Ch4. Contract Law — Formation, Enforcement, Termination, and Major Contract Types

Contract Formation

Contract: a legally enforceable agreement — a meeting of the minds achieved through a valid offer and a matching acceptance.

Contract formation:
Offeror ──── offer ──────────────────→ Offeree
            ←──── acceptance ─────────
            = Contract formed (mutual assent)

Offeror’s power / irrevocability: under common law, an offer is generally revocable at any time before acceptance unless supported by separate consideration (an “option contract”). Under the UCC, a “firm offer” by a merchant is irrevocable for up to 90 days without consideration (UCC § 2-205). Time for acceptance: if the offer specifies a time limit, acceptance must arrive within that window; if no time is stated, it must occur within a reasonable time.

Contract Performance and Excuse

Condition Precedent and the Duty to Perform Simultaneously (§ 234 Restatement)

In a bilateral contract, each party’s duty to perform is conditioned on the other party’s performance or tender of performance.

Requirements for simultaneous-performance condition:
① The exchange arises from a bilateral (mutually binding) contract
② The other party has not tendered or performed
③ The obligee's own performance is due (not deferred)

Effect: a party who refuses to perform while the other has not yet
tendered is not in breach — the refusal is justified by the
condition (Restatement (Second) of Contracts § 237)

Real estate sales example: the seller may withhold the deed and transfer of title until the buyer tenders the full purchase price; the buyer may withhold payment until the seller tenders a marketable title and deed.

Risk of Loss (UCC Article 2 / Restatement)

In a bilateral contract for the sale of goods, if a performance becomes impossible through no fault of either party, the risk-of-loss rules determine who bears the loss.

Default rule: risk of loss passes to the buyer upon the seller's
  completion of its delivery obligations (UCC § 2-509)
Exception: if the buyer is in breach when the risk passes, the
  risk may be shifted to the buyer (UCC § 2-510)
Real property: risk of loss generally passes upon execution of the
  sales contract under the doctrine of equitable conversion
  (majority rule); some states follow the Uniform Vendor and
  Purchaser Risk Act (risk remains with the seller until closing)

Termination: Rescission vs. Prospective Cancellation

Rescission (retroactive effect)

Legal rescission: material breach (after notice and opportunity
  to cure) or impossibility of performance
Contractual rescission: exercise of a rescission right specified
  in the contract

Effect:
- The contract is avoided ab initio → parties are restored to
  their pre-contract positions (restitution)
- Restoration: return what was received + interest or
  reasonable value of use

Rescission plus damages: a party who rescinds a contract for breach may also claim reliance damages or expectation damages (Restatement (Second) of Contracts § 373).

Prospective Cancellation (future effect only)

Used for continuing or relational contracts (leases, employment, agency agreements) — the contract is terminated going forward; past performance is not undone.

Major Contract Types

Sales Contracts (UCC Article 2)

Sales contract:
Seller's obligations:
  ① Transfer and deliver conforming goods
  ② Provide a warranty of title (and, if a merchant, the
     implied warranty of merchantability — UCC § 2-314)
Buyer's obligations: pay the contract price

Implied warranty of merchantability:
- Goods must be fit for the ordinary purposes for which they
  are used (UCC § 2-314)
- Defect claim: if goods are non-conforming, buyer may reject,
  revoke acceptance, or keep goods and claim damages
- Statute of limitations: 4 years from tender of delivery
  (UCC § 2-725)

Leases (Real Property)

Landlord's (lessor's) obligations:
- Deliver possession of the premises in a habitable condition
  (implied warranty of habitability — residential leases)
- Make repairs necessary to maintain habitability
  (landlord's duty; tenant's duty covers minor routine upkeep)
- Ensure quiet enjoyment (no constructive eviction)

Tenant's (lessee's) obligations:
- Pay rent as agreed
- Use the property in a tenant-like manner
- Follow the permitted-use restrictions in the lease
- Restore the premises at lease end (ordinary wear and tear excepted)

Assignment and sublease: a tenant generally may assign or sublet only with the landlord’s consent. An unconsented transfer may be treated as a material breach permitting termination (Restatement (Second) of Property: Landlord & Tenant § 15.1).

Construction Contracts

Construction contract: a contract for the completion of a
  specified work product
Contractor's obligations: complete the work and earn the
  agreed compensation
Owner's obligations: pay the contract price upon substantial
  completion (or upon the completion milestone specified)

Contractor's implied warranty:
- Structure / building: 10 years (most states — statute of
  repose for latent defects)
- Structure with iron, steel, or concrete elements: longer
  repose periods apply in some states
- General defects: 1 year express warranty (typical)

Agency / Service Agreements

Agency (service contract): a party (agent / service provider)
  undertakes to carry out tasks for the principal
Agent's obligations: perform with reasonable care and skill
  (fiduciary duty of loyalty and care — Restatement (Third)
  of Agency § 8.01)
Compensation: absent a contrary agreement, compensation is
  due for services rendered (quantum meruit)

At-will termination: either party may terminate at any time
  (no fixed term) — but termination at an unreasonable time
  or in bad faith may trigger liability for damages

Quasi-Contract: Unjust Enrichment

Unjust Enrichment (Restatement (Third) of Restitution and Unjust Enrichment § 1)

A party who is unjustly enriched at the expense of another is liable to make restitution to the extent of the enrichment.

Elements:
① Enrichment (the defendant received a benefit)
② Impoverishment (the plaintiff suffered a corresponding loss)
③ Causal connection between the enrichment and the loss
④ No legal justification for retaining the benefit

Remedy: restitution of the benefit received
  Good-faith recipient: liable for the value of the benefit
    as of the date of the unjust enrichment
  Bad-faith recipient: liable for the full value + interest
    and may be required to disgorge profits

Torts (Restatement (Third) of Torts)

Negligence (the general tort):
① Duty of care
② Breach of that duty (failure to meet the reasonable-person standard)
③ Causation (actual and proximate)
④ Damages

Special categories:
- Vicarious liability (respondeat superior): employer is liable
  for employee's torts committed within the scope of employment
- Premises liability: owner/occupier owes duties to visitors
  (invitees / licensees / trespassers — duty varies by status)
- Animal owner liability: strict liability for injuries caused
  by known dangerous propensities (Restatement (Third) of Torts:
  Liability for Physical & Emotional Harm § 23)

Key Concept Cards

Condition Precedent / Duty to Perform Simultaneously ★★★★★ : In a bilateral contract each party’s performance is conditioned on the other party’s simultaneous tender. A party who withholds performance while the other has not yet tendered is not in breach. Eliminates the risk that one side performs while the other does not. Memory hook: simultaneous exchange — neither must go first

Implied Warranty of Habitability / Construction Defect Statutes of Repose ★★★★★ : Residential leases carry an implied warranty of habitability (landlord duty). Construction defects in structures: most states impose a 10-year statute of repose for latent defects; explicit warranties run 1 year for obvious defects. Memory hook: leased premises = habitability warranty; construction = 10-year repose

Rescission vs. Prospective Cancellation ★★★★☆ : Rescission undoes the contract from the beginning (restitution required). Prospective cancellation (termination) ends the contract going forward (past performance stands). Lease terminations are always prospective. Memory hook: rescission = undo from start; termination = stop going forward

Practice Quiz

Q. Are a buyer’s duty to pay and a seller’s duty to transfer title simultaneous conditions in a real estate sale?

Yes. Under the Restatement and the law of most states, the seller’s duty to convey title and the buyer’s duty to pay the price are concurrent conditions in a real estate sales contract. The seller may withhold the deed until the purchase price is tendered, and vice versa.

Q. What are an owner’s remedies when a contractor completes a building with latent defects?

① Demand repair (cure) → if the contractor refuses or fails to cure within a reasonable time, the owner may hire another contractor and recover the cost of repair. ② If the defect is so severe that the contract purpose cannot be achieved, the owner may rescind the contract. Most states impose a 10-year statute of repose on latent defect claims (the period runs from substantial completion).

OIYO Editorial