How the MBE Approaches Contracts

The MBE tests a limited number of contracts topics. The questions usually turn on one of five issues:

  • Whether a contract was formed
  • Whether a contract was breached
  • What consequences follow from a breach
  • What defenses a party could raise after breaching
  • What remedies are available for a breach

Try to identify which issue you’re dealing with as soon as possible so you can use the right legal framework to analyze the answer choices.

One challenge students face is that the MBE tests topics that many 1L contracts classes don’t cover. Two particular areas have shown up frequently on past exams:

  • UCC provisions related to contracts for the sale of goods
  • Third-party rights (third-party beneficiaries, assignment, and delegation)

This post will highlight a few of the UCC and third-party issues that have appeared on past MBEs. But if these areas of contract law are unfamiliar to you, be sure to emphasize them in your MBE prep.

How You Should Approach Contracts on the MBE

The MBE tries to trick test-takers into making the same mistakes on contracts questions year after year. Here are some potential pitfalls from prior exams and some tips to help you avoid them.

Formation

Clarify the timeline

Some MBE questions throw a bunch of events and dates at you and ask if the parties ever formed a contract. Take a breath, and attack the facts chronologically. Was the first event an offer? Did the next one constitute an acceptance or a counteroffer? Your legal analysis will be much easier if you analyze the facts in the order in which they occurred.

Give me a call?

If you see the words “telephone,” “conversation,” or “oral,” be prepared for issues particular to oral contracts, like the statute of frauds and the parol evidence rule.

Not irrevocable but not revoked

The MBE loves to confuse the issue of whether an offer is irrevocable with the separate issue of whether an offer has been revoked.

Even an offer that says it’s irrevocable can generally be revoked (exceptions: UCC’s firm offer provision and option contracts).

Several questions have involved one party who tries to make an irrevocable offer but does it wrong. In that case, the offer isn’t irrevocable, but that doesn’t mean the offer has actually been revoked. When there’s an unsuccessful attempt to make an irrevocable offer, what you get is an offer that can be revoked. Actually revoking the offer requires an additional step.

Promise v. performance

The MBE sometimes wants you to distinguish between bilateral and unilateral contracts. Look to see if the acceptance involved a promise (“I will pay the price you’re asking for your car.”) or a performance (“I see your reward poster, and I’m looking for that lost dog.”). If it’s a performance, that’s a unilateral contract, and you should keep two things in mind: (1) the offer can’t be revoked once the person starts to perform; and (2) the offeror can’t sue if the other person fails to perform.

No “inadequate” consideration

On the MBE, “inadequate consideration” is usually going to be the wrong answer choice. Remember that a little consideration goes a long way. Courts don’t ask if the parties made a good deal. They just look to see if the parties bargained for some exchange. “Moral” consideration or “past” consideration is never legally sufficient, but if there’s any real consideration, the contract won’t be bounced just because it’s unequal.

If your initial instinct is that one party in your fact pattern isn’t giving anything up, look for hidden consideration. For example, a lender may allow a borrower extra time to repay a loan. That may look like a gift—until you remember that the borrower will have to keep paying interest throughout the extended loan period.

Interpretation

Unequal but admitted

We use four kinds of evidence to interpret a contract. Ranked from most important to least important, they are (1) express terms; (2) course of performance; (3) course of dealings; and (4) trade usage. Even though there’s a hierarchy, the court will try to read a contract in a way that’s consistent with all four sources. That means all four are likely to be admitted into evidence as long as there’s a remote possibility they might all fit together.

Just promises

The MBE loves to imply that the parol evidence rule is much broader than it actually is. Don’t fall for that trick. The parol evidence rule only restricts oral testimony that’s about promises.

The rule does not affect oral testimony brought in for other purposes, like explaining the meaning of contract terms or resolving ambiguities. It does not affect oral testimony about whether there was a condition to the contract, consideration for the contract, a mutual mistake, duress, or fraud.

The parol evidence rule says that promises that don’t end up in a final writing may not count. But it’s about promises; it only restricts oral testimony about promises.

Parol evidence v. modification

When you see a question that involves both an oral agreement and a written one, pay close attention to the timing. That’s what will determine whether you’re dealing with the parol evidence rule or a contract modification.

When the parties have a written contract and later enter into an oral agreement, the question is about contract modification, not the parol evidence rule.

When the parties have an oral agreement and later sign a written contract—or if they enter into an oral agreement and a written contract simultaneously—the question is about the parol evidence rule, not contract modification.

Written first means modification. Oral first (or at the same time) means parol evidence.

Oral mods and the statute of frauds

The MBE likes to trick test-takers by using an unenforceable contract clause to mask a question that’s really about the statute of frauds. Here’s the scenario you’ll see.

The parties have a written contract with a clause that prohibits oral modifications. At first glance, it seems simple: the question must be testing the rule that clauses like this one are unenforceable. If the parties agreed to an oral modification, it’s valid, even if the contract says otherwise. But if you pay close attention, that might not be the whole story. Some questions come down to another reason oral mods won’t fly: the statute of frauds. If the subject matter of the contract falls within the statute of frauds, the oral modification is invalid, and the original, written contract governs the relationship. So, if you see a clause prohibiting oral modifications, don’t stop there; pause to consider whether the contract implicates the statute of frauds before picking what seems like an obvious answer.

Defenses

When the crazy happened

Mistake applies when something crazy happened before the contract was formed that the parties didn’t know about at the time.

Impossibility, impracticability, and frustration of purpose apply when something crazy happens after the contract is formed.

Note that all of these defenses are premised on a party’s lack of knowledge that the crazy has happened (mistake) or could happen (the other three). A party who has assumed the risk of a surprise event can’t use that event to nix the contract.

Accord and satisfaction is a favorite defense on the MBE. When you see it among the answer choices, ask yourself whether the parties have an actual dispute over the amount that’s owed between them. If the damages are liquidated, and the parties agree, this doctrine doesn’t apply. If the damages are contested, though, look for the elements of accord and satisfaction: did one party make a good-faith payment to resolve the dispute, and did the other party accept? The home run would be a cashed check that one party has marked “paid-in-full.”

Remedies

Great expectations . . .

The general rule is that damages should equal the victim’s expectation interest: whatever would put the victim in the same position she would be in if the other party hadn’t breached. On the MBE, start by identifying the victim. Then ask (1) what benefit the victim would have received and (2) what the victim would have given up if the parties had performed the contract as written. Subtract (2) from (1), and you have your damages award.

…with some limitations

Remember the three limitations on damages—certainty, foreseeability, and mitigation—and keep a careful eye out for them in your fact patterns.

The bar examiners love to trick students with foreseeability. They’ll give you facts that suggest a particular kind of damage was unforeseeable, but they won’t hint at the issue. Unless you’re actively looking for it, you won’t find anything in the question to trigger your memory.

For mitigation, the MBE’s fact patterns often involve former employees who are suing for breach of contract. A wrongfully terminated employee doesn’t have to go to the ends of the earth to mitigate her damages—all she has to do is to make “reasonable efforts” to secure a position that’s “reasonably equivalent” to her old one.

Restitution

On the MBE, when you see a breaching party suing the victim, you’re probably looking at a question about restitution (unjust enrichment). Calculate the breaching party’s damages this way: (1) the value of the benefit the victim received, minus (2) the harm the victim suffered.

The MBE Loves the UCC

Article 2 of the UCC applies to contracts for the sale of goods, and the MBE loves to test areas where the UCC differs from the common law. Always ask if the UCC applies to your question, and if it does, remember these distinctions:

The mirror-image rule

The common law observes the mirror-image rule: the acceptance has to mirror the offer for a contract to be formed. The UCC, on the other hand, allows an acceptance with additional terms. Be sure you know the details of UCC 2-206 and 2-207, which deal with acceptances.

Acceptance by shipment

Pay attention when you see that a buyer ordered goods from a seller, and the seller just shipped them instead of responding. The question probably involves the UCC’s special provisions about contract formation in these circumstances (see 2-206 and 2-207) or about unilateral offers/contracts.

Gap-filling

Contracts that are missing terms are often still enforceable. Know the UCC’s provisions that supply certain default terms: (1) where the goods will be delivered (the seller’s place of business); (2) when the money needs to be paid (when the buyer receives the goods); and (3) where the money needs to be paid (where the buyer receives the goods).

In particular, the MBE loves to test the fact that it’s not a problem if contracts lack a price term. Courts will step in to decide what price is “reasonable” in the circumstances.

Contracts that lack a quantity term will be considered too indefinite to enforce. That doesn’t include “output-requirements” contracts, however, where a buyer agrees to take all that seller puts out or a seller agrees to provide all a buyer requires. Those clauses don’t couch quantity in numerical terms, but they are definite enough to satisfy the UCC.

Perfect tender

Outside the UCC, a defect in performance excuses the other party from its obligations only if it rises to the level of a material breach. For instance, if one party is a few days later performing its obligations, the other party can’t repudiate the contract unless time was of the essence.

If the UCC governs the contract, however, materiality doesn’t matter. The UCC adopts a variation of the perfect-tender rule, which allows buyers to reject goods based on any defect in performance, whether it’s material or minor.

Remember that the UCC does give the seller the opportunity to “cure” if the buyer rejects the goods. The seller can replace goods that don’t conform to the contract with goods that do, thereby fixing the breach. See 2-508 for more on this UCC-specific process.

Also, the UCC doesn’t apply the perfect-tender rule to installment contracts. Under 2-612, sellers who deliver in installments get a break: the buyer can only reject an installment if a defect “substantially impairs” its value.

Contract modification

The common law has loosened the pre-existing duty rule to allow one-sided contract modifications that are “fair and equitable in light of unanticipated circumstances.” But UCC 2-209 goes even further: it throws out the pre-existing duty rule altogether and says modifications don’t need any consideration at all.

Statute of frauds

The MBE likes to test the details of the UCC’s statute of frauds provision, like the merchant exception and the fact that you can only get up to the quantity of goods that’s actually stated in the writing. See UCC 2-201.

Who the Parties Are

The MBE frequently tests rules that turn on the identity of a party to a contract. Here are some common examples to prepare for.

Contractors and subs

Scenarios involving contractors and their subs are a recurring theme on the MBE.

If a contractor submits a general bid to an owner based on the sub’s bid and the owner accepts, the sub will probably have to perform at the quoted price. The contractor has a promissory estoppel claim because he relied on the sub, so even if the sub discovers an error in his bid, he’s going to be stuck with it.

The exception is that if the contractor knew (or should have known) that the sub made a mistake in the original bid, the sub can get out of the contract. There’s been a unilateral mistake, and the contractor’s reliance on the erroneous bid wasn’t reasonable.

Merchants

Watch for questions that refer to a party being a “merchant” or “dealing in the goods.” Issues particular to merchants include the UCC’s allowance for merchants to make firm offers, the merchant exception to the statute of frauds, and the implied warranty of merchantability (UCC 2-314).

Lost-volume sellers

Whenever you see a car dealership or anyone else with an inexhaustible number of identical goods, think about the lost-volume-seller doctrine. Lost-volume sellers have a unique measure of damages: the profit (including overhead) they would have made from the lost sale.

Three’s a Crowd

When you see three parties in the problem, the third party’s rights or duties are almost always going to be the issue. The question will turn on some rule about third-party beneficiaries, assignment of rights, or delegation of duties.

Who benefits?

MBE questions about third-party rights often involve the distinction between intended beneficiaries (who can sue to enforce the contract) and incidental beneficiaries (who can’t). Always look to see if the parties to the contract meant to confer a benefit on your specific beneficiary. If the parties didn’t have the beneficiary in mind when they entered into their agreement, the beneficiary can’t claim any rights under the contract.

One classic example of an intended beneficiary is a donee. The parties to the contract intend to confer a gift on the beneficiary, like a mom who pays a tutor to help her daughter pass the bar exam. Another example is the creditor who gets paid as a result of the contract: I mow your lawn, and instead of giving me the cash directly, you pay off the balance of my student loan.

No consideration

Third-party beneficiaries and assignees can sue even if they haven’t provided consideration. In fact, they almost never do!

Contract law favors delegation. In most circumstances, you can delegate your duties under a contract to a third person without getting the consent of the other party. This rule works in part because delegating your duties doesn’t get you off the hook: you’re still responsible to the other party if your delegee screws up and doesn’t perform.

There’s only one exception: if you choose the other party based on her reputation, skill, or character, that party can’t delegate her duties without your consent. If you hire a babysitter because you hear she’s great with kids, she can’t send her next-door neighbor to your house in her place. You weren’t just hiring anyone to perform the babysitting duties; you were hiring her, in particular, because of her skills.

No novation

Delegation questions on the MBE often include an answer choice that refers to a “novation.” These answers are almost always red herrings because novations rarely happen.

Here’s the scenario you’re likely to see: A has a contract with B. A delegates a contractual duty to C. The (wrong) answer choice says A no longer has a duty to B because there’s been a novation. No!

As we discussed above, a party who delegates duties usually remains on the hook for the delegee’s performance. A is still responsible to B if C breaches. The only way A gets off the hook is if B specifically releases A from the original agreement. That’s the only time the concept of novation comes into play.

For a novation to occur, all three parties have to agree that C is taking A’s place in the arrangement with B and that A is getting out entirely. In that case, C isn’t just performing some duties on A’s behalf. A is relinquishing her duties and her rights under the original contract, and what you have left is a new agreement between B and C. That’s a very specific (and very rare) fact pattern, so “novation” is almost never the right answer on the MBE.