Contracts II
Professor Tanya Monestier
SUPPLEMENTING THE
AGREEMENT
A. IMPLIED TERMS
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Definition: This is where the court is “adding” terms to a K. The Court is not adding terms that
the parties didn’t want, rather it is adding terms that the parties must have intended to be in the
K.
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Implied in Fact v. Implied in law:
o Implied in Fact: Based on the K, it is clear the parties must have intended for this term to
be part of the K.
o EX: assume person X is selling a bike for $100. The term “dollars” is implied to
mean American Dollars. It is not something that is needed to be said. Therefore,
based on the facts, it must have been a term of the K that we are dealing in US
dollars.
o Implied in Law: a term that the law implied; usually giving the K legal efficiency (quality
of being successful in producing an intended result).
1. DUTY TO USE BEST EFFORTS
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Rule: A contract is still valid if one party's detriment is implied even if it is not an explicit
element of the contract. (Good faith).
Case Analysis: Wood v. Lucy, Lady Duff-Gordon:
Lady Duff-Gordon (LDG) (∆) contracted to give Wood (π) an exclusive right to market and license
all her designs and to endorse designs w/ her name. The way that it worked was that LDG, who was
sort of a designer, gave Wood the right to market and license all her designs and endorse designs with
her name. In other words, Woods was going to take his products and put LDG's name on the products
and market bound. She gave him permission to use her brand (name) to sell his products. The Ultimate
agreement if they would split the profits from the sales, evenly. The exclusive K required that they
split all profits from Wood's sales evenly. Lucy placed endorsement on clothes w/o Wood's knowledge
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(contracts w/ Sears) and in violation of the K and Wood sued. What ended up happening is that LDG
placed endorsements on clothes w/o woods knowledge. In other words, she entered arrangements
where she lent her name to other companies–with Sears. This was in violation with the k w/ Woods.
Lack of Consideration (LDG’s argument) Lucy’s detriment is giving Wood the exclusive use of her
name on his products. Wood is giving Lucy half of her profits ($). “If I make money, I’ll give you
half.” He is not promising that he is going to make profit. Therefore, it is an illusory promise. There
is no K because of a lack of Consideration.
Did Wood Promise anything
Not expressly. He did not promise to sell her products; he promised
that if he sold products, she would get a cut. The word IF alters an illusory promise. The argument:
he is only saying IF he sells these products, he will give a cut, but that is not a return promise.
Therefore, his end of the bargain is illusory. If he has not made a return promise the fact that she
made a promise is neither here nor there. We need both detriment and bargain for exchange.
• What was the outcome? Woods DOES make a promise, it is just not explicit. Woods does
not “in so many” words promise that he will use reasonable efforts to place the ∆’s
indorsement and market her design, however, suonch a promise is to be implied. The court
says that his promise is that he will use "reasonable efforts" to sell her products. He never in
writing says that explicitly, however, this promise is implied. This means that it is so clear from
the entirety of the K that this is a promise that he has made, he has just not put it into words.
How do we know Woods Makes a Promise?
• Exclusivity She is only allowed to let him use her name. There is no one else that is allowed
to. No one would enter an arrangement where you have use if their name, but you are not
doing anything in return.
In the K he has a business enterprise that is prepared to market and
• Business Enterprise
endorse her products.
She was to be compensated only though a share of the profits. The
• Compensation
compensation arrangement would make no sense if he didn’t try to make money because there
would be no compensation w/o money.
Obligation on him to account for profits. And if he wasn’t
• Accounting for Profits
promising to try to sell her products, that would not make sense either.
2. DUTY TO GIVE NOTICE IN SOME CIRCUMSTANCES
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Rule: §309. Absence of Specific Time Provision; Notice of Termination.
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If the time for shipment or delivery or any other action under a K, if not provided in this Article
or agreed upon, shall be a reasonable time.
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a. This is an implied term. When dealing with missing dates for shipment or delivery,
assume a time that is reasonable (UCC has gap fillers).
b. The problem with no delivery time, is that you will not know how or when to recover.
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Where the K provides for successive performances but is indefinite in duration it is valid for
a reasonable time but unless otherwise agreed may be terminated at any time by either party.
a. If you don’t talk about an end point, we are going to give you an end point. It is valid
for a reasonable time depending on the industry and getting a new supplier.
b. For example, a supermarket has a standing K on berries with a supplier. The
arrangement is to ship berries every week, and the supermarket pays FMV. But the K
does not specify and end date. The reasonable time depends on the circumstances
(assume 6 months always). If the supplier terminated the K before 6 months, that is a
breach. If at the 6 months mark the supplier walks away, that is not a breach.
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Termination of a K by one party except on the happening of an agreed event requires that
reasonable notification be received by the other party and agreement dispending with
notification is invalid if its operation would be unconscionable.
a. Give reasonable notice that you are going to terminate
look at the facts, how long
you were in the relationship, etc.
b. You don’t have to give notice if your K contains a “triggering” event. The even itself
is the pre-notification.
c. You can agree, in your K, that no notice is required to terminate
BUT you cannot
do that if the provision would be unconscionable (grossly unfair).
Case analysis: Leibel v. Raynor MFG:
Raynor entered into a verbal agreement to give Leibel an exclusive dealer-distributorship for Raynor’s
garage doors. Raynor was to provide garaged doors, operations, and parts to Leibel at the factory
distributor price. Leibel agreed to sell, install and service only Raynor’s products. The agreement
covered an area extending to a fifty-mile radium from Lexington, Kentucky. Leibel borrowed a
substantial amount of money to begin the business. After two years, sales of Raynor’s products
appeared to be decreasing. Raynor notified the ∆ that the relationship was terminated. In addition,
Leibel learned there was a new dealer-distributor in the area and that any future purchases Raynor’s
products would have to be made through the new dealer-distributor.
Transactions involving goods and merchandise fall under Article II of the UCC. The court finds that
distributorships fall under the UCC. The UCC requires that reasonable notice be given if the
agreement is for an indefinite duration. The Court interprets reasonable notice as relating to “the
circumstances under which notice is given and the extent of advance warning” not the method by
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which notice is given. The Court holds that Raynor was required to give Leibel reasonable notice of
intent to terminate.
B. OBLIGATION OF GOOD FAITH
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Definition: You can’t destroy the fruits (good part) of the K for another party. Every K has with
it an implied obligation to use good faith and fair dealing. Theis is a negative inference: “Don’t be
bad.”
1. SATISFACTION CLAUSE
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Rule: A clause that says the work/K/performance must be done to the other party’s satisfaction.
It gives the person, to be satisfied, power to say whether the performance was satisfactory.
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Spotting satisfaction clauses: Any provision that essentially says “the work must be done,
subject to the approval or satisfaction of the other party” is a satisfaction clause.
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Framework:
1. What type of K we are dealing with: Utility or Aesthetics? (How you determine Obj. or Subj.).
a. Utility (Objective): Something that is useful to the corporation (performing electrical
work behind the walls of the office).
b. Aesthetics (Subjective): The look and appearance of something is important (taking
wedding photos, buyer a car, buying a cake, getting a portrait).
2. What standard of satisfaction did the parties intend: Objective or Subjective?
a. Objective Standard: Would a reasonable person consider this work to be satisfactory?
i. EX: a window cleaner has a K that contains a “satisfaction guarantee.” An
objective standard would look at whether a reasonable homeowner would be
satisfied or dissatisfied with the work that is done.
b. Subjective Standard: Whether this person is genuinely/honestly dissatisfied.
i. EX: a window cleaner has a K that contains a “satisfaction guarantee.” A
subjective standard would look at whether the homeowner in question was
genuinely dissatisfied. If you had a particularly meticulous homeowner and
they see that there are some tiny areas that are still streaky and they are
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genuinely dissatisfied, we ask if they are honestly dissatisfied and it is not a
pretense or anything, they are entitled to reject the work.
2. GOOD FAITH UNDER ARTICLE 2
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Rule: §306. A term which measures the quantity by the output of the seller, or the requirement
of the buyer means such actual output or requirements may occur in good faith, except that no
quantity unreasonably disproportionate to any stated estimate or in the absence of a stated
estimate to any normal or otherwise comparable prior output or requirements may be tendered
or demanded.
o Requirement and Output K’s can lend themselves to bad faith (good faith argument).
o There is a band in which the Requirements or Output sale purchase will take place.
Person X will agree to order at lease “this” much and nor more than “this” much.
o K’s most of the time have a buffer (they will have an estimate or rage), but K’s do not
always have the buffer so we have this section that says you cannot go so far below
or above what is normal under the circumstances. For example, if every year you
order 1,000 widgets but now you over 100 or 5,000 (issue usually comes up with high
requirements).
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Two types of K’s that fall under Sales Law:
1. Requirement K’s
o Requirement’s buyer buys all its requirements form one given seller.
o The seller agrees to supply the buyer with as much of a good as the buyer wants, in
exchange for the buyer’s agreement not to buy that good elsewhere.
Perspective of the Requirements Buyer: (1) Guaranteed source of their paper,
rather than giving to go to the open market. (2) Agreement made ahead of time
that the paper will be at a set price, no matter what.
Perspective of the Requirements Seller: (1) Builds a customer base. (2) locks in
price so that person X cannot back out. Although, this means they take the risk if
their product (in the open market) being worth more.
o The seller is not obligated to do the same, in kind.
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o EX: X purchases all its paper requirements from WB Mason. So, whatever paper
requirements X has, they are ALL going to be bought from WB Mason and in turn, WB
Mason will give X paper.
2. Output K’s
o Seller sells their entire output (all products) to one particular buyer whether it is large or
small.
o Seller has a guaranteed sale and do not have to deal with the hassle of making a new one.
Although, there may be someone out there who would have given them more.
Case Analysis: Indiana-American Water Co. v. Town of Seelyville
In 1983, Water Company and Town entered a K which prices in pertinent part as follows: Company
agrees to sell to the Town, and Town agrees to purchase from Company, at the rates hereinafter
mentioned, such quantities of water as the Town may hereafter from time-to-time need, the term of
the K is 25 years and will expire in the year 2008. The K limits the quantity of water the Town may
purchase to one million gallons of water per day, the K contains other limitations and provides that
“in no event shall the Company be obligated to supply water in excess of the limitations on usage as
provided for expressly in this Agreement . . . .” in 1967 (many ears before the present K was
executed), Town acquired land which could be used as a wellfield to supply water. In 1997, Town
announced its plan to sell bonds to finance the construction of the improvements necessary to
obtain water from the wellfield.
It is not a full Requirements K because there was a cap (maybe that is all the water company could
provide). The city was binding itself to buy all the water from the company up to a million gallons
and from no one else. It is a Requirements K because of the elements of EXCLUSIVITY. Is
developing the well a problem? Taking advantage of technology to decrease water requirements is a
good thing this is good faith and a legitimate reason for the lower requirements.
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AVOIDANCE DOCTRINES
Generally: What you are trying to do here is you are seeking for a court to declare a K voidable; you
are seeking to rescind the K. These are the ways that a party can escape a contract.
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The Three “Ps”: People, the Process, or the Product. Something is wrong with one or more
of these three things, and we have to figure out what.
The Distinction Between Void (Ab Initio) and Voidable
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Voidable Ks (Most common): This is like a divorce. Here, we have a K that is valid, however,
if a party takes steps to avoid/undue/rescind that K then a court can—in its discretion—
undue the K. The party that does not want to go through with the K has to affirmatively step
up and say they do not want to go through with the K.
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Void Ks (Ab Initio): This is alike an “annulment,” in that it never happened. We don’t need
to undo the K because there was never a K to begin with. If someone put a gun to your head
and told you to sign this K, we will say that is a void K. Here, Ks under regular duress (ex: gun
to your head) are void.
A. DURESS (ECONOMIC DURESS/ BUSINESS)
1. BACKGROUND/HISTORY
RS § 175. "If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the
victim no reasonable alternative, the contract is voidable by the victim.”
Duress: Normally, with duress, you have a situation where the party with the greater bargaining power
is trying to “blackmail” the other party and the other party (the weaker party) has no reasonable
alternative but to go along with it. Here, you feel completely backed into a corner because of this
illegal threat and there is no other thing you can do but go along with it. We are trying to say that no
one breached here (we are just getting rid of the K).
For example, a gun to the head. Here, you are compelling someone to do something not of their own
free will, for example: “The only reason I entered into the K was because I had no other choice.” If
you can prove that you are the victim of duress, the remedy is rescinding (undoing) the K. Rescinding
a K means getting rid of it and pretending it never happened (no consequences for either party).
Duress is going to be a REALLY HARD claim to make because the requirements are quite
strict. There is usually not an overt threat, and there is a lot of wiggle room in “reasonable
alternatives.”
2. ELEMENTS OF DURESS
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1. Wrongful or Improper Threat. (§175. A threat is improper if):
a. What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it
resulted in obtaining property,
b. What is threatened is a criminal prosecution,
c. What is threatened is the use of civil process and the threat is made in bad faith. (Suing
someone when you don’t have the grounds to sue that person).
d. The threat is a breach of the duty of good faith and fair dealing under a K with the
recipient. (This is the MOST COMMON. When you are acting in bad faith, then that will
be problematic in terms of constituting a wrongful or improper threat).
• For example, this often progresses where the threatening party is threatening
to breach. They say, “I am not going to pay you.” Even though they know that
they must pay you. They are threatening to not pay you to extort something
from you.
2.
No Reasonable Alternative: A lack of reasonable alternative
a. If the victim has a reasonable alternative, he is expected to take that reasonable alternative
or else he cannot avoid the K on the basis of duress.
b. The availability of reasonable alternatives is fact dependent.
i. Think about all the other things you could have done to show that their backs were
not against the wall, and they are just unhappy with the new bargain (this is the
party looking to uphold the modification or release).
ii. Consider things like: could they have sued? could they have gotten the goods from
an alternative supplier?
3. Causation: Actual inducement of the K by the threat:
a. The threat must cause the party to enter into the K. However, it is usually not an issue if
you establish elements (1) and (2).
i. If there is some other reason, then we cannot say that the K was procured by
duress. You must show there was some other reason they entered into the K.
4. (?) Pressuring party must have caused the hardship:
a. Courts debate whether this is required. Essentially, the hardship cannot come from the
weaker/servient party. It must come from the dominant party.
Note: Each element MUST be shown (maybe not 4) to prove duress. There is TOLERATION OF
THE THREAT IF IT’S A MINOR VEXATION.
3. CONTEXT IN WHICH DURESS ARISES
Modification of an original K:
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Here, a party “renegotiates.” You take the OG K and modify the K by changing the terms of
the K so that the OG K is no longer offered.
Duress and modification, the party that is seeking to get out of the modified K is saying they
were blackmailed into the modified K and want to rescind to the OG K.
For example, in K1 you have a price of $10,000. A modification involves getting rid of that
OG K and substituting a new price, $15,000, instead.
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A Settlement and Release Agreement
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In a Settlement agreement, we have a dispute as to who owns what, and instead of going to
court we have settled on a certain amount of money, and we go on our separate way.
A release is a separate agreement that has an effect of terminating (rescind/undo) the OG K.
We will see a party calming that the release was signed under duress.
Duress and settlement/release: the party (victim) here wants to reinstate the OG K (go back
to the top/OG K) because the release was a product of duress, and they want to reinstate the
OG K: “we want to be released from the release.”
4. CASE ANALYSIS
Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co
FACTS: Π contracted with ∆ to transport pipeline construction materials. Π encountered numerous
difficulties which severally delayed performance of the K. After receiving the pipes, ∆ cancelled the
K. π presented ∆ with an involve with charges of $260,000 to $300,000. Π alleged that it was in urgent
need of cash, and that if it didn’t soon pay off its bills, it would have to declare bankrup, and that ∆,
who had knowledge of π’s financial troubles, deliberately stalled on payment to reach a settlement. Π
eventually agreed to release ∆ from all liability in exchange for $97,500.
• Let’s understand the position of the parties:
o Alyeska --> release is enforceable we paid $97,000 and now we are done.
o Totem --> release is subject to rescission; we now want the full amount owing
($300,000ish).
• Issue: can Totem avoid the release? (i.e., rescind the release).
ANALYSIS: π’s argue the duress is in the release statement.
Was there an improper/wrongful threat?
• Yes. Alyeska is threatening to withhold payment. Given that the π owes money, the
withholding of money under a K is an improper threat.
• Alyeska would say that they did not threaten the π because things went awry in the K and they
were not sure how much they owed.
Did the π have a reasonable alternative (filing lawsuit, switching supplier, load)?
• No. the π didn’t have a reasonable alternative because they were in danger of becoming
bankrupt if they did not accept the release terms and filing a lawsuit would take too long.
• Alyeska would demonstrate that π had reasonable alternatives through other Ks and other
sources of revenue (using financial statements).
Did the treat cause the party to enter into the K?
• Yes. Π would not have signed the release if ∆ had not threatened to withhold payment.
Did the ∆ cause the π’s hardship?
• Yes. ∆ cause π hardship by putting them hundreds of thousands of dollars in debt.
HOLDING: The Court held that the π showed that ∆ had deliberately withheld payments of debt,
with knowledge that π had no choice but to accept the conditions of the amendment or declare
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bankrupt, and that the only way π would be able to avoid it would be to accept the amendment. In
other words, the π established duress.
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B. UNDUE INFLUENCE GENERALLY
1. BACKGROUND AND HISTORY
Undue influence is unfair persuasion of a party who is under the domination of the person exercising
the persuasion or who by virtue of the relation between them is justified in assuming that that person
will not act in a manner inconsistent with his welfare. Usually occurs in the context of a dominant and
a weaker party.
• Undue influence is most likely NOT going to come up unless you see this power dynamic of
one party that is much stronger and one party that is much weaker.
Historically, the doctrine was reserved for relationships which were expressly characterized by trust
and confidence (Doctor/patient, Lawyer/Client, Parent/Child). So, you could NOT allege undue
influence outside of those categories of relationships.
• Now, technically you can still allege undue influence if you are not in one of these categories.
But it is hard to win and would be even harder outside those categories.
• Policy seek to upend a K. the parties have a K and now one party after the fact–after they
entered a legally binding K–wants to say no, I want out, I want to rescind. Courts don’t take
this lightly.
2. ISSUE SPOTTING UNDUE INFLUENCE
Undue influence is ONLY for a natural person. This very nature is that SOMEBODY is susceptible
to being taken advantage of; it is unlikely that this would come up with a corporation. So, look for:
• A servient party (someone who is more vulnerable).
• Someone is a servient party when they are elderly/mentally incompetent (incapacity)/etc.
• On the other hand, you are looking for someone who has power or persuasion over the
servient party.
3. ELEMENTS OF UNDUE INFLUENCE
1.
2.
3.
Undue pressure, sometimes called over persuasion or coercion,
By a dominant party over a servient (vulnerable) party,
Such that the vulnerable party’s free will is overcome.
Things to also consider: (NOT elements; just factors. Guideposts to alert you to either side).
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Discussion of the transaction is at an unusual inappropriate time.
Consummation of the transaction in an unusual place
Insistent demand that the business be finished at once.
Extreme emphasis on untoward consequences of day.
The use of multiple persuaders by the dominant side against a single servient party.
Absence of third-party advisers to the servient party.
Statements that there is no time to consult financial advisers or attorneys.
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•
This is tugging at the idea that there is a lot of pressure on the servient party (the weaker party)
to decide to enter into the K, there is no time to decide you have to do this. And the person
feels so much pressure that they finally cave in and agree to the K.
4. CASE ANALYSIS:
Odorizzi v. Bloomfield School District
FACTS: π was arrested and charged based on criminal homosexual activity and submitted his
resignation as a schoolteacher. There, the π said that he was coerced to submit a resignation by the
principal and district superintendent after they visited π at his home following the arrest. Whole visiting
his home, the principal and district superintendent threatened to suspend, publicly hamulate, and
embarrass the him unless he resigned, that he had no time to speak with an attorney, and that his
chances of ever teaching again would be ruined if he did not resign. Π alleged that he was under severe
mental and emotional pain (awake for over forty hours from being arrested and questioned by police).
Π’s charges were dropped, and he sought rescission of resignation.
ANALYSIS:
Was it duress?
• No. it was not duress, because there was no improper threat – it was ∆’s duty to report under
the CA code.
Was it fraud?
• No. It was not fraud because they were not telling lies and they did not misrepresent
something.
Was it mistake?
• No. It was not mistake because the parties are not laboring under a misunderstanding.
Was it undue influence?
• Yes. The following factors are present in the case:
o (1) assured the victim they were trying to assist him,
o (2) he relied on their advice,
o (3) was told there was no time to consult an attorney,
o (4) if he didn’t resign the school would dismiss him and make his arrest public, and
o (5) If he did resign, it would not hurt his chances of getting a teaching job elsewhere.
HOLDING: The Court held that π had pleaded sufficient facts to show that ∆’s had placed excessive
pressure on π at a time when π was vulnerable and susceptible to over persuasion. In other words, π
demonstrated undue influence and contract is rescinded.
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C. MISREPRESENTATION
1. GENERALLY / TORTS V. K
A misrepresentation is an assertion that is NOT in accord with the facts. Put more simply
misstatement of existing fact (be on the lookout for prediction, opinions, and puffs).
this is a
Torts V. Contracts when alleging misrepresentation in Torts you want damages and in K you want
to rescind. For example, if a house has termites that the seller lied to you about, you could either
rescind in contract or seek damages in tort.
2. ELEMENTS OF MISREPRESENTATION
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There are four elements of misrepresentation:
o There must have been a misrepresentation
o It was fraudulent or material
o It induced the party to enter the K
o Their reliance was reasonable
1. Must have been a misrepresentation (misstatement as to an existing fact)
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Misrepresentation is a misstatement of existing fact. So, when given a fact problem with
misrepresentation, tell the Prof. what the misstatement in the fact pattern is. This can be done
by saying “the misrepresentation is when X said to Y, ‘___.’
o Put simply (1) Identify the statement. Make sure it is in quotes or a phrase directly
from the fact pattern. (2) Ask if the statement is true or not. If it is not true, then it is
a misstatement.
Exceptions: Only misstatements of FACTS can be misrepresentations.
Puffery;
Predictions; Opinions are generally NOT considered misrepresentations.
o Puffery. Here, the merchant is boasting about the product. When sellers are selling
something, we can expect some level of grandiose statements. These are not
objectifiable viable. EX: dunkin says in advertisement, “this is a delicious way to start
your day” – that is probably not actionable.
o Predictions. If you are predicting that this car will last a full 20 years w/o any repairs,
that is ok. This is DIFFERENT than saying “this car has been treated with rust guard.”
Here, predictions are generally NOT actionable.
o Opinions. This is like saying “it is my opinion that this car is safe.” This is an opinion
about a car. Opinions are generally not actionable except in the following 4 cases:
o (1) Where the person giving the opinion misrepresented his state of mind (i.e.,
stated that he held a certain belief when in fact he did not)
o (2) Where the one giving the opinion:
(a)stands in a relationship of trust or confidence (either a “fiduciary
relationship” or any other de facto relationship of trust and confidence);
(b) is an expert on matters covered by the opinion;
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© renders the opinion to one who, because of age or other factors, is
particularly susceptible to misrepresentation.
2. Misrepresentation must be Fraudulent OR Material
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It does not have to be both (though it can be). As long as you are checking on of the boxes
(Fraudulent or Material) you do not have to have both. ON A TEST, if you found that the
misstatement was fraudulent, you still look at if the provision is material and vice versa.
FRAUDULENT (an intention to deceive)
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This is outright lying. You intend for someone to enter into a K and know or believe you are
lying. A misrepresentation is fraudulent if the maker intends for his assertion to induce a party
to manifest his assent and the maker:
a. Knows or believes that the assertion is not in accord with the facts, (Reckless
negligence) or;
b. Does not have the confidence that he states or implies in the truth of the assertion,
(Fraudulent) or;
c. Knows that he does not have the basis that he states or implied for the assertion.
i. In circumstances where you say something, and you know you don’t have
enough information to say it, we call that fraudulent misrepresentation.
o
How do you show this?
use the Zone of Fraud (the zone contains 1. overt fraud and 2.
negligent or reckless statements.)
EXAMPLES:
(1) Seeing termite damage (alerted to possibility), then saying there is no termites. Not
an overt lie because no termites were seen, but you were negligent/reckless.
(2) “This car gets 40 miles/gallon” knowing that it is not true. This will be actionable
as a fraudulent misrepresentation. IF they say, “this car gets 40 miles/gallon” and shoot from
the hip; base it on very limited knowledge. Maybe they read something and did not go and
look it up and they are iffy about it, then that will be enough to represent fraudulent
misrepresentation.
(3) Knowing that a horse is not feeling well, and not following up, but telling the
buyer that the horse is in good health. This would be neg/reck.
MATERIAL (what is important)
The idea that the misrepresentation is a big deal. The word “material” is a synonym for the word
“important.” It is an important misrepresentation. Two ways you can have a material
misrepresentation: (1) Objective, (2) Subjective Plus.
Objective Material Misrepresentation
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o
Statement that is important to MOST (reasonable) people in the circumstances. If someone
says something that is untrue and that statement would be important to a reasonable person
in this scenario, then we will say that it is a material misrepresentation under this objective
prong.
These impacts structural integrity, your health, or the value of the house. If you know you
have asbestos, and you say you don’t = fraud, but if you genuinely believe you don’t have
asbestos = material misrepresentation.
For example,
if this car dealer says, “this car gets 40 miles/gallon” and they are not lying,
and they really do think that. None the less, it is likely to be captured here because most
reasonable car buyers would consider the milage to be important. It would be important to a
reasonable person in this context.
Subjective Plus Material Misrepresentation
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We are going to determine that something is a material misrepresentation by asking: (1) Was
this statement important to the recipient, AND (2) did the maker of the misrepresentation
know that it was important to that person?
EX: buyers may be concerned about how much water a well can provide if they want to do
agriculture. They do not tell the seller and the seller says that there is a lot of water coming
from the well. Subjectively this is a big deal. BUT THIS IS NOT A SUBJECTIVE
MISREPRESENATION. The seller was not aware of the subjective importance.
• The person doing the misrepresentation KNOWS OR SHOULD KNOW that the
homebuyer finds well water important.
EX: the salesperson at a car dealership says, “this car was made in Detroit.” The salesperson
knows that this is a SUPER important to the recipient BUT the “plus” part is that the maker
of the statement had to have known or have constructive knowledge of that fact. If they
through it in there without knowing, it was an important fact to the buyer, then that is OK.
Restatement Illustration (§162)
•
•
•
BOTH MATERIAL AND SUB PLUS.
(1) While negotiating with B for a racehorse, A tells him that the horse has run a mile in
a specified time. A is unknowingly mistaken. B is induced to buy the horse.
o It is not fraud because A is innocent. It is material objective because the speed
of the horse is important to an objective buyer of a racehorse.
(2) A honestly tells B that the horse was bred in B’s grandfather’s stable. In truth, the
horse was from a better stable.
o This is not anything. It is not fraud because he honestly is mistaken. It is not
objectively important because a reasonable person would not care about the
stable. They did not know about the importance to B.
(3) Same facts as 2, except not, A knows that B wants a horse from the specific stable.
o A knows that where the horse was bred was important to B, then it is subjective
plus.
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3. Misrepresentation must have induced the recipient to enter the K (Causation)
The misrepresentation must have caused the recipient to enter the K. However, if the maker of the K
can show that this misstatement has NO impact whatsoever on the decision to enter the K, then you
can break that chain of causation.
Does not have to be the ONLY cause; simply must be a SUBSTANTIAL CONTRUBUTING
CAUSE. The policy reasoning here is that we only say that it must be substantial contributing cause
and not the only cause is because there are usually going to be multiple reasons people enter into a K.
4. Recipient must have been justified in relying on the representation (Reasonable reliance)
Reliance on the misrepresentation has to have been reasonable in order for it to be actionable. Even
if it is a fraud or material, your reliance may NOT be reasonable.
o
For example,
if a car dealer says “this car gets 100 miles per gallon” it would not seem
reasonable to rely on the fact. Far out statements you should not be relying on will not
be actionable as misrepresentations.
Here, look out for clues in the facts to determine whether reliance is or is not reasonable. this imposes
a due diligence requirement on people. There is wiggle room to say that you should not have relied
on the statement.
3. NON-DISCLOSURE (OPPOSITE OF MISREPRESENTATION)
Generally: Non-disclosure is the opposite of misrepresentation: here you are not saying anything in
circumstances where you need to be saying something.
Restatement §161. A person’s non-disclosure of a fact known to him is equivalent to an assertion that
the fact does not exist in the following cases only (By staying silent in cases where you have an obligation to
disclose, that would be the equivalent to if you had said something affirmatively false).:
a. Where he knows that disclosure of the fact is necessary to prevent some previous assertion
from being a misrepresentation or from being fraudulent or material.
o Assume I am selling my car, and you are potentially considering buying my car. And
you ask me "has this car ever been in an accident?" and I say "no" which is 100%
truthful. However, over the weekend, after I made that statement, I got into an
accident. In those circumstances–I the seller–would have a duty to disclose that fact
because it would be necessary to prevent some previous assertion from being a
misrepresentation. The previous assertion, being my assertion before the weekend that
the car was not in an accident; at the time that was true. But after the weekend, that
was no longer true.
b. Where he knows that disclosure of the fact would correct a mistake of the other party as to a
basic assumption on which that party is making the K and if non-disclosure of the fact amount
to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
o This is the catch all. The most common scenario. Allows wiggle room for
imposing a duty to disclose where a failure to disclose would amount to a failure to act
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in good faith and fair dealing. If I’m selling my house and it’s obvious that the potential
buyer of the house believes that the property line extends far beyond what it does—I
didn’t say that but for whatever reason they believe it does—that would violate the
implied duty of good faith by not disclosing the fact.
c. Where he knows that disclosure of the fact would correct a mistake of the other party as to
the contents or effect of writing, evidencing, or embodying an agreement in whole or in part.
o What this involves is that the parties have agreed to a written K and before signing the
K, one party is under a misimpression of what the K says. And they are proceeding on
that assumption that the K allows them the ability to do what they can’t do. If the
other party knows that the other party has misread the K, there is a duty to speak up
in those circumstances.
d. Where the other person is entitled to know the fact because of a relation of trust and
confidence between them.
o Usually applies to fiduciary relationship: doctor/patient, lawyer/client, etc. By not
speaking up in these circumstances it is equivalent to a misstatement. So, the doctor
examines you and knows there is something wrong with you, and does not say
something, that is a misstatement—that is actionable as non-disclosure.
Factors bearing on good faith duty to disclose:
•
•
•
•
•
•
•
The difference in the degree of the intelligence of the parties; community sense of justice
demands it:
Relation that the parties bear to each other;
The way the info is acquired: by chance, by effort, or by illegal act;
Nature of the fact not disclosed (more duty to disclose if intrinsic defect not discoverable by
reasonable care, than when extrinsic defect that would affect market value);
General class to which the person who is concealing the info belongs: more likely that sellers
must disclose than buyers;
The nature of the K itself; in releases and insurance Ks practically all material facts must be
disclosed;
The importance of the fact not disclosed.
Things Like Non-Disclosures:
•
•
•
Non-Disclosure is the idea that I have not said anything in circumstances where I should
have said something.
Concealment is where you are hiding the fact from the other party. Not only are you
disclosing it, but you are also taking steps to ensure the other party does not know about it.
Half-Truths are statements that are literally true, but it conveys a misimpression. Something
that is literally true but conveys to a reasonable person a misimpression.
o For example, you are buying a car and you ask the mechanic, “how are the breaks on
this?” and they say, “I checked them out last week.” That could be true, but the
impression it conveys is that they checked in last week and what is silent is the “and
the breaks are ok.” That would be a half-truth if they did check the breaks, but they
were not ok.
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4. FRAUD IN THE EXECUTION (EXECUTING FORMAL DOCUMENT)
This is super rare. There is fraud involved in the signing process NOT fraud involved in getting
someone to agree to the bargain process.
• For example, leaning over, hiding part of the K, and then telling you to sign it.
5. CASE ANALYSIS
Alabi v. DHL Airway (Overview of Misrepresentations):
FACTS: DHL operates an express service for packages and envelopes. Plaintiff requested an envelope
to be picked up for delivery (with $15K in it) to plaintiffs’ cousin in England. The Plaintiff inquired
multiple times whether the package could be insured for the amount it held, and that the DHL rep
indicated the max insurance that could be purchased was $15K. On arrival of the courier, plaintiff
paid insurance on the package, Plaintiff has used DHL’s services before. On the airwaybill in a black
marked “description of contents,” plaintiff wrote “documents regarding school bills.” Plaintiffs’
envelope arrived in London and the envelope was stored overnight at DHL’s London facility. The
next day, when DHL attempted delivery, the envelope was stored overnight at DHL’s London facility.
The next day, when DHL attempted delivery, the envelope was missing. DHL notified plaintiff of the
loss and conducted a search for the envelope. The search didn’t work.
ANALYSIS:
What is the misstatement?
• “Documents regarding school bills”
Is this a misrepresentation?
• Yes. The word “document” implies that it is written, No one used the word “document” to
refer to cash. There are only ways to describe money.
Is it fraudulent?
• Maybe. He made this statement deliberately with intention that the money be carried overseas.
The court was not prepared to say it was fraudulent, but there is a good argument that it is
fraudulent.
Is it objectively material to a carrier in this situation?
• Yes. It is important because carriers must comply with the law and cannot carry certain things,
Even more so, DHL has a clause that they can open up packages, and that there is certain
things they are not allowed to carry.
Is it subjective PLUS material?
• Yes. It is subjectively important to DHL what they carry because of everything above. Alabi
also has knowledge of this subjective importance because he has been using DHL’s services
for 2 years and should have known that he couldn’t ship $15K.
Is there causation?
• Yes. Causation usually follows unless there is some other reason Alabi decided to ship. The
misrepresentation was substantial contributing cause of DHL deciding to ship the package.
Did DHL reasonably rely on misstatement?
• No. Alabi asked about the insurance twice, this should have put DHL on alert.
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HOLDING: Since all four elements had not been established as a matter of law, the court held that
granting summary judgement in favor of DHL would not be proper.
Hill v. Jones (Non-Disclosure)
FACTS: In 1982, buyers entered into an agreement to purchase sellers’ residence for $72,000. The
termite inspection proved negative for termites. On a visit to the house buyers noticed a small “ripple”
in the wood floor on the step, to which the ∆s said was water damage. Mr. Hill had seen similar
“ripples” in wood which had turned out to be termite damage, but he intended to rely on the report.
After moving in, buyers learned that the house and some termite infestation in the past. Mrs. Hill
noticed that the wood on the steps leading down to the sunken living room was crumbling due to
termite damages. Through discovery, a history of termite damage was revealed in wood floors and
back patio fence, which sellers failed to mention. The inspector returned to the residence to determine
what he had not found evidence of prior treatment and termite damage. The damage was covered by
boxes and a large plaint. After investigating the second time, the inspector found the damage and
evidence of past treatment.
ANALYSIS:
There is a duty to disclose (objectively) material fact in real estate relations.
How do we determine whether a fact is material?
• Non-material: paint color how old appliances are, the watts of the lighting
• Material: mold, asbestos, toxic chemicals, termites
• Stiff in the middle: arguments to be made back and forth
Is previous termite damage a material fact?
• How long ago was it? Has it been death with? Unknown.
• Factually, if having prior termite damage means the termites may come back, then that is a
material fact (maybe that is why they do the treatments every year).
HOLDING: Under the facts of this case, the question of buyers’ knowledge of the termite problem
should be left to the jury. The existence of termite damage and past termite infestation has been
considered by other Courts to be sufficiently material to warrant disclosure. “A matter is material if it
is one to which a reasonable person would attach importance in determining his choice of action in
the transaction in question.”
---------------------------------------------------------------------------------------------------------Milliken v. Jocono
Legal/Statutory Arguments for/against Non-Disclosure
(Always start with the legal arguments because the statute is binding, whereas policy is persuasive).
1. Find the Statute at issue
2. Argue whether the statute gives the impression that disclosure of murder is material defect.
Policy Arguments for/against Non-Disclosure (ND)
• FOR ND: Psychological stigma is completely different from physical and legal property.
Psychological damage will decrease over time. It is unfixable. The law should not deal with the
supernatural.
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•
•
o RESPONSE: Psychological damage is different, but it is important, and people will
be bothered about it. The very fact that you cannot do anything about it is exactly why
it should be disclosed. You can fix mold and radon, etc. It is ephemeral but it is
permanent.
FOR ND: Caveat Emptor “buyer beware” argument. If you cared about this do the legwork
to discover it. There are websites to find out this information. You can also ask the realtor
about it, and then they would have to tell the truth.
o RESPONSE: Most people do not have this on their horizon because they don’t
believe someone could be killed in the house. They won’t ask about it because it is so
rare. Also, you might not be able to get information on their own house, because it is
not on public record. And there are certain steps people can take to burt negeticve
information (such as renumbering the address).
FOR ND: Slippery slope/floodgates argument. If we make people disclose murders, how far
back are we going to go? And what if it is a burglary or drug operation, or next-door neighbors
are involved in some sort of illegal activity, or there is a registered sex offender in the
neighborhood?
o RESPONSE: This is not about every crime, its murder, and we should define it
accordingly. You can put a term limit on the number of ears in the statute. Murder is
also rare, so it is perfectly appropriate to have a carve out.
FACTS: During 2006 there was a murder/suicide at the property. The ∆s purchased the house. ∆,
Mr. Jacono, spoke with representatives of the Pennsylvania Real Estate Commission, who confirmed
that the murder/suicide was not a material defect that needed to be disclosed. The s sold the property
to the πs for $610K and did not disclose the murder/suicide. Π alleges that she was unaware of the
murder/suicide until three weeks after she moved into the property, allegedly sometimes in September
2007. The π has opportunities to discover who previously owned the house and what happened to
them. Real Estate Seller Disclosure Law (RESDL) is the statute most important to this case. Under
RESDL a material defect is defined as a problem with property that would have a significant adverse
impact on the value of the property.
ANALYSIS:
What are the legal/statutory arguments?
• For non-disclosure (majority): When you look at the items on the list for material defects
(RESDL), although the list is not exclusive, the items deal with physical and legal properties,
NOT psychological issues like murder/suicide.
• Against non-disclosure (minority): A material fact is ANYTHING that has a significant
adverse impact on the value of the property. The murder would have an adverse impact on
the value of the house. The house was appraised $100K less than what the woman paid for
the house.
o Because it is not exhaustive, so there is nothing that would preclude us from reading
murder into the list. A number of the items on the lost are not about physical or legal
properties.
What is the majority’s policy argument?
• Psychological stigma is completely different from physical and legal property. Psychological
damage will decrease over time. It is unfixable. The law should not deal with the supernatural.
• If you cared about this, do the legwork to discover it. Look at the internet.
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•
If we make people disclose murders, how far back are we going to go? And what if it is a
burglary or a drug operation, or next-door neighbors are involved in some sort of illegal
activity, or there is a registered se offender in the neighborhood?
HOLDING: the occurrence of a murder/suicide on a party does not constitute a material defect to
real estate such that a seller must disclose that fact.
Park 100 Investors v. Kartes (Fraud in the Execution):
FACTS: The Kartes (∆s) entered into an agreement to lease space at Park 100, an industrial complex.
A personal guaranty of the lease was never discussed during negotiations. Park 100’s rep went to KVC
offices and presented a document titled “Lease Agreement” to the ∆s for them to sign. Mr. Karts
called his lawyer to confirm that he had approved the papers. The Kartes signed the papers. Scannell
never informed the Kartes that they were singing a personal guaranty of lease. Years later the Kartes
discovered the personal guaranty. The Kartes’ were tricked into singing the “Lease Agreement.” The
π’s rep never commented on the personal guaranty while ∆s confirmed with their lawyer. This is fraud
in the execution. They were not singing a lease agreement but a guaranty to be responsible for the
company’s debts.
HOLDING: No, one cannot enforce a contract when he fraudulently induced the other party to enter
into the contract. To establish fraud, one must establish the following elements: “(1) A material
misrepresentation of past or existing fact by the party to be charged, which (2) was false, (3) was made
with knowledge or in reckless ignorance of the falsity, (4) was relied upon by the complaining party,
and (5) proximately caused the complaining party injury.” Regarding reliance, one must act with
ordinary care and diligence in guarding against fraud. In the current matter, the Kartes have shown
that Scannell, as a representative of Park 100, acted fraudulently. Scannell called the personal guaranty
“lease papers,” it was titled “Lease Agreement,” and Scannell stated that KVC could not move in until
they were signed. These statements were made despite Scannell’s knowledge that the signatures were
a guaranty. The Kartes, through ordinary care and diligence, believed the papers to be a lease and
signed them accordingly. The Kartes demonstrated reasonable care by calling Kaplan before signing
them and confirming that KVC’s lawyer had approved the papers. Park 100 cannot establish that the
Kartes, as knowledgeable businesspeople, could not have reasonably relied on Scannell’s
misrepresentations. Though a contracting party is obligated to know the terms of what he is signing,
that party will not be bound when misrepresentation was used to induce him to sign it. Accordingly,
the decision of the trial court is affirmed.
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D. UNCONSCIONABILITY
1. GENERALLY
•
The idea that a K or a particular provision of a K is grossly unfair. The problem, however, is
that it is hard to tell if something meets the standard of unconscionable. Therefore, this is not
a likely doctrine that you will use.
2. ELEMENTS/FRAMEWORK
•
Gross unfairness is highly subjective, so courts split the analysis in two: Procedural or
Substantive
•
Procedural Unconscionability:
o Oppression: Arises from an inequity of bargaining power which results in no real
negotiation and “an absence of meaningful choice.” Here, we look at the idea that
somebody who signed a K had no real ability to negotiate the terms; they were
negotiating with someone who had a lot more bargaining power over them.
Factors to look at: is this a company v. consumer; how sophisticated the
person signing is; did they have a lawyer; did they have the ability to negotiate.
o Surprise: Involves the extent to which the supposedly agreed-upon terms of the
bargain are hide in a prolix (really long) printed form drafted by the party seeking to
enforce the disputed terms.
Factors to look at: Would a reasonable person be surprised to find this term
in the document; was it hidden; was it buried; was it worded in a way you could
not understand what it meant.
•
Substantive Unconscionability:
o Here, the clause itself is alleged to be unconscionable. You ask what it was about the
provision that made it so unfair. Even if this was in big bold print, you are still arguing
that it is unfair, so you tell them why it is unfair. This is the heart of the analysis.
3. CROSS-COLLATERALIZATION CLAUSE
•
When one asset serves as collateral for more than one loan. If a borrower is unable to repay
any of the loans secured by the asset, the property can be seized and sold even if the borrower
is current on the remaining loans. Mortgage lenders and banking institutions will sometimes
use cross-collateralization to reduce their risk.
•
Policy reason
The lender needs to feel “secure.” Simply promising to pay back your debts
does not make a lender feel secure. So, the more personal property that the lender has to back
up the loan (that the lender can repossess) the more secure they feel.
4. ARBITRATION CLAUSE
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This is a clause that provides that the parties are going to resolve all the disputes through this other
process, through an arbitral process. The parties don’t go to court, the parties instead hire an arbitrator
or a panel of arbitrator that will hear the case. There will be more flexible rules of evidence, it is
theoretically faster, cheaper, more efficient, but the decision of the arbitrator is binding and there is
no right to judicial review (you can’t appeal).
Why businesses like them?
•
They are confidential, in a way that court proceedings are not. Business don’t like bad publicity,
so if someone sues them, they will go to arbitration which happens behind closed doors.
Corps. Won’t have their dirty laundry aired and there will be no bad publicity.
What is bad about Arbitration clauses?
•
•
Bis toward industry
o Verizon might go to the same panel of arbitrators all of the time.
Class actions
o Damages can be so negligible that you will not sue, unless you get everyone together
that suffered the same loss.
o For example, assume that Verizon charges a 10¢ surcharge on every bill. And assume
that 10¢ charge is illegal. I am not going to get up and arms about the 10¢. This is
referred to as a negative value claim.
23
E. PUBLIC POLICY
1. GENERAL/HISTORY
•
Before, there was some defect in the bargaining process which rendered it unfair in some way
to enforce the agreement. Now, we have something that the law simply won’t let us do because
it goes against the moral fabric of society.
o EX: (text from box)
•
For example, parties enter into K’s for surrogacy, some courts invalidate surrogacy K’s because
there are public policy concerns and therefore any surrogacy whereby parties K to have
someone carry their baby and ten give them the baby is void, because these courts think it is
a form of buying and selling babes and that is not appropriate. Public policy is mainly the catch
all for the idea that there are some K's out there that just offend us and go against the moral
fabric of society.
•
Historically, covenants not to compete were seen as a restraint of trade and not enforceable.
You could never prohibit someone from competing. Now, the law enforces non-competes
generally – but subjects them to extra scrutiny. Not every non-compete will be enforceable.
2. NON-COMPETE AGREEMENTS (NCA)
•
Rule: For a non-compete to be valid, (a) it must protect some legitimate interest of the employer, beyond
a simple desire to insulate itself from competition (b) and it must be reasonable.
•
Why have NCAs? (Legitimate interest of the employer).
o A covenant not to compete must protect some legitimate interest beyond the
employer’s desire to protect itself from compensation (in other words, protecting
yourself from competition is not a legitimate interest).
o Companies use it to protect themselves from someone who has worked there leaving
and taking their customers or those skills.
•
Clause must be reasonable with respect to (heart of the analysis):
o Prohibited Activity. Make sure that the prohibition on competition is no greater than
necessary to protect the employer’s legitimate interest.
o Duration. Duration of the clause to make sure it’s not too long.
o Geographic Area. A large radius that would require the party with the NCA to move
(out of state or across the state) to find work, is unreasonable.
•
In Terrorem effect of non-compete: In Terrorem effects are clauses that “terrorize” people
into abiding by them because the consequences of violating them are so potentially draconian.
So even if they are unenforceable, as a matter of law, people don’t know what and they are
essentially forced into abiding by them.
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3. LEGAL REMEDY
Any one of the three prongs is sufficient to make the non-compete problematic.
A. Option 1: Rewrite
Definition: Of the three, on its face, this seems to be the most reasonable. You cross out the number
you don’t like and put in a new number, and you have rewritten the clause. If you have a problem
with the duration of the NCA, for example then you could just rewrite it from 3 years to 1 year.
What is the upside?
•
•
Still giving effect to the broad intention of the parties.
The parties signed the K, so that means they wanted it. so now you are writing it to make it
reflective of something that is reasonable.
What is the downside?
•
If the party knows that the court is going to rewrite an agreement that is unreasonable, what
sort of incentive does this create for the employer? This creates an incentive to write a very
draconian non-compete agreement so that they fall back on whatever the Courts give them.
B. Option 2: “Blue Penciling”
Definition: A court cannot rewrite the agreement (i.e., can change 3 years into 1 year; can’t change
RI to MA), but what you can do is cross stuff out. You are still giving effect to the intention of the
parties, but you are severing out—cutting out—provisions which would make it overtly broad.
What is the upside?
•
Still giving effect to the intention of the parties, not changing it, to some extent there is still
an incentive to overreach though.
What is the downside?
•
Blue penciling does not really work except in some cases. If for instance a non-compete says
you cannot practice X, Y, and B you could get rid of Y and B. But if it says you cannot do X
then blue penciling would not allow you to cross X out and add something random in.
Restatement Gloss on Blue Penciling
•
•
Courts are permitted to blue pencil and take the intermediate approach, but they only can if
there is no evidence of overreaching (acting in bad faith).
In cases where it seems as though a party overreached, for instance assume they put in 10
years for the duration, a court would say that you are not allowed to blue pencil, because 10
years of non-compete would seem like something that was put in there, in bad faith.
25
C. Option 3: Void the Entire Clause
Definition: If the court has determined that the non-compete is unenforceable (you are saying it
violated public policy), then you strike down the whole clause and the other party is allowed to
compete. Best solution.
What is the Upside
•
•
You encourage parties (employer) to be reasonable from the get-go
If they know the clause will be deemed invalid, they will think about it more and aim for a
clause that is reasonable.
What is the downside?
•
It is an all or nothing, if you find that most of the clause is reasonable, but only think the
duration is too long, for example, then you don’t have another option than to invalidate the
whole clause.
26
JUSTIFICATIONS FOR NON-PERFORMANCE
A. MISTAKE
1. GENERALLY
This is a post-contract concern where both parties were wrong in their assumption of what the K is.
Here, we look at the three species of mistake (misunderstanding, mutual mistake, and unilateral
mistake) and how changes of circumstances have occurred or come to light since the time that the
original agreement was made.
The remedy for mistake is still rescission (i.e., you can "get out" of the K without being considered in
breach).
•
The way these cases present themselves is one person says, "you breached this K." and as a
defense to breach they say "I didn’t breach the K because there is nothing to breach because
the K doesn’t exist because it is rescinded on the bases of X." So, these avoidance doctrines
have the effect to say that there was no K and therefore I could not have possibly breached.
P is arguing breach and D is saying (in their defense) that there is no breach because they
employ one of the avoidance doctrines.
2. THREE (3) TYPES OF MISTAKE
A. Misunderstanding
Definition: The parties do not have a mutual assent because they are thinking completely different
things. (“They are not on the same page”). True misunderstanding cases are going to be rare.
• For example, a buyer looking to buy cotton on a certain ship and a seller is selling cotton on
a certain ship. Both ships are called Peerless. And each one thinks they are buying/selling their
product on their respective ships. Courts said that there was no Mutual Assent in order to
have K formation SO they were on two completely separate pages, and they do not have
Mutual Assent and no K was formed.
Key Limitation:
•
•
The doctrine does not apply when one party’s understanding, because of that party’s fault, is
less reasonable than the other party’s understanding. Both parties understanding of what is
going on must be reasonable.
It is only in times where the understanding is not shared at the time of K formation, that you
will have a misunderstanding.
B. Mutual Mistake
Definition: §152. When a mistake of both parties makes a K voidable. Where a mistake of both
parties at the time a K was made as to a basic assumption on which the K is voidable by the adversely
affected party unless he bears the risk of the mistake under the rule states in §154.
27
Mutual Mistake Elements:
1. Fact in existence. Mutual mistake relating to a fact in existence at the time the K was
executed. [The belief which is found to be in error cannot not be a prediction as to a future
occurrence or non-occurrence].
2. Basic assumption / Materially important fact. The mutual mistake relates to a basic
assumption (really important thing) of the parties upon which the K is made, and which
materially affect the agreed performances of the parties.
3. Assumption of risk. The risk must not have been borne by one of the parties. You can only
raise mutual mistake to avoid a K if you are NOT the one who created the risk. A party bears
the risk when:
a. The risk is allocated to him by agreement of the parties, or
b. He is aware, at the time the K is made, that he has only limited knowledge with
respect to the facts to which the mistake related but treats his limited knowledge as
sufficient, or
i. For example, an in an estate sale, the seller sells paintings for $60 that are
actually worth $1 million. And now the seller wants to rescind the K. The
Court says NO because seller should have looked into the paintings further.
c. The risk is allocated to him by the Court on the ground that the Court thinks it is
fair for person X to bare the mistake. This is the catch all.
Mutual Mistake vs. Misunderstanding
•
•
Mutual Mistake is where there is some important fact that the parties did not know about
when the K was made (both parties were in the dark about the fact).
o For example, when you sell a cow, because you think it is barren, but then it ends up
being fertile. The cow being barren or not, at the time the K was formed, is a mutual
mistake issue because it is likely that both the buyer and the seller did not know the
cow was fertile since it would be way more expensive.
Misunderstanding is where the parties have two completely different ideas about what the K
entails.
o For example, when one party thinks he is buying the red cow and the other party
thinks he is selling the blue cow.
C. Unilateral Mistake
Generally: This is where only one party has made a mistake. This makes it much harder to get out of
the K, on the basis of a unilateral mistake. The fact that you are mistaken as to what you K entails is
on you.
Unilateral Mistake Elements:
The first three are the same as Mutual Mistake
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1. Fact in existence. Mutual mistake relating to a fact in existence at the time the K was
executed. [The belief which is found to be in error cannot not be a prediction as to a future
occurrence or non-occurrence].
2. Basic assumption / Materially important fact. The mutual mistake relates to a basic
assumption (really important thing) of the parties upon which the K is made, and which
materially affect the agreed performances of the parties.
3. Assumption of risk. The risk must not have been borne by one of the parties. You can only
raise mutual mistake to avoid a K if you are NOT the one who created the risk. A party bears
the risk when:
a. The risk is allocated to him by agreement of the parties, or
b. He is aware, at the time the K is made, that he has only limited knowledge with
respect to the facts to which the mistake related but treats his limited knowledge as
sufficient, or
i. For example, an in an estate sale, the seller sells paintings for $60 that are
actually worth $1 million. And now the seller wants to rescind the K. The
Court says NO because seller should have looked into the paintings further.
c. The risk is allocated to him by the Court on the ground that the Court thinks it is
fair for person X to bare the mistake. This is the catch all.
4. Effect of the mistake is such that:
a. Enforcement of the K would be unconscionable, OR
b. The other party (non-mistake party) had reason to know of the mistake or his fault
cause the mistake.
MAKE SURE TO MENTION THIS ON THE FINAL:
•
•
Some courts also say that you cannot make a claim for unilateral mistake if you were negligent
(some courts further this to limit this to gross negligence).
This is not one of those things where you have to look at your JX, but if this were a law in a
restatement state, you would have to look at if this was negligence or gross negligence
3. THE RESTATEMENT POSITION DIFFERS
§157. Effect of Fault of Party Seeking Relief
•
A mistaken party’s fault in failing to know or discover the fact before making the K does not
bar him from avoidance or reformation under the rule’s states in this chapter, unless his fault
amount to a failure to act in good faith and in accordance with reasonable standards of fair
dealing
o 3 different views of fault:
Restatement View
• Fault does not matter unless it amounts to a breach of the duty of good
faith.
Fault matters if you are grossly negligent.
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•
Fault matters if you are negligent. ‘
This is an after the fact notion that Courts do take different views on the fault of the party
who is not seeking to rescind the K.
4. Mistake in the Recording
Generally: A species of mistake that happens when there is a mistake in recording something (i.e., a
mistake in written expression). The parties have an understanding (everyone knows what the K is),
but something goes wrong in the transcribing process.
For Example, there is an agreement to sell a house for $200,000. The K is drafted and both parties
sign an agreement to sell for $20,000. Clearly, this is a scenario where we have to correct it, we don’t
need to go through the mistake test. Instead, if you can show that there was a mistake in transcribing,
then the remedy here is reformation.
What is reformation?
•
The Court reforms the agreement in order to comport with the parties’ agreement. So, the
court fixes the K to conform with the parties’ understanding.
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B. CHANGED CIRCUMSTANCES
Generally: These are three doctrines (impossibility/impracticability/frustration) which deal with what
generally can be considered a change in circumstances that occurred between the time the K was
entered into and the time that the performance is to be rendered.
• For example, you entered into a K, and you are supposed to perform 3 months from now.
But at the 1 ½ month mark something happened that changes everything, which makes
performance more difficult, or defeats the whole purpose of the K.
Historically: when you entered into a K, there was a form of “strict liability – if you couldn’t preform
your end of the K, you were still held to it and would be liable in damages.
Context: When impossibility/impracticability/frustration (or even mistake or any of the other
avoidance doctrines) comes up, it will likely in in this context:
• One party argues “you are in breach.” The other party says, “not in breach. K avoided because
of ____. Therefore, nothing to breach.”
1. IMPOSSIBILITY
A. Overview
Definition: K performance that is literally impossible, it cannot be done. A K is impossible to
preform because something has happened, and the person or thing necessary for performance no
longer exists. Here, the court is likely to say the K is voidable, so the parties go back to where or
how they were, prior to the K. the standard here is super high.
• For example, Entrepreneur Emily leases space from Landlord Larry so she can open a
restaurant that only serves Tibetan Speckles Lizard meat. If the city rezoned the property to
forbid commercial uses, or if the property is destroyed by a tornado, then both Larry and
Emily are excused from performing the K by impossibility. This is because it becomes
impossible to preform if there is no restaurant there.
• For example, a cattle farmer sells cows and promises to sell 50 cows to the Buyer. The 50 that
he had planned to sell have been destroyed, but he has others. K not impossible. The seller
will not be able to avoid the K on the basis of impossibility because he has other cows. These
were not the designated cows necessary for performance. As opposed to the buyer buying a
specific prize cow. There, it is more likely that the seller will be able to avoid the K on the
basis of impossibility.
B. Necessary for Performance:
It is really important, with impossibility, that it actually has to be truly impossible. The person thing
necessary for performance has to no longer exists.
• Person necessary for performance: Someone hires a painter to paint a portrait and the
painter does. The K will be rescinded because the painter is necessary for performance.
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•
Person not necessary for performance: A photography company has plenty of
photographers, and the person allocated to me cannot take the picture. That person is not
necessary to complete performance. The K cannot be rescinded on the basis of impossibility
2. IMPRACTICABILITY
A. Overview
Definition: “Impossibility Light.” The K is not technically impossible, but it is so much more difficult,
arduous, or dangerous that it’s almost impossible. It’s become so hard that rescission is justified.
• For example, Allen and Emily hire Mark, a landscaping contractor, to install a sprinkler system
and new landscaping in their front yard, making a $500 down payment. The day before the
instillation, an unexpected storm came in, causing massive flooding in the area, leaving Allen
and Emily’s yard covered in two feet of mud, tree branches, and trash. For Mark to perform
his duties under the K, he would first have to clean up the debris, then dig through an extra
two feet of mud, which would require several days, and extra equipment and manpower.
Impracticability applies in this case in that (1) a storm caused flooding that left a huge
amount of mud and debris on the property, (2) the debris left by the flooding made the
sprinkler and landscape instillation drastically more difficult and expensive, and (3) the
flooding could not have been reasonable foreseen by the parties.
B. Impracticability Elements
1. Must have been a basic assumption* of the K that no longer holds true.
a. The basic assumption is what the parties believed about the transaction. The parties
were generally not mistaken, but rather something bad happened. The parties believed
“XX” and now they have discovered, after the fact, that it is no longer true.
2. K must be “impracticable” ** to perform as-is.
a. Impracticable = must be extremely harder, erroneous, dangerous (nearly impossible).
b. §251 comment d: “Impracticability” means more than “impracticable.” A mere change
in the degree of difficulty or expense due to such causes as increased wages, price of raw
materials, or cost of construction, unless well beyond the normal range, does not amount to
impracticability since it is this short of risk that fixed price K is intended to cover.
3. Must not be through the fault (what ever happened) of the party seeking to avoid the K.
4. Party seeking to avoid the K, must not have assumed the risk (unless the language or
circumstances are to the contrary).
a. How a party assumes a risk
expressly through the K saying they assume the risk,
because the Court says they do, or through conscious ignorance.
3. Frustration
A. Overview
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Definition: Arises when a person’s whole reason for entering into the K has become frustrated or
undermined. It becomes pointless to go through with the K.
THINGS THAT MAY COME UP (impracticability and frustration):
•
•
•
•
Market Conditions
o Courts are reluctant to let parties out based on changes (Even severe) to the market.
Severe increase in cost of raw material
o Courts are more amenable to letting people out of Ks in these cases.
War or natural disasters
o Courts tends to not be super sympathetic in these cases.
Government regulations
o Gov’t regulations make Ks less valuable, sometimes court’s grant relief.
B. Elements of Frustration (RS §265)
1. Principal Purpose Frustrated by supervening event. Purpose frustrated by the
supervening event must have been the “principal purpose” of the party making the K. Not
enough that the contacting party had in mind a specific object without which he wouldn’t have
made the K. The object must be so completely the basis of the transaction that, as both parties
understand, without it the transaction would make little sense.
2. Frustration must be substantial. Not enough that the transaction has become less profitable
for the affected party or even that he will sustain a loss. The frustration must be so severe that
it is not fairly to be regarded as within the risk that he assumed under the K.
3. Frustrating event must have been a “basic assumption” of the K that no longer holds
true. The parties both believed “XXX” and now they have discovered after the fact that that
is no longer true.
4. Frustrating event must not have been through the fault of the party looking to avoid
the K. The factual condition or event must not have been the fault of the party trying to get
out of the K.
5. Must not have assumed the risk: Circumstances are such that the party looking to avoid the
K has not assumed the risk.
4. Force Majeure Clauses
A. Overview
Definition: A contractual provision allocating the risk of loss, if performance becomes impossible or
impracticable, especially as a result of an event that the parties could not have anticipated or controlled.
It spells out in black and white what the parties' contemplated would be events that terminate the K.
• For example, parties enter into a K, and they are performing, and sometimes something
happens that prevents them from performing. When that happens, the other party calls breach.
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So defensively, the party who cannot perform, say that “the reason I didn’t perform was not
because I didn’t want to, but because of [insert reason above].”
Force Majeure and Relationship to Impossibility, Impracticability, & Frustration
• If you don’t have a Force Majeure Clause, then you fall back on the common law impossibility,
impracticability or frustration doctrines.
• If you do have a Force Majeure Clause, then the starting point for a court, to figure out if they
will let you out of the K, is going to be the wording of the clause.
• You don’t need a force majeure clause to "get out? Of a K on the basis of impossibility,
impracticability or frustration.
Pros of having a Force Majeure Clause
• You can specify what events you want to constitute terminating events. This can be broader
than the regular common law stuff. So where not having this would mean that it would go to
the Courts' discretion as to whether the "breach" was sufficient.
• The parties know where they stand because you can see exactly what circumstances they
contemplated as terminating the K; avoids litigation.
• If you fall within one of the categories, should be fairly easy to prove your case.
Cons of Force Majeure
• Parties cannot possibly foresee every event. What happens if something happens that is not
on the list?
o The Court will have a harder time saying that you were not in breach if you have 40
other things on there. Say you had 40 different scenarios where you could not go
through with performance, but COVID hit and you don’t have a clause about COVID.
o So, one thing you could do is say "including but not limited to."
• A force majeure clause will be red narrowly (Contra Proferentum) against the party seeking to
rely on it.
o We want parties to perform their K's. If a party can get out of their K, because you
have a laundry list of things, Courts will look at it narrowly.
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C. MODIFICATION
1. Background
Generally: You change the terms of an existing K and substitute a new term so now the new K
becomes the operative one. The old K falls away and the new one replaces it.
2. Modification at Common Law
Rule: In order for a modification to be valid and binding in a common law K, new consideration
needs to be given on BOTH SIDES.
• Both sides: Both parties need to agree to a new detriment they are incurring.
• For example, you have a builder and a homeowner. The homeowner is going to pay X to the
contractor to build a new house and the builder, in turn, is going to build a new house. That
is the OG K. The contractor says he needs more money, and the home buyer says “yes” and
agrees to pay more. The homeowner gives a new consideration, the new consideration is the
new price they are paying. In return, the builder must give a new form of consideration.
Building the house that they were already obligated to build is not enough. That new thing the
builder must give can be nominal, as long as it is bargained for, but it has to be something in
the way of consideration. Maybe they were not going to do the landscaping but now they are
going to do the landscaping. So, they build a house plus do landscaping. Courts look for both
parties to give new consideration, so in effect, you have a new K.
A. Pre-Existing Duty Rule (another way to express consideration)
Definition: Modification requires additional consideration on both sides in order to be binding.
A promise to do that which you are already contractually obligated to do is not valid consideration.
At common law, all Ks except sale of goods, need consideration to be binding.
Theory behind the rule: It is intended to address coercive bargains. If both sides give something
new, then it is considered a fair bargain.
B. Exceptions to the Pre-Existing Duty Rule
You only need one of these to get around the pre-existing duty rule.
Even if you don’t provide enough consideration, the modification will be binding:
1.
Unforeseen Circumstances
The standard here is not as high as impracticability, just has to be unforeseen. If unforeseen
circumstances present themselves, that might be a way for the Court to say that new
consideration is not required. When there are unforeseen circumstances that necessitate you
going back to the table for modification—like a storm ruining a construction site.
For example, plumber does construction. Pipes have to move during construction
(unforeseen). Original K is $5K, now it is $6K to account for the pipes. This is not valid
because there is only one side of consideration. But under the exception it would be valid.
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2. Detrimental Reliance
One of the parties had detrimentally relied on the modification. Meaning they have changed
their position for the worst. Allowing DR to apply to just going through with the K invalidates
modification without consideration. This would git the pre-existing duty rule. There should be
a change in position.
For example, a homeowner agrees to pay $10,000 more because of the increased wood, and
the builder promises to make the house. Here the builder detrimentally relies on the $10,000.
But are they relying on it in the sense that they just went through with the K? Or did they rely
on it by committing this $10,000 irrevocably in some way? A clear example is when you’re in
a position where the $10,000 is going to be donated to charity, and you have already written a
check and that $10,000 has been committed in that way. You cannot change your position
back. You engage the exception by arguing that the party relied on the extra $10,000.
3. Mutual Release Followed by New Agreement
Essentially doing away with your K and writing a new k with new terms including modification
terms. Now this becomes K2 rather. Here, you don’t need to add a new consideration on top
of the old one, you just make a new consideration. The bad thing about it is that this could be
taken so broadly as to say that modifications do not require consideration. If this is your view,
your position is that there is no such thing as a modification. All a modification is ripping apart
K1 and agreeing to K2. So, we don’t have a consideration problem to begin with.
C. How to approach a consideration question at CL
• First step is to consider consideration. You look at the rule that modifications require
consideration on both sides, even if it is just a peppercorn.
• Then you transition into the exceptions if you don’t have consideration
o The exceptions are: 1. unforeseen circumstances, 2. detrimental reliance, 3. Mutual
Release. And we have Asterix on 2 and 3 because they are somewhat problematic in
that they end up gutting—depending on how you interpret them—the general rule
that modification at CL require new consideration.
• And finally, even if you have consideration or even if you have an exception, all these K's all
these Modifications are subject to the doctrines of duress and bad faith.
3. MODIFICATION UNDER UCC
When dealing with the sale of goods, however, you do not need new consideration for a modification
to be binding. One-sided changes are totally fine (therefore no exceptions needed). With sale Ks we
don’t want the law to get in the way of people’s intention to modify Ks.
• For example, if you are buying 100 computers for your business, and you sing a K and it’s
going to cost $X, and then the seller of the product wants to modify the K and charge you
more, that is going to be (prima facia) binding. We don’t need new consideration.
A. Duress & Modification
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Even if you have valid consideration or meet an exception (or under Art. 2, consideration is not
required), a modification is not valid if procured by duress or was made in bad faith.
Elements of Duress:
1. Illegal or wrongful threat. One party is threatening to breach.
2. No reasonable alternative but to agree to the threat. You need to look at whether the
party that is the victim could have done something else (could have sued, fired the person,
hired someone new, etc.).
3. Causation. There is a threat that caused the modification.
4. Protest to terms (new). The party that is the victim needed to protest the modified terms.
a. Remember where we are situated: You have the OG K and the modified K. The OG
K is done and now we go off the modified K and you, the victim of duress, want out
of the modified K and want to go back to the OG K.
b. You must protest because it is kind of an aspect of your duty of good faith. When
you are talking about duress, duress is the bad thing. You are saying (in duress) that
they exerted so much pressure over you (blackmailed you, threatened) and you had no
choice. So, at the very least, if you are in that position, we expect you to say something.
B. Bad faith and Modification
Bad faith can be used to get out of a modification under the UCC.
The Roth Test:
1. Party may in good faith seek modification when “unforeseen economic exigencies existed
which would prompt and ordinary merchant to seek a modification in order to avoid a loss on
the K.”
a. if it makes sense, based on these unforeseen circumstances, that you would look for
modification from the other party then that meets part one. BUT . . . .
2. Even where circumstances do justify in asking for a modification, it is none the less bad faith
to attempt to coerce one by threatening a breach.
C. How to approach a consideration question at Article 2
• Under sales law, we don’t need consideration therefore we don’t need the exceptions. So, you
are able to go ahead and modify a K, but it is subject to:
1. Duress, and
2. Bad Faith.
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EXPRESS CONDITIONS
(Consequences of non-performance)
A. OVERVIEW
Definition: An act or event, other than the lapse of time, that, unless the condition is excused must
occur before a duty to perform becomes due. A condition cannot be a deadline.
Rule: Express conditions must be literally and strictly performed before the other party’s performance
obligation becomes due.
• For example, if your express condition says, “I will continue to pay your tuition as long as you
only get A’s and B’s.” If you get a C+ (which is close to a B), then that is not good enough.
The condition has not literally and strictly been performed.
• For example, “I promise to sell you this car, provided you make a down payment of $500 by
Friday at noon.” If the payment comes at 12:01, the condition has not been fulfilled and the
other party’s (seller’s) counter performance is not due.
• In leu of saying it was breached we say, “the express condition was not satisfied, therefore,
person X does not owe counter performance.”
B. ISSUE SPOTTING (CONDITIONAL LANGUAGE):
“If, then”; “Provided that”; “On the condition that”; “Contingent upon”; “Until and unless; “So long
as”.
• Employment Scenario. K might be condition upon you retaining and maintain a professional
license. So, the K might say, “you will be employed, provided that you maintain your license
in good standing with the state of Rhode Island.” If you fail to do that, then the performance
obligation of the employer does not arise.
• Housing Scenario. “This K is condition upon the house not having lead paint.”
• Insurance Scenario. “If you don’t notify us within 10 days, we won’t pay you.”
The Beneficiary. The beneficiary of the express condition is the person who the provision is meant
to protect. The beneficiary can choose to excuse the express condition (proceed with the transaction
even through the condition was not satisfied).
• The logic is that if I include this express condition to protect me, and I no longer want to be
protected, I can get out of that if I want.
C. EXCEPTIONS
Courts say substantial performance is NOT applicable to express conditions. However, courts have
crafted exceptions to this rule over the years.
1. Waiver (“excusing the condition”)
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Definition: The beneficiary’s conduct, signals to the other party that they are not going to insist on
the condition. Therefore, the non-beneficiary might say “you have waived the right to condition.”
•
Waiver, in other words, is being used as a sword by the non-beneficiary of the condition (you
waived the condition because you led me to believe you were ok with proceeding).
Limitation: You can only waive things that are not material (immaterial). This refers to things that
are of no significance.
•
For example, distinction between waiving oral vs. written notice (probably not material) vs.
waiving a termite report (probably material).
2. Estoppel
Definition: If you, the non-beneficiary of the condition, in turn takes steps in reliance on the
beneficiaries purported waiver (their purported actions which amount to waiver), then you have
estoppel.
•
•
Waiver + Reliance of the other party. The words/conduct of the parties being held against
them, PLUS reliance on the other side. This applies to material terms.
For example, if on the phone the lawyer says that they do not need it in writing, and the
landlord says that he is not going to get it. You have waiver (phone call) and the other party
relied on this waiver by stopping to communicate with the prime landlord to get consent,
renovate, contract lawyer.
3. Prevention
Definition: under this doctrine, a condition is excused if the beneficiary of the condition wrongfully
hinders or prevents the condition from occurring. (The general duty of good faith).
•
For example, the house purchase is contingent on you getting a mortgage at 4% then you need
to TRY to get the mortgage. If you don’t even try, that is preventions. The Court can hold this
against you and the condition is crossed out. You are this bound to buy the house.
4. Forfeiture
Definition: The idea that by insisting on the condition, the party who is not the beneficiary of the
condition, will incur some sort of significant loss (usually financial).
•
•
The non-beneficiary of the conditions, as a matter of fairness, shouldn’t be forced to lose or
give up all of its money/investment/etc.
You need to consider fault and balance the rights of the beneficiary of the condition.
Problems with Forfeiture:
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•
•
•
•
There will be forfeiture in everything (in every K a person has invested in the property), and
the rile is this gutted for express conditions.
We really should not be getting into the fault of the non-beneficiary (whether it was inattention
or negligence — gradients of fault) because the spectrum of fault does not make sense.
Having this rule allows a party to gamble with markets (the concern was that if parties may let
the time go to hedge their bets on finding a cheaper place, and if they cannot then they fall
back on the forfeiture exception).
We’re dealing with sophisticated businesspeople, so why is the Court going to meddle in the
business of the sophisticated parties.
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BREACH
A. OVERVIEW
Definition: If you don’t follow through with your promise or follow through incorrectly, you are said
to have breached the promise or breach the K.
•
For example, if you agreed to send a certain number of plastic planes to a store by a certain
date, and you don’t send them until the week after, that will be a breach of K. Because your
promised something and you did not follow through on that promise.
Any breach no matter how minor entitles you to sue for damages “theoretically”. However,
while any breach is a breach and entitles you to damages, not any breach entitles you to walk away
from the K and not perform your end of the K.
•
•
Issue 1: Was there a breach? If yes, the innocent party is entitled to damages.
Issue 2: What the consequences are for the innocent party.
For example, K with a painter to paint the fence that wraps around the house. The work is $1,000.
The painter only paints 95% of the fence. This is a breach. Is the other party not entitled to pay?
Because the painter substantially performed, you give performance subject to offset from damages
(so you don’t pay the full $1,000).
B. DOCTRINE OF SUBSTANTIAL PERFORMANCE
Rule: If substantial performance is done, then the innocent party owes their end of the bargain
(they must perform) subject to damages. If you have not substantially performed, then the innocent
party does not owe counter performance.
• For example, I K with a painter to paint my fence for $500. The painter paints my entire fence
but for 10% of my fence, he does not put on the second coat. He has therefore breached, and
you are entitled to damages. Although, you are probably not entitled to withhold payment. We
are almost at 100% performance. So, I would ow $500 and subtract some nominal amount for
how much it would cost me to get the paint and hire someone to do the last portion, the 10%
portion.
Factors to look at (§241):
•
•
•
•
•
•
Purpose of the K
If the breach was willful or inadvertent
Extent of performance rendered
Extent of benefit received by injured party
Type of K involved
Can injured party be adequately compensated in damages?
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•
•
•
•
What is the cost of remedying the defect?
Harm to the breaching party/forfeiture
Is timing important?
Is aesthetic look of something important?
C. MATERIAL BREACH
Definition: If we are short of substantial performance, the there has been a material breach, then, by
definition, there cannot have been substantial performance. Importantly, just because the other
party’s performance obligation does not arise, does not mean the other party’s performance obligation
is discharged.
• Issue 1: If there is a material breach, does the innocent party have to perform? No.
• Issue 2: can the innocent party treat the K as at an end? It depends on whether the breach is
partial or total.
For example, if a builder builds the structure of the building, but does not install the drywall plumbing,
electric, etic. We would probably say that the builder did not “substantially perform” (though we could
say there was a material breach).
Material Breach: Total or Partial
This comes after deciding if there is a material breach
•
•
Partial Breach: The innocent party cannot walk away yet. The innocent party must give the
breaching party an opportunity to cure. At that point either:
1. The innocent party fixes the breach and goes from being material breach to having
substantially or full performed, OR
2. They don’t fix the breach and then we transition to considering it a total or material
breach.
Total Breach: The innocent party can walk away and not render counter performance. They
are don’t and move on.
o For example, a painter shows up and does a haphazard job and says that they booked
another job and they will no longer be coming. That is a total breach.
Factors to determine partial or total breach:
•
•
•
•
Same factors as substantial performance (§241).
Heavy focus on timing.
The extent to which it reasonably appears to the injured party that delay may prevent or hinder
him in making reasonable substitute arrangements
The extent to which the agreement provides for performance without delay, but a material
failure to perform or to offer to perform on a state day does not, in it of itself, discharge the
other party’s remaining duties unless the circumstances, including the language of the
agreement, indicate that performance or an offer to perform by that da is important.
Cure (the time to fix): Under §§ 237 and 238
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•
•
Ordinarily there is some period of time between suspension and discharge, and during this
period a party may cure his failure. Even then, since any breach gives rise to claim, a party who
has cured a material breach has still committed a breach, by his delay, for which he is liable in
damages. Furthermore, in some instances timely performance is so essential that any delay
immediately results in discharge and there is no period of time during which the injured party's
duties are merely suspended and the other party can cure his failure.
o Suspension meaning you are holding back your performance.
o Discharge meaning that you walk away.
"Furthermore, in some instances . . . Can cure his failure" talks about sometimes you will be
in total breach and automatically discharged.
o Even though we might get to the point the breach is fixed, doesn’t mean it didn’t
occur. Therefore, you are entitled to damages.
For example, I have contracted with you on June 1 for you to paint my house with a certain shade of
paint and to have the job complete by June 10. On June 5, you have finished painting my house with
a different shade of paint. Provided the color of paint was essential in the K, you (the painter) have
committed a material breach (or you have not substantially performed). However, you have until June
10 to complete the paint project, so here you are in partial material breach, and you could potentially
be allowed to cure the breach and I am not yet justified in treating the K at the end (but am justified
in not paying you). This may also be true if you paint my house the wrong color on June 10. Provided
an additional few days delay is not problematic, I may be required to let you cure.
D. DAMAGES FOR MATERIAL BREACH
Between Partial and Total breach
• Partial Breach: Damages are limited to the time period breach (no consequential damages).
• Total Breach: Damages will be direct and consequential damages (lost profits, etc.)
Measure of expectancy damages:
1. Cost of Completion
a. Normal measure of damages in construction cases.
b. You should be able to get what you bargained for, so how much will it cost to take
everything out and re do everything?
c. For example, a badly done backsplash in the kitchen. Does not make sense to have
diminution in value because then the innocent party would get nothing when there is
a breach. It would cost a few thousand dollars to get the tile redone.
2. Diminution in Value
a. Asks how much the faulty work impacted the value of the property.
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ANTICIPATORY REPUDIATION
(Breach)
A. OVERVIEW
Definition: A refusal by one party to a K to perform his or her future obligations under the K that is
expressed either by a clear statement of refusal or by a statement or action that clearly implies refusal.
This intention must be a definite and unequivocal manifestation that he will not render the promised
performance when the time fixed, in the K, arrives.
For example, if I K with a painter to paint my house on April 15 for $1,000 and on April 1, he writes
to me and says, “I’m sorry. I’m not going to paint your house for $1,000 ono April 15. I’ll lose money
doing that. The only way I’ll do it is for $1,500.”
Policy: This is an extremely high standard. Because we want parties to adhere to their K, and we
don’t want to disrupt a contractual relationship that still has the potential for moving forward.
• So, if the party expresses doubt, that’s one thing and we might have a remedy there, but if
there is some wiggle room and still possible the party will perform, we will then error on the
side of caution and not going to treat that as anticipatory repudiation.
B. WAYS TO REPUDIATE
Anticipatory Repudiation:
1. Words:
a. Express: “I simply will not perform” or “I will not be showing up to your house as
promised.”
b. Implied: “I looked over my numbers, and there is just no way I can do the job for the
price that we agreed to.”
2. Conduct:
a. They have acted in such a way, or the circumstances are such that you know they are
not going to be able to do the job.
b. If you hired a painter, and they only have one crewmember, and you learn that this
crew has now been booked on another job, and there is no way possible for them to
do both jobs.
C. RETRACTION OF REPUDIATION
Rule: Even if there has been an anticipatory repudiation, the party that has anticipatorily repudiated
is entitled to retract that repudiation.
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Circumstances where you can’t retract:
Absent one of these two exceptions you, the repudiating party, can change your mind.
1. Innocent party has changed their position; OR
a. Where the innocent party has changed their position because of the anticipatory
repudiation, then the breaching party cannot retract its repudiation.
b. For example, a Seller Ks with Buyer to sell his car for $5,000. The payments are to be
made on Friday. Buyer later changes his mind and says he will not pay $5,000 on
Friday; the most he will pay is $4,500. Seller then sells the car to someone else. Buyer
cannot retract the repudiation.
2. Innocent party has declared repudiation to be final.
a. No particular words are needed; context dependent. You are telling the breaching party
that you will be holding them to their word, their repudiation.
b. For example, if the Seller of the car says, “I’m done dealing with you, I’m moving on.”
This would probably be sufficient to fall within this exception.
Rights upon repudiation (for the innocent party):
1. Treat the repudiation as a breach immediately, change position, and sure.
2. Treat the repudiation as a breach immediately & communicate that to them, then sue.
3. Wait until the time for performance, urge party to perform and then sue.
4. Do nothing (don’t sue) and move on.
D. RIGHT TO REQUEST ASSURANCE
Statutory creation (UCC and RS) but more often sale of goods cases.
Rule: You have to have reasonable grounds for insecurity, then you can, in writing, demand
assurances. In the meantime, after you do that, generally speaking you don’t have to render counter
performance you can hold on, and the other party after they receive that demand has a reasonable
time (cannot exceed 30 days) to get back to you and give you adequate assurances.
• You have a right, as a party to a sales K, to feel like you are going to get what it is that you
bargained for.
Two separate inquiries:
•
Whether you are entitled to demand assurances.
o Test: Reasonable grounds for insecurity (for merchants, judges by commercial
standards). You can request whatever you want, does not mean you are entitled to it.
•
If so, whether you got adequate assurances.
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o If the innocent has reasonable grounds for insecurity the other party must assuage
them within a reasonable time (not exceeding 30 days).
o They do not have to provide the assurances requested. They just have to provide
assurances that are reasonable in the circumstances.
Common Law Right to Request assurances:
1. Where reasonable grounds arise to believe that the obligor will commit a breach by nonperformance that would of itself give the obligee a claim for damages for total breach under §
243, the obligee may demand adequate assurance of due performance and may, if reasonable,
suspend any performance for which he has not already received the agreed exchange until he
receives such assurance.
2. The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time
such assurance of due performance as is adequate in the circumstances of the particular case.
Factors for reasonable grounds for insecurity
1. If the other party is struggling financially, and you feel that that problem will spill over into
your K, that might give you reasonable grounds for insecurity.
2. If they are failing to perform the K right now with you, that might give you reasonable grounds
for insecurity in terms of future performance.
3. Other indications that a party might not perform that don’t rise to the level of anticipatory
repudiation. Might look at things that are happening in the industry, actions that they are
taking, general market conditions (if you are reading in the news that the company is facing
financial difficulties and is not able to meet other Ks).
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DAMAGES
A. OVERVIEW
Definition: you are entitled to be put in the position you would be in, had the K been performed.
Formula: The loss in value + any other loss – any cost or loss that’s avoided.
B. COMPUTING THE VALUE OF PLAINTIFF’S EXPECTATION
1. Restitution
•
Definition: His interest in having restored to him any benefit that he has conferred on the
other party. (If the buyer has conferred a benefit on the seller, then at the very least he is
entitled to get that benefit back.)
•
For example, you enter a K to buy a house for $300,000. You put down a $10,000 deposit.
Because you have brought a house, you have hired a roofer to fix the roof at a non-refundable
cost of $5,000. The house you bought is valued at $310,000. Seller breaches. Therefore, you
(buyer) are entitled to damages. What benefit has the buyer conferred on the seller? The
$10,000 deposit. The buyer is entitled (to protect his restitution interest) to the deposit back.
2. Reliance
•
Definition: His interest in being reimbursed for loss caused by reliance on the K by being
put in as good a position as he would have been in had the K not been made.
•
What is the reliance interest here? After the parties entered the K on reliance of the K the
buyer went out and made certain commitments. In particular, he contracted with the roofer,
where he was going to pay $5,000 the roof.
3. Expectation
•
Definition: His interest in having the benefit of his bargain by being put in as good a position
as he would have been in had the K been performed. That is, giving him the benefit of his
bargain.
•
What would it mean to give the buyer here the benefit of his bargain? If everything had gone
well, and the house had been conveyed, the buyer would have paid $300,000 for the house.
But he would have been in possession of a house that would have been worth $310,000. So,
to give the buyer the benefit of his bargain, would be to give him that delta (the value that he
bargained for, the $10,000 which represents the difference between how much he paid for the
house and how much the house was worth.
C. EXPECTATION DAMAGES: PRINCIPLES & LIMITATIONS
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1. Real Estate:
A. When buyer breaches
Rule: Damages = K Price – FMV (as of date of breach)
DO NOT SUPTRACT THE RESALE PRICE. You don’t subtract the K price from the price
you resold it for. Subtract the fair market value on the date when the breach occurred.
Determining FMV on Date of Breach: What Can You Look At?
• Resale price (If the resale took place within two weeks or a month, it is highly
relevant).
• Comparable sales (How much are other comparable sales in the neighborhood).
• Real Estate Appraisal
• Other offers on the property
• Testimony of real estate agents or other experts
Damages In Real Estate Ks
• Realistically, in a lot of real estate transactions where the buyer breaches, you are not
going to have damages (or at least not sizeable damages) assuming:
1. The breach happens shortly after the K is entered; and
2. The market remains stable
B. When seller breaches
Rule: FMV (on breaching date) – K Price
Usually, they can breach anywhere after the purchase and sale agreement. The buyer is going
to recover only if they made a good deal (bought the house at under market value).
Damages In Real Estate Ks
• Not all Courts award expectancy damages to a buyer when a seller breaches a real
estate. The limitation is to simply the return of the buyer’s deposit.
• American Rule: You get full expectancy damages as a buyer.
• English Rule: You (the aggrieved buyer) get your deposit back.
2. Damages under UCC sale of goods
A. When BUYER breaches
Issue: What happens when the buyer does not want the goods, or refuses to pay?
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1. Cover Damages: Go buy a new frog and charge the difference to the breaching
seller.
2. Hypothetical Cover: Do nothing and collect the difference between the K price
and the FMV.
3. Cover/Hypo only apply if you never had/have the goods.
For example, Mr. Velasquez buys a poison dart frog for $50. It is valued at $90. Under cover
damages, we look at the subtract the new frog ($75) from the old frog ($50) = $25. Under
hypothetical cover, we take the K price ($50) and subtract it from the FMV ($90) = $40.
B. When SELLER breaches
Issue: What happens when the breaching seller is not delivering goods, delivering wrong
goods, delivering goods late?
1. Resale: Sell to someone else and recoup the difference
2. Hypothetical Resale: Difference between K price and FMV at time of delivery.
For example, Ms. Ball sells her 2-year-old G-Wagon to Ms. Devoe for $100,000. At that time,
the car is valued at $90,000. Ms. Devoe breaches. Under resale, Ms. Ball can find a new buyer
who perhaps would only pay $95,000 and Ms. Ball would get $5,000. Under hypothetical
resale Ms. Ball would subtract the K price ($100,000) from FMV at time of delivery.
3. Employment contracts
A. Employer breaches
Rule: The difference between the agreed K price and the Cost to hire a new employee (like
cover for goods).
B. Employee breaches
Say you have two-year K at $50,000/year. The employer fires you after year 1. How
much are you owed. Answer: $50,000 (full year’s salary).
But you have a duty to mitigate . . . You cannot do nothing. You have to find a new job.
When you find the new job, if it pays you $45,000 then your damages are going to be
$5,000.
You don’t have to take any job (working at McD). It’s a comparable job.
4. Construction K’s
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Rule: It’s the difference in the value of the property/good with the promise performance VS.
Without the promise performance.
Two Possible Measures of Damages:
1. Cost of Completion
• Rule: How much extra would it cost for me to hire somebody else to finish
the job?
• Policy: You should get what you bargained for. Think ugly statute.
• Sometimes when you award C of C measure of damages, you could end up
giving the Plaintiff a huge windfall.
• For example, OG K price is $5,000. Contractor materially breaches (doesn’t
show up and does nothing). The cost to hire someone else to do the same
job is $6,000. The measure of recover would be $1,000.
2. Diminution in Value
• Definition: Asks how much the faulty work impacted the value of property.
• Rule: Is awarded in cases of economic waste, but only where:
1. K has been substantially performed, in good faith, and the cost of
completion would involve unreasonable economic waste.
2. You are dealing with incidental breaches
No destruction of the work would be involved, but the
breach is incidental to the main purpose of the K AND C
of C would be disproportionately costly.
Aesthetic Ks
•
Definition: K where the aesthetic value of something is important, then a Court is
ALWAYS going to award cost of completion damages.
•
For example, assume there is a tiling K that said the contractor would use white grout.
For some reason, the contractor used grey grout.
•
Cost of Completion: would require ripping out the entire floor, in both the main part of
the bathroom and in the shower and would cause damage to some other things so you
are literally going to have to rip it out and throw it away. Therefore, you would have to
buy the materials again, install it again, and fix anything you have broken in the process.
• Diminution in value: would go like this: the contractor would say "listen, a
house that has a basement bathroom with white grout is no different in value than
a grey grout one." when you consider there is no hit on the value of the house,
and this is crazy to rip up a functional bathroom, the argument is that there
should only be nominal damages.
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