CHAPTER FIVE
• Parol Evidence Analysis
o Is additional evidence looking to be introduced?
If yes, continue.
o Are under the UCC or Common Law? Sale of goods?
UCC
• UCC §2-202
• What is the intent of the parties?
o Was the writing intended by the parties to be a “final expression of their
agreement with respect to such terms as are included therein?
o Whether the writing was intended to be a ‘complete and exclusive
statement of all the terms of the agreement’?
Common Law
• Is the agreement fully integrated?
o Four Corners Rule If the contract unambiguously demonstrates the
parties’ intent, we will simply apply the contract as written and, generally,
“parol or extrinsic evidence is inadmissible to expand, vary, or explain the
instrument.” (Barker v. Price)
o “In determining if the writing is integrated, the judge should also examine
the writing itself to see whether it appears complete on its face and should
also consider any other relevant evidence.” (Barker v. Price).
• If the writing is fully integrated no parol evidence
• If the writing is not fully integrated parol evidence may be admitted
• Exceptions to the Parol Evidence Rule
o Does not apply to evidence relating to terms discussed or agreed to after the execution of the
agreement
o Purpose of the rule is to “discharge prior agreements” Restatement §213(1)
o Collateral Agreement Exception
The parol evidence rule does not prohibit the introduction of parol evidence to prove the
existence of a collateral/separate/independent agreement
Forbids the use of evidence that may vary or contradict the terms of the original
agreement
Evidence may be admissible if relevant, which does NOT contradict the terms of the
original agreement, to prove a collateral oral agreement which does not vary the terms of
the writing
o Exception of Fraud
The parol evidence rule does not apply in cases of fraud in the inducement
No matter how clear and unambiguous a contract might be, parol evidence may be
offered to show a contract is invalid because of fraud in its inducement
Restatement §214(d)
Important Note: Fraudulent inducement is almost always grounds to set aside a contract
despite a merger clause, BUT in certain circumstances, it may be possible for a contract’s
terms to precluded a claim for fraudulent inducement by a clear and specific disclaimer of
reliance clause
o Validity Exception
There can be other areas where this same exception (as fraud) may apply
• Mistake
• Duress
• Unconscionability
• Misrepresentation
• Illegality
•
Any time we are challenging if there was ever mutual assent to the same thing, then this
rule can ascend
o Ambiguity Exception
Ambiguity Rule (Gassner)
• An ambiguity exists where there is doubt as to the true sense or meaning of the
words themselves or an indefiniteness in the word’ expression resulting in a
difficulty in the application of the words under the circumstances of the dispute
that the contract is supposed to govern.
Parol evidence may be admitted to interpret the agreement’s terms to establish “the
meaning of the writing, whether or not it is integrated”
• Restatement §214(c)
• When time comes for performance, the dispute that arises is not over what words
were used, but over the meaning of those words used
Extrinsic and parol evidence of the parties’ intent may not be admitted to create
ambiguity in a contract that is unambiguous on its face, but such evidence may be
considered where a contract is determined to be ambiguous
In re Kohn
Four Corners Rule
• Contract speaks for itself
• If the language of an agreement is facially unambiguous, then it is interpreted as a
matter of law, without resort to parol evidence
• If, however, a facial ambiguity is present, then parol evidence may be admitted to
aid the trier of fact in resolving the ambiguity
Provisional Admission Approach (Extrinsic Ambiguity Approach)
• Under the provisional admission approach, although the language of the contract
is facially unambiguous, a party may still proffer parol evidence to the trial judge
for the purpose of showing that an ambiguity exists which can be found only by
looking beyond the clear language of the contract
• Extrinsic Ambiguity
“when someone who knows the context of the contract
would know if the contract means something other than what it seems to mean”
• If after “provisionally” reviewing the parol evidence, the trial judge finds that an
“extrinsic ambiguity” is present, then the parol evidence is admitted to aid the
trier in fact in resolving the ambiguity
Restatement §203 Standards for Preference in Interpretation
Restatement §206 Interpretation Against the Draftsman
o Condition Precedent
Warranties and the U.C.C.
o Warranties are a way of allocation risk
o Express Warranties
Statements made or assurances given by the seller concerning the quality or
characteristics of the goods subject to the contract
Deemed to automatically become part of the contract unless they are excluded from the
contract by affirmative agreement of the parties
Restatement §2-313: Express Warranties by Affirmation, Promise, Description, Sample
• Provides that an express warranty be created by…
o Any affirmation of fact or promise that relates to the goods
o Any description of the goods
o Any sample of the goods
“any affirmation of fact or any promise by the seller relating to the goods is an express
warranty of the natural tendency of such affirmation or promise is to induce the buyer to
purchase the goods, and if the buyer purchases the goods relying thereon.” (Daughtry)
o Implied Warranties
Restatement §2-314: Implied Warranty, Merchantability, Usage of Trade
Becomes a part of the contract without any affirmative undertaking by the seller
• Must specifically disclaim them
Implied Warranty of Merchantability
• Seller is a merchant with respect to goods of that kind (§2-314)
• Most of the merchantability cases are litigated under the “fitness for the ordinary
purpose” or the “would pass without objection in the trade” standard, to be
merchantable for the purposes of §2-314(1) (Webster v. Blue Ship Tea Room)
• Causation Note 13 of 2-314
o “it is of course necessary to show not only the existence of the warranty
but the fact that the warranty was broken and that the breach was the
proximate cause of the loss sustained”
Implied Warranty of Fitness for Particular Purpose
• Implied warranty that the goods are fit for the particular purpose to which the
buyer intends to put them (§2-315)
• Breach of this would be that the goods are not for the particular purpose the buyer
had in mind
o If the seller affirmed that the goods to serve that purpose, the buyer will
have a claim for breach of express warranty
• Three-part rule for an implied warranty for a particular purpose (Leal)
o Seller has a reason to know the buyer’s particular purpose
o The seller has reason to know that the buyer is relying on the seller’s skill
or judgement to furnish or select the appropriate goods
o Actual reliance in fact
o Express v. Implied Warranties – Can they coexist? (Singer)
Whether an express warranty necessarily precludes an implied warranty relating to the
same or similar terms
Unless the exclusion of the implied warranty of fitness is specifically and conspicuously
excluded, courts, relying on UCC §2-317 have found that such implied and expressed
warranties can be cumulative and coexist within the same agreement
Two situations in which an express warranty may exclude an implied warranty\:
• Cases where there has been a showing that the buyer in possession or control of
the item failed to follow the express warranty specifications
• Cases where an enforceable disclaimer of the implied warranty was established
o Disclaimer of Warranties
UCC §2-316(2)
The UCC allows contracting parties to exclude or modify all implied warranties
To effectively disclaim a warranty, the selling party must: (Basic/Four)
• Mention merchantability, and
• In the case of an expressed or implied warranty, the exclusion must be by a
writing and conspicuous
o Restatement (Second) of Contracts §1-210(10)
Conspicuous With reference to a term, means so written,
displayed, or presented that a reasonable person against which it is
to operate ought to have noticed it
CHAPTER SIX
• Performance and Breach – Generally
o Restatement (Second) of Contracts §235(2)
When performance of a duty under a contract is due, any non-performance is a breach
o Contract law focuses of the performance due and rendered from each party
•
•
•
o The terms are set obligations, and the court compares the parties’ actions or inaction with those
obligations
o If there is a match, no breach; if there is any variance, breach
Contractual Obligations: Of Promise, Covenants, and Warranties
o Restatement (Second) of Contracts §235(2): Effect of Performance as Discharge and of NonPerformance as Breach
o Conditions Including a condition in a contract does not affect whether we have a legally
enforceable contract, but may affect whether, when, or under what circumstances there is a legal
obligation to perform under the contract
Important Notes:
• Non-occurrence of a condition is not breach
• Conditional language does not create a new obligation, it just modifies the limits
of the obligations that already exist
o If a party’s obligation under a contract is subject to a condition, then if the
condition is not satisfied, no duty arises
No duty = failure to perform cannot be breach because there is no
duty
Condition Precedent Prerequisite to the duty arising
Condition Subsequent Terminated a duty that came into existence when the contract
was formed
o Promise Restatement (Second) of Contracts §2(1)
o Covenant Fancier word for promise
A right is the inverse of a covenant/promise
• A right is the benefit of the obligor’s promise owed to the oblige
Only difference between a covenant and a promise is the, “douchiness of someone saying
the word.” – Randy himself
o Representation An assertion of fact, given by one party to induce another party to ender into
a contract or take some other action
o Warranty A promise that an assertion of fat is true, supported by an implied promise of
indemnity (a promise to compensate another party) if the assertion turns out to be false
Strict Liability Nature of Contract
o Restatement (Second) of Contracts §235
When performance is due, anything short of full performance is a breach, even if the
party who does not fully perform was not at fault and even if the defect is his
performance was not substantial
Non-performance of a duty where performance is due is a breach whether the duty
imposed by a promise stated in the agreement or by a term supplied by a court, as in the
case of the duty of good faith and fair dealing
Conditions: Not Having to Perform because Something that the Contract Expressly said must Occur,
Didn’t
o Effects of Conditions
A condition precedent is a fact or event which the parties intend must exist or take place
before there is a right to performance; if the condition precedent is not fulfilled the
contract is not enforceable (Luttinger)
Courts will construe the language of express conditions strictly (Schindler Elevator)
• Express condition precedents must be literally performed; substantial performance
will not suffice
• Failure to strictly comply with such provision generally constitute the waiver of a
claim
• Express conditions will be strictly enforced
•
If an obligation is subject to a condition, and the condition does not occur, the duty
connected to that condition does not arise (and this its nonperformance is not breach)
o Distinguishing Conditions from Covenants
Three distinctions between covenants and conditions (Celtic Bank)
• Parties to a contract have no duty to perform until a condition is fulfilled, so
failure of a condition relieves the parties of all their remaining contractual duties
• The parties have no remedy for breach of contract if the condition is not fulfilled
because at that point there is simply no contract to breach
• Conditions typically fall outside of the control of the party to the contract often
requiring some environmental trigger or action by a third party
In determining whether a provision is a covenant or a condition, the courts must evaluate
the language used
• Mandatory language USUALLY indicate a covenant (i.e., shall, must, agree)
• Express terms create conditions (i.e., on condition that, provided that, if)
Excuse: Legitimate Ways to Avoid Performance
o Excuses Even though a party to a contract does not render the performance required, external
factors “excuse” that performance, and there is not a breach, and no remedy for damages
o Four Categories:
Excuse: Post-Formation Modification, Waiver and Estoppel
• Modification
o Post formation actions are not covered by the parol evidence rule and they
extend the rule to modifications made orally and not in writing
o “Where the parties conduct, after signing the written agreement, conforms
with a previous oral modification, rather than with the terms of the written
agreement, it may be reasonably inferred that the parties have agreed after
the signing to be bound by the oral modification of the written contract
ratifying it in effect by their conduct.” (Schinkel)
o No Oral Modification – Common Law
To give effect to the oral modification, the party seeking to
introduce an oral revision will simply say that the “no oral
amendment” provision was itself amendment by a subsequent oral
undertaking
Once the “no oral amendment” provision is modified, then any
provision can be modified by an oral understanding
o No Oral Modification – UCC Version
§2-209(2) A signed agreement which excludes modification or
rescission except by a signed writing cannot be otherwise modified
or rescinded
• Waiver
o Waivers are an equitable doctrine that is designed to prevent the waiving
party from lulling the other party into the belief that strict compliance with
a contractual duty will not be required
Waivers are equitable
o Implied or expressed A waiver may be express or inferred from actions
or conduct, but all the attendant facts taken together must amount to an
intentional relinquishment of a known right
o Must be voluntary
o Focuses on the conduct of the party against whom the waiver is sought,
and required that party to have intentionally relinquished a known right
o Basic Rules Governing Waiver
UCC §2-208 & §2-209
•
•
•
A party may through its course of performance, waive a
term of the contract, either retrospectively (in connection
with a past obligation or condition) or prospectively (in
connection with an executory obligation)
o If a waiver applies prospectively, it may be
retracted upon reasonable notice, unless such
retraction would be unjust in view of a material
change of position in reliance on the waiver
An election to continue performance of a
contract despite the occurrence of a material
breach would bar the right to terminate the
contract based on that breach
A prospective waiver of a breached provision would, unless
effectively retracted in accordance with UCC 2-209(5),
serve to bar an action based on a subsequent breach of that
provision
Estoppel
o Failure to act that constitutes an abandonment of right under the contract
• Waiver v. Estoppel
o Point #1
Waiver is the voluntary surrender of a right
Estoppel in the inhabitation to assert a right which the law places
on one as a consequence of his own conduct which has resulted in
injury or detriment to another
o Point #2
Waiver depends upon what one himself intends to do
Estoppel depends rather upon what he caused his adversary to do
o Point #3
Waiver arises from the voluntary actions of the contract’s obligor
alone
To create an estoppel, both the obligor and the oblige must act
o Point #4
Waiver does not require proof of prejudice or detrimental reliance
by the party asserting waiver
Estoppel requires proof of prejudice of detrimental reliance
Excuse: Failure to Perform Terms or to Satisfy Conditions because of External
Factors
• Impossibility Non-performance is a breach, even if it was beyond the control
of the breaching party
o Death and Contract
Restatement (Second) of Contract §262 Death or incapacity of a
person “necessary for the performance of a duty” excuses the
nonperformance
o Restatement §262 Expanded
Taylor v. Caldwell
Analogizing from the death of a person to the destruction of a
place that needed to exist for the agreement to be carried out
Personal Services Contract Performance of the contract cannot
be performed because the person died
o “If not expressly stated in the contract, it is implied that the thing
contracted for will exist when it is time to exercise the contract; if it does
•
•
not then the contract is more personal in nature and the contractor is not in
breach for not executing the contract.” (Taylor)
o Forced Majeure Provision
A contractual provision that excuses performance because of
unforeseen events outside the parties’ control
• Natural disasters, war, rioting, governmental regulations,
labor strikes, etc.
Economic instability is a risk inherent in any complex agreement
• Economic factors are an inherent part of all sophisticated
business transactions, and, as such, while not predictable,
are never completely unforeseeable; indeed, “financial
hardship is not grounds for avoiding performance under a
contract.” (Ruby Tuesday).
Impracticability and Frustration of Purpose (Krell)
o Doctrine of Impracticability
Has been referred to as a “catch-all” for situations where
performance is physically possible but would entail a much higher
cost than originally intended
o Frustration of Purpose
Performance remains impossible but the expected value of the
performance to the party seeking to be excised has been destroyed
by a supervening event
o Extended the Taylor v. Caldwell rule in situations to a place (Krell)
The occurrence of an event forms the foundation of the contract
this its nonoccurrence frustrates the purpose for which the contract
was formed
It is enough if a state of things or condition expressed in the
contract and essential to its performance perished or failed to be in
existence at the time
o Questions to determine when it should imply a condition precedent:
What, having regard to all the circumstances, was the foundation
of the contract?
Was the performance of the contract prevented?
Was the event that prevented the performance of the contract of
such a character that it could not reasonably be said to have been in
the contemplation of the parties at the time of the contract?
Avoidance for Forfeiture
o Restatement §229
To the extent that the non-occurrence of a condition would cause
disproportionate forfeiture, a court may excuse the nonoccurrence
of that condition unless its occurrence was a material part of the
agreed exchange
o Condition Precedent Circumstance that must occur before a party’s
duty under a contract is triggered
No specific language is required for the creation of a condition
precedent, but a provision will only be construed as a condition
precedent if it was obviously the party’s intent
o A condition may be excused if strict enforcement would be unjust
o Rule for determining when forfeiture would be disproportionate
Forfeiture Loss of a right under the contract after substantial
reliance, such as a partial or full performance
•
•
The court must weigh the extent of the forfeiture by the oblige
against the importance to the obligor of the risk from which he
sought to be protected and the degree to which that protection is
excuse to the extent required to prevent forfeiture
• Balancing test that considers what the obligor sought to
protect b putting in place the condition verses what the
oblige would forfeit should the condition be strictly
enforced
• Need to weigh the forfeiture against the risk the condition
was meant to protect against the loss of that prevention
Prevention
o When a promisor prevents, hinders, or renders impossible the occurrence
of a condition precedent to its promise to perform of a return promise, the
promisor is not relived of the obligation to perform and may not legally
terminate the contract of the non-performance
Under the doctrine of prevention, when a party to a contract causes
the failure of the performance of the obligation due, it cannot in
any way take advantage of that failure
o The promisor may not invoke the other party’s nonperformance as a
defense when it is sued on the contract
o Under the doctrine of prevention, if a promisor prevents or hinders
fulfillment of a condition to his performance, the condition may be waived
or excused (Cox)
“The relevant inquiry is whether a condition precedent failed to
occur because of any fault upon the part of the promisor.” (Cox)
o The prevention doctrine is not dependent on the prevailing party taking an
affirmative action to prevent the occurrence of a condition, but instead
withholding cooperation that is required under the contract can constitute
frustration (Cox)
Non-Occurrence of a Post-Formation Constructive Condition of Exchange
o Restatement §238
o Promise of payment buy the buyer and of delivery by the seller came to be
dependent upon each other through the use of court-supplied assumptions
called constructive conditions of exchange
If two persons are bound to give concurrently, neither party will be
liable until performance has either been made or tendered by the
other (Brinton)
Though tender may be absolute, it need only be conditional, that is,
subject to receiving concurrent performance from the other side
• “Me fulfilling my obligation is conditional on you fulfilling
your obligation and vise versa”
o Express v. Constructive Conditions
Express Conditions Strictly construed, it was expressed as the
intent of the parties’ bargain
• May be waived either expressly or implied waiver, but the
waiver must be clear and unequivocal even if it is implied
Constructive Conditions The parties often neglect to state the
order in which their promises are to be performed and constructive
conditions fill these gaps
•
A party who is to perform work over an extended period of
time must substantially perform becoming entitled to
payment
• Performance of the work is a constructive condition
precedent to the duty to pay
Express Condition Precedent Unless otherwise excused,
operates by agreement of the parties to define satisfaction of a
necessary antecedent to a party’s performance under the contract
and is subject to the rule of strict compliance, unless such
compliance is waived
Constructive or Implied Conditions of Exchange Operate to
regulate the parties’ course of performance and are subject to the
rule of substantial performance
Excuse: When the Other Side Fails to substantially Perform Under a Common Law
Contract (aka “Material Breach”)
• Restatement §237
• A failure to perform a contractual obligation that is important enough that it
undermines the agreement and warrants allowing the other party to terminate the
contract and bring suit for damages.
• If there is a material breach, you can terminate the agreement and are dismissed
form further performance under the contract
• Non-material breach by party A would still require party B to sue for damages
BUT they cannot terminate the agreement
o DOES NOT relieve party B of their obligations of performance
• GENERALLY…
o Any breach Sue for damages and continue performance
o Material breach
Sue for damages and suspend performance
• These are constructive conditions because it is created by the courts and a rule of
law
• What Constitutes a Material Breach?
o What is the critical difference between material breach and avoidance of
forfeiture?
Material breach is covenants
o An omission both trivial and innocent will sometimes be atoned for by
allowance of the resulting damages and will not always be the breach of a
condition followed by forfeiture (Jacobs)
o “It is a fundamental principle of contract law that when one party to a
contract commits a material breach of that contract, the other party is
discharged or excused from further performance.” (Bartush)
“By contrast, when a party commits a non-material breach, the
other party “is not excused from further performance but may sue
for damages caused by the breach.”” (Bartush)
• A breach of contract occurs when a party failed or refuses
to do something he promised to do.
o A material breach does not discharge claim for damages that has already
arisen
While a party’s non-material breach does not excuse further
performance by the other party, neither does the second breach
excuse the first (Bartush)
o Whether a breach is material is a question of fact to be made by the
factfinder (Bartush)
•
o A random general rule: If a general contract contains a “time is of the
essence” contract clause, then any untimely performance is material
breach
All deadlines must be strictly complied with
Failure to comply with those requirements is a material breach
Exceptions, Exclusions and Nuances to the Material Breach Concept
o In addition to the parties’ ability to specify explicitly what nonperformance is material, there are also various doctrines which soften the
hard consequences of material breach
Divisible Contracts
• Restatement §240
• Contract that is one under which the whole performance is
divided into two or more sets of partial performances, each
part of each set being the agreed exchange for a
corresponding part of the set of performances to be
rendered by the other promisor
Elections of Remedies
• When a party materially breaches a contract, the nonbreaching party must choose between to remedies:
o Terminate the contract and recover liquidated
damages
A remedy of termination – or the “right to
terminate” is available only where a party
has material y breached the contract
o It can continue the contract and recover damages
solely for the breach
It can never thereafter elect to terminate the
contract based on breach, although it retains
the option for terminating the contract based
on other, subsequent breaches
Moots the legal justification for termination
If a party chooses to continue with the
contract and the other party subsequently.
Omits another material breach, the party has
a right to terminate based on the NEW
breach (ESPN part one)
o Permits parties to wait a “reasonable time” after
learning of the alleged breaches before terminating
the contract
Reasonable time depends on the nature of
the contract
• Difference between waiver and election of remedies (ESPN
part one)
o Waiver Voluntary relinquishment of a right
Waiving the right to the performance that
was due under the contract. By the other
party not performing, you are waiving that
performance.
o Election of Remedies Choice among the
remedies by the party; it is a decision by the party
as to how it should proceed in the wake of the
breaching party’s non-performance
Huge Exclusion: UCC and “Perfect Tender”
• Restatement §2-601: Buyer’s Rights on Improper Delivery
• In common law contracts such as for land or services, a
breach by one of the parties to the contract excuses the
performance of the non-breaching party only if the breach
is a “material breach”
• In sale of goods contracts, any breach by a seller will
excuse the buyer from performing
• Terms used in a contract must be interpreted considering
relevant trade usage
• Perfect Tender Rule:
o Only applies in single-delivery contracts
o Parties under the UCC and common law can agree
to certain remedies such as liquidated damages or
such as a repair or replace remedy
Excuse: “Anticipatory Repudiation” as Other Guy’s Unambiguous Indication of an
Unwillingness of Inability to Perform
• Statements or conduct that makes it clear that the party will not perform some
future obligation under the contract
o Restatement §250 Repudiation defined
o Restatement §253
Effect of repudiation
Repudiation is in and of itself a breach
o Restatement §2-610 Repudiation by the UCC
• Unequivocal Statement as Anticipatory Repudiation
o Anticipatory Repudiation (Hochster)
When one party to an agreement is informed by another party to
the agreement that the second party intends to breach the
agreement (anticipatory repudiation) the first party has an option to
file suit for damages immediately in anticipation of the breach, or
to wait until the act was supposed to be done.
o A party may repudiate its obligations under a contract through conduct.
o To constitute anticipatory repudiation of contract there must be a definite
and unequivocal manifestation of intent on the part of the repudiator that
he will not tender the promised performance when the time fixed for it in
the contract arises
We see the same standard when we are talking about waiver
we do not want to imply waiver because waiver is a voluntary
relinquishment of a future contractual right
• Unambiguous Conduct as Anticipatory Repudiation
o Restatement §250
o In order to constitute an anticipatory repudiation of a contract, there must
be a definite and unequivocal manifestation of intention on the party of the
repudiator that he will not render the promised performance when the time
fixed for it in the contract arrives
• Retractions of Repudiations
o Restatement §256 Repudiation may be retracted (Pavone)
A repudiation may be retracted if “notification of the retraction
comes to the attention of the injured party before he materially
changes his position in reliance on the repudiation to be final
•
The limiting factor is that one the non-repudiating party has
detrimental reliance on your repudiation, you cannot revoke it
o Restatement §257 The injured party does not change the effect of
repudiation by urging the repudiator to perform in spite of his repudiation
or to retraction of repudiation (Pavone)
Failure to Give Adequate Assurance of Future Performance Repudiation (at least
under the UCC)
o Doctrine of Demands for Adequate Assurance
Springs from the doctrine of anticipatory repudiation
• When a party repudiates contractual duties “prior to the
time designated for performance and before” all of the
consideration has been fulfilled, the “repudiation entitles
the non-repudiating party to claim damages for total
breach” (Norcon)
Purpose?
• To protect the non-repudiating party in the case of words or
acts by the other party that appears to be a repudiation
Restatement §251
• If you demand assurances and you do not get them in a
reasonable amount of time, that in and of itself is a
repudiation which is a material breach which entitles you to
terminate and sue for damages
Should only apply for complex commercial agreements of some
significant duration
o A repudiation can either be…
A statement by the obligor to the obligee
Voluntary affirmative act which renders the obligor unable or
apparently unable to perform without such a breach
CHAPTER SEVEN
• Money Damages
o The Preliminaries: Material Breach and Cancellation (and a small comment on Partial
Breach)
When there is a material breach, the aggrieved party’s rights can cancel the contract
Restatement §238 Cancelation “occurs when either party puts an end to the contract
for breach by the other”
The non-breaching party does not have to accept any purported performance, as the
contract is no more and thus there are no more duties
This allows the court to calculate damages without any reference to, or deduction for, the
breacher’s attempted future performance
Restatement §236
every breach gives rise to a claim for damages, and may give rise to
other remedies
Restatement §354
Damages for partial breach are real, but tend to be small
o The General Measure of Contract Damages for Total Breach: the “Expectation Interest”
(Receipt of the Benefit of the Bargain)
The General Theories:
• Expectation Damages Restatement §345
o Want to put the non-breaching party to put them back in the position they
would be in had they not been in breach
o This is the preferred and dominant approach in contract law
• Expectation Interest Restatement §344
o When a person makes a contract, she expects that the other person will not
breach
o Protection of that expectation means damages should put the nonbreaching party in the same $$ position as if the contract had been
performed without breach
o Basic Expectancy Interest Damages: Benefit of the Bargain Through Price or Cost
Differential
General Rule: Measure of Damages
• “As a general rule, the measure of the vendee’s damages is the difference between
the value of the goods as they would have been if the warranty as to quality had
been true, and the actual value at the time of the sale, including fails prevented
and losses sustained, and such other damages as could be reasonably anticipated
by the parties as likely to be caused by the vendor’s failure to keep his agreement,
and could not be reasonable care on the part of the vendee have been avoided.”
(Hawkins)
o Measure of damages was the difference between what he expected and
what he had (Hawkins)
o Expectation Damages as Cost of Repair and Completion
Measuring Expectancy Interest by Cost of Completion
• Lewis v. Levine There was no evidence as to what work was performed (how
much of the payment was paid in exchange for performance) nor was there any
evidence on how much they paid the third party (second contractor to finish the
work)
o Therefore, the court could not measure their expectancy interest and, as a
result, not entitled to damages
Limitations on Cost of Completion Due to Economic Waste
• Economic Waste
o A contractual rule preventing the non-breaching party from receiving the
amount of money it would cost to get what was contracted for if that
amount greatly exceeds the loss in value caused by the breach
The owner is entitled to the money which will permit him to
complete unless the cost of completion is grossly and unfairly out
of proportion to the good to be obtained. (PeevyHouse)
• When that is true, the measure is the difference in value
• Remedying the defect Proper measure of damages (Groves)
• Under a construction contract, the thing lost by a breach is a physical structure or
accomplishment, a promised and paid for alteration in land
o Its only appropriate measure is the cost of performance
• Restatement §346
o Defendants are liable to plaintiff for the reasonable cost of doing what
defendants promised to do and have willfully declined to do
• Damages for willfully breach of a construction contract, even where there has
been substantial performance are awarded as the cost of completing the failed
performance (Groves)
o Expectation Damages for Lost Profits and Opportunities – Consequential or Direct
Damages?
General or Market Damages
• Allowed the plaintiff to recover the value of the very performance promised, but
not the delivered performance
•
Market Damages when the promised delivery is the delivery of goods, such
damages are measured by the difference between the contract price and the
market value of the goods at the time of the breach
Special or Consequential Damages
• Seek to compensate a plaintiff for additional losses that are incurred because of
the defendant’s breach
o Losses other than the value of the promised performance
Liquidated Damages
• Parties may exclude certain types of damages in the contract itself of specify what
the damages may be in the case of breach
Incidental Damages
• Note on Attorney’s Fees as Incidental Damages
o Under the American Rule, it is well established that attorney’s fees are not
ordinarily recoverable in the absence of a statute or enforceable contract
providing therefor
Money Damages under the UCC
• Hawkins v. McGee gives us our sale of goods damages rule
o The rule is premised on putting the non-breaching party in the same
position as if the contract has been performed without breach
• Buyer’s Remedies
o UCC §2-711: Buyer’s Remedies in General; Buyer’s Security Interest in
Rejected Goods
• The Role of Notice of Breach and Buyer’s Remedies
o UCC §2-607(a)(3)
“where the tender has been accepted, buyer must within a
reasonable time after he discovers or should have discovered any
breach notified the seller of the breach or be barred from any
remedy” (Gebbia)
o UCC §2-714 “Where the buyer has accepted goods and given
notification…”
o A remedy for breach of implied warranty of merchantability is available
only where the buyer notifies the seller of its breach within a reasonable
time after it discovers or should have discovered the non-conformity of the
goods (Gebbia)
• Seller’s Remedies
o §2-703 Seller’s Remedies in General
• The Role of Notice of Breach and Sellers Remedies
o One of the remedies that a seller can pursue when a buyer breaches is to
sell the goods at a private sale §2-706(3)
You must give notice to the breaching party
o Strict compliance with the notice requirement of §2-706 is a prerequisite
to a claim for damages under that provision (Fuji)
o §2-708 (Fuji)
Provisions allow sellers to recover damages measured by the
difference between the market price at the time and place of tender
and the unpaid contract price
No actual sale is required
o General Rule: Private Sale = Notice Required (Fuji)
o Reliance Interest as an Alternative Measure of Money Damages
Expectation vs. Reliance Damages Generally
•
Expectation Damages Damages sufficient to put the non-breaching party in
the same position it would have been in had there been no breach
• Reliance Damages Seeks to put the injured party in the position that he or she
would have been in had the contract never been made
o Recovery of actual expenditures incurred in performing under the
agreement
o PROMISSORY ESTOPPEL
o Restatement §349
Reliance Damages and Promissory Estoppel
• Promissory Basis of §90
o “the remedy granted for breach may be limited as justice requires”
o Detrimental reliance
They added language to the traditional rule and
carved out some of this language
By eliminating the requirement that reliance be of a definite and
substantial character in theory, they broadened the remedies
available for promissory estoppel
At the same time, the said remedies for breach may be limited as
justice requires
o Whether damages in promissory estoppel claims are limited to reliance
damages of whether a party may seek expectation damages
• Thus, under the Restatement, an award of expectation damages is often an
appropriate remedy for promissory estoppel claims. But, in other instances,
reliance damages may be more suitable. (Dynalectric)
o In order to determine the appropriate measure of damages for promissory
estoppel claims, the court should consider the measure of damages justice
requires an that comports with the restatement’s general requirements that
damages be foreseeable and generally certain
Limitations on Money Damages Awards
• First Limitation: Avoidable Loss and Mitigation
o Avoided Costs
The non-breaching party is entitled to be put in the position it
would have been in had the other side performed, but is not
entitled to be put in a better position
Expectation damages do not include cost that are avoidable
that
is costs that are anticipated by the non-breaching party, but not
actually incurred
o Mitigation
Plaintiff has the duty to mitigate the damages that he incurs.
If the plaintiff fails to mitigate his damages, the defendant cannot
be charged with them.
This duty applies to those damages that the plaintiff could have
avoided with reasonable effort and without undue risk, burden, or
expense.”
Importantly, the duty to mitigate damages, also called the doctrine
of avoidable consequences, requires only reasonable, practical care
and diligence, not extraordinary measures.
o General Rule for Recovery of Salary by a Discharged Employee
The measure of recovery by a wrongfully discharged employee is
the amount of salary agreed upon for the period of service, less the
amount of which the employer affirmatively proves the employee
•
•
has earned or with reasonable effort might have earned from other
employment (Parker)
The employee’s rejection of or failure to seek out other
employment of a different of inferior kind may not be resorted to,
to mitigate damages (Parker)
o The victim of a breach must exercise reasonable diligence and ordinary
care in attempting to minimize damages after injury has been inflicted
(R.R. Donnelly)
Second Limitation: Foreseeability
o Hadley v. Baxendale
Limits damages to those reasonably foreseeable at the time of the
contract.
To satisfy the foreseeability requirement, the injury for which
damages are sought must follow the breach in the natural course of
events, or, the evidence must specifically show that the breaching
party had reason to foresee the injury
Knowledge of special circumstances at the time of contracting
plays a critical role in the analysis
• When the special circumstances are known and
communicated, the measure of damages is the amount
which would ordinarily be found in breach of contract
• If such circumstances are not known, the damages must be
limited to those foreseeable at the time of formation, since
it is presumed that the parties factored only the general
measure into their negotiations and the price to be paid
o Foreseeability Is it reasonable to think that at the time you entered into
the contract you could have known that your breach would make you
liable for whatever the measure of damages is?
o Restatement §351
Third Limitation: Certainty
o While UCC §2-714 sets “the measure of damages as the difference
between the value of goods as warranted and the value of goods as they
are accepted, often that difference can only be approximated but the cost
of repaid to the goods so they conform to warranty”
o The question here involves incidental damages and consequential damages
(Manoucherhri)
(1) Incidental damages resulting from the seller's breach include
expenses reasonably incurred in inspection, receipt, transportation
and care and custody of goods rightfully rejected, any
commercially reasonable charges, expenses, or commissions in
connection with effecting cover and any other reasonable expense
incident to the delay or other breach
• Any cost you incur to ship back or repair
• Any cost you incur to find a substitute product
• Incidental damages are damages you incur either in regards
to the rejected goods storing/returning or charges you incur
to getting a cover product
(2) Consequential damages resulting from the seller's breach
include
• (a) any loss resulting from general or particular
requirements and needs of which the seller at the time of
contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and
• (b) injury to person or property proximately resulting from
any breach of warranty.
o Must be able to demonstrate or prove your damages with some degree of
certainty need to provide evidence of what your actual contractual
damages are (ESPN part two)
•
•
Agreed Damages
o Liquidated Damages
Parties often try to anticipate the effect of breach and specify its consequences
UCC §2-719
“a liquidated damages contract provision is enforceable if the predetermined amount for
damages seeks to compensate the non-breaching party rather than penalize the breaching
party” (Dobson)
A contract term fixing an unreasonably large liquidated damages amount is
unenforceable on the grounds of public policy as a penalty (Dobson)
Restatement §356 Reasonableness Test
• Damages for breach by either party may be liquidated in the agreement but only at
an amount that is reasonable considering the anticipated or the actual losses
caused by the breach and the difficulties of proof of breach.
• Under the restatement standard, we compare the liquidated damages provision
either to what was anticipated at the time of contracting, or to the actual damages
suffered and that is how we make this reasonableness determination.
o Look at the time of contracting
UCC 2-718 provides three criteria by which to measure reasonableness of liquidated
damages (Kvassay)
• Anticipated or actual harm caused by the breach
• Difficulty of proving loss
• Difficulty of obtaining an adequate remedy
Big Take-Aways
• Liquidated damages are available
• Parties can contract for these but they must be compensatory, not a penalty
o Look to the reasonableness of the provision either at the time of
contracting or the reasonableness of the provision in relation to the actual
damages suffered post-breach
Non-Monetary Relief
o Specific Performance: Doing What Was Promised
Specific Performance at Common Law
• Three Part Rule: (Oliver)
o Plaintiff must be clearly entitled to such relief
o There must be no adequate remedy at law
o The court must believe that justice requires such a decree
• Specific performance is often, if not always, available as a remedy for seller’s
breach of contract in a real estate transaction
• Specific performance is a proper remedy for breach of contract if money damages
would be inadequate to uphold the expectations of the injured party and when the
subject matter of the particular contract is unique and has no established market
value (Reed Foundation)
• Specific performance has been held to be a proper remedy in actions for breach of
contract when the uniqueness of the subject matter in question makes calculation
of money damages too difficult or uncertain (Reed Foundation)
•
Specific Performance under the UCC
• Rules for determining whether good are unique under the UCC (i.LAN Systems)
o UCC §2-716 The test of uniqueness under this section must be made in
terms of the total situation that characterizes the contract
Whether the goods are replaceable as a practical matter or too
difficult to obtain similar goods on the open market
• If they are Remedy is money damages
• If they aren’t Strong argument for specific performance
under the UCC §2-716
o Note in Specific Performance and Negative Injunctions
One of the problems that courts have seen repeatedly in cases of specific performance is
the difficulty of monitoring performance
• Restatement §367 states, “a promise to render personal services will not be
specifically enforced”
Negative Injunction
• What do you do when someone agreed to perform a service for you and then
breaches and tries to do the same thing to someone else?
o Enjoin the breaching party from taking another event, even if that other
event is more profitable
o Everything needs to consider fairness and justness to both parties
o Rescission and Cancellation
Rescission
• Equitable remedy that had the effect of voiding a contract from its inception
o It is as if the contract never existed
• This equitable remedy is generally not available if damages are available and will
adequately compensate the non-breaching party
Termination UCC §2-106(3)
• Usually in a contract, if you have a termination provision, the contract will say,
“Hey, the non-breaching party has a right to terminate this agreement upon
material breach.”
• When we use termination, the term termination is a power that arises under the
contract comes from the contract itself
• If the contract does not have a termination provision, then the contract cannot be
technically terminated
Cancellation UCC §2-106(4)
• Action ending the contract by the non-breaching party followed by a material
breach by another party
Arbitration as a Contractual Alternate to Lawsuit
o Congress has concluded that party’s ability to resolve disputes through binding arbitration is
supported as a matter of public policy
o Federal Arbitration preempts many state laws – thus requiring courts to grant motions
compelling arbitration when party to a contract with such a provision requests that relief
o Jackson v. Shakespeare Foundation
Three “fundamental elements that must be considered when determining whether a
dispute is required to proceed to arbitration”
• Whether a valid written agreement to arbitrate exists
• Whether an arbitration issue exists
• Whether the right to arbitration was waived
Narrow vs. Broad in Scope
• Narrow in Scope “arising out of”
•
o Claims that attack the formation of the agreement, fraud,
unconscionability, duress, undue influence, etc., you would not have to
arbitrate or tort claims that arise out of the contract
• Broad in Scope “arising out of or relating to”
o “hey, you contractually agreed to arbitrate claims not just arising out of
the contract, but also claims that are relating to the contract”
Significant Relationship
• To constitute a significant relationship there must be a contractual nexus between
the claim and the contract, and that requires more than just the existence of a
contractual relationship.
• Contractual nexus
o Exists between a claim and a contract if the claim presents circumstances
in which the resolution of the disputed issue requires either reference to or
construction of a portion of the contract. A claim has a nexus to a contract
and arises from the terms of the contract if it emanates from a duty created
by the party’s unique contractual relationship
If you make a material misrepresentation, innocent or fraudulent, that indices another
party to enter into the contract, then that party that is induced may rescind the contract
Restitution Interest as an Alternative Measure of Damages
o Restitution Equitable remedy that is available based on a claim of quantum meruit
Damages under a theory of restitution also can provide an appropriate measure of relief
where the injured party’s ability to recover is clouded or otherwise not feasible
Purpose?
• No legal remedy Equity remedy
• Legal remedy Money damages
• Meant to restore the non-breaching party to the position he would have been in
had there never been a contract to breach
• Makes the most sense when one party has already performed and the other party
has not and the non-breaching party is going to have some level of difficulty
proving damages
Restatement (Second) of Contracts §344
YOU CANNOT RECOVER BOTH EXPECTATION DAMAGES AND
RESTITUTION! One or the other, but NOT both!
o When a party, actually receives labor or materials and thereby derives a benefit and advantage
over and above the damages which has resulted from the breach of contract by the other party,
the labor actually done and the value received furnished new consideration and the law
thereupon raises a promise to pay to the extent for the reasonable forth of such excess (Britton)
Parties can contract around this
• By expressed stipulation that strict performance is a condition precedent to the
employer’s duty to pay a portion of the contract price
o Special Addendum Notes: Differences between Quantum Meruit and Unjust Enrichment
Critical difference
• Quantum Meruit Sometimes labeled “contract implied in fact” involved
recovery for services or materials provided under an implied contract
o Three Elements:
A valid claim in quantum meruit requires three things:
• The services were rendered to the defendant by the plaintiff
with the knowledge and consent of the defendant, and
under circumstances that make it reasonable for the
plaintiff to expect payment
Needs to be an expectation of exchange on both sides
•
•
•
While the formalities of an express contract are not a prerequisite
to recovery in quantum meruit, there must be a reasonable
expectation on the part of the claimant to receive compensation for
services and a concurrent intention on the other party to
compensate it
o Damages Measure of recovery is the reasonable value of the
performance and recovery is undiminished by any loss which would have
been incurred by complete performance (Algernon)
The standard for measuring the reasonable value of the services
rendered dis the amount of which services could have been
purchased from one in the plaintiff’s position at the time and place
the services were rendered Market price for services at the time
Unjust enrichment Describes recovery for the value of the benefit retained
when there is no contractual relationship, but when on the grounds of fairness and
justice, the law compels performance of a legal and moral duty to pay and the
damages analysis is based on principles of equity, and not contract.
o Three elements:
Benefit conferred upon the defendant by the plaintiff
An appreciation of knowledge by the defendant of the benefit
The acceptance and retention by the defendant of the benefit under
such circumstances as to make it inequitable for the defendant to
maintain the benefit without payment of its value
o Damages Measured by the value of what was inequitably retained
Dividing line between the two
o Quantum Meruit there is intent on both sides to the exchange
o Unjust Enrichment we are willing to compensate a party for the benefit
that it unilaterally decided as long as it was not officiously or
unreasonably decided to provide to another
Damages Review
o Direct Damages Expectation damages are the general rule
Sometimes they don’t work because it would be hard to calculate what they would be
• Then we look at reliance damages
What is the measure of damages of direct damages?
• Expectation damages
o You are entitled to damages sufficient to put you back in the same position
you would have been in had there not been a breach
When do we not use expectation damages?
• What is another way of measuring direct damages?
o Reliance interest Damages that flow directly from the breach
o Indirect Damages
Consequential damages Lost profits, knock-on effect
• What if I hire someone to work on my business and they are late in delivering the
work on the business and because of that, I have lost profits.
o Foreseeability At the time of contracting would that party have
reasonably known that they were taking on this liability
o Mitigation
o Certainty
• Sunnyland Best language
o Restatement §351
o Rejected tacit agreement test
o Only a question of whether it is reasonable or foreseeable
Limits on Expectation/Reliance Interest
• Foreseeability, mitigation, certainty sometimes come up from this
o Rule Funnel
Contract law is the law of voluntary exchange
Therefore, contract law is compensatory, not punitive
Standard measure of damages is expectation damages
• SOMETIMES YOU STOP HERE, other times you keep going
Reliance Damages
Restitution Get back something that we have given
Consequential Damages Lost profits, knock-on effect
Incidental Damages Damages incurred in securing substitute performance
o Examples:
Contractor A is hired to do an addition on Robinson’s house for $10,000. Contractor A
never shows up and never does anything. Robinson has to hire Contractor B to do the
work for $12,000.
• What are the damages?
o The difference between the value of Contractor A and Contractor B
Expectation Interest $2,000
Direct damages
Contractor A is hired to do an addition on Robinson’s house for $10,000. Contractor A
never shows up and never does anything. When Contractor A, drops out there is a big
construction boom and Robinson can’t find anyone local. Robinson has to hire Contractor
B to do the work for $12,000, and pay for their lodging, etc. because they are from St.
Louis.
• What are the damages?
o The difference between the value of Contractor A and Contractor B
Expectation Interest $2,000
Direct damages
o What every you had to pay for the lodging and extra expenses
Incidental
• Damages you incurred in getting substitute performance
Contractor A is hired to do an addition on Robinson’s restaurant for $10,000. Contractor
A never shows up and never does anything. When Contractor A, drops out there is a big
construction boom and Robinson can’t find anyone local. Robinson has to hire Contractor
B to do the work for $12,000, and pay for their lodging, etc. because they are from St.
Louis. The Restaurant is closed for seven days, and Robinson can prove that he lost
$1,000 a day in lost profits.
• What are the damages?
o The difference between the value of Contractor A and Contractor B
Expectation Interest $2,000
Direct damages
o What every you had to pay for the lodging and extra expenses
Incidental damages
• Damages you incurred in securing substitute
performance
o Lost profits
Consequential damages
• Caused by the breach but don’t flow directly from the
contract
•
Restitution
Nothing in the contract that says $1,000 a day, but because
of the breach, the work wasn’t done, the restaurant couldn’t
open, and they are indirectly caused by the breach
Getting back a benefit that you already performed
CHAPTER NINE
• Third Party Beneficiaries
o Third Party Beneficiary A nonparty who receives the benefits of a contract and who may
possess the right to sue under the contract. (Lawrence)
• When a Third Party is an “Intended Beneficiary”
o Restatement §302 Intended v. Incidental Beneficiaries
o To be an intended third-party beneficiary, you must prove that the parties intended the contract to
benefit you (Ex Parte Stamey)
• Cancellation and Modification of the Rights of the Third-Party Beneficiary and Defenses Against a
Third-Party Beneficiary
o Olsen v. Etheridge
Bay Rule Former Illinois Controlling Precedent
• Rights of a 3rd party beneficiary in a contract are subject to immediate vesting,
and once vesting, cannot be altered, or extinguished through later agreement of
the contracting parties without the assent of the beneficiary
o Parties are prohibited from amending, modifying, or canceling the
agreement, without the assent of the third parties
Vesting Rule Parties to a contract should remain free to amend or rescind their
agreement so long as there is no detriment to a third party who has provided no
consideration for the benefit received
The court in Olsen rejects Bay in favor of Restatement §311
• A third-party beneficiary has no vested rights, unless one of three things happens:
o Unless the beneficiary materially changes position in justifiable or
detrimental reliance on the promise
o The beneficiary brings suit to enforce the promise
o The beneficiary affirmatively assents to the promise at the request of the
promisor or promisee
• Assignment and Delegation
o Introduction to Assignment and Delegation: What Are They?
Assignment A contracting party is later (post) transfer of his contract right to a third
party - Transfer of rights or benefits to the party under the contract
• Two Deals:
o Base Contract, between A and B
o Second, separate contract where B assigns its rights to 3rd party, C
Delegation A contracting party’s later agreement with a third party to perform their
contract duties
• Transfer of duties
• Delegation = Duty
In order for there to be an assignment or delegation, there HAS TO BE two contracts!
A contracting party can do both! Assign its rights and delegate its duties!
Five Key Points to Keep in Mind:
• A third-party beneficiary only requires one agreement
• A third-party beneficiary deal requires that both the promisor (All-State) and the
promisee (Robinson) intend to benefit the third party.
• In contrast, an assignment requires two deals.
•
In an assignment deal, one of the parties to the first deal may not even know the
assignee or not even know of the assignment until notified.
• According to Restatement (Second) Of Contracts §317, majority rule in common
law courts, the assigners right to performance by the obligor is extinguished by
assignment.
o Consequences of an Assignment and Delegation: Who Can Sue Whom?
Assignee Can Sue Obligor Problems
• Restatement §317
Obligor Can Sue Delegator Problems
• Restatement §318
o Limitations on Assignment and Delegation
At common law, there were two primary limits on the ability of parties to assign rights or
delegate duties under a contract:
• Common law prohibits agreements that materially change the duty to the other
party
• Common law does not permit a delegation of work that requires special skill
What Restatement section(s) are helpful here?
• UCC 2-210
o (1) Looks a lot like §317 but there is no corresponding provision for
gratuitous assignments or novation
Contrast this with §318 and §280 which permit novation, whereas
under the UCC, we say “Hey, even when you delegate a duty, even
if the other side agrees, you as a delegator are still liable”
o (2) Law is consistent as to whether you are under the UCC or the
Restatement common law
But there are those little wrinkles in there, particularly the idea of
novation and revocable gratuitous assignments
“A party may perform his duty through a delegate unless otherwise agreed to or unless
the other party has a substantial interest in having his original promisor perform or
control the acts required by the contract.” (Sally Beauty)
“Best Efforts” requirement is an implied obligation under the contract (Sally Beauty)
• UCC 2-306(2) “A lawful agreement by either buyer or seller for exclusive
dealing in the kind of good concerned imposes unless otherwise agreed an
obligation by the seller to use best efforts to supply the goods and by the buyer to
use best efforts to promote their sale”
The exclusive distribution agreement contains this implied in law promise that the buyer
will use its best efforts to sell its exclusively distributed products (Sally Beauty)
“The duty of performance under an exclusive distributorship may not be delegated to a
competitor in the market place – or the wholly-owned subsidiary of a competitor –
without the obliges consent.” (Sally Beauty)
GOOD LUCK MOTHER FUCKERS!