Contracts and Sales (UCC Article 2)

Master the intricacies of contract law and UCC Article 2 sales provisions with free flashcards designed to reinforce black-letter rules. This lesson covers contract formation (offer, acceptance, consideration), common defenses, the Statute of Frauds, performance conditions, breach doctrines, remedies, third-party rights, and the specialized merchant rules under Article 2—all essential for MBE success.

Welcome to Contracts and Sales 📜

Contracts and Sales questions account for approximately 25 of the 200 MBE questions. This area tests your ability to identify whether a contract exists, analyze performance obligations, spot breach scenarios, and apply appropriate remedies. The UCC Article 2 governs sales of goods (tangible, movable items) and introduces special rules that often differ from common law. Understanding when common law applies versus UCC Article 2 is critical—many MBE trap answers exploit confusion between these two regimes.

💡 Pro Tip: Always ask yourself first: "Is this a sale of goods?" If yes, UCC Article 2 applies. If it's services, real estate, or mixed contracts, you'll need to determine which law governs.

Core Concepts: Contract Formation ⚖️

Offer

An offer is a manifestation of intent to enter a bargain that creates the power of acceptance in the offeree. It must:

• Show intent to be bound (objective standard—what would a reasonable person understand?)
• Contain definite and certain terms (parties, subject matter, price, quantity)
• Be communicated to the offeree

⚠️ Common Trap: Advertisements are generally invitations to deal, not offers. Exception: if the ad specifies quantity and explicitly indicates who can accept ("First 10 customers get...")

Termination of Offers:

• Revocation by offeror (effective upon receipt, unless option contract exists)
• Rejection or counteroffer by offeree (destroys original offer)
• Lapse of time (reasonable time if not specified)
• Death/incapacity of either party
• Destruction of subject matter

💡 Firm Offer Rule (UCC §2-205): A merchant's written, signed promise to hold an offer open is irrevocable for the stated time (max 3 months) even without consideration.

Acceptance

Common Law: Acceptance must be the "mirror image" of the offer. Any deviation is a counteroffer.

UCC §2-207 (Battle of the Forms): Much more flexible for sales of goods:

1. Definite expression of acceptance OR written confirmation operates as acceptance
2. Additional terms in acceptance:
   • Between merchants: additional terms become part of contract UNLESS:
     • Offer expressly limits acceptance to its terms
     • Terms materially alter the contract
     • Offeror objects within reasonable time
   • If non-merchant involved: additional terms are mere proposals
3. Different terms: Courts split on treatment (knockout rule vs. treating as additional terms)
4. Conduct: Parties' conduct recognizing a contract is sufficient even if writings don't match

Buyer sends Purchase Order → Seller sends Acknowledgment (different terms)
           ↓
   Is there definite acceptance?
           ↓
        YES (UCC §2-207(1))
           ↓
   Are parties both merchants?
      ↙              ↘
    YES               NO
     ↓                 ↓
Additional terms   Additional terms
become part of     are proposals only
contract UNLESS:   (don't become part
• Offer limits     unless agreed)
• Materially alter
• Objection made

Consideration 💰

A contract requires a bargained-for exchange of legal value. Each party must incur a detriment or confer a benefit.

Valid Consideration:

• Promise for a promise (bilateral)
• Promise for performance (unilateral)
• Forbearance (giving up a legal right)

NOT Consideration:

• Past consideration: Act completed before promise made
• Preexisting duty: Promise to do what you're already legally obligated to do (Exception: UCC §2-209 allows contract modification without consideration if in good faith)
• Illusory promise: Promisor retains unlimited discretion ("I'll buy if I feel like it")

💡 Promissory Estoppel (§90 Restatement): Substitute for consideration when:

1. Promise made
2. Promisor should reasonably expect reliance
3. Promisee actually relies to their detriment
4. Injustice can only be avoided by enforcement

Defenses to Formation 🛡️

Statute of Frauds

Certain contracts must be in writing and signed by the party against whom enforcement is sought:

MYLEGS mnemonic:

• Marriage (in consideration of)
• Year (contracts not performable within one year)
• Land (sale or transfer of interest in real property)
• Executor (promise to pay estate debts from personal funds)
• Goods ($500 or more under UCC—raised to $5,000 in some states)
• Surety (promise to pay another's debt)

UCC Exceptions (writing not required):

• Specially manufactured goods not suitable for resale to others
• Admission in court that contract existed
• Performance: Contract enforceable to extent of goods accepted or paid for
• Merchant's confirmatory memo: If between merchants, failure to object within 10 days satisfies SOF against recipient

Parol Evidence Rule

Once parties reduce agreement to a final writing (integration), extrinsic evidence of prior or contemporaneous agreements cannot contradict or supplement the writing.

Complete Integration: Cannot add or contradict Partial Integration: Can add consistent additional terms, but cannot contradict

Exceptions (parol evidence IS admissible to show):

• Formation defects (fraud, duress, mistake, illegality)
• Condition precedent to contract formation
• Ambiguity or interpretation issues
• Subsequent modifications
• UCC: Course of dealing, usage of trade, course of performance

Performance and Conditions 🔄

Types of Conditions

Condition Precedent: Must occur before duty to perform arises ("I'll pay you $1,000 if you graduate")

Condition Subsequent: Excuses duty to perform if it occurs ("I'll employ you unless you fail background check")

Concurrent Conditions: Mutual performances due simultaneously (typical in sales contracts)

Express vs. Implied:

• Express: Stated in contract (watch for "if," "provided that," "on condition that")
• Implied in fact: Inferred from parties' conduct/circumstances
• Constructive condition: Imposed by law to ensure fairness

💡 Substantial Performance Doctrine (Common Law): If party substantially performs (minor breach only), they can recover contract price minus damages for defects. Does NOT apply to:

• Sale of goods (perfect tender rule)
• Express conditions (must be strictly satisfied)

UCC Perfect Tender Rule (§2-601)

In single-delivery contracts, if goods or tender fail in any respect to conform to contract, buyer may:

• Reject the whole
• Accept the whole
• Accept any commercial unit(s) and reject the rest

Limitations on Perfect Tender:

• Installment contracts (§2-612): Buyer can reject only if non-conformity substantially impairs value of that installment
• Cure (§2-508): Seller has right to cure if:
  • Time for performance hasn't expired, OR
  • Seller had reasonable grounds to believe tender would be acceptable (may get additional reasonable time)
• Acceptance of goods: Once buyer accepts, can only revoke acceptance if non-conformity substantially impairs value

Breach and Remedies 💔

Types of Breach

Material Breach (Common Law): Substantially defeats the contract's purpose; non-breaching party is excused from performing and may sue immediately for total damages.

Minor Breach: Non-breaching party must still perform but can recover damages for the defect.

Anticipatory Repudiation: Before performance is due, party clearly indicates they won't perform. Non-breaching party may:

• Treat as immediate breach and sue
• Wait until performance due (but must if repudiator retracts before material change in position)
• Suspend own performance
• Under UCC: may demand adequate assurances (§2-609)

Remedies for Breach 💵

Goal: Put non-breaching party in position they'd be in if contract had been performed (expectation damages).

Common Damages Measures:

1. Expectation damages = Loss in value + Other losses - Costs avoided - Loss avoided

2. Reliance damages: Out-of-pocket expenses incurred in reasonable reliance (when expectation can't be proven)

3. Restitution: Value conferred on breaching party (quasi-contract remedy)

4. Consequential damages: Special/indirect losses (must be foreseeable and proven with reasonable certainty)

5. Incidental damages: Costs of dealing with breach (inspection, return shipping, finding substitute)

⚠️ Duty to Mitigate: Non-breaching party must take reasonable steps to minimize damages (can't recover for avoidable losses).

UCC Buyer's Remedies (§2-711 et seq.)

When seller breaches (non-delivery or rightful rejection):

Cover Damages (§2-712): Buyer purchases substitute goods in good faith

• Formula: (Cover price - Contract price) + Incidental + Consequential - Expenses saved

Market Damages (§2-713): If buyer doesn't cover

• Formula: (Market price at time of breach - Contract price) + Incidental + Consequential

Specific Performance (§2-716): Available when goods are unique or "in other proper circumstances"

UCC Seller's Remedies (§2-703 et seq.)

When buyer breaches (wrongful rejection, repudiation, non-payment):

Resale Damages (§2-706): Seller resells goods in good faith

• Formula: (Contract price - Resale price) + Incidental - Expenses saved

Market Damages (§2-708(1)): If seller doesn't resale

• Formula: (Contract price - Market price at time of breach) + Incidental - Expenses saved

Lost Profit (§2-708(2)): For "lost volume seller" (had unlimited supply)

• Formula: Expected profit + Reasonable overhead + Incidental - Payments received

Action for Price (§2-709): Limited to situations where:

• Buyer accepted goods
• Risk of loss passed and goods were lost/damaged
• Goods cannot be resold at reasonable price

Third-Party Rights 👥

Third-Party Beneficiaries

A non-party may enforce a contract if they're an intended beneficiary (not merely incidental).

Intended Beneficiary: Parties intended to benefit the third party, who is either:

• Creditor beneficiary: Performance will satisfy promisee's debt to beneficiary
• Donee beneficiary: Promisee intends to make a gift to beneficiary

Rights: Intended beneficiary can sue promisor once rights vest (when beneficiary learns of contract and assents, or detrimentally relies, or sues).

Incidental Beneficiary: No enforcement rights (parties didn't intend to benefit them).

Assignment and Delegation

Assignment: Transfer of rights under contract

• Generally allowed unless:
  • Contract prohibits (but prohibition usually ineffective for money)
  • Assignment would materially change obligor's duty
  • Personal services requiring special skill/trust

Delegation: Transfer of duties under contract

• Generally allowed unless:
  • Contract prohibits
  • Duties involve personal services, skill, or discretion
  • Other party has substantial interest in having original party perform

💡 Key Distinction:

• Assignor (who assigns rights) has no further rights
• Delegator (who delegates duties) remains liable unless novation occurs

Special UCC Provisions 📦

Warranties

Express Warranties (§2-313): Created by:

• Affirmation of fact or promise
• Description of goods
• Sample or model

("Puffing" or opinion doesn't create warranty)

Implied Warranty of Merchantability (§2-314): Goods must be fit for ordinary purposes (only if seller is merchant)

Implied Warranty of Fitness for Particular Purpose (§2-315): Goods fit for buyer's particular purpose when:

• Seller knows of particular purpose
• Seller knows buyer is relying on seller's expertise
• Buyer actually relies

Disclaimer:

• Express warranties: Hard to disclaim (inconsistent terms don't negate)
• Merchantability: Must mention "merchantability" and be conspicuous if written
• Fitness: Must be in writing and conspicuous
• "As is" or "with all faults": Generally disclaims implied warranties

Risk of Loss

UCC allocates risk of loss (who bears loss if goods destroyed before buyer receives them):

Breaching Party: Risk stays with breaching party

Non-Breaching Scenarios:

1. Agreement: Parties can allocate risk by agreement
2. Carrier cases (shipment/delivery contracts):
   • Shipment contract (FOB seller's place): Risk passes when goods delivered to carrier
   • Destination contract (FOB buyer's place): Risk passes when goods tendered at destination
3. Non-carrier cases:
   • Merchant seller: Risk passes when buyer takes physical possession
   • Non-merchant seller: Risk passes on tender of delivery

Risk of Loss Flowchart
┌─────────────────────────────────────┐
│ Did either party breach?            │
└──────────┬──────────────────────────┘
           │
      ┌────┴────┐
      ↓         ↓
    YES        NO
     │          │
 Risk on    Check contract
 breaching      │
  party    ┌───┴────┐
           ↓        ↓
      Carrier  Non-carrier
         │          │
    Shipment/   Merchant?
    Destination   │
                ┌─┴─┐
                ↓   ↓
              YES  NO
               │    │
          On taking On tender
          possession

Good Faith and Commercial Reasonableness

UCC imposes obligations of good faith (honesty in fact + observance of reasonable commercial standards for merchants) and commercial reasonableness throughout.

§2-609 Adequate Assurance: When reasonable grounds for insecurity arise, party may demand written assurance. If not provided within reasonable time (max 30 days), may treat as repudiation.

Examples with Explanations 📚

Example 1: Battle of the Forms

Fact Pattern: Buyer sends purchase order for 1,000 widgets at $10 each. Seller responds with acknowledgment agreeing to quantity and price but adding: "Disputes resolved by arbitration." Buyer receives acknowledgment but says nothing. Seller ships, buyer accepts. Later, dispute arises over quality.

Analysis:

1. Is there a contract? YES—Seller's acknowledgment is definite expression of acceptance under UCC §2-207(1)
2. Does arbitration clause become part of contract? Are both parties merchants? (assume yes)
3. Apply §2-207(2):
   • Did offer expressly limit acceptance to its terms? (not stated—no)
   • Does arbitration materially alter? (SPLIT: many courts say yes)
   • Did buyer object? (no)
4. Result: If arbitration deemed material alteration, it's out; if not, it's in (unless buyer objects).

Key Takeaway: Under UCC, acceptance with additional terms forms contract, but whether additional terms become part depends on merchant status and material alteration test.

Example 2: Substantial Performance vs. Perfect Tender

Scenario A (Common Law—Construction): Contractor agrees to build house with "Reading pipe" specified. Contractor uses functionally identical "Cohoes pipe" instead. Homeowner refuses to pay final $10,000.

Result: Contractor substantially performed (minor breach). Can recover contract price minus damages ($0 if pipes truly equivalent). Homeowner must pay.

Scenario B (UCC—Goods): Buyer orders 1,000 blue widgets. Seller delivers 998 blue and 2 green widgets.

Result: Under perfect tender rule, buyer may reject entire shipment (failure in "any respect"). However, if seller has time, may cure by delivering 2 blue widgets.

Key Takeaway: Common law uses substantial performance; UCC uses perfect tender (subject to exceptions).

Example 3: Lost Volume Seller

Fact Pattern: Car dealer contracts to sell car to Buyer for $30,000. Buyer breaches. Dealer resells same car to another customer for $30,000 (who would have bought a different car from lot).

Analysis:

• Market/resale damages would yield $0 (contract price = resale price)
• But dealer is lost volume seller: had unlimited inventory and would have made two sales
• Dealer lost one sale profit due to breach

Remedy: UCC §2-708(2) lost profit + overhead (might be $3,000 profit + $500 overhead = $3,500)

Key Takeaway: Lost volume sellers can recover expected profit even if they resold goods, because they could have made both sales.

Example 4: Merchant's Confirmatory Memo

Fact Pattern: Buyer (merchant) and Seller (merchant) orally agree to sale of $4,000 worth of goods. Seller sends written confirmation. Buyer receives it but doesn't respond. Later, Buyer claims no contract due to Statute of Frauds.

Analysis:

• Oral contract for goods ≥$500 normally requires writing
• Exception: UCC §2-201(2) merchant's confirmatory memo
• Seller sent written confirmation to Buyer (both merchants)
• Buyer had 10 days to object in writing
• Buyer's silence = contract enforceable against Buyer

Key Takeaway: Between merchants, written confirmation satisfies SOF against recipient who doesn't object within 10 days.

Common Mistakes ⚠️

Mistake #1: Confusing Common Law and UCC

❌ Wrong: Applying perfect tender rule to service contracts ✅ Right: Perfect tender only applies to UCC sales of goods; services use substantial performance

💡 Remember: Ask "Is this a sale of goods?" first. Mixed contracts: predominant purpose test.

Mistake #2: Missing Firm Offer Requirements

❌ Wrong: Thinking any written offer by merchant is irrevocable ✅ Right: Must be (1) merchant, (2) written and signed, (3) explicit assurance to hold open

💡 Remember: Three-month maximum even if longer period stated.

Mistake #3: Forgetting Duty to Mitigate

❌ Wrong: Awarding full contract price when non-breaching party didn't seek substitute ✅ Right: Non-breaching party can't recover avoidable damages

💡 Remember: Mitigation must be reasonable—don't need to take inferior substitute, but must make reasonable efforts.

Mistake #4: Misidentifying Intended vs. Incidental Beneficiaries

❌ Wrong: Allowing anyone who benefits from contract to sue ✅ Right: Only intended beneficiaries can enforce; ask "Did parties intend to benefit this person directly?"

💡 Test: Would reasonable person in position of parties understand performance was to benefit third party?

Mistake #5: Overlooking UCC Cure Rights

❌ Wrong: Concluding buyer can reject and that's final ✅ Right: Seller may have right to cure if time remains or had reasonable grounds to believe tender acceptable

💡 Remember: Cure extends perfect tender rule's harshness—check if seller can fix defect.

Mistake #6: Ignoring Parol Evidence Rule Exceptions

❌ Wrong: Excluding all evidence of prior negotiations ✅ Right: Parol evidence admissible to show fraud, duress, mistake, condition precedent, ambiguity

💡 Remember: Rule only excludes evidence that contradicts/supplements integrated writing; formation defects always admissible.

Key Takeaways 🎯

Further Study 📚

1. UCC Article 2 Full Text: https://www.law.cornell.edu/ucc/2 - Cornell Legal Information Institute's official UCC provisions with commentary

2. Restatement (Second) of Contracts: https://www.ali.org/publications/show/contracts/ - American Law Institute's authoritative synthesis of contract common law

3. National Conference of Bar Examiners - MBE Subject Outlines: https://www.ncbex.org/exams/mbe/ - Official MBE subject matter outlines showing tested topics and weighting

🧠 Memory Device - UCC vs. Common Law:

"GOODS GET SPECIAL TREATMENT"

• Goods = UCC Article 2 (tangible, movable)
• Offer flexibility (firm offers, battle of forms)
• Outcome strict (perfect tender, unless cure)
• Damages specific (cover/resale preferred)
• Statute of Frauds has merchant exceptions

🎯 MBE Strategy: When you see a contracts question, immediately classify as goods (UCC) vs. services/land (common law). Half the battle is applying the right law. Watch for merchant status—it triggers special rules. In remedies questions, always check if plaintiff mitigated damages!