Source: https://www.scribd.com/document/185832979/Contracts-Synthesis
Timestamp: 2019-12-06 08:00:01
Document Index: 160529481

Matched Legal Cases: ['arty 1', 'arty 2', 'arty 1', 'arty 1', 'arty 4', 'arty 4', 'arty 2']

Contracts Synthesis | Offer And Acceptance | Consideration
1L year Contracts outline - a condensed version of everything you need to know
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Introduction To have a contract, one must have: -An exchange or bargain- i.e.
. consideration or a substitute [Ch 1] -An agreement- offer and acceptance [Ch 2] -May have to be in writing: statute of frauds [Ch 3] -No abuse of bargaining process (eg: fraud) [Ch 4] -No substantive infirmities (unconscionable contract) [Ch 6] -No excuse based on mistake or changed circumstances [Ch 9] What are the parties supposed to do under contract? -Interpretation and supplementation of agreement [Ch 5] What if they dont do what they are supposed to? -Judicial remedies [Ch 7] -Self-help: the other party may be able to stop performing its end [Ch 8] What about third parties? -If A & B contract, C may be able to enforce against A or satisfy Bs obligations by rendering performance to A [Ch 10] THEME: shift from strong emphasis on clarity & crispness, formalism, to more acceptance of fuzziness. Ex: move away from literal interpretation. More substantive limits on contracts that can be entered into. Terms like reasonable and good faith used a lot more. ***Shift from certainty to more just results*** Chapter 1 I. Enforceable Promises 1. Contract an enforceable promise or set of promises to which there is judicial remedy if breached. - Offer, acceptance (mutual assent), and consideration. 2. What is a promise? Objective question of fact for jury to decide How to tell what is promise v. opinion/prediction? Reasonableness under the circumstances: Was a promise needed to induce assent? (Hawkins v. McGee: hairy hand case) Course of dealing Is it likely that the speaker can control whether the promise is kept? Specificity/vagueness of prediction/promise/description (Bayliner v. Crow: the more specificity, more likely to be promise) Fact v. Opinion II. Remedying Breach A. Why enforce contracts? a) b) c) d) Protect promisees reliance on promise Respect promisors autonomy or will to make binding promises Economic efficiency Predictability
e) Fairness f) Social Justice g) Morality (i.e., moral obligation to keep promise) B. Contract remedies are NOT intended to punish or deter breach ex: White v. Benkowski (neighbors feuding about water): Damages that follow naturally and directly from breach (including inconvenience) are recoverable C. Damages are overwhelmingly monetary. Note: consistent with the amoral view of efficient breach Sullivan v. OConnor (botched nose job) -Pain & suffering are NOT compensable for mere breach of contract. Only if that breach further injuries. D. Three types of remedy: 1. Expectation damages (most common) Where P would have been if contract had been performed. 2. Reliance damages Where P would have been if had never entered into contract. 3. Restitution Return of benefits conferred under contract. E. Efficient Breach Pareto-improving: transactions that make no one worse of while making someone else better off - Kaldor-Hicks Efficiency: promisors gains from breach exceed the promisees loss. F. U.S. Naval Institute v. Charter Communications (paperback book sales) R 352 (a)- doubts are generally resolved against the party in breach II. Consideration 1. A formalization of bargained-for benefit or detriment Elements of consideration: (focus is on exchange) 1. Promise or performance by the promisee Performance can be action or forbearance 2. Given in exchange for the promise being analyzed Causation: the benefit or detriment is caused by the promise 3. Sought in exchange for the promise analyzed Motive: promisors motive in making the promise was to induce the promisee to confer benefit or suffer the detriment. 2. Courts generally do not look into the adequacy of consideration -courts leave determination of worth to parties - unless consideration is a mere peppercorn and clearly fictitious 3. Purpose of Consideration: -Evidentiary proof of existence and terms of K -Cautionary letting promisor know s/he is entering K Doesnt requiring a writing serve both functions better?
In CA, a writing is presumptive evidence of consideration 4. Forbearance as consideration: a) The detriment supporting consideration can be any forbearance of a right - Hamer v. Sidway (nephew giving up bad habits) b) Forbearing from litigation = consideration must be a non-frivolous claim brought in good faith: -Fiege v. Boehm (wedlock case) Rest. 74(1): Surrender of an invalid claim is consideration if objectively doubtful OR subjective belief it may be found valid. c) Continued at-will employment= forbearance (= consideration) ? a) Lake Land v. Columber -Employers forbearance from firing counts as consideration (in exchange for covenant not to compete) b) Pine River State Bank v. Mettville -Employees forbearance from quitting is consideration (employer didnt follow proper protocol in employee handbook) **CAUTION: public policy restraints for covenants not to compete (and issue of reality of bargain). Courts are divided over whether continued employment is consideration for a promise. It probably does, at least if reasonable in duration and outside the context of covenants not to compete. 5. Past performance consideration - Feinberg v. Pfeiffer (employees past work consideration for pension) - Broadnax v. Ledbetter (captures criminal without knowing of reward & later sues for the reward consideration) 6. Past Performance: Moral Obligation as Consideration 1. Traditional Approach: -Moral obligation (for past action) is NOT valid consideration - Mills v. Wyman (sick young man cared for by stranger; grateful dad later renigs on promise to pay) 2. Modern Approach: When promisor receives a material benefit and promisee receives material detriment, moral obligation IS sufficient consideration - Webb v. McGowin (W injured after saved M from falling brick)
*McGowins material benefit = not being injured *Webbs material detriment = injury
R 86: moral obligation sufficient consideration to prevent injustice (restitutionary concept to enforce promises, not pure restitution though) Only if needed to prevent unjust enrichment Not if disproportionate to value received 7. Conditional gift is NOT enforceable promise due to lack of consideration Note: Importance of form v. substance: If you do X, Ill do Y not necessarily a bargain-
-Kirksey v. Kirksey (Brother-in-law promises land, not enforceable b/c was a conditional gift not bargained for) 8. Limits of Consideration: Tension between formalism and substantive goals (peppercorn effectively allows gift contracts, but if you dont allow peppercorn, what is reasonable) Formalistic doctrines sanction extreme results (Feinberg) they call our attention to whether we really believe in the underlying goal of the doctrine. That is, do we really want to have a bargain be the sine qua non of contract enforcement? Probably not, hence detirmental reliance as a substitute. Legal domain boundaries (formalistic consideration doesnt explain contemporary moral obligation because contemporary thought about it is largely restitutionary, not contractual) III. Promises as Consideration 1. Bilateral v. Unilateral Contracts a. Bilateral contract Contract formed by the exchange of promises (to perform) b. Unilateral contract Contract formed by the exchange of a promise for performance
-Offerees acceptance = performance (simultaneous)
2. Illusory promises a) Promise is illusory if performance by one side is entirely optional. (undertakings on both sides must be real & meaningful) - Strong v. Sheffield (promissory note signed for husband, but didnt actually bind Strong to forbear)
*Note: Forbearance of undefined length = reasonable time
b) illusory if it is impossible for a condition of performance to occur Conditioned promises: when performance is conditioned on occurrence of some event or condition, the mere fact that a promise is conditional does not make it insufficient consideration. As long as there is a legal detriment, promise is sufficient. 3. Various open terms are given content by courts or statutes that saves them from illusoriness. a) Satisfaction clauses illusory b/c of implied obligation of good faith Mattei v. Hopper (shopping center w/ leases satisfactory to purchaser) Standards for evaluation satisfaction: 1. Objective/Reasonable person test: judge by commercial value or quality, operative fitness, or mechanical utility 2. Subjective/good faith test: satisfaction as to fancy, taste, or judgment b) Requirements/output contract illusory [according to UCC 2-306(1)] -Eastern Air Lines, Inc. v. Gulf Oil Corp UCC 2-306(1): Requirements means actual good faith requirements, which must not be unreasonably
disproportionate to any estimate or, absent estimate, normal or otherwise comparable prior output. -Note: There is also an objective standard that no quantity unreasonably disproportionate may be used. 4. Implied promise (writing instinct with obligation) = consideration -Wood v. Lucy: Is there consideration for the grant of exclusivity in endorsement, marketing, and design? - Yes, an implied obligation on Woods part to use reasonable efforts to secure endorsement and licensing deals and sales. UCC 2-306(2) Exclusive Dealings A lawful agreementby the buyer for exclusive dealingimposes unless otherwise agreed an obligationby the buyer to use best efforts to promote their sale IV. Reliance/Promissory Estoppel as a basis of enforcement Detrimental reliance on another partys promise= substitute for consideration Theory of Detrimental Reliance [R. 90] 1) Reliance was reasonably foreseeable (obj. evalutation of promisors conduct) 2) Actual reliance by the promisee (obj. evaluation of promisees reaction to promise) 3) Injustice would result from non-enforcement (evaluation of actual detriment due to reliance) 4) Remedy granted for breach may be limited as justice requires. *note: R, first, required substantial reliance (not so now) Damages: -Usually expectation, but may be calculated according to reliance damages if a) reliance damages are less b) justice so requires -Easier to calculate reliance -Expectation damages are disproportionate to actual reliance 1. Reliance on a gratuitous promise a) Ricketts v. Scothorn (grandfather promises $2K if she quits job, excutor refuses to pay) Promissory estoppel can be used as an alternative where a gift promise induces a change in position of the worse as a reasonable & probable consequence of the gift. b) Feinberg v. Pfeiffer, Part II Applying R 90, resignation in reliance on promise was reasonably foreseeable by employer: enforceable on detrimental reliance grounds c) R 90(2)- A charitable subscription or a marriage settlement is binding without proof that the promise induced action or forbearance. 2. Promissory Estoppel to prevent injustice Cohen v. Cowles Media (newspapers didnt keep snitchs id confidential so he was fired) 3. Reliance damages: D&G Stout v. Bacardi Imports
Can recover reliance damages (as justice requires) from at-will relationship when reliance on a promise causes opportunity to be missed V. Restitution as an Alternative Basis for Recovery 1. Introduction a) Rectify unjust enrichment by restoring the reasonable value of benefits conferred. does not require an agreement (although helpful) Does NOT reward intermeddlers (ppl who bestow a benefit on someone w/o consent & demand payment) b) Unjust enrichment test: 1) P rendered services or expended property which confers a benefit on D; 2) P rendered performance with expectation of being paid; 3) P was not acting as an intermeddler or volunteer; 4) To allow D to retain benefits without paying would result in unjust enrichment of D at Ps expense c) Quasi-contract -Legal fiction created to allow formalistic court to use contractual from of action as basis for giving relief for unjust enrichment 2. Emergency Services: Restitution is available where benefit is conferred without a request; recovery allowed for reasonable value of services. -Cotnam v. Wisdom (Dr. tries to save patient who is run over in street) Doctors are entitled to reasonable compensation based on quasicontract arising out of plain legal obligation when they perform emergency services, despite lack of true contract. Ability to pay physician does not affect recovery b/c same medical services to rich and poor (public policy: we want to encourage doctors to perform emergency services?) 3. Cannot be indirect Benefit -Callano v. Oakwood Park Homes (Cs plant shrubs under contract w/original owner who dies, builder sells to new buyer, but value enhanced by shrubs) Holding: For restitution, must be a direct relationship btwn parties, C must collect against original owners estate. 4. Restitution between spouses permitted -Pyeatte v. Pyeatte (wife pays for husbands law school & then she was to go to grad school, he divorces her) Restitution can be basis for recovery btwn spouses if: Agreement between the spouses, and Extraordinary or unilateral effort by one Which inures solely to the benefit of the other
Chapter 2- the Offer and Acceptance Offer & Acceptance= manifestation of mutual assent [R 22]: meeting of the minds 1. Subjective v. Objective Formation Theory Subjective: Did A actually intend to make a binding offer and did B actually believe A intended to make such an offer? Literal meeting of the minds. Objective: Was it reasonable for B to believe that A intended to make an offer, based on what A said and did (As manifestations)? Factors relevant to whether an offer exists: 1. Words used 2. Surrounding circumstances (might alter meaning of words) 3. Definiteness/Specificity/completeness of deal terms 4. To whom offer is made- degree of certainty about whether the alleged offeror is actually willing to deal with the alleged offeree 5. Written contract contemplated 2. The Offer R 24: manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. (i) does not need actual, subjective willingness Rationale behind objective approach: a) security and certainty in business transactions b) parties cant read each others minds c) law must protect reasonable expectations of relying on promise Power of acceptance: an offer creates a power of acceptance in the offeree to make a contract 1. Contracts made in jest Lucy v. Zehmer (Z agrees in writing to sell farm, but was drunk and jesting) Court uses objective interpretation: manifestation of assent that recipient 1) reasonably & 2) actually believes is serious counts. Pepsico Harrier Jet Commercial case (Zany tone of the commercial might suggest lack of seriousness NOT offer) 2. Price quotations & Ads = invitations to deal offer Price quotes & ads usually are not offers, but they can be. Look for: Specificity/completeness of terms Lack of need for further approval Offerors clear willingness to deal with offeree Correspondence as a whole For ads, allocation method for goods (to avoid multiple acceptances) [e.g. First come first serve] Owen v. Tunison (T unable to sell for less than $16k) Mere statement of minimum price is not an offer, but instead an invitation for an offer. No contract.
Harvey v. Facey (H asks lowest selling price; F quotes; H accepts) No contract- just quote. Implied contract to sell to person making price inquiry; didnt state specific party. Lefkowitz v. Great Minn. Surplus Store (First come, first servedstore declines because of house rule that stoles are for women only) Advertisement is a binding offer when it is clear, definite, and explicit and leaves nothing open to negotiation - No definite quantity stated in ads - Sellers should be able to choose with whom they deal -Ads are addressed to general public; may be limited quantity 3. Specific price quotations CAN be offers Fairmont Glass Words v. Crunden-Martin Woodenware Where price quotation is a complete reply to a question that describes the transaction in some detail (i.e. quantity, payment, price) and explicitly solicits buyers acceptance then it is a binding offer. 4. Construction contracts; mistaken bid a) Elsinore Union Elementary School D v. Kastorff Relief from mistaken bids is allowed where one party knows or has reason to know of others mistake (eg: clerical mistakes in this case) b) A contractor can avoid being bound by mistaken bid when: 1) Mistake is material 2) Mistake is not the result of neglect of legal duty 3) Enforcement would be unconscionable 4) Other party can be placed back where it was 5) Prompt notice of rescission given 6) Everything rescinding party received is restored or offered to be restored 3. The Acceptance R 50- manifestation of assent to the terms of the offer Can be promise or performance [R 50(2)] The offeror is master or mistress of the offer [R. 30] They control the means & manner of acceptance Acceptance must be unequivocal If acceptance is qualified, it is treated as a rejection and counteroffer 1. Notification to offeror of offerees acceptance in words a) Intl Filter Co. v. Conroe Gin, Ice & Light (seller wrote ok in office) Acceptance can be valid w/o communication to offeror if consistent with manner of acceptance solicited in the offer (no express notice of acceptance required) b) R 56: offeree must exercise reasonable diligence to notify offeror of acceptance or that offeror receive acceptance seasonably 2. Notification to offeror of offerees acceptance inferred from conduct
a) White v. Corlies & Tift (Upon agreement, begin at once. Buys lumber for construction project, next morning offeror revokes) Rule: If an offer is accepted by commencement of performance signifying a promise, the performance must itself unequivocally indicate acceptance. Application: lumber not clearly bought in response to offer; acceptance must be reasonably calculated to give notice. b) Ever-Tite Roofing v. Green (K says upon written acceptance or upon commencement of performance) Rule: If offer expressly says it can be accepted by commencing performance, then commencing the performance operates as an acceptance even if the performance itself does not unequivocally indicate acceptance. Application: Commencement was loading trucks in Shreveport and transporting the materials to the house. c) Carlill v. Carbolic Smoke Ball (quack remedy & reward offered if get sick w/flu) Unilateral case - acceptance was by completed performance. If [s/]he performs the condition, notice is dispensed with. 3. Suggested Method of Acceptance Allied Steel & Conveyors, Inc. v. Ford ) (Acceptance should be by returning acknowledgement form barring negligence suit, was not) Rule: If an offer merely suggests a permitted method of acceptance (rather than setting forth an exclusive method), then 1) acceptance by another method + 2) offerors knowledge, consent, and acquiescence = acceptance. 4. Shipment of Non-conforming goods Corinthian Pharm. Sys. v. Lederle Labs. (order for 1000 vials; L gave notice of price increase & offered to cancel; shipped 50 at old price, C wants all at old price) Rule: Although a sellers shipment of nonconforming goods typically acts as an acceptance, that is not the case when the seller notifies the buyer that the shipment is offered only as an accommodation. [UCC 2-206(1)(b)] 5. Modes of Acceptance a) Acceptance can be by promise (bilateral contract = Promise on both sides) -Accepting promise can be: Expressed in words (Intl Filter) Or inferred from conduct (White, Ever-Tite , Allied) Starting performance is the basis for inferring the promise. Notice of acceptance is generally required. Exception: Waiver (Intl Filter , Ever-Tite) Notice can be receipt of notice (Allied?) or act that naturally will lead to receipt of notice (White) b) Or by performance (unilateral contract= Promise on one side) ex: Carlill v. Carbolic, UCC - Corinthian
No notice required for acceptance. 4. Termination of the Power of Acceptance 1. Ways an offer can be terminated: Lapse by offers terms or in reasonable time. Revocation generally, effective when received [R 42] In CA, effective when dispatched Death of offeror [R 48] Rejection/counteroffer by offeree 2. Lapse of an Offer Offer lapses at end of time window specified in offer Absent specification, offer lapses after reasonable period of time. Usually close of conversation if made face to face. 3. Revocation of Offers 1. CL: offeror can revoke an offer at any time R 42: An offerees power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract. 2. CL: promise to hold an offer open is not unless supported by consideration (i.e., unless an option contract exists). An offeror can revoke by conduct definitely inconsistent with the offers remaining open [R 43] Offer is revoked when the offeree learns of such conduct from a reliable source [R 43] Ex: Dickinson v. Dodds (D learns property is sold to 3rd party, tries to accept at train station) **NOTE: According to R, even if learn of inconsistent action from a reliable source, must be ACTUALLY inconsistent (ex: if it turns out newspaper was wrong, acceptance is valid) 3. Option Contract: [R 25] the promise to hold an offer open is itself a contract (needing separate consideration) Nominal consideration (peppercorn) = sufficient to hold offer open -think DOWN PAYMENT Sufficient if writing signed by offeror states that there is consideration given to hold open 4. UCC Firm Offers **NO consideration for a firm offer to be held open** UCC 2-205: Offeror must 1) be a merchant AND 2) must be a signed writing 2-104: Merchant = 1. person who deals in goods of the kind OR 2. holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction if time period not stated, reasonable time= > 3 months
if option contract is on a form supplied by the offeree, must be separately signed by the offeror 5. Reliance on an option without consideration Ragosta v. Wilder (promise to sell fork shop, buyer take out loan) Rule 1: Part performance must be part of the actual performance invited, not just preparation for performance. (obtaining financing = preparation for performance) Rule 2: For option contract, consideration must be bargained for (buyers took out loan before got offer= past performance, not given or exchanged for sellers promise to hold offer open) Rule 3: Equitable Estoppel is available only where the party to be estopped knows facts that the other party does not. 4. Mailbox Rule Acceptance is effective when sent, as long as done in a manner and by a medium communicated by in offer [R 63] *Exception: Mailbox rule does NOT apply to option contracts (irrevocable offers): acceptance effective when received [R 63(b)] Revocation is effective only when received [R 42] Rejection effective only when received 5. Mirror Image Rule (common law) Acceptance does NOT exactly mirror offer = rejection + counteroffer. Mitigating strategies: The additional/different term in the acceptance was an implied term that was actually in the offer in the first place. The offerees language relating to an additional or different term is only suggestive. 6. Counteroffer R 39: An offer by the offeree to the offeror relating to the same matter as the original offer, but proposing a different, substitute bargain. 7. Last Shot Rule If exchange of messages that contract, but there is acceptance by compete or partial performance, the last shot (i.e. last writing) before performance started sets terms of K. a) other side accepts terms by conduct. 5. The Battle of Forms and the U.C.C. The U.C.C. repeals the mirror image rule. 1) UCC 2-207(1): -A definite and seasonable expression of acceptance operates as an acceptance even though it states terms additional to or different from those offered, unless acceptance is expressly made conditional on assent to the additional or different terms. Offeree/acceptor can still opt in to mirror-image rule by making acceptance expressly conditional on assent to new terms. 2) UCC 2-207(2): The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to its terms; (b) they materially alter it; (c) [objection within reasonable time] ** Typically, material terms may be: arbitration limiting warranties choice of forum time for payment 3) UCC 2-207(3): Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such cases the terms of the particular contract consist of the terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. Note gap fillers (supplementary terms). When a contract is implied from conduct, the law will fill in missing terms by implication (e.g., reasonable price). See UCC 2-305 et seq. for examples of gap-fillers. A) Limits on expressly conditional terms: 1. Offeree/acceptor must be clearly unwilling to proceed with the transaction UNLESS he is assured of the offerors assent to the terms -Dorton v. Collins & Aikman Corp. (carpet buyer took delivery of carpets without objecting to arbitration clause in acknowledgment form) Application: silence cannot be assent & carpet seller was willing to proceed w/o it, so acceptance was NOT expressly conditioned on arbitration clause. 2. Where offerees acceptance is made expressly conditional on offerors assent to additional terms, the writings do not create a contract absent offerors assent. -C. Itoh & Co. v. Jordan Intl Co (acknowledgment form gives additional/different terms & makes them expressly conditional & asks for buyers rejection of terms if unliked; steel paid for) Application: No contract created by writings. B) Agreement can be established by performance not writings Terms are supplied by U.C.C. 2-207(3), and the terms that may be supplied are limited to those supplied by standardized gap-filler provisions. Itoh v. Jordan: Standardized gap-fillers do not supply arbitration clauses, so no arbitration clause will be added in. C) **Approaches to different terms** Northrop Corp. v. Litronic Indus (offer contains 90-day warranty v. invoice with indefinite warranty) 1. Knockout approach (majority): The conflicting terms drop out and are replaced by U.C.C. gap-fillers (if available).
2. Literal approach (minority): No provision in 2-207(2) for different terms to become part of contract, so they dont. Term is a proposal & need express consent for different terms to become part of contract. 3. Different = additional approach (CA): Treat different terms the same as additional terms. If two parties are merchants, different terms may become part of agreement if not material. Confirmation = a document describing a contract that already exists. It is clear that the U.C.C. intends a confirmation that has additional or varying terms to act as a proposal. (2-207 cmt. 6) D) Rolling Contracts- contract first, terms later: UCC 2-207 1. Step-Saver Approach Additional terms treated as confirmations/proposals under UCC 2-207 -Step Saver (box top liscense) Additional terms on a product box are to be treated as a written confirmation and thus as a proposal for additional terms under U.C.C. 2-207. Application: Warranty disclaimers are material additional terms, so they cant be added to the contract under 2-207(2) without express assent. 2. The Easterbrook approach: Additional terms treated as offer that is accepted by performance; binding if adequate notice & opportunity to review prior to acceptance & ability to return (revival of last shot doctrine). Pro CD v. Zeidenberg (software comes with restrictions in an enclosed license, Z violates the terms of the enclosed license) Rule: Where there is a notice of additional terms on the outside of a package, terms on the inside, and a right to return the product for refund, the terms on the inside will become binding on the consumer purchaser if the purchaser uses the product. Application: enclosed license is binding. Hill v. Gateway (computer shipped, terms with arbitration clause in box, 30 return policy) Same as above + court effectively dispenses with prepurchase notice of additional terms Majority view in consumer transactions (although not clear what adequate notice & opportunity is) 6. Precontractual Liability 1. Unilateral Contract: Brooklyn Bridge Hypo a) A gives B $100 if B walks across; B walks way; A revokes Classic view: offer revocable until performance completed, even if performance already begun. Modern view [R 45]: commencing performance creates an option contract, so offeror cannot revoke contract.
2. Detrimental reliance in precontractual situations -Drennan v. Star Paving (General contractor relies on sub-cs bid, sub tries to claim made an error in their bid) Holding: Where reliance on an offer is reasonably foreseeable, an implied promise to hold open is needed to prevent injustice. Note: Revocation of firm offer/rescission of contract for mistake available only if other party can be placed back where it started (in statu quo) Application: No rescission. 3. Liability When Negotiations Fail Generally, can recover: a) Restitution of benefits conferred on other party. -usually doesnt work for services rendered b) Costs incurred as a result of other partys misrepresentation a) Hoffman v. Red Owl Stores (H wants to join Red Owl franchise, gets promise with no offer, does varies costly things in reliance) Relief under detrimental reliance is available for promises made during contract negotiations [R 90]- (says promises not limited to offers) b) Cyberchron Corp. v. Calldata Sys. Dev. (no resolution over what weight of equipment should be, production happens anyways with assumption well work out details later) There was promise to negtiate in good faith, damages limited to reliance b/c expectation would be too speculative. 4. Leval framework: can you contract to contract? Tribune Type I [fully binding preliminary agreement] -Parties agree on all points that require negotiation, and all that remains is memorialization in a document. Tribune Type II [binding preliminary commitment] -Parties agree on certain major points, and accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement. Agreement to negotiate in good faith is enforceable with all the elements of a normal contract: mutual assent to be bound, consideration, definiteness (Channel Home Centers v. Grossman) 7. Requirement of Definiteness 1. Definiteness a) Contracts do NOT have to agree on every term, but can be open (filled with gap-fillers) b) Contracts do have some essential terms 2. U.C.C. gap-fillers save contracts from indefiniteness: No price reasonable price (2-307) No place of delivery sellers place of business (2-308) No time of delivery reasonable time of delivery (2-309) Theres no gap-filler for quantity- only essential UCC term.
This is a full contract that just needs to be documented.
Note: gap-fillers also can be used under the Rest. Toys, Inc. v. F.M. Burlington (option to renew lease at prevailing rate: disagreement over meaning of term) Issue: too vague to enforce? Option agreement is enforceable as long as contains a practicable, objective method of determining the essential terms. Application: Prevailing rate is definite and ascertainable. Oglebay Norton Co. v. Armco (26 yr iron ore shipping relationship with two pricing mechanisms that break down) The contract survives if the parties intended to be bound in this event [of mechanism failure]. New price is a reasonable price at the time of delivery [R 33]
Chapter 3 Statute of Frauds = agreements in certain categories are unenforceable unless evidenced by a writing signed by the party to be charged. *Note: whole contract does not have to be in writing. Category overlap: If agreement falls into multiple categories, documentation must satisfy the SoF for all categories. 1) Categories within the Statute of Frauds 1) One-year Rule Must be in writing if performance cannot be completed on one side or the other within one year.
*Rationale: 1. Such agreements are momentous and should be documented. 2. Recollections of an oral agreement may fade (questionable)
Exceptions: 1. Full performance on one side 2. Performance can theoretically be completely within a year (even if unlikely) 3. If promise is to be completed within someones lifetime, this does NOT fall under SofF b/c person could die & complete performance within one year. For contracts of indefinite duration: Majority: if contract cant be completed by its terms in a year, its within the Statute. Minority: CR Kelwin v. Flagship (construction manager) One-year rule only applies to agreements that expressly state duration of performance is > 1 year Informal extensions of employment (for employee hired for a fixed term, not at will) Two approaches: No extensions without a writing (Farone) Can extend without a writing for periods up to a year, including by conduct (Rash) 2) Real Estate Agreements for sale of real estate and for leases longer than 1 yr. Exception: Partial Performance -Richard v. Richard (oral agreement to buy; couple makes improvements, then separate) Look for possession, improvement, or substantial payment Such that it is necessary to avoid injustice 3) Sale of goods over $500 Agreements for the sale of goods for a price of $500 or more.
*Rationale: Momentous transaction (though dollar threshold outdated) *Rationale: Historical importance of land.
Source: U.C.C. 2-201 -Good= all tangible movable property Exceptions:
1) Buyer receives & accepts all or part of the goods [K enforceable as to the goods accepted] 2) Buyer gives something in part payment for the goods [K enforceable to extent paid for] 3) Manufacture of special goods for buyer Seller has made substantial beginning in their manufacture. Requires sellers 1. justifiable 2. reliance 3. evidencing a contract. 4) Admission in court that a contract exists. 5) 2-201 (1) Confirmation: K btwn merchants written confirmation is sent within reasonable time *determined by course of dealing, price volatility, size of sale (St. Ansgar Mills) and party receiving it does not send a written objection within 10 days. Signed by the party against whom enforcement is sought. OK to omit or misstate terms (but quantity is required) But enforceability limited to quantity stated in the writing. ***An unhappy response to a confirmation may not be an objection to contents, and may itself be a writing that satisfies 2-201(1). Open Q whether estoppel applies to SoF under UCC 2-201 4) Lease of Goods over $1,000 Agreements for the lease of goods for rent of $1,000 or more 5) Surety Promise to a creditor to be a surety. surety = agreement to pay a debt of another 1. Must be to a creditor (Langman v. Alumni Assoc. of University of VA) 2. Main Purpose Rule Exception: an oral agreement is still enforceable if the promise was given primarily or solely to benefit the promisor (pecuniary benefit) -Central Ceilings, Inc. v. National Amusements, Inc. Factors for testing for main purpose :
*Rationale: protect unwitting relatives of debtors from oral promises w/lenders. * Source: U.C.C. 2A-201 *Rationale: Momentous transaction
- Prior default, inability, or repudiation of the principal obligor - Forbearance of the creditor to enforce a lien on property in which the promisor has an interest or which the promisor has an interest or which he intends to use - Equivalence btwn the value of the benefit and the amount promised
-Lack of participation by the principal obligor in the making of the suretys promise - A larger transaction to which the suretyship is incidental.
6) Security Interest in Personal Property Agreement by which personal property (NOT real property) is to stand as a security interest for an obligation. -i.e. A creditor can repossess and sell that property if you dont fulfill the obligation.
*Rationale: Frequent subject of dispute (?) *Source: U.C.C. 9-203(b)
7) Lifetime Agreements Agreement that is not to be completed before the end of a lifetime (CA looks to the promisors life)
*Rationale: Momentous
8) Real Estate Brokerage Agreement to pay a (in form of a commission) real estate broker. 9) Agreement to Extend Credit Agreement to lend money or sell goods on credit. 10) Contract in consideration of marriage Basically, look for property settlements on marriage. *Rationale: Historical economic importance of marriage contracts (?) 11) Promise to Pay Debts of Estate An executor or administrators promise to pay personally the debts of the estate s/he is administrating. 2. Writing, Signing and Authentication 1. Ethics a. Rule of effrontery allows client to say Haha, I agreed but didnt sign a writing! b. OK under professional rules to use SofF astechnical defense, BUT its fine to try to persuade your client that his/her proposed course of action is immoral. 2. The Writing 1) Usually must state the essential terms of unperformed promises. Apparently not dates for real estate transactions. Special rule for sales of goods over $500 under U.C.C. 2) May be pieced together out of separate writings. If so, you must be able to tell from the face of the writings that they refer to the same transaction. a. On their face: By words in the documents. b. Can be done by incorporation by reference 3. The Signature Signature = symbol executed by a party with the present intention to authenticate a writing
*Rationale: Presumably similar to surety: avoid trapping debtors unwary associates. *Rationale: Bank protection? *Rationale: Consumer protection; momentous
-Note: post-agreement signatures are fine. Broadly defined: doesnt need to be formal signature: just need to have requisite intent to be bound. Letterhead = signature, if present intent to authenticate 4. Electronic Documentation Under UETA, electronic records count as writings. Electronic signatures count as signatures Electronic sound, symbol, or process executed with intent to sign. Examples: Typing name at end of e-mail Typing /s/ over typed name at end of letter in Word. Pressing 1 when the electronic voice tells you Press 1 to accept. Maybe your e-mail address on a message you send. 3) Reliance and Other Equities Reliance/Estoppel- Oral promises may be enforced based on reliance despite Statute. Will other remedies prevent injustice? Does reliance prove the promise, or is the promise otherwise clearly proven? Was reliance definite and substantial? Was reliance extra-reasonable or extra-foreseeable? Monarco v. Lo Greco (Son forgoes other opportunities & works family property & it is willed to someone else; specific performance ordered) Waiver: if we have an oral deal and I treat it as binding even though its within the Statute, I may be treated as having waived it. Mitigating Doctrines Complete performance (one-year) Judicial limitation of scope (strict construction) (one-year - Klewin) Part performance (real estate, sales of goods) Confirmations (sales of goods) Main-purpose rule (surety) Estoppel (all? Maybe not sales of goods)
Chapter 4- Policing the bargaining process 1) CAPACITY Incapacity protects from improvident bargains, exploitation, and poor judgment, but also disables from benefits of contracting. a) Infancy Minors contracts generally are voidable by the minor. -Voidable: Minor has a power of avoidance (or disaffirmance) -Exception: necessaries may not be voidable -Kiefer v. Fred Howe Motors (buys car when minor, after age of majority seeks return car; car not ruled a necessary so returnable) * rescission available for fully executed contracts Ratification: A minor can ratify (reaffirm) the contract after majority. Ratification can be by words or by conduct. Minor may disaffirm contract within a reasonable time after reaching the age of majority. Other statutory exceptions in CA: a) No contracts relating to real property or personal property not in minors immediate possession or control b) Cannot disaffirm a contract to pay the reasonable value of necessities actually received. c) Lengthy provisions for judicial approval of contracts for the services of child performers and athletes. Following rescission: 1. Minor must return tangible property received (normal rule) 2. Usually NO penalty for depreciation of property (exception to theory of rescission) 3. Usually NO requirement to return value of services received (exception to theory of rescission) b) Mental Infirmity 1) Mental illness Tests for mental illness: 1) Cognitive Test [traditional approach] Contract is voidable if party does not understand nature and consequences of transaction.
-E.g., do not understand that you entering a contract. Ex: Cundick v. Broadbent (rancher sells land for much less than market price, had history of prior mental illness; fact do not show he was unable to conduct business affairs or that D deceived or overreached P)
2) Reasonable manner test [Restatement approach] a) party unable to act in a reasonable manner in relation to the transaction, AND b) the other party has reason to know of this inability.
ex: Ortelere v. Teachers Retirement Board (teacher makes decision to leave husband out of retirement, then dies & husband wants benefits)
Application: retirement system should have known about Orteleres mental incapacity because she was on a leave of absence for medical reasons known to the Board of Education.
2) Intoxication Contract void if due to intoxication: 1. Party is unable to act reasonably with respect to the subject matter of the transaction AND 2. Other party had reason to know of the inability. Note: Same as Rest. test for incapacity due to mental illness 2) OVERREACHING/UNFAIRNESS IN BARGAINING If contract results in unfairness in the bargaining process, it is generally voidable. 1) Pressure in Bargaining a) Duress [R 175]- Need impropriety (improper threat)+ lack of alternatives inducing assent to avoid a contract for duress. Improper threat = wrongful [R 176(1); HARD TERMS] a) What is threatened is a crime or tort. b) What is threatened is a criminal prosecution. c) What is threatened is a civil suit in bad faith. d) The threat is a breach of the duty of good faith and fair dealing under a contract. Improper if exchange is not on fair terms and: [R 176(2); SOFT TERMS] a) Threatened act would harm threatened person and not benefit threatener, or b) Effectiveness of threat is increased by prior unfair dealing, or c) What is threatened is otherwise a use of power for illegitimate ends Note: threatened party is responsible for showing some degree of fortitude. How much is unclear. Duress & Third Parties [R 175(2)] a) If partys manifestation of assent is induced by a third party, contract is voidable by the victim UNLESS the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction b) Pre-existing duty (CL rule only) [R 73]: if party gets other party to promise something in return for doing something the party was obligated to do anyway (legal duty), promise is unenforceable for lack of consideration. ---One-sided contract modifications NOT ok. * similar performance is consideration if it differs in a way that seems more than the pretense of a bargain Preexisting Duty & Duress often co-exist - Alaska Packers Assn v. Domenico (workers demand higher wages & its impossible to get substitute workers)
-Two ways to analyze: 1) duress: no other workers, short fishing season= no alternatives 2) had preexisting duty to work under K, so no new consideration given. Modification under Pre-existing duty 1. Restatement approach: Can modify duty if K not fully performed AND: (1) the modification is fair & equitable in view of circumstances not anticipated by the parties when the contract was made
-Watkins & Son v. Carrig (hitting rock in cellar unforeseeable & parties agree to higher price)
(2) to the extent provided by statute; (3) to the extent that justice requires enforcement in view of material change in position in reliance on the promise) 2. UCC approach: NO preexisting duty rule under UCC No consideration needed [2-209(1)] *Note: can bargain around with signed writing requirement [2-209(2)] Must be done in good faith [1-304] 1. honesty in fact 2. observance of reasonable commercial standards Open question whether CL duress applies under UCC Austin Instrument v. Loral Corp (parts supplier threatened to withhold delivery of parts unless Loral would pay more) - Court used duress framework to say unenforceable, not UCC bad faith- but no use of preexisting duty rule. Avoiding Pre-Existing Rule 1) Rescission: Rescind the old contract and make a new contract with the modified terms. 2) New Consideration New consideration can be: when consideration is changed rather than reduced -hawk rather than $1 million, -$90 on Monday rather than $100 Tuesday detriment to pay earlier agreement that resolves dispute Partial Repayment & Preexisting duty CL RULE: Preexisting duty applies to reductions of undisputed debts of and of fixed amount Does not apply to settlements of disputed claims (dispute has to at least be in good faith)
-Schwartzreich v. Bauman-Basch
Third parties & Pre-existing Rule Applies when the pre-existing duty is owed to a third party. Classical rule: promise by A to B to induce B not to break a contract with C is void. c) Undue Influence If someone exploited situation (even w/o threats) to get a contract, other party should be excused Think undue susceptibility + excessive pressure Elements: 1. Weakness on one side -weakness of mind -necessities or distress 2. Exploitation of position of strength 3. And either: (a) special/confidential relationship (not needed in CA & Rest?) OR - Guardian/ward - Attorney/client - principal/agent (b) factors such as those cited by court: [need < 1] Unusual/inappropriate time or place for discussion Insistent demand that business be finished immediately/stress on bad consequences of delay Use of multiple persuaders against one persuadee Absence of third-party advisers to persuadee Statements that there is no time to consult advisers. Ordorizzi v. Bloomfield School District (teacher arrested for homosexuality & threatened to either be fired or to resign quietly. Charges later dismissed & teacher wants job back) Subjective & Objective elements: 1) Subjective: actually induce assent 2) Objective: induce assent in a reasonable person in the persuadees situation 2) Concealment and Misrepresentation Generally, if assent is based on false information given by one side, contract is voidable a) Nondisclosure Concealment - Swinton v. Whitinsville Savings Bank (Seller conceals termites; duty to disclose not required by law; mere nondisclosure) BUT once you speak about something, failing to disclose the whole truth is a misrepresentation: half-truths NOT ok. -Kannavos v. Annino (building advertised as apartment complex when this is actually illegal & seller also knew this was buyers purpose= concealment & recession) c) Misrepresentation v. Fraud as a Tort Fraud (causing damage to someone by lying) is a tort and, possibly, a crime.
Fraud is a basis for escaping a contract, but the standard for escaping a contract is lower - you dont have to prove fraud. Just materiality plus other elements under Restatement. b) Misrepresentation Elements [R 164(1) approach] 1) Misrepresentation can be: a) of fact OR b) of opinion if made by someone of superior knowledge -Vokes v. Arthur Murray (widow buys more dance lessons b/c she is told she has amazing talent & potential= misrep) 2) Causation: -misrepresentation induced manifestation of intent 3) Fraudulence or materiality fraud = lie = dont believe what you are saying materiality = important to transaction -exception: lies dont have to be material to excuse under R. -innocent misrepresentations can excuse. 4) Justifiable reliance -this varies b/c duty to investigate varies.
Chapter 5: Ascertaining, Interpreting & Supplementing the Agreement A) Parole Evidence Rule: 1. Parole Evidence: Evidence of a prior (written or oral) or contemporaneous oral agreement. a) Agreement = final & incomplete (partially integrated) [R 209, 215] 1) cant be contradicted 2) BUT can be supplemented b) Agreement = final & complete (completely integrated) [R 210, 216(1)] 1) cant be contradicted 2) cant be supplemented 2. Time frame: Parol evidence rule does NOT apply to dealings after the writing was made. B) Determining whether a written contract is FINAL & COMPLETE TEST for Completeness: Would the additional term would naturally be included in the writing? Is it within the scope of the writing such that it would normally be included in the contract? If it would be included and wasnt, proof is barred. If it wouldnt be included, proof is not barred. 1. Completely Integrated; Prior Oral Agreement excluded Gianni v. R Russell (Lease to sell fruit, candy, soda water, etc & not tobacco, G argues he has exclusive right to sell soda by oral agreement) If oral agreement is on same subject matter as written contract, then it would be natural to expect that term to be included. 2. Partially Integrated Agreement: Masterson v. Sine Determine whether the oral agreement is one that might naturally be made as a separate agreement. Evaluate in full context of oral agreement and the writing; dont just examine the face of the writing. Application: No integration clause + formalized structure of deed = might naturally be made as separate agreement. NOTE: They differ in how they assess might naturally be omitted. Gianni: Looking at the contents of the agreements only. Masterson: Looking at surrounding circumstances (whether deeds accommodate terms easily) 3. Integration Clauses (entire agreement or merger clauses) An express provision saying writing is completely integrated. Usually given effect. A way of telling from the face of the writing that it is completely integrated. Exception: if on the documents face it is clear the integration clause is not correct. 4. Fraud, Duress or Mistake Exception: Parol evidence can be used to show grounds for avoiding contract for fraud, duress, and mistake. Remedy is reformation: Changing the contract to reflect the true agreement Bollinger v. Central PA Quarry Stripping & Constr. Co.
Facts: Oral agreement to sandwich waste w/ topsoil, waste, then soil; provision omitted- mistake proven by performance Rule: The parol evidence rule does not bar proof that the parties writing does not reflect their agreement because of mutual mistake in reducing the agreement to writing. 5. Parol Evidence and U.C.C. U.C.C. 2-202 is quite similar to the common-law parol evidence rule. Final agreements cant be contradicted by parol evidence. 2-202(a) Complete and exclusive agreements cant be supplemented by evidence of consistent additional terms. 2-202(b) Test for completeness: whether proffered term necessarily would have been in the writing if it existed. Can ALWAYS use extrinsic trade evidence to supplement [UCC 2-202(a)] Course of Performance Course of Dealing Trade Usage *does NOT matter if there is an integration clause!* No-oral-modification clauses NOT usually permitted Parties cant contract away freedom to modify contract. Moreover, modification can become effective by reliance Parties can agree that contracts can be modified only by a signed writing (2-209(2)). Reliance can probably render a modification that violates such a clause effective. C) Extrinsic Evidence of parties intent Issue: allowed to look at evidence other than the words of the contract itself (extrinsic evidence) to discern/interpret (not supplement or contradict) the contracts meaning. 1) Traditional/NY Approach: If the contract is not clear to the court on its face (from being read), only then may factfinder consider extrinsic evidence to interpret. W.W.W. Assocs. v. Giancontieri (Real estate K has clause saying that either party can cancel if certain litigation against seller concerning the property is not concluded by 6/1/87. Buyer argues that if the litigation is not concluded, Buyer can make Seller go through with the deal. The buyer did offer extrinsic evidence that this was the idea) Holding: BUT since there was no ambiguity in cancellation clause, cant introduce extrinsic evidence to create ambiguity. Greenfield v. Philles Records (NY approach: rights given to produce music recordings by any method; CA approach: absolve each other of all past & future claims in connection w/divorce. 2) CA Approach: Court reads contract and compares all proffered credible evidence on parties intent to see if K reasonably susceptible to proffered meaning. If the document is not clear to the court in light of the proffered evidence, factfinder may consider extrinsic evidence to interpret.
PG&E v. G.W. Thomas Co. (T repairs turbine, dispute over indemnity clause: whether applies only to third parties; court allows extrinsic e) Delta Dynamics v. Arioto (issue: was termination clause an exclusive remedy or mere description of termination rights) Pro/Con arguments re CA approach. Pro: Traynor majority opinion in PG&E (note statutory focus in CA on party intent) - NY approach ignores party intent or presupposes an unrealistic degree of verbal precision and stability. Con: Kozinski opinion in Trident Center, Mosk dissent in Delta Dynamics There is an argument that the CA approach does undermine the parol evidence rule because contradictions and additions can be sneaked in under the guise of interpretation. Impossible to draw up litigation-proof agreement. Skepticism about truth-finding value of litigation process. Law depends on idea that language can be clear. undermines stability of transactions imperfections of litigation process What types of extrinsic evidence can be used: Admissions, conduct under similar contracts (PG&E) Negotiating history (Delta Dynamics, Giancontieri) Parol evidence rule does not bar use of parol evidence to interpret a writing - just to contradict or supplement its terms (Trident Center) D) Interpretation & vagueness v. Ambiguity Approach to deciding which sides meaning should reasonably prevail. 1. Interpretation: Usually use prevailing meaning of words But use technical meaning if appropriate in context Course of dealing, course of performance, usage of trade can lead to variation Interpret writing as a whole Attempt to reconcile apparently contradictory terms. Interpret writing to make contract lawful and effective. Specific terms take precedence over general ones Purpose is important - general statements of purpose (recitals) can be used for this, but yield to operative provisions Public interest - used for interpretation, not just enforceability, if discernible Separately negotiated or added terms are given greater weight 2. Maxims 1. Ejusdem generis; listed items includes similar things -of the same family 2. Expressio unius est exclusio alterius; not listed, not included -the inclusion of one is the exclusion of the other 3. Noscitur a sociis; meaning determined by surrounding context -it is known by its associates
4. Contracts will be interpreted against the draftercontra proferentem How seriously people take this varies widely and is context-specific. Important in insurance contracts. Many highly negotiated contracts dont have a drafter as both sides contribute to the document. 3. Vagueness v. Ambiguity Vague = unclear boundaries Does all the dirt include sand from subsoil? Ambiguous = two different meanings of term Light feathers = light in weight or in color? Can result from context (syntactical ambiguity) E) Extrinsic Evidence from Commercial Context to Interpret Agreements Recall 2-202(a): Writing may be explained or supplemented by course of dealing or usage of trade or by course of performance = commercial extrinsic e - can use without a threshold finding of ambiguity. 1. Subjective Meaning of Contract Term: When A knows Bs interpretation, and B doesnt know As, then Bs interpretation controls. [R 201]: D will be held to Ps interpretation of term if P proves D knew or should have known the Ps interpretation. -Frigaliment Importing v. BNS Intl (Pre-UCC) D shipped stewing chicken under both contacts instead of broiling & frying chicken desired by P. P sues for breach of warranty. Issue: What is the interpretation of the term chicken? Old or young chicken? (vague term b/c its a question of gradation) Reasoning: NY approach- chicken is vague on its face. *Test used: how long the company has been in the industry (note: this is overturned by the UCC later). Because they were new to the industry the standard for trade usage was higher. Various types of trade evidence: Contract Words Negotiations Trade usage Regulations- govt agency Price Buyers conduct after shipping (course of performance) 2. Interpretation of Contract Terms: meaning of terms of trade should take precedence. Hurst v. W.J. Lake & Co (Pre-UCC) (horsemeat discount on <50% protein) Reasoning: Trade usage can be used to interpret a contract that is unambiguous in terms of dictionary meaning, at least where the party to be charged with the trade usage is aware of it. F) Extrinsic evidence to supplement or qualify the agreement a) U.C.C. Definitions 1) Course of performance- U.C.C. 1-303(a) [look for evidence excluding possibility of waiver] A sequence of conduct between the parties that exists if
the agreement calls for repeated occasions for performance; AND the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.
2) Course of dealing- U.C.C. 1-303(b) [repeated past transactions] A sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. 3) Usage of trade- U.C.C. 1-303(c)&(d) [experts, industry sources] Any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proven as facts. Relevant trade usage is of a trade in which the parties are engaged or of which they are or should be aware. b) U.C.C. Extrinsic Evidence How Used Construe the express terms and the extrinsic evidence as consistent if possible. If not, use this hierarchy (highest to lowest): UCC 1-303(e) (1) express terms, (2) course of performance, (3) course of dealing, (4) usage of trade c) Implied duty to act in accordance with trade usage -Nanakuli Paving & Rock Co. v. Shell Oil (shell argued it was not obligated to price protect) Course of dealing: Shell 2x price protected for Nanakuli. S argued N had waived their requirement. Court said that waiver is the proper interpretation when the course of dealing is ambiguous (?) and its up to the jury to decide. Shell wasnt engaged in the rock trade, but the court found that they should have known about the price protecting in the rock trade. d) Test of admissibility of trade usage/course of dealing is not completeness, but whether the evidence can reasonably be construed as consistent (Columbia Nitrogen Corp. v. Royster Co) E. Objective Interpretation & its limits -Subjective intent can nullify a contract in some cases. R 20(1): There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations AND Neither party knows or has reason to know the others meaning Both parties know or have reason to know the others meaning 1. Latent Ambiguity: Raffles v. Wichelhaus Facts: Agreement to ship goods from India on ship named Peerless. Two ships named Peerless. One leaves in Oct & other Dec. They each mean a different one.
Holding: -Under subjective theory: No agreement- there was no meeting of the minds. -Under Rest? D didnt have reason to know of Ps meaning & P failed to meet the burden of proof. They gave materially different meanings to contract. 2. Limiting principles? Holmes: Narrow reading- limited to situation where a name used in the contract means two different things. Young: limit to situation of ambivalence or double meaning of a word (ambiguity not vagueness) 3. Restatement: terms must be materially different. Oswald v. Allen (there are 2 swiss coin collections sold) -Is this a question of ambiguity or vagueness? Ambiguity. - Under Youngs theory, no contract. 4. Risk of Contrary Interpretation Colfax Envelope v. Local NO. 458-3M (Posners effort to limit Raffles) - When parties include a patently ambiguous term in a contract, they subject themselves to having disputes resolved by interpretation by an arbitrator or court. 5. Course of dealing/trade usage must be carefully negated OR ELSE they always can modify express written terms. Columbia v. Royster (court ruled it was ok to interpret an express quantity term as a mere projection) F. Supplementing with terms supplied by law: GAP FILLERS, WARRANTIES, AND MANDATORY TERMS 1. Gap Fillers 2 strategies-Subjective: Actual expectation of parties - Objective: Reasonable gap fillers. [R 204]: If essential term is open, can use a gap-filler 2. UCC Implied Warranties: 1) [UCC 2-314] Implied Warranty of Merchantability: a merchant (with respect to goods of the kind) must sell goods that are merchantable, i.e. that meet basic standards: 1Pass without objection in the trade under the K description 2Are of fair average quality within the description 3Are fit for the ordinary purposes for which such goods are used Koken b. Black & Veatch Construction (fire blanket meltdown; P has obligation to prove reasonable expectations of ordinary user) 2) [UCC 2-315] Implied Warranty of Fitness for a Particular Purpose: If seller has reason to know that: 1. buyer intends to use the good for a particular purpose AND 2. buyer is relying on the seller to select suitable goods -then the seller warrants by implication that the goods are fit for a particular purpose
ex: Lewis v. Mobil Oil Corp (seller gave sawmill oil with wrong additives twice) 3. Warranty Disclaimer: South Carolina Electric & Gas v. Combustion Engineering Unambiguous disclaimer can exclude warranties if circumstances of transaction are in themselves sufficient to show disclaimer was expected Application: Correspondence regarding exclusion of warranty, sophistication and bargaining strength show that the disclaimer was expected. 4. Implied warranties can be disclaimed under the U.C.C. 2-316(2): a) Merchantability: To exclude or modify the implied warranty of merchantability the language must 1) mention merchantability and 2) in case of a writing, must be conspicuous. b) Implied warranty of fitness: Exclusion must be by a writing and conspicuous. Language is sufficient if it states, for example, that "there are no warranties which extend beyond the description on the face hereof. **U.C.C. 2-316(3) Notwithstanding subdivision (2), can exclude all warranties by: As is, with all faults or similar words - unless the circumstances indicate otherwise. IF buyer before entering into the contract: 1) has examined the goods or the sample or model as fully as he desired OR 2) has refused to examine the goods -THEN: there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade. 5. Disclaimer of implied warranty: Henningsen v. Bloomfield Motors (Pre-UCC) Provision exculpating D form liability under implied warranty struck down. -Why? All auto sellers were using the same warranty; there was a form contract with no negotiation, no alternative, no bargaining, language deceptive. 1) No bargaining 2) Deceptive 3) No competition Judgment based on public policy? Probably. 6) Magnuson-Moss Act (1975) A supplier of consumer products may not disclaim or modify an implied warranty if It makes a written warranty, or Enters into a service contract with the consumer Implied warranties may be limited to the duration of a written warranty of reasonable duration, if the limitation is Conscionable Clear and prominent on face of warranty G. Express Warranties Actual terms of the deal.
The U.C.C. construes certain statements as promises about the goods (2-313). Affirmations of fact or promises Descriptions of the goods create a warranty that goods will conform to description Sample or model creates a warranty that the rest will conform to the sample or model. Dental chair ex: statement that chair reclined 180 degrees was an express warranty, but probably excluded from the K by the integration clause in the final writing. No reliance requirement, but the warranty-creating statement/model must be part of basis of bargain (we wont pursue further) No requirement of sellers intent to make a warranty. Note that puffing does not create a warranty. (2-313(2)). Boundary between puffery and description has something to do with objectivity, specificity, prediction recall Bayliner
CHAPTER 6 1. Law v. Equity Equitable Remedy= an order to do or not to do something (such as complete a sale of land) Legal Remedy= An order to pay damages. A) Classical rule: Courts dont inquire into adequacy of consideration. Although you can inquire into whether consideration fictitious. Corollary - dont address substantive fairness of transaction. B) Exception: Equitable discretion when court considers specific performance (using equitable discretion), will query into whether the bargain is substantively fair 1. McKinnon v. Benedict (agreement not to improve land for 25 yrs in exchange for $5000 loan & help to make business a success) Substantively unfair? Court focuses on: inadequacy of consideration (!) ($5k loan) inequitable bargaining position willingness to enter into unfair bargain- necessitous parties are not free parties. Court balances harms & policy concern with restraint on use of land 2. Tuckwiller v. Tuckwiller (Niece agrees to care for aunt in exchange for property after her death; aunt dies VERY soon after) Court says that viewed prospectively, the contract was a fair exchange. Congenial relationship, past actions, can be factored into the analysis. Not true where damages are the only issue (Black) Black Indus., Inc. v. Bush (Black is middleman; Bush defaults on contract and argues that this contract should not be enforced b/c it was against public policy: no war profiteering) Court not willing to examine fairness of bargain where contract between business men (comparable sophistication) & no specific performance sought 2. Policing Standard Form and Adhesion Contracts 1) Standard form contracts: Usually no bargaining when a form contract is used. Arguably necessary: negotiations of individual terms not practical. If enforced, can allocate risks effectively. Take it or leave it Not inherently unenforceable. Pro: Reduces transaction costs/practicality? Makes risk manageable? Con: Not really bargained, so is signing really a manifestation of assent to the terms? Potential for abuse of power, through deception, clever drafting, or plain unfairness? Adequate disclosure of terms? 2) Adhesion Contract Standard form contract + inequality of power.
Note: this does not relate to whether a contract or specified terms exist, just to whether court will enforce in a particular manner.
Definition: a form contract imposed (adhering party has no option not to sign) on someone with inferior bargaining power. Inequality of power: 1) Lack of competition? For the product/service? Over the specific terms of the contract? (Henningsen) 2) Necessary product? 3) Inequality of sophistication: form writers presumed greater drafting skill? In an adhesive contract, you probably have procedural unconscionability. A. Form contracts enforced if court finds that there was formation and no statute. [R 211]: standardized agreements are enforced except where Party A has reason to believe Party B would not enter the transaction if Party B knew of a particular term. SPLIT in authority: 1) Henningsen (no enforcement though no shortage of necessity) 2) OCallaghan (enforcement despite shortage of necessity) 1. No statute: courts institutionally ill-suited to police. -OCallaghan v. Waller & Beckwith Realty (form lease had an exculpatory clause that the landlord was not liable for his negligence) - Majority argument: discrepancy in power is not so great that enforcement is unreasonable- competition in housing market; no effort by P to negotiate - Dissent argument: Shortage of a necessity; no competition over form clauses; she couldnt negotiate, public policy protects negligence actions. 2. Formation as a policing method. -Klar v. H. & M. Parcel Room (P dropped off a parcel & given tag with a contract on it. Company accidentally gives it to the wrong person & loses $1000 of goods) Holding: Not enforced b/c no formation here- no offer or acceptance. There was no notice. 3. Other policing techniques such as strict construction (contra proferentem) are available. Henningsen mentions this. B. Arbitration clause in adhesion contract -Graham v. Scissor-Tail, Inc. (Artist signed a form contract that had arbitration clause with the executive board of AF of M) Issue: If contract is adhesive, is clause enforceable? 1. Unenforceable if it does not fall within reasonable expectations of weaker party, OR 2. Is unduly oppressive C. Duty to Read/Disclosure CL RULE: Youre bound by the terms of a written agreement you sign even if you dont read it. But courts may deny enforcement to objectively unintelligible form agreement. Many special rules for form contracts (state- and topic-specific): Conspicuity (fonts, colors)
Plain language (clear and coherent, divided and captioned) Specified disclosures (APR in mortage) In Carnival, review for fairness (passed, due to business justification) Carnival Cruise Lines, Inc. v. Shute The forum selection clause is being analyzed as an adhesion contract The court is imposing a requirement of reasonableness on a contract that is not negotiated where there is a power disparity. Its application of that reasonableness requirement seems unusual. Doesnt consider reasonable expectations of adhering party. Seemingly allows the one-sidedness of the clause to count in its favor (inconvenience to many litigants of suing in FL probably causes at least some of the savings that the cruise line enjoys by limiting the fora). Note strong emphasis on business justification. D. Legislatures have passed statutory bargain controls & disclosure requirements & damages Doe v. Great Expectations Facts: GE is an Internet dating service that promises zero referrals in written contract (despite alleged earlier oral guarantees). Doe seeks to recover under the Dating Services Law. Holding: GE is in statutory breach- P is entitled to recover both actual & restitutionary damages. Consistent w/Restatement: if GE had reason to know that Doe would never have entered into the contract if they really knew the terms, then there is no contract. 3. Unconscionability POLICY: moving toward a general unconscionability doctrine that unifies concerns about the existence of bargaining, inequality of bargaining power, and substantive fairness What is unconscionability? a) Bargaining or terms are so one-sided as to be unfair or even oppressive. b) Types of unconscionability 1. Procedural unconscionability [formation] Unequal bargaining power or other problems with bargaining process i) lacks knowledge or understanding of terms; lack of voluntary assent -contract of adhesion = procedural unconscionability 2. Substantive unconscionability [performance/enforcement] Oppression or unfair surprise in substantive terms of agreement i) Excessive price, lack of remedy for breach, unreasonable foreiture provisions, unreasonable warranty disclaimers. Sliding scale: The more procedural unconscionability is present, the less substantive unconscionability needed to invalidate the agreement. c) Restatement Appraoch = UCC 2-302 approach
a) R 208- if entire contract or term is unconscionable at formation, a court may: i. Refuse to enforce entire K ii. Refuse to enforce unconscionable term iii. Limit application of unconscionable term to avoid unconscionable result. d) Why unconscionability? [Rationale] 1. Limit power of parties in superior position to dictate unfair terms [public policy] 2. Consumer protection e) Two views on unconscionability Eisenberg: procedural/substantive distinction too rigid to help. Epstein: Insists on procedural/substantive distinction; unconscionability should not be applied to correct substantive unfairness. f) Procedural Factors Gross inequality of bargaining power, form/adhesion contract, lack of competition, inequality in sophistication, obscure terms, seller knew buyer lack financial resources, no opportunity to negotiate Substantive factors: Gross leverage, price-value disparity, lack of mutuality (arb clause only applies to one side), no business justification ordered. Repossession: Williams v. Walker-Thomas Furniture (installmentpay furniture business; K says all prior items purchased are subject to repossession if $ not paid) Excessive Price: Jones v. Star Credit Corp (freezer purchased in home visit) g) Approaches to Determining Price Fairness To determine if price is fair, must compare to something to determine unconscionability and to award recovery 1) Jones: retail value (probably price, so market-based) to determine, actual amount paid for recovery. 2) Uniform Consumer Credit Code: Determination: price at which similar property [is] readily obtainable in credit transactions by like consumers (market-based) 3) Frostifresh: Recovery: Cost plus reasonable profit and finance charges Market-based measures probably work better if there is some wellfunctioning market for comparison, but unconscionability often is bolstered by a finding of lack of competition h) Arbitration and Unconscionability Federal Arbitration Act State courts cant decline to enforce arbitration agreements just because they disfavor arbitration. But applying unconscionability to arbitration requires an evaluation of the substantive fairness of an arbitration clause. Easy to see how you could end up disfavoring arbitration.
Mandatory arbitration in employment agreement- unconscionable due to lack of mutuality (also limts employee not employer remedies)-nArmendariz v. Foundation Health) Easterbrook: Arbitration is offered as part of a package deal, so analyzing arbitration terms for mutuality disfavors arbitration unless all package deals are going to be discarded. g) Class action waivers for claims that are likely to be small may be unenforceable on substantive unconscionability/public policy grounds. Scott v. Cingular Wireless; arbitration clause that allowed individuals to litigate, but not class actions) Court held undermined statutory protections afforded by class actions & exculpates liability for large class of wrongful conduct
*note: only substantive unconscionability found here
4. Implied Covenant of Good Faith and Fair Dealing Easterbrook suggests that the good-faith doctrine is intended to control opportunism What is it? R 204: Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. U.C.C. 1-304: Every contract or duty within [the U.C.C.] imposes and obligation of good faith in its performance and enforcement. Good faith = honesty in fact + observance of reasonable commercial standards of fair dealing [U.C.C. 1-201] Governs performance and enforcement, NOT negotiation and formation: the manner in which a contract is carried out Duty of good faith governs how a party exercises discretion conferred on it under a contract. How does ETS have to exercise its right to cancel your SAT scores? How does Eastern have to decide how much fuel to buy at each airport? How does Falstaff have to decide how much effort to put into selling Ballantine beer? Limitation: implied covenant cant vary express contract terms. For example, an at-will employment relationship has express term allowing for firing for any or no reason. NO breach of a duty to perform in good faith for firing in an at-will relationship (Guz v. Bechtel) Implied obligation of good faith, per some courts: Prevents party to a contract from deliberately taking advantage of other partys oversights - even oversights relating to the contract text itself (MSA v. Frey; buy-back clause in 34) Imposes some obligation to do something to make exclusive arrangements work- probably be willing to undertake trivial loses & cannot merely act in own self interest (extent unclear) (Falstaff- agreement to market other brand of beer) Good faith termination: requires reasonable period for at-will franchisee to recoup investment costs (Lockewill)
Contract discretion must be exercised rationally and not arbitrarily, at least when acting as some sort of fair arbiter (Dalton); SAT score cancellation due to handwriting) Must follow procedures set out in a K (Dalton) Cant exercise discretion outside K to destroy subject of K (Dynamic Duo; fighter stripped of title so cant perform at casino) Implied obligation of good faith under UCC Objective good faith shown by following reasonable commercial standards, which can be supplied by course of dealing/performance, usage of trade (Eastern) Eastern Air Lines v. Gulf Oil (Gulf accuses Eastern of fuel freighting) Issue: Did large variations in volume demanded establish a violation of the U.C.C. duty of good faith and fair dealing? NO. 5. Public Policy The issue here is not problems between the contracting parties, but harm to the public. Types of contracts that raise public policy concerns: (1) A contract where the statute says, This contract is unenforceable
ex: employment covenants not to compete (in CA). ex: Hit contract
(2) A contract to do something expressly prohibited by statute (3) A contract that violates the policy underlying a statute, even though it does not expressly violate the law.
ex: Bovard : contract to sell a business making drug paraphernalia; statute just prevents drug sale and use.
(4) A contract that violates judicially defined public policy
Ex: rare; AZ court in Wagenseller (very activist); can usually base on statute
Restatement 178 Balancing test: (Bovard, supra) Dont enforce contract term if legislation provides that it is unenforceable, else apply balancing test: a) Strength of interest in enforcing a term: [ 178(2)] Parties justified expectations Forfeiture (loss of property) that would take place if enforcement denied Special public interest in enforcement of particular term. b) Strength of the policy against enforcing the term: [ 178(3)] Strength of the public policy as manifested in legislation or judicial decisions Likelihood that refusing to enforce the term will favor the policy. Seriousness of any misconduct involved. Directness of connection between misconduct and term Rescission v. Non-intervention Default rule = courts will NOT intervene to order restitution (unlike other cases of nonenforcement- eg. minor has to return car). Exception: if parties not equally in wrong: [R 198 & 197]
1) not in pari delicto or 2) disproportionate forfeiture then restitution Despite the default rule, courts dont like letting people get something for nothing so weighing of equities (who was more at fault) will be important in determining how gains/losses will be allocated -ex of forfeiture: X.L.O. Concrete v. Rivergate (full performance of construction contract; D refused to pay on ground that K was part of illegal bid rigging: anti-trust defense). Court will weighs: 1) forfeiture/unjust enrichment vs. other alternatives to stopping the schemes - AG relevance in deciding whether or not to enforce the illegal contact. Inducing Official Action OK to pay someone to use argument and reason to influence official action; not OK to pay for exertion of personal or political influence. Bribe money NOT returned: application of in pari delicto Commercial Bribery Typical facts: Seller bribes buyers purchasing agent to buy goods; after delivery, buyer refuses to pay on grounds that contract violates public policy. Courts have completely denied relief to seller in this case - buyer keeps goods without paying for them (Sirkin). Aggressive application of public policy that may result in unjust enrichment as the seller gets zero. Buyer can also collect the bribe money from its bribed employee, apparently. Courts also have denied contract compensation where someone is employed to arrange a deal and does so by paying commercial bribes. Employer doesnt have to pay employee who paid the bribe. (McConnell). Judicially Created Public Policy Two long-standing public policy limits on contract enforcement: Restraint of trade (covenants not to compete) Impairment of family relations ex: In Re Baby M (Agreement to pay $10,000 to be inseminated, deliver baby & terminate parental rights, biological mothers agreement unenforceable) Characterized as pay-for-adoption contract, violates statute. 5. Covenants Not to Compete In most jurisdictions (not CA, where they are void), employees covenants not to compete with employer are examined for reasonableness in: 1) duration 2) geography 3) scope of activity. Reasonableness determined by weighing employees need to work against employers interest in avoiding unfair competition. Unfair competition includes at least competition advantaged by competitively sensitive materials gained during the course of employment. Hopper v. All Pet Animal Clinic
Covenant sats: Vet will not practice small animal medicine for three years from the date of her termination within five miles of Laramie. Application: 1. Geographic area reasonable: Clients located throughout the county. 2. Activity scope reasonable: She could do large animal medicine. 3. Duration (three years) NOT reasonable: Pricing policies and practice development info are changed yearly. **So limit to reasonable duration of one year. Note: injunctive relief is commonly granted in such cases. 6. Public Policy and Termination of At-Will Employees 1. Public-policy EXCEPTION to at-will employment: If employer fires employee for doing something public policy requires him/her to do, then employee can sue in tort for wrongful discharge -at least where the employee could have been criminally prosecuted for not doing
the right thing. Ex: Sheets v. Teddys Frosted Foods (employee reports products are underweight & is unjustly fired)- idea is it is wrong to make someone choose btwn pulic policy & being fired.
2. Cause of action for wrongful discharge may not be available to in-house lawyers Balla v. Gambro (In-house counsel is fired for saying goods do NOT comply with FDA regs; his conduct was required by professional rules)
idea is that the requirement to do what public policy wants you to do protects the public policy.
CHAPTER 7 1. SPECIFIC PERFORMANCE AS DAMAGES Default rule is damages not specific performance Two tests for when specific performance is available: 1) U.C.C. Unique goods or other circumstances 2-716- (1) Specific performance may be decreed where the goods are unique or in other proper circumstances 2) Rest. tests (damages inadequate to protect expectation interest) 359- Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party. 360: In determining whether the remedy of damages would be adequate, consider: (a) the difficulty of proving damages with reasonable certainty, (b) the difficulty of procuring a suitable substitute performance by means of money awarded as damages (c) the likelihood that an award of damages could not be collected Generally ask: 1Can the damages be calculated? 2Can a substitute be procured using the damages? Recall that a basic expectation remedy is contract-market damages I have a deal to buy for $100. You breach when market is at $150. My damages are $150 - $100 = $50. A. Specific performance is equitable relief, so courts may look to a wide variety of factors: equities, judicial economy, administrability, transaction costs for damages vs. injunctive, bilateral monopoly, how hard it is to ascertain damages. 1. Specific Performance for special goods -Campbell Soup Co. v. Wentz (Chantenay carrots case & sp ordered)
No close substitutes (subjective: determined by buyers needs) available on the market Particular carrots are unique & need for uniformity No supervision by court needed Deliberately broken agreement
2. No specific performance were damages are adequate - Klein v. PepsiCo, Inc. (Gulfstream G-II sale rescinded after chairman stranded & NO sp ordered)
Close substitute available on market. Plane not unique b/c he bid on other planes Deliberateness of breach not relevant.
Other Plane Case (damages inadequate b/c impossible to buy cover 3. Peculiar & Unique Personal Value Morris v. Sparrow (Sparrow was to get horse he specially trained for taking care of the land & sp ordered) 4. Specific Performance in Requirements Contracts
U.C.C. 2-716 output/requirement contacts= typically specific performance -Laclede Gas Co. v. Amoco Oil Co. (Natural Gas contract & sp ordered) No good substitute for particular long-term supply contract without considerable expense, trouble & loss. Damages difficult to calculate Equitable factors: public interest & judicial supervision 5. Specific Performance and Investment a) Protecting partys return on a relationship-specific investment = reason for sp
i) ppl wont invest if they cant ensure they will receive a full return ii) If sp is required, investor will invest w/o worrying lose $
b) Specific performance can lead to overinvestment if: Performance is inefficient (efficient breach = possible), AND There is no way to bargain around specific performance 6. Coase Theorem With completely free bargaining (no transaction costs), property rights allocations dont matter to allocatively efficient outcomes. -in reality, there are going to be transaction costs. 7. Cost-Benefit Analysis of Injunction v. Damages [Posner Approach] Walgreen Co. v. Sara Creek Property (mall breaches K leasing agreement with drugstore) Benefits of injunction (vs. damages): Judicial economy: Shifts burden of calculation of value from court (hearing testimony) to parties (negotiating). Market is superior to courts in valuation. Costs of injunction (vs. damages): Judicial economy: Continuing supervision. Negotiation costs high in bilateral monopoly (lockin). **when injunctive relief costs < damages; choose injunctive relief** 8. Specific Performance & Personal Service (Employment) Contracts: No specific performance for a personal service (employment) contract. Moral hazard: Imperfect monitoring agent doesnt see full costs of
poor-quality performance poor-quality performance Involuntary servitude
However, may be ordered NOT to work for anyone else.
Functionally similar to/same as enforcing a covenant not to compete, but this is a remedy for breach of a promise to work for X, not enforcement of a promise not to work for Y.
Specific performance typically ordered only if services are unique or extraordinary. Skilled opera singer, athlete.
Special competitive knowledge of employers business (like covenant not to compete - Hopper
2. MEASURING EXPECTATION
Expectation Damages = where youd be if K performed (counterfactual) less where you are (actual). R 347- Expectation interest is measured by: [same as UCC approach] 1) Loss in value to promisee of other partys performance caused by failure or deficiency. 2) PLUS other loss, including incidental or consequential loss, caused by the breach. 3) MINUS cost or other loss avoided by promisee by not having to perform. 1) Deduction for avoided cost (Vitex: Caribbean) Fixed costs - those incurred whether transaction performed or not - by definition arent avoided by promisees nonperformance. 2) UCC Buyers remedies: Cover and Contract-Market (Laredo Hides) Net effect: Same as Rest. 347 approach. 1. Loss in value of performance (contract-market or cover approach) 2. Plus consequential and incidental damages 3. Less cost avoided. 2-711: In case of breach by non-delivery, buyer can recover price actually paid and choose one of two expectation-based remedies: 1) 2-712: Cover: making in good faith and without unreasonable delay any reasonable purchase of goods in substitution for those due from the seller. (note: cover is a substitute transaction) collect difference between cost of cover and the contract price, plus incidental and consequential damages. 2) 2-713: Contract-market: Damages equal to difference between market price when buyer learned of the breach and the contract price: 2-715: Incidental and consequential damages Incidental: Expenses of cover (not price of replacement goods), cost of dealing with the defective goods Consequential: Loss from buyers needs of which the seller had reason to know at time of contracting and which could not reasonably be prevented by cover. Ex: Laredo Hides v. H & H Meat Prods (cover hides purchased on open market) **Note: Cover ROCKS! Often better than relief under contract-market b/c: Dont have to prove market price Can recover more than market price as long as your substitute purchase (cover) is reasonable 3) UCC Sellers remedies Sellers damages: 2-706: Contract-price, with commercially reasonable good-faith resale (like cover), plus incidental damages 2-708: Contract-market at time & place for tender OR lost profits (lost revenues -avoided costs; think lost volume seller) if contract-market inadequate, plus incidental damages (includes lost profits) 2-709: Price of goods accepted. Lost-volume seller
Seller would have made the second sale transaction anyway, so contractmarket or contract-resale damages dont reflect expectation, and the proper measure of damages is lost profits. Ex: Star paving (2nd construction K after breach a substiute?) Damages: K price - unit cost = profit on contract = lost profits. BUT must prove both units are profitable ex: Davis v. Diasonics (medical diagnostic equipment) Deposits under UCC: 2-718(2): Where the seller justifiably withholds delivery of goods because of the buyers breach, the buyer is entitled to restitution of any amount by which the sum of the payments exceeds: Amount to which the seller is entitled in liquidated damages (if applicable), or The smaller of 1) 20% of the value of the total performance (price) or 2) $500 But there is an offset for sellers damages (2-718(3)) 4) In case of wrongful breach of employment contract: Aggrieved promisee (employee) is the seller, not the buyer Contract-market damages = contract wage minus fair wage Usual approach: contract wage minus actual replacement wage (so like cover). Note: no adjustment for relative enjoyment of the job. 5) Losing Contracts: Reliance, and Restitution (U.S. v. Algernon Blair) Losing contracts can still get reliance and restitution damages! R 37- restitution may be measured by either: Taking away the other partys unjust enrichment here equals recovery of reasonable value of performance, undiminished by the projected loss on the contract. Reasonable value = amount for which such services could have been purchased from one in the plaintiffs position at time of K or extent to which the other partys property has been increased in value ex: U.S. v. Algernon Blair, Inc. (Subcontractor is entitled to restitution following breach, despite the fact that the contract was losing) Limit on Restitution: complete performance of K [Rest. 373] 3. LIMITATIONS ON DAMAGES a) Duty to make reasonable efforts to mitigate damages 1) CL example: Rockingham County v. Luten Bridge (P keeps building bridge despite countys repudiation of K; post-repudiation construction costs were avoidable and thus couldnt be included in damages) 2) Under UCC 2-704(2): seller can complete manufacture of goods instead of selling them for scrap in the exercise of reasonable commercial judgment upon repudiation So, general rule is that you must make reasonable efforts to mitigate c) Duty to mitigate in employment context: Parker v. Twentieth Century-Fox (lead role in drama v. western movie)
Rule: Employee is NOT required to take substitute employment unless comparable or substantially similar to the wrongfully terminated employment. b) Avoidability as limit on expectation damages under UCC Anti-Windfall Principal: [UCC 1-305(a)] The remedies provided must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed. Contract market may be better than cover/resale, in which case they are NOT available! For buyer, better if MARKET > COVER (found something cheaper than market) For seller, better if MARKET < RESALE (sold for better than market price) BUT Contract-market damages are available even if they lead to recovery exceeding expected profit (Tongish v. Thomas) Discourages breach (questionable in light of nonpunitive nature of contract damages, unless we can define a category of bad faith breaches that includes what appears to be the garden-variety efficient breach here) Is the majority rule. The alternative approach of limiting to injured promisees actual loss has found only nominal support. Note: Limits efficient breach where there is readily available market price and contract-market damages E.g., the breaching seller receives market price from third party, but will have to pay the market price (less contract price) to the injured promisee. Seller ends up with: Market price - (Market price - Contract price) = Contract price ***so why bother efficiently breaching? c) Cost of Performance > market value Generally, cost of performance = market value Potential limitation: when performance is much greater than market value of performance. -Jacob & Youngs v. Kent (wrong brand of pipe installed in house; but already had substantial performance & would have had to destroy house; damages limited to diminution in market value of house) -Groves v. John Wunder Co. (Cost of re-grading = $60k; value of property at uniform grade = $12k; value of land doesnt matter) -Peevyhouse v. Garland Coal & Mining (restoring land after stripping coal as promised extremely costly; held this was not material breach) Subjective Expectation interest= $ value of thing to YOU K price -BUT hard to measure so bounded by cost of pefom. & market value Remedy Defect Test Willful breach? Performance = Physical Destruction/Damage?
Breach Material/ Central?** Specific Performance valued at more than market value? (somewhere in between?) Rest 348(2) Test If breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on (a) the diminution in the market price of the property caused by the breach, or (b) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him *** No specific performance b/c damages bounded A damage remedy measured by cost of performance raises the possibility of strategic threats to perform inefficiently. d) Foreseeability a) Restatement on foreseeability (same as CL) 351(2): Loss may be foreseeable as a probable result of a breach because it follows: (a) In the ordinary course of events, OR (b) as a result of special circumstances beyond the ordinary course of events, that the party in breach had reason to know 351(3): limit damages to loss incurred in reliance Ex: (Hadley v. Baxendal: mill shaft shuts down plant) Ex: (Delchi Carrier Spa v. Rotorex: shipped non-conforming good; costs for return, labor expense due to breach, damages for unfulfilled orders) b) Foreseeability judged at FORMATION e) Emotional Distress Rest 353- Recovery for emotional distress will be excluded UNLESS a) the breach also caused bodily harm or b) the contract or the breach is of such a kind that serious emotional disturbance is a particularly likely result High level of foreseeability required. Brown v. Fritz is even harsher: where there is a contract, no recovery; for emotional distress. you can collect punitive damages if justified. f) Certainty 1) Rest 352- Damages are NOT recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty. 2) U.C.C. 1-305- Damages need NOT be calculable with mathematical accuracy, and have to be proved with whatever definiteness and accuracy the facts permits, but no more. Loss of reputation: Contract damages typically not recoverable for loss of general reputation, as opposed to loss of specific opportunities.
Lost profits for new business must be proved with reasonable certainty i.e. substantiated by expert testimony, econ. data, market surveys, Fera v. Village Plaza (new business loses lease spot) Artistic creations: Generally hard to get lost profits on an artistic venture, Good will/business reputation: Generally allowed (presumably with expert proof). LIQUIDATED DAMAGES AND PENALTIES 1. What are liquidated damages? A contract provision setting damages at a fixed monetary amount. ** reasonable estimates of contract damages will be enforced. UCC [2-718(1)] = Rest Approach 356(1) LD must be only at an amount which is reasonable in light of the: anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy [UCC only] A term fixing unreasonably large liquidated damages is void as a penalty/on grounds of public policy Query: whether sophisticated parties should be prohibited from entering into clauses that provide penalties clearly in excess of expectation damages as a way of showing commitment to the transaction. whether nonenforcement unjustly enriches the injured party, who may have been paid more because of the clause- i.e. the risk of nonenforcement is priced in. 2. Penalties in CA Party not wanting liquidated damages clause must how it was unreasonable under the circumstances existing at the time the contract was made. Higher standard for consumer contracts only: void except unless it is presumed amt of damages b/c it would be impracticable or extremely difficult to fix the actual damage 3. Enforcement rests on reasonableness of damage estimate Wassermans v. Middletown (LD for termination) Burden of proof of unreasonableness is on challenging party. Dave Gustafson & Co. v. State (Contract to pave roads had LD clause for late construction; LD OK b/c graduation scheme based on total K size is reasonable & state wants to get it done quickly) 4. Alternative means of Performance v. Liquidated Damages: Take-or-pay: either perform or pay the liquidated damages.
CHAPTER 8 A. CONDITIONS 1. Rest. 224: A condition is an event, not certain to occur, which must occur, unless its nonoccurrence is excused, before performance under a contract becomes due. Promise (in a K) = A partys commitment to do or not do something. (Rest. 2) If party doesnt perform promise when due, party is in breach, which can lead to damages. Condition = Event that must occur before a performance is due. Event or fact, the happening or non-happening of which creates or extinguishes a duty to perform on the part of the promisor. Failure of a condition is NOT breach. Promissory condition = Both a condition and a promise. Ex: If A wants B to do X under a contract, there are three possibilities: B promises to do X. Result of nonperformance = breach, which can lead to damages. Bs doing X is a condition of As duty/duties under the contract. Result of nonperformance = A does not have to perform. Bs doing X is both a promise of B and a condition to As duty to perform (Bs doing X is a promissory condition). Result of nonperformance = A does not have to perform and B is in breach. 2. Strict compliance with an express condition is required. Ex: Luttinger v. Rosen (buying house expressly conditional to finding financing) Note: Buyer was obliged to use objective due diligence Note: sellers offer to make up the difference doesnt matter in this case. 3. To determine whether something is a condition, courts must analyze the parties actual or likely intent time is of the essence CAN be a condition/promissory condition ex: Internatio-Rotterdam v. River Brand Rice Mills (late shipping rice & timeliness was found to be a promissory condition) If a promise, not excusing sellers duty: Seller gets damages to seller from delivering on, say, January 2, not December 31. Extra storage fees? Other damages caused by breach (e.g., congestion, etc.) Not contract-market damages: Still received K price despite breach (note c-m dmgs to seller negative here). If a condition, excuses sellers duty. To determine if there is a condition, must analyze parties actual or likely intent: Both sides wanted protection of delivery period Prices on rice market fluctuating Letter of credit suggested buyer had no way of paying if there was late notice. 4. Conditions of Satisfaction Typical tests: [note: can contract around] Personal taste = subjective good faith test Functional qualities = objective reasonable test
Third-Party Satisfaction ( e.g. architects certificates) Usual test for third-party satisfaction is subjective (honest) satisfaction. Courts sometimes call really bad judgment bad faith. - NY holds 3rd parties to an objective standard, but can contract around it with language like architects decision is final and unreviewable. 6. Mitigating Doctrines: 1) Prevention If you prevent the occurrence of a condition of your own duty, you generally are precluded from relying on the nonoccurrence of that condition. But parties can contract around this. 2) Waiver, Estoppel & Election [Rest. 84] Waiver: Party whose duty is conditional may promise before time for occurrence to perform despite nonoccurrence of the condition. Estoppel: Reliance on waiver precludes retraction. Election: Party that decides to disregard nonoccurrence of condition after time for occurrence has made an election, usually irrevocable. Implied waiver: McKenna v. Vernon (architects certificate condition of construction payment; for last payment, owner argues that there was no certificate, so no need to pay) Holding: The payments for nonfinal installments were made without a certificate. Treated as waiver. Time-of-occurrence analysis: demand for the certificate occurred after the time for occurrence of the condition. Or can reliance: was continuing performance was caused by belief in lack of need for certificate? Anti-waiver In condition of satisfaction agreement, saying youre dissatisfied and the deal is off terminates your power to say youre satisfied and the deal is on? 7) Interpretation & avoidance of forfeiture Forfeiture = termination of K. Unfair/very harsh impact on one party. Rest. 227: in unclear cases, interpret as duty rather than condition - avoid forfeiture. Courts try to avoid forfeiture, although possible to contract around. Rest. 229- BUT condition may sometimes be excused to avoid disproportionate forfeiture 8) Parol evidence rule does NOT bar parol evidence of a condition to the effectiveness of a written agreement, as long as the condition doesnt contradict the express terms [R 217] ex: Hicks v. Bush ( Merger b/t Hicks and Bush; Hicks transfers stock, but Bush doesnt) Note: Applied in the context of conditions to the performance of both parties. Note: CANNOT use parol evidence to prove additional conditions on your duties in an agreement that has taken effect. ***Normal integration clause wont work: must add there are no conditions to the effectiveness of this agreement.
B. CONSTRUCTIVE CONDITIONS OF EXCHANGE 1. What are constructive conditions of exchange? exchange of promises to exchange duties inferred by the court by the evident sense & meaning of the parties -NOT an express condition -must go to the essence of the deal Kingston v. Preston (apprentice doesnt provide security in transfer of silk business) Holding: Court finds that Owner doesnt have to convey business unless Apprentice provides security, so As provision of security is a condition of Owners duty. Its not an express condition, but implied by the ct. a) When constructive conditions do NOT apply: Employment contract with valid covenant not to compete that clearly states it is independent of the main contract. If employer breaches by firing the employee, the employee still has a duty to abide by the covenant not to compete. b) General default rule: service is rendered first, then payment. Court is imposing an order of performance. This is routinely contracted around Ex: Stewart v. Newbury (owner doesnt want to pay contractor in partial segment payments) Holding: Unless a contrary agreement is made, no obligation to pay builder for work until its substantially completed. Characterized the contract as entire (that is, indivisible), so no entitlement to be paid for partial work. c) Concurrent Conditions and Tender Morton v. Lamb: Where both sides of the exchange are to take place at the same time (concurrent conditions), the party who sues must allege that s/he has performed or is ready to perform U.C.C.: Tender of price by buyer and tender of goods by seller are concurrent conditions Tender = being ready & willing to perform and communicating it 2. Mitigating doctrines for constructive conditions (constructive conditions are judicially inferred, so extra solicitude for forfeiture concerns) #1. Substantial Performance- meeting the essential purpose a) Only substantial compliance is required for a constructive condition. Ex: Jacob & Youngs v. Kent - (reading pipe house dispute) Deviations that frustrate the purpose of the contract are not tolerated substantial compliance is required. How to tell if performance is substantial enough? We must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence.
This court states that willfulness of breach matters. Court here says that willful breaches cant benefit from substantialcompliance rule. b) Test: Does performance seem to meet the essential purpose of K? ex: Plante v. Jacobs (wall put in wrong place, appliances not installed) Why did the misplaced wall not fail to meet the essential purpose? Stock floor plan, no blueprints, they moved in - is this satisfactory? willful breach (as to omitted minor items) did not matter Application cost-of-replacement rule to small items that can be remedied without physical destruction and diminution-invalue rule to the major item (wall) May reflect the idea that there is not likely to be a large discrepancy in market value and cost to perform for the minor items. Note 2: Cases show difficulty of pinning down substantial performance: Structural defects? Percentage of value? c) Restatement Approach to substantial performance 1. Rest. 241- Substantial performance is performance that is not affected by a material failure 2. Factors Extent to which injured party is deprived of reasonably expected benefit [by the breach] Extent to which injured party can be adequately compensated for the part of that benefit of which he will be deprived Extent to which the party failing to perform will suffer forfeiture Likelihood that party failing to perform will cure Extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing (reflects Rest.s approach to willfulness) d) The Perfect Tender Rule In general, NO doctrine of substantial performance in contracts for the sale of goods. The goods tendered must be exactly what was ordered or no duty to pay: perfect tender. This is retained in U.C.C. 2-601, but note three mitigating provisions: 1. Seller can cure defective tender until time for performance has expired. (U.C.C. 2-508) 2. After buyer accepts goods, can revoke acceptance and return goods to seller only if defect substantially impairs their value (U.C.C. 2608) 3. In installment contract, can reject an installment only if the defect substantially impairs the value of the installment and can claim
breach of the whole K only if defect substantially impairs the value of the whole contract. (U.C.C. 2-612) There is an obligation of good faith in enforcement under the U.C.C. ( 1-304) But the perfect-tender section just says the buyer may reject as a result of sellers breach. ( 2-601) #2. Divisibility 1) Alternative to resorting to restitution by implying a condition that divides the contract into pieces; pay for part performance as per K
**exception to rule that there is no payment until complete performance
2) In finding divisibility ASK: 1. whether K can be split into several independent subparts each with its own value. Each delivery of 1,000 log-feet in Gill v. Johnstown Lumber 2. OR whether the subparts have full value only when taken together [subparts are dependent] produce microwave tees in Pennsylvania Exch. Bank v. U.S. (3 stages dont provide value unless supplier can perform 4th stage) 3. Rest. 240 on Divisibility If a) the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances b) so that the parts of each pair are properly regarded as agreed equivalents, Then: a) a partys performance of his part of such a pair has the same effect on the others duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised. 3. Restitution a) Rest: Restitution in favor of party in breach 374(1). Default Rule: [I]f a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other partys breach, the party in breach is entitled to restitution: for any benefit he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach. 374(2). Can contract for non-breaching party to retain benefits received, as long as depriving the breaching party of restitution doesnt amount to a penalty. b) Restitution under Common Law Kirkland v. Archbold- (Owner stops renovation b/c not satisfied w/work, series of payments had been scheduled) Restitutionary relief is available for breaching party, despite default, at least where there is no bad faith.
Damages caused by breach deducted from restitutionary relief. Restatement doesnt inquire into good faith, but many courts do: Issue is unjust enrichment, not contract damages. Reverses trial courts finding that the contract is severable: contract is not severable just because there is a schedule of payments. c) Restitution under the U.C.C. Defaulting buyer gets refund of amounts paid for goods not delivered (restitution), less 20%/$500 (2-718(2)) Defaulting seller is entitled to be paid contract price for goods accepted by buyer (2-607(1)) Some courts retain a default rule in real estate transactions that jilted seller can keep deposit without proving damages (no restitution for buyer) C. SUSPENDING PERFORMANCE & TERMINATING THE CONTRACT When a breach arises in the middle of both sides performance: 1) Firstly: Is it uncured? Is the breach of a duty of performance that was to be exchanged under an exchange of promises (dependant covenants)? This is presumed to be the case unless a contrary intention is manifested [R 232] Is the breach of a duty that was to be performed before the current performance is due? 2) Is the breach material? (justifying suspension of performance?) a) If NOT material, the injured promisee is obligated to treat as partial breach: treat K as in effect and potentially seek damages. [R 237] b) If material, injured promisee has at some point the right to treat as total if no cure ( 243) If elect to treat as total, contract is done: all injured promisees duties are discharged and a claim for damages for total breach arises. May have a right to treat as total immediately; may have to wait. 3) If injured promisee wrongly claims total breach and terminates, it will be treated as breaching. ex: Walker & Co. v. Harrison (sign hit by tomato, maintenance not forthcoming, sign leasee terminates) Holding: Delay was not a material breach, so repudiation unjustified, so business owner is in material breach. Should have hired someone to clean & sued for damages. ex: K&G Constr. Co. v. Harris (bulldozer & wall) In CA, materiality of a breach is a question of fact Good faith not matter if you are wrong about other partys breach being material. 4) Hindrance & Performance Hindering/preventing the other side from performing can excuse their nonperformance.
Iron Trade Prods. Co. v. Wilkoff Co. Seller argues there was a rail shortage & buyer bought a ton of rails that seller was trying to buy, which enhanced the price to an exorbitant sum, made sellers performance impossible. Holding: Market existed at all relevant times, so supply not exhausted by Buyers purchases, so performance possible. Two issues: Mere hindrance, not prevention Hindering party didnt know of/intend hindrance 5) Cooperation: Duty to take affirmative steps to cooperate exists but is not easy to specify. Patterson article:[A]cts and omissions which are clearly in the within the obligors control and which are the normal or obvious means of the obligees performance, are presumably required of the obligor, or he assumes the risk of their nonoccurrence. New England Structures v. Loranger General contractor claims there is a material breach- not enough skilled workers? (this is what telegram said). Bad welding not brought to their attention (so no opportunity to cure). Sub K claims that they werent given an opportunity to cure b/c they were prevented from finishing the job. Rule: Party 1 doesnt waive grounds for claiming right to terminate unless Party 2 relies on Party 1s failure to claim the grounds (or, maybe, Party 1 acts in bad faith). Application: Lower court erred by barring general contractor from relying on alternative grounds for termination (e.g., poor workmanship, failure to comply with specs), absent proof of subcontractor reliance. 6) Waiver of Grounds for Breach - U.C.C U.C.C. 2-605(1): A buyer cant rely on a defect that reasonable inspection would have revealed as a basis for rejecting goods or establishing breach if the seller could have cured the defect if seasonably notified of it. Similar concept to New England Structures - evident assumption that seller would cure if it had notice and cant reasonably cure without notice, so seller taken as relying on nondisclosure of defect. McCloskey v. Minweld D. PROSPECTIVE NON PERFORMANCE A) Anticipatory Repudation Repudiation: in middle of performance, declare you wont perform anymore. If accompanied by breach for nonperformance, total breach. Anticipatory Repudiation= utter renunciation before performance due. Party receiving anticipatory repudiation is free to make arrangements inconsistent with contract performance and sue for damages. Hochster v. De La Tour (employer repudiates employment of employee)
Recipient of anticipatory repudiation may treat it as discharging his duties to perform under the contract. Recipient of anticipatory repudiation may treat it as giving rise to a claim for breach immediately, without waiting for the time of performance to come due. Exception: One-sided Contract If one side has performed and all that remains is the other sides payment of money in installments, neither failure to pay installments or repudiation gives rise to a claim for total breach. I.e., creditor has to wait for installments to come due to sue, unless there is an acceleration clause. B) Repudiation and Causation Issue of causation of damages is especially difficult in the context of anticipatory repudiation, because of the time gap between the repudiation and the time for performance. Kanavos v. Hancock Bank & Trust (stock option case) Issue: Did investor (Kanavos) have to prove that he was able to come up with the money to exercise the option? Rule: Plaintiff must prove ability to comply with concurrent conditions of exchange even when defendant repudiates the contract. Application: Tendering the money and exchanging the stock were concurrent obligations (concurrent conditions of exchange), so plaintiff was required to prove his ability to meet the condition (pay for the stock) to collect damages. Repudiation by conduct: Action clearly inconsistent with performance (selling the stock to someone else) treated as repudiation. Dont have to prove continuing ability to perform into the future to collect damages for a K to be performed over a period of time. Shifts risk of future disability of injured promisee to breaching party? In prevention context, no need to prove that condition under the control of the other party would have been met (Shear) C) Anticipatory Repudiation and Tender Even though plaintiff has some burden of proof as to causation of loss, anticipatory repudiation DOES excuse actual tender of performance (e.g., sending truck to pick up hides that the seller has said it will not hand over). D) High standard set for repudiation McCloskey & Co. v. Minweld Steel Non-performance is not repudiation- need affirmative negative nonperformance (like relocating steel company to France) Setting a thirty day deadline was fine, but cant terminate if the other side doesnt confirm right away that they will comply with deadline. Was the letter a repudiation? No, there was hope for possible performance with help basically have to admit that they cannot do it to repudiate.
did the other side have a duty to cooperate? Maybe?? Rule: Not a repudiation unless the potentially repudiating party states definitely that it cant or won t perform. Failure to prepare is not anticipatory repudiation even if failure makes performance impossible D) Permissible Responses to Repudiation: Rest. 250 Repudiation definition: 1) [A] statement by the obligor to the obligee indicating that the obligor will commit a [total] breach. 2) [A] voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach. Repudiation can trigger duty to suspend performance where performance entails piling up costs. (Rockingham Bridge) Pre-U.C.C. rule was that market price was evaluated at time/place of tender. Responses under UCC: If buyer repudiates, seller can resell or choose contract-market damages. In latter case, market price is measured at time and place for tender. ( 2-708) If seller repudiates, buyer can cover or choose contract-market damages. In latter case, market price is measured when buyer learned of the breach. ( 2713) -This is problematic when seller anticipatorily repudiates. -Recent (failed) U.C.C. proposed revisions would have harmonized on tender date Cosden v. Karl Helm (Repudiation & rising market. Buyer wants latest possible time (when learned of breach) & seller wants earliest possible (at time of tender)) Rule: Commercially reasonable time after repudiation. What does when learned of breach mean? In case of seller default, 3 options: 1. Time of Repudiation Learned of breach The repudiation is the breach, so this seems to be the plain meaning. ease of administration (this indicates what a reasonable time is), the repudiation is the breach. 2. Repudiation + reasonable time- allows for retraction, then cover within a reasonable time. Allowed to await performance (2-610(a))- i.e. giving the other side a chance to perform. Note: if you wait too long for performance, might not be allowed to collect damages (BUT might just show that you want to continue with the contract) 3. Time of tender- Prior CL rule, arguably the period of time for allocation of price risk. This is symmetrical- shouldnt the price risk be allocated in the same way? Buyer & seller both get time of tender? Tender is arguably the earliest time buyer knows seller is not going to perform. E) Urging Retraction:
Rest. 257- The recipient of a retraction can urge retraction without prejudice to its own position (such as having to continue performing while the repudiator decides whether to retract). F) Repudiation & Arbitration Cases cited illustrate the idea that a partys repudiation does not discharge other partys obligation to follow arbitration or forum-selection clauses in a contract. Rationales offered: Enforcement poses no risk of economic waste via continued performance, so underlying purpose of anticipatory repudiation doctrine not involved. Arbitration clause is a condition to liability that is not excused by repudiation. G) The Door to Repentance: Retraction of Repudiation The door to repentance closes when: a) U.C.C. 2-611(1): Aggrieved party cancels or materially changes position or otherwise indicates that it considers the retraction final. b) Rest. 256: Aggrieved party materially changes position in reliance on the repudiation or indicates to the other party that it considers the repudiation final. Ex: U.S. v. Seacoast Gas Co. (was the seller permitted to retract its repudation?) this requisite can be supplied by a firm declaration, as here, that unless within a fixed time the breach is repudiated, it will be accepted. Application: United States notification that it would accept another bid unless seller retracted in three days was the required definite action. H) Assurance of Due Performance a) Traditionally no right to demand assurance of due performance (open Q in CA) Classic case: Seller learns after concluding K that buyer is in financial distress. BUT one could write an express provision for adequate assurances into a contract. Repudiation of one contract may create doubts about performance of another leading to a demand for assurances. b) U.C.C. expressly adopted a right to demand assurances of due performance, and Rest. (Second) followed. -Must have reasonable grounds for suspecting non-performance/insecurity -Then can request adequate assurance of performance -BUT cannot use this as an excuse to re-write the contract. Not all states have adopted this doctrine in the non-U.C.C. context. 1) U.C.C. 2-609: A contract for sale imposes an obligation on each party that the others expectation of receiving due performance will not be impaired. (1) When reasonable grounds for insecurity arise with respect to the
performance of either party the other may (2) in writing demand adequate assurance of due performance and until he receives such assurance (3) may if commercially reasonable suspend any performance for which he has not already received the agreed return. Failure to reply within a reasonable time (max 30 days) after receipt of justified demand is a repudiation. 2) Rest. 251: Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach , the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. Pittsburgh-Des Moines Steel v. Brookhaven Manor Water But the demand for escrow/personal guarantee went further than a demand for adequate assurance Unclear whether a party entitled to assurance may demand a specific form of assurance or must be satisfied with any objectively adequate assurance. Some courts find oral demands for assurance OK under U.C.C., despite statutory language. I) When Does the U.C.C. Apply? Predominant factor test a) Is the sale of goods the predominant factor, with services incidental? Installation of a water heater Building a water tower with an expensive tank b) Is the provision of services the predominant factor, with sale of goods incidental? Painting a house or a picture (assuming paint cost is relatively minor) ex: Norcon Power Partners v. Niagara Mohawk Power Corp. Issue: Can Niagara Mohawk demand adequate assurances if it faces reasonable grounds for insecurity, even if case is not governed by U.C.C.? Rule: In a non-U.C.C. case, adequate-assurances doctrine applies at least to non-U.C.C. long-term commercial contracts that are not reasonably susceptible of all security features being anticipated, bargained for and incorporated in the original contract. J) Material Breach and Cure When Party A is in material breach by nonperformance, Party B may immediately suspend performance, but may not be able to treat the contract as done and sue for total breach. The reason is that Party B may be required to give Party A an opportunity to cure the breach.
Factors in determining whether/how long Party B must wait (Restatement 241-42): Can/will Party A cure if given opportunity? Harm to Party B from waiting (prejudice to ability to arrange substitute transaction) Intent at time of contracting that timely performance be of the essence Forfeiture Good faith
CHAPTER 9 Three excusing doctrines: 1) Mistake: Circumstances in existence at time of formation but unknown to one/both parties. 2) Impracticability: Post-formation (usually) developments that (generally speaking) increase cost of performance. 3) Frustration: Post-formation developments that (generally speaking) decrease value of performance. 1. Mistake a) Rest. 151- mistake is a belief not in accord with the facts. Doesnt have to be an affirmative belief; a party may have a belief as to a fact when he merely makes an assumption with respect to it, without being aware of alternatives. Relates to facts in existence at time of contract. b) Rest. 152- mutual mistake Where a mistake of both parties at the time the contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154. c) Rest. 154- A party bears the risk of a mistake when: (a) The risk is allocated to him by agreement of the parties, or (b) He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) The risk is allocated to him by the court on the ground that it is reasonable to do so. d) Mutual Mistake vs. Misunderstanding Misunderstanding (Peerless problem): Same words but talking about different things. Mutual mistake: Talking about the same thing, but the thing is not what either party thought it was. e) Old law: Background principle that promises should be enforced. Stees v. Leonard- (2x building house on quicksand according to specs). Old Rule: If a man bind himself, by a positive, express contract, to do an act in itself possible, he must perform his engagement, unless prevented by the act of God, the law, or the other party to the contract. Application: Characterize as a K to build building, not to follow specifications. So the contractor apparently was required to drain the land (though expectation damages not sought or awarded) Pre-K owner promise to drain: barred by parol evidence rule Post-K owner promise to drain: barred by pre-existing duty rule Restatement Analysis
Assuming there was a mutual assumption ground was firm: Mistake of both parties: Both thought ground was firm when it had/was quicksand. As to basic assumption: Wouldnt have made this contract had they known the truth Material effect on exchange: Mistake caused contract to turn out to be seriously different for builder and arguably made it unfair for builder to have to perform. Allocation of risk: No contract allocation, one side didnt perform in conscious ignorance more than the other. So what is reasonable risk allocation? f) Certainty framework for mutual mistake: a) Did parties really assume the state of affairs was X or b) did they intend to allocate the risk of X existing/not existing? High certainty of the (incorrect) mutual belief in X: Suggests a mistake (more of an affirmative belief not in accord with the facts) Makes it more likely that if X is important to the contract, then Xs existence/nonexistence was a basic assumption. Makes it less likely that there was a contractual allocation of Xs existence/nonexistence (both parties thought X definitely existed so no attempt to allocate it in K). Consequence: dont enforce unqualified contract language Allocate the resulting loss according to noncontractual reasonableness principles (i.e, Restatement 154(c)) Low certainty of the (incorrect) mutual belief in X: Reverse of all the above. Consequence: enforce unqualified contract language g) Reasonable Risk Allocation Can one party better cope with the risk? Who is better positioned to understand and provide for? Who can better insure/hedge/diversify to cope with it? Some scholars argue final default should be: Literal contract application (i.e., if it says build, then build - assume unqualified language is intended to allocate risk as text suggests). Note: The doctrines may come into play when contract language is unqualified as to the duty in question. e) Modern Rule: Mutual Mistake is a valid basis for recession where it is an essential part and condition to the contract. Restitution for benefit parties have conferred. BUT the rescinding party is not entitled to consequential damages. Ex: Renner v. Kehl (not enough land to grow the Jojoba) Buyer gets back down payment, has to give up fair rental value of land Seller has to give up amount land was enhanced in value
Contrary to Renner, a land seller typically cant get rescission of a contract of sale, even if the land turns out to be much more valuable than imagined due to hidden mineral deposits. Can be thought of in terms of certainty: Land that has water (high certainty) Land that might or might not have helium (low certainty) Wood v. Boynton (diamond in the rough) v. Sherwood v. Walker (Pregnant cow) How do we reconcile these? Risk allocation (just want to sell what the rock, not sure what it is) vs. contact for a specific purpose (cow was supposed to be sterile). Was contract a gamble or a contract for a definite purpose? Estate of Neslon v. Rice (painting sold for $60 is worth $1 million) Can be understood as a finding that the deal was really a gamble on an unknown characteristic. Not a sale of a low-value painting, but rather a sale of a possibly high-, possibly-low value painting, at least from Estates side. Arguably not a mistake as to basic assumption at all, as opinion acknowledges. f) Mistake and Restitution The basic rule is that mistake gives rise to rescission/unwinding. Restitution on both sides. Each side gives up what it got. Some scholars argue that performance should (and in practice does) just stop in its tracks when mistake is found. No unwinding, no further obligation to perform. 2. Impracticability of Performance Generally, may apply when performance becomes more difficult after formation (costs of performance rise). Note: that this is a doctrine for finding implied qualifications or conditions to contractual duties. Issue is whether a facially unqualified duty is really unqualified in the face of unforeseen events or whether there something like an implied exception covering the events. Mineral Park Land Co. v. Howard (Not enough gravel to build the bridge, some was below water) -Issue: did they have to take all the gravel from below the water? -Holding: This is impracticable b/c -10-12 times as expensive -Need special equipment -Would have caused delay -Why wasnt this mutual mistake? There was no misunderstanding about the amt of gravel (perhaps could have said this). -Certainty framework: low certainty (neither side explored how much gravel there was). Outlier case- this framework doesnt really work?
Builder escapes: All the gravel all the available gravel all the gravel that is practical to take and remove from a financial standpoint. b) Supervening Impracticability Contemporaneous impracticability seems to address the same issues as mutual mistake, so probably isnt needed. Its the law in CA, though, and it may be easier to get out of mistakes about cost of performance under the Mineral Park standard than the Restatement standard. Rest. 261 Where, after a contract is made, a partys performance is made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or circumstances indicate the contrary. Can contract to avoid application of the doctrine, at least as to foreseen risks (but the risks are usually unforeseen/unforeseeable). What should happen if the assumed-not-to-occur actually occurs can be thought of as an omitted case or contract gap. High certainty (or confidence) at time of contracting: There is water here; The Suez Canal will be open. More likely that there is a gap if there is no water or the Suez Canal is closed. More likely that such events are gaps or omitted cases. Hence more likely to need to appeal to extracontractual allocation. Low certainty (or confidence) at time of contracting: The Suez Canal might be closed. The supervening event is foreseeable Less likely that closure is a gap or omitted case. Less likely to need to appeal to extracontractual allocation. c) Foreseeability & Supervening Impracticability Unqualified contract language is unlikely to allocate the risk of an unforeseeable event. Unqualified contract language is much more likely to, but does not automatically, allocate the risk of a foreseeable event (Transatlantic, Wolf Trap case). Could reflect parties studious silence as to a recognized risk. Low certainty, but a deliberate gap can exist despite recognition of risk. d) Taylor v. Caldwell -Facts: Music hall burns down. -Issue: Was the existence of the music hall a condition to the contract? When performance of a contract depends on the continuing existence of a thing, that things continued existence is an implied condition of the contract. Arguably we might ask for a better risk-allocation analysis than no fault today, but this case illustrates
1. Historical origin of impossibility/ impracticability doctrine in specific categories that retain importance. 2. Can be reconciled with certainty approach by saying that there is presumptively high certainty that buildings in existence will continue to exist. If the contract was just to use reasonable efforts, you wont be into impracticability analysis. The analysis applies as a default rule where an unqualified duty is undertaken. e) Common Impracticability Categories -Rest 262-64 Death or incapacity of a person necessary for performance. Destruction or deterioration of thing necessary for performance. Adoption of a governmental order rendering performance impracticable -UCC Article 2: 2-613: Total loss - before risk of loss passes - of goods that are the only goods that can satisfy the contract excuses the contract. Impossibility 2-614: Where without fault agreed delivery method becomes commercially impracticable, a commercially reasonable substitute must be tendered and accepted if available. 2-615: Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: Non-delivery is not a breach if performance has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made f) Transatlantic Financing Co. v. U.S. (Suez canal closes) Three-element test employed by court: A contingency -- something unexpected -- must have occurred. Normal route was blocked. The risk of the unexpected occurrence must not have been allocated by custom or by agreement. The implied expectation that the route would be via Suez is hardly adequate proof of an allocation to the promisee [U.S.] of the risk of closure. Shipper apparently did/could have/should have foreseen, but Foreseeability or even recognition of a risk does not necessarily prove its allocation. OK, but why not allocated? Occurrence of the contingency must have rendered performance commercially impracticable. No: Was possible, shipper could purchase insurance, better situated to calculate increased cost from alternate route, shipper claims inconsistent theories of liability. Low certainty that Suez Canal would stay open and no excuse.
We might rephrase the courts analysis in terms of the approach weve been using: a) Did unqualified contract language allocate risk? Likely yes as to foreseeable events/recognizable risks/low confidence of nonoccurrence of event. Likely yes as to minor cost increases, even if unforeseeable (see Transatlantic discussion). Likely no as to special categories of continued existence of necessary things and persons, and government regulation. b) how to allocate the risk/loss? Extracontractual risk allocation factors favored placing loss on shipper (insurance, better situated to calculate cost). Note: U.C.C. 2-615 might favor placing risk on seller Market fluctuations that dont have a traceable extraordinary cause are least likely to lead to excuse. See 2-615, cmt. 4. When you make a contract to delivery a revolutionary new system still to be invented, the risk of failure to develop it is likely to be put on you - despite the fact that failure to develop renders performance literally impossible. 3) Frustration of Purpose 1. What is frustration of purpose? a) failure of basic assumption causes performance to lack value Rest 265 Where, after a contract is made, a partys principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate the contrary UCC 2-615- Excuse by Failure of Presupposed Conditions UCC doesnt have express frustration of purpose provision [Grey Area] -for sure covers sellers impracticability, maybe buyers frustration b) What is its result? R allows discharge of contractual duties when principal purpose is frustrated c) Frustration of Purpose Test: In order to find frustration of purpose sufficient to discharge duties: 1) Some supervening act or event 2) Supervening act or event was not reasonably foreseeable at the time contact was entered into; 3) Alleged purpose or object of the contract was known & recognized by both parties at the time of contracting; and 4) Supervening act or event totally or nearly totally destroys the purpose or object of the contract 2. Unforeseeable Supervening Event
a) Krell v. Henry (Rents apt for coronation; King gets sick, D doesnt pay rent; advertised view of procession) Performance will be excused when the purpose of a contract is frustrated by an unforeseeable supervening event and the purpose was within the contemplation of both parties when the contract was executed * K to use rooms for a particular purpose, implied from extrinsic sources. Implied condition. b) General Frustration Questions to Ask: 1) Is this contract for a very specific purpose?
Ex: K to buy dress [NO] or contract to buy dress for marriage [YES]? As long as its not buyer, then frustration
2) Who is in better situation to assume risk? 3. Government intervention Chase Precast v. John J Paonessa (Gen C. & Sub C. K for concrete medians on road, then state cancels barrier part of project, D pays for barriers produced & P sues for lost profits) Rule 1: Once shared basic assumption fails, party may be excused unless contractual allocation is shown (high standard) Rule 2: Party can rely on frustration of purpose as a defense if risk not allocated to that party 4. Changes in Market Price Insufficient NIPSCO v. Carbon Coutny Coal Co. (force majeure clause seeks to get out of K) A party cannot avoid performance of a contract on the basis of impracticability or impossibility where the contract specifically shifts the risk of such to that party 4) Half measures a) What is a half measure? If a contract has been partially performed at time completion becomes impossible, some remedy in addition to excuse may be warranted 1) Restitution for partys performance before it became impracticable b) Why are half measures necessary? 1) Party who partially performed may suffer loss 2) Party who received performance may be unjustly enriched c) Limitations on relief 1) Must be no fault of either party 2) Restitution only for value of any benefits conferred before occurrence of disrupting event 1. Impracticability & Reliance [Restitution Plus]R a) Restitution in cases of excused performance 1) Excused party may be paid for partial performance even if no benefit to other party b/c subject matter destroyed a) expansion of unjust enrichment theory of restitution
goal of long term contracts is to allocate risk of govt imposed price changes to buyer
b) Young v. City of Chicopee (K to repair bridge; bridge destroyed by fire, w/o fault of either party. As per K, contractor put lumber @ jobsite; some lumber destroyed) When object upon which work is being performed is destroyed without fault of either party, party performing the work cannot recover the value of his work or materials purchased in contemplation of performing the work -city only liable to labor + material wrought into bridge c) Reliance interests a)What is the extent of reliance damages awarded in excuse cases? Protection against unjust enrichment, but NOT to compensate for expenditures incurred in reliance on the contract which didnt result in benefit conferred on other party b) R 272 Relief Including Restitution 1) Restitution is available to either party in cases of impracticability/frustration 2) In cases of impracticability/frustration, relief to protect parties reliance interests may be granted if other rules will not avoid injustice Alcoa Case (K to smelt aluminum; price mechanism not accurate to actual price & ALCOA losing money on long-term contract. Where there is mutual mistake about whether a pricing formula will work to keep price in an acceptable range, court may rewrite K to include terms selected by court
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