceling the contract, the contract is reinstated. If the buyer sues only in regard to past
installments or demands performance as to future installments, the contract is reinstated.
Commercial impracticability. If events unforeseen at the time of contracting make performance
commercially impracticable, the perfect tender rule does not apply. The seller must notify the buyer
that there will be a delay or nondelivery. Risks normally assumed by a seller (such as increased
costs due to inflation) do not alone excuse performance. Also, the event must alter the essential
nature of performance (for example, a sudden shortage of raw materials). If a seller can fulfill
contractual obligations only partially, performance must be fairly allocated among buyers (who must
receive notice, and who may accept or reject the performance). Destruction of identified goods. When
identified goods are destroyed through a casualty that is no fault of either party and before risk
passes to the buyer, the parties are excused from performing (a fire, for instance, that destroys the
last one of a discontinued model after a consumer buys it, but before it is delivered, releases the
seller of the obligation to deliver and the buyer of the obligation to pay). If goods are only partially
destroyed, the buyer can inspect them and treat the contract as void or accept the goods with a price

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4. What is “anticipatory repudiation”? Anticipatory repudiation is when one party, before the
time for either party’s performance, clearly communicates to the other an intent not to perform. The
other party can: (1) await performance by the repudiating party for a commercially reasonable time
(retraction of a repudiation can be made by any method that clearly indicates an intent to perform,
and once made, the repudiating party’s contractual rights are reinstated); (2) pursue any remedy for
breach even if the repudiating party has been notified that his or her performance is expected; or (3)
in either case, suspend performance or proceed in accordance with the seller’s right to identify goods
notwithstanding breach or to salvage unfinished goods.

5. When does a seller have a right to withhold delivery? Generally, sellers can withhold
delivery (or discontinue performance) when buyers are in breach. Specifically, if the breach is due to
a buyer’s insolvency, a seller can refuse to deliver the goods unless the buyer pays cash (for instance,
if a buyer files for bankruptcy after ordering goods on credit, but before the goods are shipped, the
seller, on learning of the filing, can refuse to ship unless the buyer pays cash). A seller can withhold
delivery if a buyer wrongfully rejects or revokes acceptance of the goods, fails to make proper and
timely payment, or repudiates a part of the contract. If a breach is material, a seller can withhold
the entire undelivered balance of goods.

6. When can a seller reclaim goods? A seller can demand return of goods, if the demand is
within ten days of the buyer’s receipt, when a seller learns that a buyer has received goods on credit
while insolvent. A seller can demand and reclaim goods at any time if the buyer misrepresented his
or her solvency in writing within three months before delivery. A seller’s right to reclaim is subject
to the rights of a good faith purchaser or other buyer in the ordinary course of business who
purchases the goods from the buyer before the seller reclaims.

7. When is a seller entitled to recover damages? A seller can sue for damages if a buyer
repudiates a contract or wrongfully refuses to accept goods. What is the measure of the damages?
The measure of the damages is the difference between the contract price and the market price (at the
time and place of tender) plus incidental damages. If the market price is less than the contract price,
damages include the seller’s lost profits.

8. When can a buyer cancel a contract? A buyer can cancel a contract when a seller fails to
make proper delivery or repudiates the contract. A buyer who has rightfully rejected or revoked
acceptance of goods can cancel or rescind. A buyer can cancel or rescind a part of a contract directly
involved in a breach. A buyer can cancel or rescind a whole contract if a breach is material and
substantially impairs the value of the whole contract.

9. What damages can a buyer recover on a seller’s nondelivery or repudiation? If a seller
fails to deliver goods or repudiates a contract, the buyer may recover as damages the difference
between the contract and market prices of goods when the buyer learns of the breach. Market price
is determined at the place at which the seller was to deliver the goods. Sometimes a buyer can also
recover incidental and consequential damages less expenses saved as a result of the breach (for
instance, if a seller fails to deliver 10,000 bushels of soybeans (ordered at $5/bu.) on October 1 as
promised, when the price of soybeans is $5.50/bu., the buyer can recover $5,000 plus any expenses
the breach caused, less any expenses the breach saved.

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