I titled this particular post: “ONE approach” because there is more than one way a contracts essay question can be answered. If you look at my previous post on Stage 1 outlines, you can see that this approach to a contracts essay practically mirrors the outline. Since you will be memorizing your own outlines, it would help to use it as your approach to answering your essay questions.
This post will not go into rules or definitions. It is just an efficient way to answer a contracts essay question. It is best to use headlines when answering any essay question (not only contracts) because it helps the grader understand your answer. If you do not know what a “headline” is, you will see examples in the sample answer below.
I should also mention that some people like to start by defining a contract. Others like to start with applicable law. Some don’t think this first part is worth headlining. The first part does not usually answer the call of the question, but I feel the introduction is necessary for all contracts questions
Here is my approach:
1. What is the applicable law? (i.e. Common law or UCC)
Remember the UCC is used when the sale of goods is involved in the contract. The Common Law is used with all other contracts. Start your answer with a headline titled “applicable law”
Ex:
Applicable Law
The UCC applies to sale of goods (movable personal property) all other contracts are governed by common law. Here the contract involves the sale of widgets. Because widgets are goods (movable property), the UCC applies.
*Note. Sometimes the subject matter appears to be both a good and a service. (Ex: the sale and installation of an air conditioning unit) In that case, you could apply one or both of these tests
(a) Predominant factor test: What is the predominant subject matter a good or a service?
(b) Gravamen of injury test: Was the injury to the good or to the service?
2. Was a contract formed?
Remember that contracts require offer, acceptance and consideration. Remember to specify which facts constituted each of those requirements. If you are missing Offer, Acceptance or consideration you do not have a contract but you may have something else.
*Note. This is also where you discuss the statute of frauds. As you know, some contracts Must be in writing. Do you remember which ones?
3. Terms of the contract
What are the terms of the contract? Is there a condition? Here you may have to look at the Parol Evidence Rule. Or whether there has been a modification in the contract terms.
4. Condition
A duty to perform under the contract may not be absolute if there is a condition that has not been satisfied. So you must look to whether there is a condition and, if so, whether there it is a condition precedent, concurrent or subsequent. There is also the possibility the the condition has been excused
5. Performance
Has the performance been satisfied or discharged/excused? Remember all the ways performance can be discharged/excused? (i.e. illegality, impossibility, novation, accord and satisfaction, etc…)
6. Breach
This is where you can go into minor breach, material breach, anticipatory repudiation, perfect tender rule UCC) and/or breach of warranty.
7. Remedies
If applicable, you can write about nonmonetary damages (specific performance), monetary damages, restitution, rescission, reformation etc…
I realize that this is very broad. Most contracts essay questions are very precise about which of the above issues they would like an answer to. Always remember to look at the call of the question. There are precise ways that I like to answer each of these sections. You should develop your way as you develop your outline. Hopefully, this is just something you can work with.
Yes, I knowI did not include Third Party Rights. I will have a separate post on addressing that issue.
Below is a sample question from the California Bar Exam in 2009
Developer had an option to purchase a five-acre parcel named The Highlands in City from Owner, and was planning to build a residential development there. Developer could not proceed with the project until City approved the extension of utilities to The Highlands parcel. In order to encourage development, City had a well-known and long-standing policy of reimbursing developers for the cost of installing utilities in new areas. Developer signed a contract with Builder for the construction of ten single-family homes on The Highlands parcel. The contract provided in section 14(d), ―All obligations under this agreement are conditioned on approval by City of all necessary utility extensions.
During precontract negotiations, Developer specifically informed Builder that he could not proceed with the project unless City followed its usual policy of reimbursing the developer for the installation of utilities, and Builder acknowledged that he understood such a condition to be implicit in section 14(d). The contract also provided, ―This written contract is a complete and final statement of the agreement between the parties hereto
In a change of policy, City approved ―necessary utility extensions to The Highlands parcel but only on the condition that Developer bear the entire cost, which was substantial, without reimbursement by City. Because this additional cost made the project unprofitable, Developer abandoned plans for the development and did not exercise his option to purchase The Highlands parcel from Owner. Builder, claiming breach of contract, sued Developer for the $700,000 profit he would have made on the project. In the meantime, Architect purchased The Highlands parcel from Owner and contracted with Builder to construct a business park there. Builder’s expected profit under this new contract with Architect is $500,000. What arguments can Developer make, and what is the likely outcome, on each of the following points?
1. Developer did not breach the contract with Builder.
2. Developer’s performance was excused.
3. In any event, Builder did not suffer $700,000 in damages. Discuss.
Notice that this question asks for the answer to specific issues: Breach, Performance and Damages. I would still go into applicable law and formation.
Answer This is one of the model answers provided by the California State Bar
Applicable Law
The UCC applies to sale of goods (movable personal property) all other contracts are governed by common law. This contract is for construction services. As a result, it will be governed by the common law.
Formation
In order to proceed, Builder must establish a valid contract, which requires (1) offer, (2) acceptance, and (3) consideration. The facts state that Builder and Developer reached an agreement and signed a contract. Therefore, there is likely the required offer, acceptance and consideration.
The contract does not fall under the Statute of Frauds because it is not: in consideration of marriage, suretyship, contract for real property, sale of goods $500 or more, or unable to be performed within one year. In any event, the contract was signed, which indicates that it would satisfy the Statute of Frauds anyway. There is a valid enforceable contract.
- Developer did not breach
A breach of contract occurs when a party to the contract does not perform after performance comes due. Therefore, if performance has not come due, there cannot be a breach. Likewise, if the party substantially performs his obligations under the contract, there is no breach.
Conditions
Performance only comes due after the occurrence of all conditions precedent to performance. This contract contained such a condition. The contract contained the condition that obligations were only due once the City approved ―necessary utility extension. Therefore, unless the City approved these extensions, performance is not due. Builder will argue that the City did approve the extensions, and that performance is due. The fact that the City approved the extensions is true; however, it still may not give rise to performance. Developer will rebut this argument with a claim that Developer and Builder agreed that this condition impliedly included the condition that City reimburse Developer for the cost of the extensions.
Terms: Merger Clause and Parol Evidence Rule
A merger clause in a contract indicates that the contract is a final integration of the agreement between the parties. This clause causes the Parol Evidence rule to apply. This rule states that no prior or contemporaneous oral statements are admissible that contradict the final integration between the parties. Builder will argue that the statements by Developer that the condition means that the City must approve and reimburse for the extensionsis barred as parol evidence. However, the parol evidence rule does not outlaw all statements. Developer can still admit statements that prove the existence of a condition precedent to the formation of the contract or statements that explain the meaning of a clause in the contract. Both the merger clause and parol evidence rules apply here.
The statements in question represent the agreement by Developer and Builder that the condition in 14(d) means that the agreement is conditioned on reimbursement by the City for the cost of the extensions. This means that there was an additional condition precedent: the contract is conditioned upon reimbursement by the City. This also means that statements that Developer seeks to admit will explain the language of 14(d). Therefore, the statements Developer seeks to admit will [be] admissible by the Parol Evidence Rule. Because Developer can admit the statement pertaining to reimbursement, he will be able to establish that performance is not due. As a result, his failure to perform is not a breach.
2. Performance was excused
Performance can be excused by the occurrence of a number of events. These include frustration of purpose, impracticability, impossibility, and failure of a condition precedent. Failure of a condition precedent is discussed above.
Frustration of Purpose
Frustration of purpose excuses performance under a contract when performance is still technically possible, but the purpose of the contract no longer exists. In order to prevail, the defendant must show (1) the purpose of the contract was known by the plaintiff at the time of contracting, (2) circumstances that are out of the defendant’s control changed, and (3) the change of circumstances caused the original purpose to be unavailable. Here, the purpose of the contract was to make money on the development of a residential community. Builder, who knew that he was expected to build single family homes, was aware of the purpose of the contract. Circumstances did change pertaining to the development.
The City had a long-standing policy of reimbursing the cost of extensions to new areas. After this contract was entered into, the City changed this policy. Therefore, the second element is met. Lastly, Developer must show that the change in circumstances made the purpose of the contract unavailable. City’s change in policy made Developer bear the cost of the extensions. However, Developer could still build the extensions, and therefore, build the residential development. It would cost Developer more money; however, the purpose of the contract was still available. Therefore, the purpose of the contract was not frustrated. It may have been less appealing to Developer, but it was not frustrated.
Impracticability
Performance of a contractual obligation is impracticable when (1) circumstances affecting the contract have changed, (2) the change is not due to any act by the defendant, and (3) the change of circumstances causes undue hardship on the defendant. Here, as discussed above, circumstances did change: City changed a long-standing policy. This was out of Developer’s control. Therefore, Developer need only demonstrate undue hardship to prevail with this claim. The change of the policy meant that Developer would bear the burden of financing the extensions required to build the community. This cost was ―substantial,and made the project unprofitable for Developer. Making a project unprofitable is probably inadequate for a court to find impracticability. Developer would have to establish more than simple unprofitability. If Developer could show that the cost is so burdensome that he would be forced out of business, that would establish impracticability. However, simply unprofitability is probably inadequate. Therefore, this element is not met. The court will probably not find that performance was excused by impracticability.
Impossibility
Impossibility occurs when (1) circumstances affecting the contract have changed, (2) the change is not due to any act by the defendant, and (3) the change of circumstances causes performance to be impossible for the defendant. As discussed above, the change in circumstances makes performance unappealing, but not impossible. Impossibility will not excuse performance.
Developer should be able to successfully argue that performance should be excused by failure of a condition precedent.
3. Builder did not suffer $700,000 in damages
A plaintiff in breach of contract claim can pursue damages that put the plaintiff in the position he would have been in had the defendant fully performed. This is generally established by expectation damages, incidental damages, and consequential damages, minus any mitigation available to the plaintiff. These damages are not available to the plaintiff if there is a valid liquidated damages clause. This contract fid not have a liquidated damages clause, so that will not apply. Punitive damages are not available in a contract cause of action. Expectation Damages For a seller or provider of services, these damages typically equal the amount of profit the plaintiff expected to make. Here, that is clearly established as $700,000.
Incidental Damages
These damages are the damages that the plaintiff incurred as incidental to the defendant’s breach. They typically include the cost of finding a replacement buyer and administrative costs incurred because of the breach. Here, the facts do not indicate any incidental damages. However, if Builder incurred any costs in contracting with Architect to construct a business park, such as lawyer’s fees, etc., these would be covered as incidental damages.
Consequential damages
These are the damages that occurred as a foreseeable result of the breach. In order to recover these damages, the plaintiff must establish that the parties contemplated these damages at the time the contract was formed. Builder does not appear to have incurred any consequential damages.
Mitigation
Generally, a plaintiff is required to mitigate damages. He is not allowed to sit by after a breach and allow himself to incur more damage than is necessary. Here, the original contract required Builder to build residences for Developer on The Highlands. After the alleged breach by Developer, Architect hired Builder to build a business park on the Highlands. This contract would not be available to Builder had he performed for Developer. If it would have been possible for Builder to perform both contracts, then this would not be mitigation. However, that would be impossible. Therefore, this is proper mitigation of damages.
The other issue involved with mitigation is time. If the work for Developer would have taken 9 months, and the work for Architect takes 12 months, Builder could argue that the entire $500,000 profit should not be considered for mitigation. However, no facts indicate the time required for either job, so the court will assume equal performance for both contracts.
Builder’s damages for the alleged breach are $700,000. However, because Builder is required to mitigate his damages, the $500,000 from the contract with Architect will be applied to the damages. Therefore, Builder’s total damages due to the alleged breach are $200,000
