CONTRACTS II OUTLINE
PROFESSOR SCOTT
SPRING 1999
I. PAROL EVIDENCE RULE
A. UNDER RESTATEMENT
(1) Like SOF, Parol Evidence is a rule of exclusion
(2) Evidence of prior or contemporaneous agreements that contradict, modify, or add supplemental contractual terms is
inadmissible if the written K is intended as a complete and final expression of the parties (writing is fully integrated)
(R2d '213).
(a) A partially integrated writing may be supplemented by consistent terms, but not contradictions
(3) A written K that appears complete and specific is assumed to be integrated unless other evidence shows that it was not
a final expression (R2d '209). To be integrated, the K merely needs to be complete, not comprehensive
(4) Exceptions to Parol Evidence Rule (R2d '214). Evidence is admissible to establish:
(a) whether the writing is an integrated agreement ('214(a))
(b) whether the integration is complete or partial ('214(b))
(c) the meaning of ambiguous terms (or trade usage applied to otherwise clear terms) in the K ('214(c))
1. Some cts have stretched the doctrine to allow evidence to show that the plain words of the K are
ambiguous. If they find ambiguity, they will then apply the same evidence to interpret the ambiguity
2. However, other cts have held that if the terms are unambiguous, then evidence cannot be admitted
(Hershon)
(d) illegality, incapacity, fraud, duress, mistake, or other invalidating cause ('214(d))
- for defenses, usually only applies to substantive uncon and sometimes mistake
(e) ground for granting or denying rescission, reformation, specific performance, or other remedy ('214(e))
- usually used to show that term was excluded because of clerical error - need clear and convincing
evidence that term was meant to be included by both parties
(f) the existence of collateral agreements - an agreement is not fully integrated if the parties have made a
consistent additional agreement which is either agreed to for separate consideration or is “such a term as in
the circumstances might naturally be omitted from the writings” (R2d '216(2))
(g) subsequent modifications to the K (see modification section)
(5) A small number of cases, for the purpose of a promissory estoppel claim, have allowed evidence to show that the P
detrimentally relied on promises not contained in an integrated written K
B. UNDER UCC '2-202
(1) Written terms may not be contradicted, but may be supplemented or explained with extrinsic evidence such as
(a) trade usage or course of performance ('2-202(a)) (defined in UCC '1-205)
1. Parties can be bound by a usage common to the place they are in business, even if it is not the usage of
their particular vocation or trade (Nanakuli Paving)
2. Persons who should be aware of the trade usage include those who regularly deal with members of the
relevant trade (Nanakuli Paving)
(b) consistent or additional terms (for partially integrated agreements) - if the term would have certainly been
included in the K if agreed to, it should be kept out ('2-202(b))
II. IMPLIED TERMS
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A. IMPLIED TERMS GENERALLY
(1) Implied in fact - A term implied by fact is what the parties would have agreed to or did agree to.
- Some terms implied in fact - default rules include: Place of delivery '2-308, Time of payment '2-310, Risk of
Loss '2-509, and Buyer’s right of inspection '2-513
(2) Implied by law - A term implied by law (e.g., good faith)
(a) cannot be overcome by express terms and
(b) exists regardless of the parties’ intent
(4) Default rules should reflect the agreement that the parties probably would have made if they had bargained over the
issue. Implied terms help decrease the transaction costs in bargaining and some also help to prevent unconscionable
K’s (good faith requirements)
(5) Even though Cardozo did not find so in Lady Duff Gordon, “Illusory” promises may reflect a rational bargain - the
person making the real illusory promise is bargaining for the chance to prove that their performance is attractive
B. IMPLIED OBLIGATION OF GOOD FAITH
(1) Good faith: UCC '2-103 - Good faith is honesty in fact and the observance of reasonable commercial standards of fair
dealing in the trade
- commercial standards include trade usage, course of performance, and course of dealing in past K’s
(2) Duty of good faith and fair dealing extends to every K - R2d '205 & UCC '1-203
(3) Policy Reasons for good faith requirement:
(a) reduces transaction costs finding out the truth of the statement
(b) polices opportunistic behavior - moral and ethical reasons
(c) protects the reasonable expectation of the contracting parties
(4) Good faith framework:
(a) What is the purpose behind this K?
(b) Does the conduct in question frustrate this purpose?
(5) In a requirements K (UCC '2-306), variations in buying are allowed if done in good faith. Bad faith would be taking
advantage of other party’s poor position and buying or not buying purely on price variances
(6) If course of performance indicates that it was allowed in the past, it is a common practice and not done in bad faith
(UCC '2-208 & Eastern Airlines)
(7) Best Efforts - Exclusive dealing K’s imply an obligation on the seller to make his best efforts to supply the goods and
on the buyer to make his best efforts to promote and sell the goods ('2-306(2) & Lady Duff Gordon)
(8) Reasonable notice before termination '2-309(3) of K’s that are terminable at will
(a) Reasonable notice is a default rule - can K out right to terminate at will as long as acting on that clause would
not be unconscionable (comment 8)
(b) Do not need to give notice if there is a material breach of K (comment 9)
(c) Do not need to give notice if K states termination upon a particular event. The event itself is notice when it
occurs (e.g., death of franchisee, declining sales for 2 yrs) (comment 10)
C. WARRANTIES
(1) Warranties are essentially risk shifting instruments that function as insurance to reduce the risk to the buyer. They
substitute for the lack of expertise and impossibility of inspection faced by the buyer. The seller has superior
knowledge, greater control of the risks, and often is in a better bargaining position.
(2) Warranties in UCC
(a) '2-312 - implied warranty of title - guarantees that title is good and unencumbered
(b) '2-313 - express warranty by affirmation, description, or sample
1. Any affirmation of fact or promise, description of goods, or sample or model that is made part of the
basis of the bargain creates a warrantee that the goods will conform. Formal words such as “guarantee”
do not have to be used.
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2. However, an affirmation of the value of goods or statement of seller’s opinion does not create an express
warranty
(c) '2-314 - implied warranty of merchantability - applies to merchants
1. goods are fit for ordinary purposes for which the goods are used, and
2. if goods are fungible, they are of fair, average, and even quality, and
3. conform to other promises made
(d) '2-315 - implied warranty of fitness for a particular purpose
1. the seller knows or has reason to know of the buyer’s needs,
2. the buyer relies on the seller, and
3. the goods do not conform to that particular purpose (even if they conform to ordinary use there is still a
breach)
(3) The seller can disclaim implied warranties ('2-316)
(a) but must be conspicuous, obvious, and in writing
(b) for warranty of merchantability, it must explicitly mention merchantability
(c) for an “as is” clause to work, the buyer must be offered an opportunity to reasonably examine the good.
(d) some courts also require a showing that it was part of a mutual agreement
(d) the seller cannot generally disavow “all warranties”, but must be specific
(e) they can also be excluded or modified by trade usage or course of performance or dealing.
(f) remedies for breach of implied warranty can also be limited by the K
(4) Warranties also apply to real property - warranty of habitability (McDonald v Mianecki) - stronger case for residential
property than commercial property
(5) Warranties toward services
(a) Normally warranties of quality are also implied for commercial service providers (e.g., hairdresser uses
product that burns hair). However, a state may have specific statutes that limit the application of warranties.
- In, Doe v Travenol Labs there was a statute limiting warranties to blood products. The court justified not
extending a warranty since the hospital could not eliminate the risk of harm and because of the
importance of the market for the product.
(b) Professional services (e.g., lawyer, doctor, accountant) are normally only held to a negligence standard. Their
fiduciary responsibility serves as a surrogate for a warranty of quality of service. However, they may be held
for breach of express warranties made
III. AVOIDING ENFORCEMENT
A. MINORITY
(1) K’s of infants are not void, but voidable at the election of the minor. The K must be disaffirmed by the minor either
before or in reasonable time after attaining majority or it is automatically affirmed (R2d '14)
(2) Exception: the minor is liable for the reasonable value of necessaries (R2d '12)
(3) Other rules practiced in a minority of states:
(a) Benefit rule - upon recision, recovery of the full purchase price is subject to a deduction for the minor’s use of
the merchandise
(b) The minor is liable for depreciation of the product while in his possession
(4) Dodson v. Schrader rule
(a) Where the minor has not been overreached in any way and there has been no undue influence, and the K is fair
and reasonable, and the minor has actually paid money on the purchase price, and taken and used the article
purchased, that he ought not to be permitted to recover the amount actually paid, without allowing the vendor
of the goods reasonable compensation for the use of, depreciation, and willful or negligent damage to article
purchased while in his hands
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(b) If there has been any fraud or imposition on the part of the seller or if the K is unfair, or any unfair advantage
has been taken of the minor inducing him to make the purchase, then the rule does not apply
- This rule balances the interests of a good-faith vendor against the interest of the child
B. MENTAL INCAPACITY
(1) Cognitive test (Estate of McGovern v State Employees’ Retirement Board)
(a) In the face of a signed document, the ct requires clear and convincing evidence of mental incapacity at the time
of the signing in order to rescind.
1. Testimony of people who observed the signing outranks testimony from people who have observed him
before or subsequent to the signing
2. A presumption of mental incapacity does not arise merely because of an unreasonable or unnatural
disposition of property
(b) This test looks at the person’s understanding of the transaction at hand
(2) Volitional test - Rule under restatement (R2d '15)
(a) K is voidable by a party if by reason of mental illness or defect
1. he is unable to understand in a reasonable manner the nature and consequences of the transaction,
(cognitive test) or
2. he is unable to act in a reasonable manner in relation to the transaction and the other party knows or has
reason to know of his condition (volitional test)
(b) Where the K is made on fair terms and the other party is without knowledge of the mental illness, the power of
avoidance terminates to the extent the K has been performed or the circumstances have so changed that
avoidance would be unjust. Ct may grant relief as justice requires.
(c) the rule looks at understanding and the person’s ability to conform his actions to reason
(3) If the person has been declared legally incompetent and a guardian has been appointed to care for the incompetent
person’s person or property, then the person does not have the capacity to enter into K’s (R2d '13)
C. DURESS
(1) Common law duress (R2d '174)
(a) automatically voids K - assent is not given
(b) limited to physical threats of
1. physical injury
2. false imprisonment
3. force
(c) based on involuntary nature of one’s acts and the tainting of the bargaining process.
(2) Modern expansion of duress (including economic duress) (R2d '175)
(a) If assent is induced
1. by improper threat by that other party
2. and the victim is left with no reasonable alternative, the K is voidable
(b) A threat is improper if ('176)
1. threat of crime or tort ('176(1)(a))
2. threat of criminal prosecution ('176(1)(b))
3. bad faith threat of using civil process - threat of frivolous law suits ('176(1)(c))
4. threat of breach of good faith in K with victim - threat of improper breach ('176(1)(d))
5. the resulting exchange is not on fair terms and ('214(2))
a. the act would harm the recipient and not benefit the party making the threat,
b. the effectiveness of the threat is significantly increased by prior unfair dealing with the party
making the threat, or
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c. the threat is otherwise a use of power for illegitimate ends
(c) Absence of alternative - hardship to be suffered by nonacceptance of proposed conditions
1. irreparable injury - bankruptcy, or
2. inability to cover
(c) If threat is made by a third party, the K is voidable unless the other party, in good faith and without reason to
know of the duress, gives value or relies materially on the transaction
(3) Duress is ground in notions of unjust enrichment and restitutionary principles
(4) Policy reasons against economic duress:
(a) parties must eat K losses caused by threats up to the point of insolvency - cost of business failure is extremely
high
(b) punishing wrongful acts by other parties - lack of alternatives means more egregious impropriety by party
causing duress
(5) Duress (as well as most of the other defenses) brings rescission - which places the parties in status quo... the condition
that they were in before they entered into the K. It has restitutionary aspects, but it is not technically restitution
(6) May Also have tort claim including punitive damages for duress
D. UNDUE INFLUENCE
(1) Elements - need to prove:
(a) undue susceptibility to pressure on one party because of a mental, emotional, physical impairment, or special
relationship, and
(b) excessive pressure is applied by the other party
(2) Rule under Restatement - R2d '177
(a) Undue influence is
1. Unfair persuasion of a party who is under the domination of the person exercising the persuasion, or
2. Unfair persuasion of a party who is justified in assuming based on a special relationship that persuader
would not act in manner inconsistent with the victim’s welfare
(b) If undue influence the K is voidable by the victim
(c) If undue influence is caused by a third party, the K is voidable unless the other party, in good faith and without
reason to know of the duress, gives value or relies materially on the transaction
(3) Bad faith is not an issue in undue influence claims. Do not need special relationship.
(4) Probative factors as to whether undue influence include (Odorizzi)
(a) Discussion of the transaction at an unusual or inappropriate time
(b) Consummation of the transaction in an unusual place
(c) Insistent demand that the business be finished at once
(d) Extreme emphasis on untoward consequences of delay
(e) Use of multiple persuaders against a single party
(f) Absence of third-party advisors to the servient party
(g) Statements that there is no time to consult financial advisers or legal counsel
E. MISREPRESENTATION
(1) A K is voidable when (R2d '164(1))
(a) assent is induced (implies reliance)
(b) by either a fraudulent or material misrepresentation
1. an assertion - when is an omission an assertion? (R2d '161) - F(2)
2. of fact - when is an opinion a fact? (R2d '168 & '169) - E(4)
3. that is either fraudulent or material (R2d '162) - E(3)
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4. and false - no claim if fact is true
(c) that the recipient is justified in relying upon
(2) Where the misrepresentation is made by a third party and the recipient is justified in relying upon it, the K is voidable
unless the other party in good faith and without reason to know of the misrep gives value or relies materially on the
transaction (R2d '164(2))
(3) Fraudulent or material misrepresentation (R2d '162)
(a) A misrep is fraudulent if (R2d '162(1))
1. the maker intends his assertion to induce assent and
2. the maker:
a. knows or believes that the assertion is not true,
b. does not have the confidence that he states or implies about the truth of the assertion, or
c. knows that he does not have the basis that he states or implies for the assertion,
(b) A misrep is material if (R2d '162(2))
1. it would likely induce a reasonable person to assent, or
2. the maker knows that it would be likely to induce the specific recipient to assent
(4) Opinions - must have justified reliance to be actionable
(a) An opinion is the expression of a belief, without certainty, as to the existence of a fact. Typically opinions
deal with matters such as quality or value of property (R2d '168(1))
(b) A statement of opinion is a misrepresentation of fact if the person giving the opinion misrepresented his state
of mind (R2d '159) - stated an opinion that he did not hold
(c) The recipient can rely upon the opinion as an assertion only if the recipient (R2d '169)
1. is in a trust and confidence relationship (i.e., fiduciary or guardian), (R2d '169(a))
2. reasonably believes that the person is an expert (professional), (R2d '169(b)) OR
3. is for some other reason particularly susceptible to a misrep of the type involved (e.g., age or mental
incapacity) (R2d '169(c))
(d) If '169 fails, can possibly prevail on (R2d '168(2)): An opinion is an implied representation that
1. the speaker does not know any facts that would make the opinion false, and
2. the speaker knows enough facts to justify forming the opinion
- if either is not true (misrep of actual opinion or not enough info to make opinion), the opinion may be
actionable if it is reasonable for the recipient to rely upon the opinion (e.g., it may be impossible for you
to check on the truth of the opinion for yourself)
F. NON-DISCLOSURE
(1) There is no general duty for parties to disclose information.
- Policy reasons: even though it increases the costs of information and wastes efforts, forced disclosure creates
incentive not to discover by either party since they do not receive the benefit from finding information, only the
cost. We want people to invest in getting information to better utilize resources.
(2) Non-disclosure is equivalent to an assertion that the fact does not exist only when (R2d '161)
(a) the speaker knows that the disclosure is necessary to prevent a previous assertion from being a misrep
(b) the speaker knows that the disclosure would correct a mistake of the recipient as to a basic assumption on
which the party is making the K, and the non-disclosure would be bad faith
(c) the speaker knows that the disclosure would correct a mistake of the recipient as to the contents or effect of a
writing in whole or in part
(d) there is a trust and confidence relationship between them (i.e., fiduciary)
(3) Hill v Jones - a seller has a duty to disclose if he knows of facts which materially affect the value of the property not
known or readily observable (through due diligence) by the buyer
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(4) Disclosure is also required in areas with structural weaknesses from non-disclosure (e.g., securities market, home
mortgages)
(5) Some states have rules on inquiry disclosure - if someone asks, you must disclose (Hill v Jones)
(6) Factors to consider in determining necessity of disclosure under R2d '161(b) bad faith (Keeton):
(a) difference in degree of intelligence of the parties
(b) relationship between the parties
(c) the manner in which the info is acquired - by chance, effort, or illegal act - ethical quality
(d) nature of the fact not disclosed - is defect obvious? - patent/latent
(e) general class to which the person who is concealing the info belongs. Sellers are more likely to need to
disclose than the buyer
(f) the nature of the K itself - releases and insurance K’s usually require disclosure of all material facts
(g) importance of the fact not disclosed
(h) the conduct of the person not disclosing - active concealment of material fact
G. UNCONSCIONABILITY (“UNCON”)
(1) Uncon includes both an absence of meaningful choice on the part of one party and K terms which are unreasonably
favorable to the other party (Williams v Walker-Thomas)
(2) Uncon requires both procedural and substantive uncon - may need less of one kind if high degree of the other
(a) procedural - a defect in the bargaining process
1. how term is included in K - boilerplate, fine print, incomprehensible language
2. how K is made - high pressure sales tactics, term is significant aberration from standard trade practices,
adhesion K’s (take it or leave it deal), advantaged party is an expert, unusual time, place or
circumstances (e.g., emergency)
3. no reasonable alternative- no other sellers in the market, all sellers use the same clause, no bargaining
power, exploitation of the underprivileged, uneducated, and illiterate
(b) substantive - oppressive nature of terms in K
- cost/price disparity, sheer excessive price, excessive penalty charges, denial of basic rights and remedies,
imbalance of obligations, money paid vs. value received, forfeiture
(3) If a ct finds that a K or term is uncon at the time it was made, the ct may refuse to enforce the K, enforce the
remainder of the K without the uncon term, or limit the application of the clause that would cause an uncon result
(UCC '2-302 & R2d '208)
(4) Most cts allow uncon only as a defense for rescission and not as a means of affirmative relief for damages or
restitution
(5) Uncon is not purely about disparity of bargaining power, but more about oppression and improper practices. It is
used as a “catch all”/”safety net” doctrine for where the K seems horribly unfair, but it does not fit into other
defenses such as duress, misrepresentation, or fraud.
(6) The court should try to prevent oppression and unfair surprise, not disturb allocation of risks because of greater
bargaining power (UCC '2-302). Uncon is a question of law- decided by judge
(7) Price uncon. (Ahern v Knecht) - grossly excessive price alone can make agreement uncon
(a) in general, the obviousness of the price mitigates against findings of uncon
(b) UCC is unclear as to whether price uncon is valid action, but Restatement indicates that excessive price may
be a basis of uncon (R2d '208)
(8) Consumer protection legislation
(a) It is often used to limit tactics by sellers to create K’s and terms that would be uncon
(b) Legislation has stronger impact than law of uncon... uncon is highly uncertain in law, most people do not
litigate, and it does not have as strong a deterrent on the seller.
H. PUBLIC POLICY
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(1) Not based upon defects in the bargaining process, but relates to public’s interest in making the machinery of
enforcement unavailable
(2) K’s with criminal subject matter are unenforceable (e.g., bribes, assassinations)
(3) Failure to comply with license, registration, or similar agreement (R2d '181) - K’s in violation of purely revenue
raising statutes are not void unless it expressly states so in the statute. However, the K may be unenforceable if
(a) the requirement has a regulatory purpose (designed to protect the public), and
(b) the interest in the enforcement of the promise is clearly outweighed by public policy
(4) Where the statute is regulatory, a ct can
(a) Rescind the K
1. It furthers public policy embodies in the statute and is easy to administer
2. However, may cause windfall at one party’s expense without their fault
(b) Use the balancing test under R2d '178
1. A K in violation of public policy is unenforceable if either legislature provided for it OR the interest in
enforcement is clearly outweighed by public policy against enforcement (R2d '178(1))
a. weighing in favor of enforcement (R2d '178(2))
(i) parties’ justified expectations
(ii) forfeiture that would result if enforcement were denied
(iii) special public interest in enforcement
b. weighing against enforcement (R2d '178(3))
(i) strength or importance of public policy
(ii) likelihood that non-enforcement will further that policy
(iii) presence of deliberate misconduct
(iv) connection between misconduct and term of K
(c) Void the K, but use restitution to compensate for unjust enrichment
- However, R2d '197 states that a party cannot use restitution if the K was unforeseeable because of public
policy unless denial of restitution would cause disproportionate forfeiture. Whether forfeiture is
disproportionate depends on a balancing test of the forfeiture and the gravity of public interest involved
(d) Only rescind the K if the statute explicitly calls for it
1. If the legislature wanted a prohibition, it could have expressly done so in the statute
2. Other penalties in the statute fully punish the party in violation - voiding the K would be excessive
punishment
(5) Even if the K does not violate a statute, a ct may refuse to enforce it if it is directly related to some serious illegal
activity (e.g., K does not violate, but bribe was used to get K)
I. COVENANTS NOT TO COMPETE (“CNC”)
(1) There is an implicit underlying assumption that there is a general public policy against CNC’s since they restrain
economic competition and free trade. However, they protect trade secrets, protect relationships, and preserve
business good will.
(2) Most states do not have statutes prohibiting CNC’s (CA has statute), and most courts have not found them
unenforceable per se. However, Courts prefer not to allow them unless they are reasonable restraints.
(3) R2d '187 allows CNC’s only where the restraint is ancillary to an otherwise valid transaction.
(a) Even if ancillary, CNC is not allowed if (R2d '188(1))
1. the restraint is greater than is needed to protect the promisee’s legitimate interest, or
- excessive time, geographic scope, or scope and type of industry/competition
2. the promisee’s need is outweighed by
a. the hardship to the promisor and
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- likelihood of finding work elsewhere, bad faith triggering by promisee
b. the likely interest to the public
- shortage of supply, old customers cannot still reasonably get to promisor if they want to
(b) Allowable ancillary restraints include (R2d '188(2))
1. promise by the seller of a business not to compete with the buyer
2. promise by an employee/agent not to compete with the employer/principal
3. promise by a partner not to compete with the partnership
(4) “Blue pencil” theory - If a ct finds a CNC that is unreasonable, instead of striking the entire CNC, the ct can sever it
and enforce it only to the degree it finds reasonable
(5) Inventions agreement - any inventions you have while in the employ of the company belong to the company...
includes inventions created on free time and sometimes unrelated to company’s business. It is a per se rule - your
thoughts are linked with company resources
(6) CNC for lawyers are unenforceable per se because of rules of conduct... effectively statute
IV. JUSTIFICATION FOR NONPERFORMANCE
A. MISTAKE
(1) A mistake relates to a mistake of a fact in existence at the time the K is formed
- if fact comes into existence after K is formed, go to section (B) - changed circumstances - impossibility,
impracticability, and frustration of purpose
(2) A ct will intervene when the mistake is outside the range of risk allocation (foreseeable outcomes)
(3) Normal remedy is rescission along with restitution of any benefits conferred. However, cts can award reformation of
the K or pure restitution.
(4) Mutual mistake
(a) A K is voidable by the adversely affected party if (R2d '152)
1. the mistake is a basic assumption on which the K was made, and
2. it has a material effect on the agreed exchange of performances
3. UNLESS he bears the risk of mistake
(b) A party bears the risk of mistake when (R2d '154)
1. the risk is allocated to him by the agreement (R2d '154(a))
2. he is aware that he has limited knowledge with respect to the facts but treats his limited knowledge as
sufficient, (R2d '154(b)) OR
3. the ct finds it is reasonable to allocate the risk to him under the circumstances - the ct will usually
allocate the risk to the person best able to bear it if neither party is at fault (R2d '154(c))
(c) “As is” clauses as risk allocations
1. should be truly bargained for - not boilerplate, buyer was aware of clause, and it was explicitly
negotiated for
- some cts hold that boilerplate is not enough to enforce an “as is” clause (Shore Builders)
2. the mistake should be within the realm of “present condition” envisioned by the clause
3. can deal with the risk-loss provisions in the K by
a. insuring against the risk
b. have experts inspect and look into permit requirements
c. buying an option K
d. conditional K’s - “condition subsequent conditions (known as an “out”)
e. getting a warranty
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(d) A ct does not look at fault or knowledge for mutual mistake - otherwise it could be misrep
(5) Unilateral mistake
(a) Under the restatement, a K is voidable by the party making the mistake if (R2d '153)
1. the mistake is a basic assumption on which he made the K,
2. it has a material effect on the agreed exchange of performances that is adverse to him, and
3. he does not bear the risk of mistake (explained under R2d '154), AND EITHER
a. the effect of the mistake is such that enforcement would be unconscionable, or
b. the other party had reason to know or caused the mistake (R2d '153(b))
(b) Wil-Fred’s test
1. the mistake relates to a material feature of the K
2. it occurred despite due care by the person making the mistake
3. the consequences from enforcing the K would be uncon
4. the other party can be placed in status quo and returned to their original position - no significant
detrimental reliance on the promise and damages to the other party by not enforcing K... mainly
windfall by enforcing it
B. CHANGED CIRCUMSTANCES - IMPOSSIBILITY, IMPRACTICABILITY, AND
FRUSTRATION OF PURPOSE
(1) Changed circumstances relates to a mistake of a fact not in existence at the time the K is formed
(2) These are equitable doctrines which are meant to fairly apportion risks between parties in light of unforeseen or
unbargained for circumstances - cts will often look at who had the better opportunity to minimize the chance of the
risk or the damage caused by the risk
(3) Most cts grant rescission as the sole remedy
(4) Impossibility and Impracticability
(a) cannot reasonably provide specific performance and money will not cure the problem
(b) Impossibility: death or incapacity of person necessary for performance (R2d '262), destruction, deterioration,
or failure to come into existence of the thing necessary for performance (R2d '263 & UCC '2-613)
(c) Impracticability under Restatement (R2d '261)
1. A party’s duty to perform is discharged by supervening impracticability:
a. when his performance is made impracticable
b. without his fault
c. by the occurrence of an event
d. the non-occurrence of which was a basic assumption on which the K was made,
e. unless the language of the K or circumstances indicate the contrary
2. Includes prevention of performance by government regulation or order ('264)
(d) Impracticability under UCC '2-615
1. Unless the seller assumed a greater obligation, late or non-delivery is not a breach
a. if performance has been made impracticable ('2-615(a))
(i) by the occurrence of an event, the non-occurrence of which was a basic assumption on
which the K was made, or
(ii) by compliance in good faith with gov’t regulation or order, and
- even if regulation is later found illegal, only the good faith of the seller in following
the regulations matter (cmt 10)
- the gov’t regulation must truly “supervene” in that it is beyond the seller’s
assumption of risk (cmt 10)
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- however, cts want to encourage public policy of companies working with gov’t
regulation, so they may discharge the obligation anyway (IMC v Llano)
b. the seller must provide reasonable notice to the buyer about non-performance
c. the seller may allocate production and deliveries between buyer and regular customers in any
manner fair and reasonable ('2-615(c))
2. The seller must make all reasonable efforts to assure that his source will not fail (cmt 5)
3. The UCC does not discuss buyers, but most cts have been willing to grant relief to buyers as well (IMC
v Llano)
(e) Performance is not excused simply because a K is no longer profitable - the party will not be released unless
bankruptcy occurs - profitability is easily manipulated by skilled accountants (International Harvester)
(f) Market shifts
1. A market shift caused by ordinary business activities and cycles that increases costs does not justify nonperformance. The risk of market changes are inherent in long-term K’s
2. The market shift must be due to unforeseeable event, such as war, embargo, local crop failure, or
unforeseen shutdown of major sources of supply. (UCC '2-615, cmt 4) - “acts of god”. However, cts
have been more willing to grant relief for gov’t action than for act of war, natural disaster, or market
change
(g) Mere foreseeability does not eliminate the defense of impracticability. It still does not prove the allocation of
the risk (R2d '261, cmt c)
(h) Force majeure clauses
1. Force majeure clauses are allocations of risk devises that cover areas that the impracticability doctrine
may not cover
2. Cts disfavor broad force majeure clauses as methods of risk allocation. They also disfavor clauses
included in boilerplate. The clauses should address the specific risks which the parties bargained for to
be valid risk-allocation agreements
(5) Frustration of purpose
(a) R2d '265 - A party’s duty to perform is discharged:
1. when a party’s primary purpose is substantially frustrated
2. without his fault
3. by the occurrence of an event
4. the non-occurrence of which was a basic assumption on which the K was made,
5. unless the language of the K or circumstances indicate the contrary
(b) frustration must be substantial - not enough that the K may no longer be profitable (cmt a)
(c) primary purpose - the object must be so completely the basis of the transaction that, as both parties understand,
without it the transaction would not make sense (cmt a)
C. MODIFICATION
(1) Generally, the restatement views “one-sided” modifications as presumptively improper and only enforceable in
exceptional cases. The UCC views “one-sided” modifications as commonplace, to go unenforced only in the
presence of special circumstances. “Two-sided” modifications mean that consideration has been given by both
parties.
(2) Under Restatement
(a) Pre-existing duty ('73)
1. Performance of a pre-existing duty cannot constitute consideration for K modification
2. If a party is already obliged to perform, then an agreement to modify the K is invalid without additional
consideration
3. A change in the old consideration (e.g., reduced time schedule, later service) can satisfy the new
consideration requirement
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(b) Exceptions to pre-existing duty rule ('89) - modifications are binding
1. If modification is fair and equitable in view of unanticipated circumstances ('89(a))
- harder burden than UCC good faith requirement
2. To the extent required by statute ('89(b))
3. To the extent justice requires enforcement in view of a material change of position in reliance on the
promise of the modification ('89(c))
- only usually provides reliance damages
(c) If both parties agree to rescind the old K and then execute a new one with the modifications, this is allowable,
since the pre-existing duty was eliminated (Schwartzreich) - questionable rule
(3) Under UCC '2-209
(a) Modification does not need additional consideration to be binding
(b) Good faith required (Roth v Sharon Steel test)
1. Existence of unforeseen changes which would prompt an ordinary merchant to seek a modification in
order to avoid a loss
2. Wrongful threat of breach is bad faith
- party having modification forced upon them must prove threat of breach, then party threatening
breach must prove that it is not wrongful
(c) Modification cannot be obtained by taking advantage of economic duress
D. EXPRESS CONDITIONS
(1) Express Conditions vs. Promises - if it is not a condition, it is a promise, subject to liab for breach
(a) A condition precedent is a prerequisite to performance. If the condition does not occur, there is no obligation
and therefore no breach
(b) A promise creates obligations on both parties and they are subject to liability for non-performance
(c) Where it is doubtful whether words create or promise or condition, they are interpreted as creating a promise,
with duties on both parties. It is not a condition subsequent unless the party charged with its fulfillment can be
said to have assumed the risk of forfeiture (Jones Assoc v Eastside Properties)
(2) Under traditional common law, express conditions were strictly enforced (Inman)
- courts want certainty of commercial dealings and predictability, and the written words of a K normally take
priority
(3) However, while generally following this rule, the restatement has allowed more liberal grounds for getting out of the
K
(a) Effect of a non-occurrence of a condition (R2d '225)
1. The performance of a duty subject to a condition cannot become due unless the condition occurs or its
non-occurrence is excused
2. Unless it is excused, the non-occurrence of a condition discharges the duty when the condition can no
longer occur
3. Non-occurrence is not a breach unless a party is under a duty that the condition occur
(b) Standards of preference with regard to conditions (R2d '227) - allows cts to review express conditional terms
of K, but it must have some doubt on whether the condition was what they intended
1. An interpretation is preferred that will reduce the party’s risk of forfeiture, as long as
(a) the event is not within the his control, and
(b) the circumstances do not indicate that he has assumed the risk
2. Courts prefer to impose the duty on the party that the event occur if the event is within the party’s
control
(c) Excuse of a Condition to Avoid Forfeiture (R2d '229) - equity doctrine
1. A ct may excuse the non-occurrence of the event if it would cause disproportionate forfeiture,
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- windfall by one party at the expense of the other - party receiving benefit can always try to argue
portfolio theory, but probably will not work
2. UNLESS its occurrence was a material part of the agreed exchange
- if event involves timing - was time important in the past... is it arbitrary now?
- even if a condition is excused, a ct may still impose restitutionary damages
(4) Conditions can be waived by the party benefited by the condition. A waiver is effective without consideration or
reliance, but only if the condition waived was not a material part of the performance or a material part of the risk
assumed (R2d '84)
(5) If the party waived the right to wait for fulfillment of the condition, he may still be under a duty to perform despite the
non-occurrence of that t condition (R2d '84)
E. MATERIAL BREACH
(1) Generally
(a) A breach is a total breach if the breach is material and the breaching party either cannot correct or fails to
correct the breach within a reasonable period of time.
(b) A total breach by one party eliminates the other party’s obligation to perform
(c) Upon total breach, the party can make other arrangements and sue for damages for uncovered amounts and
costs including future damages
(d) The non-breaching party must show that he was both willing and able to perform
(e) A partial or minor breach does not end obligations, but can still bring damages for harm incurred to date
(2) An uncured material breach by one party suspends the obligation of the non-breaching party until the breach is cured
(R2d '237). Obligations are not permanently suspended until the breach becomes a total breach (see part E(4)).
(3) Factors courts look at to see if a breach is material (R2d '241)
(a) the injured party will be significantly deprived of the benefit which he reasonably expected
(b) the injured party cannot be adequately compensated for the part of the benefit of which he will be deprived
(c) the party failing to perform will not suffer forfeiture
(d) the party failing to perform is unlikely to cure his failure
(e) the party failing to perform did not act in good faith
(4) To determine the time after which a party’s uncured material breach becomes a total breach, eliminating the
obligations of the parties, courts look at ('242)
(a) the materiality of the breach (explained in '241)
(b) how delay will affect the injured party’s ability to find reasonable substitute arrangements
(c) importance of time to K
1. Failure to perform by the time stated in a K is generally not a total breach if performance is rendered
within a reasonable time.
2. If the nature of the K makes time essential or the K expressly states a drop dead date and acts
accordingly, the failure to perform on time is a total breach
3. Stock phrases such as “time is of the essence” in the K will not mean that a delay is material if the other
circumstances do not indicate that it is.
a. If the K has interest payments, it does not communicate that time is of the essence since they are
compensated for late performance
b. A good K should normally put limits on time leeway - specific grace period
(d) the reasonableness of the injured party’s conduct in communicating his grievances and in seeking satisfaction
(comment b)
(5) A party who thinks a material breach has occurred takes a risk when he stops performance. If a ct does not find a
material breach on the other party’s end, he will have committed a material breach
F. SUBSTANTIAL PERFORMANCE (“SP”)
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(1) SP is an equitable doctrine - do not have to follow express conditions of K if equitable - helps cts avoid
disproportionate forfeiture from a minor imperfection
(2) R2d '237 - each party’s duty of performance is conditioned on there being no uncured material failure of performance
by the other party. Minor or immaterial deviations from the K provisions do not amount to a failure of a condition to
the other party’s duty to perform
(3) Use R2d '241 to see if material breach. If not material, it is SP
(4) Act normally must be in good faith - innocent mistake or minor carelessness, not fraudulent or intentional error or
reckless behavior. However, it is just one factor in '241 to consider
(5) If SP, damage for breach can be the difference in the FMV received rather than the replacement cost if the
replacement cost is grossly out of proportion with the benefit received (Jacob & Youngs v. Kent)
(6) Policy Issues in SP
(a) It is almost impossible to satisfy all technical requirements of complex transactions without glitches
(b) Usually quality is the real issue - as long as quality of performance is met, there is no reason to find breach
(c) SP helps avoid forfeiture when the other party performed objectively well in good faith
(d) Parties can make compliance with express conditions as cental to the K to show that it is more than a quality
issue
(e) However, SP overrides the express terms of the K
(7) If a K is divisible and can be separated into part performances where each part is an “agreed equivalent” (e.g., K to
build multiple lots), the ct can allocate the price to each of the part performances (R2d '240)
(8) Constructive conditions (R2d '234) - order of performance - only applies if not stated in K
(a) Where performance by the parties can be exchanged simultaneously, they are due simultaneously
(b) Where performance one party requires a longer period of time, his performance is due at an earlier time than
the other party
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