CONTRACTS OUTLINE
Goggans—Fall ‘22
Introduction ............................................................... 1
Chapter 26. Anticipatory Repudiation ................... 61
Chapter 1. The Objective Theory of Contracts ....... 3
Chapter 27. Impossibility & Impracticability ........ 63
Chapter 2. Has An Offer Been Made? ..................... 4
Chapter 28. Good Faith ........................................... 66
Chapter 3. Has the Offer Been Accepted? ............... 5
Chapter 29. Non-Party Rights ................................ 67
Chapter 4. Has the Offer Been Terminated? ........... 9
Chapter 5. Consideration ....................................... 15
Chapter 6. Quasi-Contracts..................................... 17
Chapter 7. Pre-Existing Duty ................................. 18
Chapter 8. Promissory Estoppel ............................. 20
Chapter 9. Misunderstanding & Mistake ............... 21
Chapter 10. Misrepresentation................................ 26
Chapter 11. Duress & Undue Influence ................. 28
Chapter 12. Unconscionability ............................... 29
Chapter 13. Statute of Frauds ................................. 31
Chapter 14. The Parol Evidence Rule .................... 34
Chapter 15. Interpretation ....................................... 38
Chapter 25. Contract Performance—UCC ............ 40
Chapter 16. Warranties ........................................... 47
Chapter 17. Defenses to Warranty Liability .......... 48
Chapter 18. Damages .............................................. 51
Chapter 19. Limitations on Contract Damages ..... 54
Chapter 20. Other Remedies................................... 55
Chapter 21. Liquidated Damages ........................... 56
Chapter 22. Specific Performance.......................... 57
Chapter 23. Express Conditions ............................. 58
Chapter 24. Constructive Conditions ..................... 59
Introduction
Legal Questions For This Course:
1. Are contractual obligations created by the promises
or bargains made by the parties?
FORMATION.
2. If so, what are the terms of the contractual obligation,
and what do those terms mean?
INTERPRETATION.
3. Have the terms of the contractual obligation been
performed as agreed, and if not, are there any excuses for non-performance?
BREACH.
4. If the non-performance is a breach of contract, what
remedies, if any, are available to redress the losses
caused by the breach?
DAMAGES.
The Uniform Commercial Code (“UCC”)
The UCC is an effort by the National Conference of Commissioners on Uniform State Laws and the American
Law Institute to produce a comprehensive code of contract law; i.e., an effort to promote certainty and uniformity in the laws governing private transactions. However, the UCC is not uniform because each state has nonuniform variations; it is not commercial because it also
covers consumer contracts; and is not a true “Code” in
that it does not preempt the field.
Article 1. General provisions (i.e., general rules of statutory construction and interpretation, in addition to definitions).
The general rules of Article 1 apply to all cases under the
UCC, but if there is a more specific rules in a specific Article [e.g., Art. 2] governing the case, then the specific rule
will supersede Art. 1.
§ 1-103. Construction of [UCC] to Promote its Purposes
and Policies; Applicability of Supplemental Principles of
Law.
(a) [The UCC] must be liberally construed and
applied to promote its underlying purposes and
policies, which are:
(1) To simplify, clarify, and modernize the law governing commercial transactions;
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(2) To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
(3) To make uniform the law among the various jurisdictions.
(b) Unless displaced by the particular provisions of [the
UCC], the principles of law and equity, including the
law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and
other validating or invalidating cause supplement its
provisions.
Take away from § 1-103(a): The Code is to be interpreted
broadly, not narrowly; & Courts have sometimes cited
this section when expanding coverage of the UCC to
things like software transactions.
Take away from § 1-103(b): Provides limitations to section (a) regarding ‘liberal interpretations’ to the UCC;
i.e., it indicates that the drafters have left some things out
and that it is sometimes necessary to look at the common
law.
Common Law v. UCC
Note that the introductory language to § 1-103 says, “unless displaced by the particular provisions of this Act.”
There will be arguments from time to time about whether
the Code provides the answer to a question or whether we
need to look outside the Code. Sometimes judges may be
tempted to look outside the Code if they do not like the
answer apparently given by the Code, so this is sometimes
called the “judicial wild card.”
§ 1-302. Variation by Agreement.
(a) Except as otherwise provided in subsection (b) or elsewhere in, the effect of provisions of [the UCC] may
be varied by agreement.
Article 2. Sale of Goods
§ 2-102. “Unless the context otherwise requires, this Article apples to transactions in goods.”
Take away from § 2-102: UCC Art. 2 ONLY applies to the
sale of goods.
§ 2-105. Definitions; Transferability; “Goods”; Future”
Goods; “Lot”; “Commercial Unit”.
(1) “Goods” means all things (including specially manufactured goods) which are movable at the time of
identification to the contract for sale other than the
money in which the price is to be paid, investment
securities (Art. 8) and things in action.
So what are NOT “goods”?
Real property, service contracts, the sale of paper rights
[like stocks and bonds], the sale of intangible property
[like insurance contracts].
Sale of Goods Contracts v. Service Contracts
Contracts are (typically) about goods, services, or both. A
contract is considered a “mixed contract,” when it is for
both goods and services. But because Art. 2 of the UCC
only applies to the sale of goods, it must be determined
what the predominate (or main) purpose of the contract is.
To do so, we use the “predominate purpose test” or
“PPT”.
When we apply the PPT, we have to look at the part of the
deal that is the most significant. Under the PPT for mixed
contracts, if the predominate purpose of the contract is the
sale of goods, the UCC applies. If the predominate purpose of the contract is not goods (e.g., services), the UCC
does not apply.
How can we tell which factor is “predominate”? Look at
the goods versus the value of the service(s) provided; and
public policy.
Merchant:
§ 2-104. Definitions: “Merchant;” “Between Merchants;” “Financing Agency.”
(1) “Merchant” means a person who deals in goods of the
kind or otherwise by his occupation holds himself
out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom
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such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary
who by his occupation holds himself out as having
such knowledge or skill.
Chapter 1. The Objective Theory of Contracts
A contract is “a promise that the law will enforce.”
What constitutes a contract?
Offer, Acceptance, & Consideration.
R2d § 24. Offer Defined. An offer is the manifestation of
willingness to enter into a bargain, so made as to justify
another person in understanding that his assent to that bargain is invited and will conclude it.
Objective Theory of Contracts—we look at whether a
reasonable person to whom the statement was addressed
would believe it to be an offer (we do not look at whether
the person intended their statement to be an offer).
So, how do we determine whether there has been
agreement?
We look for an objective manifestation of mutual assent,
and not subjective meeting of the minds. The subjective
standard would be much harder to apply; secret, unmanifested intent could defeat outward expressions of assent.
Issues of proof are complicated here.
R2d § 26. Preliminary Negotiations. A manifestation of
willingness to enter into a bargain is not an offer if the
person to whom it is addressed knows or has reason to
know that the person making it does not intend to conclude a bargain until he has made a further manifestation
of assent.
R2d § 16. Intoxicated Persons. A person incurs only
voidable contractual duties by entering into a transaction
if the other party has reason to know that by reason of
intoxication:
(a) he is unable to understand in a reasonable manner the
nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation
to the transaction.
R2d § 26. Comment (b). Advertising. Business enterprises commonly secure general publicity for the goods or
services they supply or purchase. Advertisements of
goods by display, sign, handbill, newspaper, radio, or television are not ordinarily intended or understood as offers
to sell. The same is true of catalogues, price lists and circulars, even though the terms of suggested bargains may
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be stated in some detail. It is of course possible to make
an offer by advertisement directed to the general public
but there must ordinarily be some language of commitment or some invitation to take action without further
communication.
Unidroit Article 4.2 (Interpretation of statements and
other conduct)
(1) The statements and other conduct of a party shall be
interpreted according to that party’s intention if the
other party knew or could not have been aware of
that intention.
(2) If the preceding paragraph is not applicable, such
statements and other conduct shall be interpreted according to the meaning that a reasonable person of
the same kind as the other party would give to it in
the same circumstances.
Chapter 2. Has An Offer Been Made?
Characterizing Communications:
- Offer §§ 24; 33; 29; 35
- Acceptance § 50
- Counteroffer § 39
- Rejection § 38
- Revocation §§ 42; 43
- Request for an offer
- Just conversation
- Preliminary Negotiations § 26
What do we need for a valid offer?
1. Intent to be bound, measured objectively, under Restatement § 24.
2. Definiteness and certainty of the material terms, under Restatement § 33.
3. Communication from the offeror (or his agent) to offeree under Restatement § 29, to create the power of
acceptance under Restatement § 35.
Frist Requirement: A valid offer requires an objective
manifestation of offeror’s intent to be bound.
§ 24. Offer Defined.
An offer is defined as the manifestation of willingness to
enter into a bargain, so made as to justify another person
in understanding that his assent to that bargain is invited
and will conclude it.
Second Requirement: A valid offer requires definiteness
and certainty in the material terms.
§ 33. Certainty.
(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be
accepted so as to form a contract unless the terms
of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if
they provide a basis for determining the existence
of a breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a
manifestation of intention is not intended to be
understood as an offer or as an acceptance.
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Third Requirement: A valid offer requires communication from the offeror (or his agent) to the offeree in order
to create the power of acceptance.
§ 29. To Whom An Offer Is Addressed.
(1) The manifested intention of the offeror determines the person or persons in whom is created a
power of acceptance.
(2) An offer may create a power of acceptance in a
specified person or in one or more of a specified
group or class of persons, acting separately or together, or in anyone or everyone who makes a
specified promise or renders a specified performance.
§ 35. The Offeree’s Power of Acceptance.
An offer gives to the offeree a continuing power of acceptance to complete the manifestation of mutual assent
by acceptance of the offer.
§ 2-204. Formation in General.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties
have intended to make a contract and there is a reasonably
certain basis for giving an appropriate remedy.
Chapter 3. Has the Offer Been Accepted?
Once we have a valid offer [intent to be bound measured
objectively; definiteness and certainty of the material
terms and communication form the offeror to the offeree],
we look for a valid acceptance.
A VALID OFFER + A VALID ACCEPTANCE =
MUTUAL ASSENT
Note: offers can terminate BEFORE they are accepted
and can be revoked BEFORE they are accepted. We will
spend some time on these concepts in chapter 4.
§ 50. Acceptance of an Offer Defined; Acceptance by Performance; Acceptance by Promise.
(1) Acceptance of an offer is a manifestation of assent to
the terms thereof made by the offeree in a manner
invited or required by the offer.
Requirements for a valid acceptance:
1. Intent to accept, measured objectively.
2. Communication, if required.
There are different rules for promissory v. conduct
acceptances:
§ 56. Acceptance By Promise; Necessity Of Notification
To Offeror.
Except as stated in § 69 or where the offer manifests a
contrary intention, it is essential to an acceptance by
promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably.
§ 54. Acceptance by performance; Necessity of Notification To Offeror.
(1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to
make such an acceptance effective unless the offer
requests such a notification.
(2) If an offeree who accepts by rendering a performance
has reason to know that the offeror has no adequate
means of learning of the performance with reasonable promptness and certainty, the contractual duty of
the offeror is discharged unless:
(a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or
(b) the offeror learns of the performance within a
reasonable time, or
(c) the offer indicates that notification of acceptance
is not required.
Promissory Acceptances: the offeree needs to let
the offeror “seasonably” know she is accepting or at
least exercise reasonable diligence to try to let the offeror know. This makes sense, because with a promissory acceptance, the offeror has no independent
way to learn of the acceptance.
NOTE: For goods transactions, the Mirror Image Rule
does not apply; instead we use §2-207!
Conduct Acceptances: In this case, it’s possible that
the offeror may actually learn of the acceptance
through offeree’s actual conduct, obviating the need
for communication.
Is it possible to accept an offer that you do not know
about?
No, because the first requirement of a valid acceptance is
intent to accept, measured objectively.
3. Mirror image rule [for non-goods transactions]
The acceptance must exactly match the offer under
the common law. Any deviation, no matter how
small, is considered a counteroffer and terminates the
original offer forever.
What if you learn about the offer AFTER you have
rendered part of the performance to accept?
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§ 52. Who May Accept an Offer.
An offer can be accepted only by a person whom it invites
to furnish the consideration.
§ 51. Effect of Part Performance Without Knowledge of
the Offer.
Unless the offeror manifests and contrary intention, an offeree who learns of an offer after he has rendered part of
the performance requested by the offer may accept by
completing the requested performance.
Can an offeror put conditions on her offer?
Yes, the offeror is the master of her offer. She can put
any conditions she wants on it. She can require the offeree
to accept in writing, or in French or standing on one food.
§58. Necessity of Acceptance Complying with the Terms
of the Offer.
An acceptance must comply with the requirements of the
offer as to the promise to be made or the performance to
be rendered.
How is the offer capable of being accepted? There are
four possibilities: the offer can be accepted,
(1) by conduct only,
(2) by promise only,
(3) the offeree gets to choose, or
(4) the offer is unclear [and the offeree gets to choose
here too- see § 32].
§ 30. Form of Acceptance Invited.
(1) An offer may invite or require acceptance to be made
by an affirmative answer in words, or by performing
or refraining from performing a specified act or may
empower the offeree to make a selection of terms in
his acceptance.
What if the offer can be accepted only by performance?
It’s an offer to enter into a unilateral contract and can be
accepted ONLY by the offeree doing the act or forbearance.
Unilateral contracts are pretty rare, outside of law school
and the bar exam. Why would you want to bind yourself
and then see if and when the offeree wants to bind herself?
What if the offer can only be accepted only by promise?
It’s an offer to enter into a bilateral contract and can be
accepted ONLY by the offeree making the promise.
What if the offeror has not specified exactly how to accept?
Then the offeree may reasonably choose how to accept.
What if it’s not clear whether the offer can be accepted
by promise or performance?
Offeree’s (reasonable) choice.
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§ 32. Invitation of Promise or Performance.
In case of doubt, an offer is interpreted as inviting the offeree to accept, either by promising to perform what the
offer requests, or by rendering the performance, as the offeree chooses.
§ 32 Illustrations:
(3) Annie posts a sign that says: “I will pay $50 for the
return of my diamond bracelet lost yesterday on State
Street.” She includes her name, address and phone
number. Bob sees this advertisement and at once
sends a letter to Annie, saying, “I accept your offer
and will search for this bracelet.” Is there an acceptance here?
§ 32 Comment b. Offer limited to acceptance by performance only.
Language or circumstances sometimes make it clear that
the offeree is not to bind himself in advance of performance. His promise may be worthless to the offeror, or
the circumstances may make it unreasonable for the offeror to expect a firm commitment form the offeree. In such
cases, the offer does not invite a promissory acceptance,
and a promise is ineffective as an acceptance.
§ 2-206. Offer and Acceptance in Formation of Contract.
(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) an offer to make a contract shall be construed
as inviting acceptance in any manner and by
any medium reasonable in the circumstances;
Comment: “Any reasonable manner of acceptance is intended to be regarded as available unless the offeror has
made quite clear that it will not be acceptable. Former
technical rules as to acceptance, such as requiring that telegraphic offers be accepted by telegraphed acceptance,
etc., are rejected and a criterion that the acceptance be “in
any manner and by any medium reasonable under the circumstances,” is substituted. This section is intended to remain flexible and its applicability to be enlarged as new
media of communication develop or as the more time-saving present day media come into general use.”
§ 41. Lapse of Time.
(1) An offeree’s power of acceptance is terminated at the
time specified in the offer, or, if no time is specified,
at the end of a reasonable time.
Example: This week, I offer to sell you my Honda
Odyssey for $2,000. You never get back to me.
Twenty years later, you come into my office with
$2,000 and say, “I hereby accept.” And I say, “accept
what?” Do we have a contract?
§ 60 Illustration (4): A offers to sell his land to B on certain
terms, also saying: “you may accept by leaving word at
my house.” How is this offer capable of being accepted?
§ 60 Illustration (3). “You must accept this, if at all, in
person at my office at ten o’clock tomorrow.” Can B accept by mail? By phone? By email? In any way that’s reasonable?
notifies the buyer that the shipment is offered
only as an accommodation to the buyer.
(2) Where the beginning of a requested performance is a
reasonable mode of acceptance an offeror who is not
notified of an acceptance within a reasonable time
may treat the offer as having lapsed before acceptance.
→ Note that Goods or conduct including any part of a
performance are “conforming” when they are in accordance with the obligations under the contract.
§ 2-106 (2). Goods or conduct including any part of a performance are “conforming” or conform to the contract
when they are in accordance with the obligations under
the contract.
TIMING______________________________________
When do contractual acts become effective?
§ 206. Interpretation Against the Draftsman.
In choosing among the reasonable meanings of a promise
or agreement or a term thereof, that meaning is generally
preferred which operates against the party who supplies
the words or form whom a writing otherwise proceeds.
R2d § 31. Presumption that offer invites a bilateral contract.
In case of doubt it is presumed that an offer invites the
formation of a bilateral contract by an acceptance amounting in effect to a promise by the offeree to perform what
the offer requests, rather than the formation of one or
more unilateral contracts by actual performance on the
part of the offeree.
§ 2-206. Offer and Acceptance in Formation of Contract.
(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) an offer to make a contract shall be construed as
inviting acceptance in any manner and by any
medium reasonable in the circumstances;
(b) an order or other offer to buy goods for prompt
or current shipment shall be construed as inviting acceptance either by a prompt promise to
ship or by the prompt or current shipment of
conforming or non-conforming goods, but such
a shipment of non-conforming goods does not
constitute an acceptance if the seller seasonably
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Offers, counteroffers, revocations, and rejections are all
effective when received.
Mailed acceptances with proper address and postage are
effective when sent.
§ 63. Time When Acceptance Takes Effect.
Unless the offer provides otherwise,
(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as
soon as put out of the offeree’s possession,
without regard to whether it ever reaches the offeror;
(b) an acceptance under an option contract is not
operative until received by the offeror.
Is there a contract if the offeree's acceptance is lost
and not received?
Is there a contract if the offeree mails her acceptance,
changes her mind and communicates her rejection before the offeror receives acceptance?
What if the offeree mails her rejection, changes her
mind and mails her acceptance before the offeror receives the rejection?
§ 40. Time When Rejection or Counter-Offer Terminates
the Power of Acceptance
Rejection or counter-offer by mail or telegram does not
terminate the power of acceptance until received by the
offeror but limits the power so that a letter or telegram of
acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he
receives the rejection or counter-offer.
HYPO:
If Sue offers to sell her house to Lori in writing and
Lori gets it on Sept. 1. On Sept. 2, Lori mails a rejection of the offer, and on Sept. 3, Lori mails an acceptance of the offer.
Do we have a contract?
If Sue received the acceptance one day before the rejection arrives, what results?
If Sue received the rejection one day before the acceptance arrives, what results?
So what exception to the mailbox rule can we craft here?
What about under the UCC? When does an acceptance
become operative, in the absence of some specific request
to let offeror know under the UCC?
§ 64. Acceptance by Telephone or Teletype.
Acceptance given by telephone or other medium of substantially instantaneous two-way communication is governed by the principles applicable to acceptances where
the parties are in the presence of each other.
§ 66. Acceptance Must be Properly Dispatched.
An acceptance sent by mail or otherwise from a distance
is not operative when dispatched unless it is properly addressed, and such other precautions taken as are ordinarily
observed to insure safe transmission of similar messages.
.
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Chapter 4. Has the Offer Been Terminated?
§ 36 (1). Termination of Offers.
An offeree’s power of acceptance may be terminated by :
- Rejection or Counteroffer by the offeree;
(See §§ 38, 39)
- Lapse of time;
(See § 41)
- Revocation by the offeror;
(See §§ 42, 43)
- Death or incapacity of the offeror or offeree.
(See § 48)
HYPO:
I offer to pay you $1000 if and only if you paint my
house. How would you characterize this offer?
How will you accept my offer?
So you pull up and start to unload the truck, and I say, I
revoke my offer. Is the revocation valid?
What if you are almost done painting- you have one
more windowsill left, and I say, I revoke my offer.
Does that seem fair?
§ 25. Option Contracts.
An option contract is a promise that meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.
Am I allowed to revoke the offer at this point?
General Rule: an offeror is free to revoke his offer at
any time prior to acceptance, with four exceptions!
How much performance is enough to make the offer irrevocable under §45?
1. Part performance of a unilateral contract, § 45;
What if the offer allows a performance acceptance but
does NOT require it?
2. When something of value is given in exchange for a
promise to keep the offer open, § 87(1)(a);
How much performance is sufficient to constitute acceptance?
Will partial performance create an option contract, a la §
45?
3. Promissory estoppel, § 87(2); or
4. Firm offer rule under UCC § 2-205.
Under Restatement § 45, part performance of an offer
to enter into a unilateral contract makes the offer
irrevocable
§ 45. Option Contract Created by Part Performance or
Tender.
(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory
acceptance, an option contract is created when the offeree tenders or begins he invited performance or tenders a beginning of it.
(2) The offeror’s duty of performance under any option
contract so created is conditional on completion or
tender of the invited performance in accordance with
the terms of the offer.
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§ 62. Effect of Performance By Offeree Where Offer Invites Either Performance Or Promise.
(1) Where an offer invites an offeree to choose between
acceptance by promise and acceptance by performance, the tender or beginning of the invited performance or a tender of a beginning of it as an acceptance by performance.
(2) Such an acceptance operates as a promise to render
complete performance.
Under Restatement § 87 (1), if the promise to keep the
offer open is supported by consideration, the offer is irrevocable due to the consideration, for the duration of the
offer.
Under Restatement § 87 (2), if the offeree has reasonably
relied on the offer, which the offeror should have reasonably expected would happen, the offer becomes irrevocable.
§ 87. Option Contract.
(1) An offer is binding as an option contract if it
(a) is in writing and signed by the offeror, recites
a purported consideration for the making of
the offer, and proposes an exchange on fair
terms within a reasonable time; or
(b) is made irrevocable by statute.
(2) An offer which the offeror should reasonably expect
to induce action or forbearance of a substantial character on the part of the offeree before acceptance and
which does induce such action or forbearance is binding as an option contract to the extent necessary to
avoid injustice.
What does § 87(1)(b) add to this discussion?
It deals with offers that are made irrevocable statutorily,
like under § 2-205 which covers “firm offers.”
§ 2-205. Firm Offers.
An offer by a merchant to buy or sell goods in a signed
writing which by its terms gives assurance that it will be
held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable
time, but in no event may such period of irrevocability
exceed three months; but any such term of assurance of a
form supplied by the offeree must be separately signed by
the offeror.
Is there any way for option contracts to be destroyed
before the passage of the exercise time?
One would suppose that if the offeree unequivocally rejected the proposed bargain, rather than proposing additional or different terms, the option could be canceled by
the offeror.
But even a rejection of an irrevocable offer will not terminate the offer. The offeree has a contract right to accept
within the time [stated in the offer, made irrevocable by
the option].
At most rejection is a waiver of this right, but waiver is
not supported by consideration or an estoppel by change
in position can have no effect upon subsequent assertion
of the right.
So an option holder may complete a contract by communicating his acceptance despite the fact that he has previously rejected the offer.
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MECHANICS OF REVOCATION_________________
Okay, so offers are freely revocable absent an option
contract. But what are the mechanics of revocation?
HOW can an offer be revoked?
And offer can be revoked directly by the offeror manifesting intent to revoke to offeree, or indirectly through reliable information given to offeree of offeror’s intent to revoke.
§ 42. Revocation by Communication from Offeror Received by Offeree.
An offeree's power of acceptance is terminated when the
offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.
§ 43. Indirect Communication of Revocation.
An offeree's power of acceptance is terminated when the
offeror takes definite action inconsistent with an intention
to enter into the proposed contract and the offeree acquires reliable information to that effect.
UCC § 1-201 (37).
“Signed” includes using any symbol executed or adopted
with present intention to adopt or accept a writing.
MIRROR IMAGE RULE_________________________
The common law mirror image rule was that the acceptance must exactly mirror the offer. The acceptance
must be unequivocal.
The presumption was that a deviation meant that the offeree was still negotiating. The mirror image rule made it
harder to create contracts because any deviation by the offeree in restating the terms could destroy the offer.
Buyer, Seller will indemnify Buyer and pay the judgment
and pay Buyer’s legal fees.
Seller receives the order/offer and immediately sends an
acknowledgement that conforms to the order and contains
a preprinted indemnity disclaimer provision that Seller
will not indemnify Buyer.
What could happen between the parties?
What is an independent proposal?
An independent offer that does NOT operate as a counteroffer, but a new, separate and independent offer, which
could keep the power to accept the offerors’ original offer
alive for offeree
§ 42. Revocation by Communication from Offeror Received by Offeree.
An offeree's power of acceptance is terminated when the
offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.
Are the following counteroffers (which destroys the
original offer and is susceptible to acceptance) or
simply requests to take the offer under advisement
and retain the power of acceptance?
“Would you think about taking less than $15,000?”
"Would you sell me the car for $10,000?"
“I wouldn’t pay $15,000. I will pay only $10,000”
What about a “grumbling” acceptance? Is that a valid
acceptance?
Example: I really thought I could find this for less somewhere else, but all right, I’ll accept your offer”
LAST SHOT RULE_____________________________
Prior to the adoption of the UCC [§ 2-207 specifically],
there was a maxim called the “last shot principle” that determined the terms of a contract.
NOTE: Our text calls this the “last shot advantage”- it’s
the same doctrine.
HYPO:
Buyer sends Seller a written order for a forklift model
x2000, for a price of $10,000, COD delivery in 30 days.
The order form Buyer uses has a preprinted indemnity
provision that says that if anyone suffers injury in operating the forklift after Buyer buys it, and successfully sues
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Best case scenario: no injuries occur; the parties could
both fully perform (delivery and payment occur, the forklift is used without incident, and no one every has to worry
about the opposing indemnification provisions, and we
are all surrounded by hearts and rainbows and puppies and
kittens. Yay.
Next best-case scenario: pretext for reneging- pre performance: One of the parties may wish to escape from
the transaction prior to delivery, and upon discovering the
divergence between offer and acceptance, it may use this
divergence as the basis to assert that no contract came into
existence, based on the Mirror Image Rule.
Worst case scenario: conflict will need to be resolved
– post performance: the parties perform – delivery and
payment occur, and then one of Buyer’s workers is injured when using the forklift. At this point, a dispute will
arise as to the allocation of liability under the contract.
THE UCC RULE § 2-207_________________________
The drafters of the UCC thought the result of the mirror
image/last shot rule was unduly rigid and unrealistic, especially where the conflicting terms are in standard preprinted forms. The rationale is that the parties really did
agree on the essential terms, and the reply by Seller was
intended to be an acceptance but just did not mirror the
offer; here, to treat the reply as a counteroffer ignores the
commercial reality of many contracting situations. So
they drafted § 2-207.
The good news: the rigid results of the mirror image rule
and the last shot rule are eliminated in the UCC.
The bad news: this reform sadly creates more problems
than it fixes. The most common question that comes up
in these cases is NOT whether there is a contract, but
when there is a contract, WHAT the terms are.
UCC § 2-207(1)
“A definite and seasonable expression of acceptance or a
written confirmation which is sent within a reasonable
time operates as an acceptance even though it states terms
additional to or different from those offered or agreed
upon, unless acceptance is expressly made conditional on
assent to the additional or different terms.”
FIRST requirement for § 2-207(1):
We need a “definite and seasonable” expression of acceptance.
What makes an expression of acceptance
“seasonable?”
§ 1-205(b): an action is “seasonable” when it is taken at
or within the time agreed, or if no time is agreed, at or
within a reasonable time.
What makes an expression of acceptance “definite”?
It must show intent to accept THIS offer. We need the
new term not to result in:
(1) a change in the description of the goods,
(2) a change in the price or payment,
(3) a change in the quantity, or
(4) a change in the delivery terms.
Acceptances that change these material terms are typically NOT definite expressions of acceptance and will
prevent formation of a contract. So a change in material
terms is typically a counteroffer, while a change in immaterial terms is typically fine. Another way to think of it is
that the additional or different term can be part of the boilerplate but can’t be one of the essential business terms.
SECOND requirement for § 2-207(1):
This definite and seasonable expression of acceptance
needs to state terms that are additional to or different
from the offer.
THIRD requirement for § 2-207(1):
If the acceptance is definite and seasonable, and contains
additional or different terms, we need to make sure the
definite and seasonable expression of acceptance is NOT
conditioned on the offeror’s assent to the additional or
different terms.
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Now let’s come back to the option of a “written confirmation” in § 2-207(1):
§ 2-207(1) deals with two different situations that should
really be treated differently since acceptance and confirmation are two entirely different concepts.
First is the situation we have just unpacked: whether a
purported acceptance that deviates from an offer is really
an acceptance, creating a contract [so the issue is whether
there is a contract at all];
But the language of § 2-207(1) also includes written confirmations that deviate from the terms of an oral agreement. So the section offers guidance on how to interpret
post-formation changes – and tells us whether they
should they be given effect.
So once 2-207(1) is satisfied, we move to 2-207(2).
I.e., we have a contract under § 2-207(1), because we have
a definite and seasonable expression of acceptance with
different or additional terms, that is not conditioned on the
offer’s agreement to the new or different terms OR we
have a written confirmation which is sent within a reasonable time, but what are the terms?
UCC § 2-207(2)
(2) The additional terms are to be construed as proposals
for addition to the contract. Between merchants such
terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms
of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been
given or is given within a reasonable time after
notice of them is received.
So 2-207(2) is only applied if 2-207(1) is satisfied!
Another way to say that is that § 2-207(2) does not apply
to counteroffers [when there is a definite and seasonable
expression of acceptance or a written confirmation that
DOES NOT operate as an acceptance because it is expressly made conditional on agreement/assent to the additional or different term.]
(b) The new terms materially alter the offer; OR
(c) Notification of objection has already been given or is
given within a reasonable time after notice of the
new terms has been received.
What is a “material alteration” under § 2-207(2)b)?
Typically, one where the new/different term would result
in hardship or surprise if incorporated without the express
awareness of the other party.
Hardship: the term imposes an un-bargained-for
burden [financial or otherwise] or detracts significantly from the reasonable expectations of the
other party.
Surprise: determined with reference to reasonable expectations in light of common practice and
usage; not sufficiently common to be expected
UCC § 2-207 (3)
If §2-207(1) is satisfied and we have moved on to analyzing § 2-207(2), we need to determine each parties’ merchant status.
What is a “merchant” under § 2- 104(1)?
Merchants include those who deal in goods of that kind,
and also those folks who, by following a particular occupation, have/represent having knowledge or skill concerning the goods.
Why does it matter if the parties are both merchants
IN THIS GOOD?
Because § 2-207(2) has a different outcome if both parties
are merchants in these goods.
Unless both parties are merchants in these goods [so if
EITHER party is a non-merchant], the additional terms
are deemed to be merely a proposal, so the terms of the
offer constitute the contract WITHOUT modification, unless the offeror expressly assents to the new/different
term.
If BOTH parties are merchants in this good, the new
terms become part of the contract UNLESS:
(a) The offer expressly limits acceptance to the terms of
the offer [opting out of § 2-207(2) via the original
offer]; OR
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Conduct by both parties which recognizes the existence
of a contract is sufficient to establish a contract for sale
although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular
contract consist of those terms on which the writings of
the parties agree, together with any supplementary terms
incorporated under any other provisions of this Act.
What has to be true if we are using § 2-207(3)?
It must be true that §2-207(1) and (2) were not satisfied,
or we would have a contract and be focusing on the terms.
We would not need to look at § 2-207(3).
So our options are:
- 2-207(1) is satisfied, so move to 2-207(2). OR
- 2-207(1) is NOT satisfied and move to 2-207(3).
GAP FILLERS_________________________________
The UCC provides a series of “default” rules under Part
Three of Article 2. They are supplied by law where parties who intend to contract have left terms open or to be
agreed. They become part of the bargain but are not
the result of agreement. In most cases, these gap fillers
depend upon a standard of reasonableness.
[Gap filler for delivery]:
§ 2-307. Delivery in Single Lot or Several Lots.
Unless otherwise agreed all goods called for by a contract
for sale must be tendered in a single delivery and payment
is due only on such tender but where the circumstances
give either party the right to make or demand delivery in
lots the price if it can be apportioned may be demanded
for each lot.
[Gap filler for place of delivery]:
§ 2-308. Absence of Specified Place for Delivery.
Unless otherwise agreed
(a) the place for delivery of goods is the seller's
place of business or if he has none his residence;
[Gap filler for time for shipment/delivery]:
§ 2-309. Absence of Specific Time Provisions; Notice of
Termination.
(1) The time for shipment or delivery or any other action
under a contract if not provided in this Article or
agreed upon shall be a reasonable time.
(2) Where the contract 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.
(3) Termination of a contract by one party except on the
happening of an agreed event requires that reasonable notification be received by the other party and an
agreement dispensing with notification is invalid if
its operation would be unconscionable.
[Gap filler for payment]:
§ 2-310. Open Time for Payment or Running of Credit;
Authority to Ship Under Reservation.
Unless otherwise agreed
(a) payment is due at the time and place at which
the buyer is to receive the goods even though the
place of shipment is the place of delivery;
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Chapter 5. Consideration: The Bargain Requirement
§ 17. Requirement of a Bargain.
(1) … the formation of a contract requires a bargain in
which there is a manifestation of mutual assent to
the exchange and a consideration.
In other words, a promise will not be legally enforceable
unless it is “supported by consideration,” i.e., something
has been given in return for the promise.
Consideration consists of:
- Legal Sufficiency
o Benefit to the offeror; or
o Detriment to the offeree.
- Bargained for exchange.
§ 71. Requirement of Exchange; Types of Exchange.
(1) To constitute consideration, a performance, or a return promise mut be bargained for.
(2) A performance or return promise is bargained for if it
is sought by the promisor in exchange for his promise and is given by the promise in exchange for that
promise.
(3) The performance may consist of:
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to
the promisor or to some other person. It may be
given by the promise or by some other person.
Unilateral v. Bilateral Contracts___________________
What is the difference between an offer to enter into
a bilateral contract and an offer to enter into a unilateral contract, and how does it bear on our consideration analysis?
In a unilateral contract, only one party promises to perform obligations without getting a reciprocal assurance
from the other party. Whereas a bilateral contract is created where both the parties mutually agree to the terms
and conditions and promise to perform their obligation.
I.e., unilateral = one promisor; bilateral = a promise for a
promise.
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§ 90. Promise Reasonably Inducing Action or Forbearance.
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the
promise or a third party and which does induce such
action or forbearance is binding if injustice can be
avoided only be enforcement of the promise. The
remedy granted for breach may be limited as justice
requires.
A few things to note:
(1) In a commercial deal, the presence of consideration
will never be a serious issue;
(2) where a promise induces substantial reliance, the lack
of consideration will never bar enforcement if we can
use promissory estoppel; and
(3) in marginal cases, the court will stretch the doctrines
to achieve particularized fairness.
§ 79. Adequacy of Consideration; Mutuality of Obligation.
If the requirement of consideration is met, there is no additional requirement of:
(a) a gain, advantage, or benefit to the promisor or a loss,
disadvantage, or detriment to the promise; or
(b) equivalence in the values exchanged; or
(c) mutuality of obligation.
§ 79. Comment c. Exchange of unequal values.
To the extent that the apportionment of productive energy and product in the economy are left to private action, the parties to transaction are free to fix their own
valuations.
The resolution of disputes often requires a determination
of value in the more general sense of market value, and
such values are commonly fixed as an approximation
based on a multitude of private valuations. But in many
situations, there is no reliable external standard of value,
or the general standard is inappropriate to the precise circumstances of the parties.
Valuation is left to private action in part because the parties are thought to be better able than others to evaluate
the circumstances of particular transactions. In any
event, they are not ordinarily bound to follow the valuations of others.
Ordinarily, therefore, courts do not inquire into the adequacy of consideration. This is particularly so when one
or both of the values exchanged are uncertain or difficult
to measure. But it is also applied even when it is clear
that the transaction is a mixture of bargain and gift.
Gross inadequacy of consideration may be relevant to issues of capacity, fraud and the like, but the requirement
of consideration is not a safeguard against imprudent and
improvident contracts except in cases where it appears
that there is no bargain in fact.
§ 71. Comment b. Nominal Consideration
“Moreover, a mere pretense of bargain does not suffice,
as where there is a false recital of consideration or where
the purported consideration is merely nominal.
§ 79. Comment d. Pretended Exchange.
Disparity in value, with or without other circumstances,
sometimes indicates that they purported consideration
was not in fact bargained for but was a mere formality or
pretense.
Illusory Promises_______________________________
For there to be consideration, the promise has to be real.
E.g., A says to B, “Promise to pay me $500 and I may
give up smoking.” Here, A has not bound himself to
anything.
§ 2-306. Output, Requirements and Exclusive Dealings.
(1) A term which measures the quantity by the output of
the seller or the requirements of the buyer means
such actual output or requirements as 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 ma be tendered
or demanded.
Conditional Promises__________________________
What’s the deal with words of condition in a promise—how can we tell when the performance of the
condition constitutes consideration, and when the
performance of the condition is just a condition to a
gratuitous promise?
A conditional promise is consideration if the condition is
outside the control of the promisor.
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Alternative Promises____________________________
If the condition is within the control of the promisor,
then it is an alternative promise. For an alternative promise to be consideration, both options, taken separately
must be consideration. If one alternative is illusory consideration, then the requirement of consideration is not
met.
Implied Promise of Consideration_________________
Cases involving implied promises as consideration present a simple legal principle together with a difficult factual determination.
Legal principal: If A makes a promise in return for B’s
promise, B’s promise is the consideration that makes A’s
promise binding. On the other hand, if B does not promise anything, A’s promise was given without consideration and therefore nothing is binding.
How to tell when a promise is merely gratuitous or a
conditional promise?
“It is often difficult to determine whether words of condition in a promise indicate a request for consideration
or state a mere condition in a gratuitous promise. An aid,
though not a conclusive test in determining which construction of a promise is more reasonable in an inquiry
whether the happening of the condition will be a benefit
to the promisor. If so, it is a fair inference that the happening was requested as consideration.” —Williston.
I.e., the Williston Test: Does the satisfaction of the condition benefit the promisor? If so, there is a fair inference
that there was a bargain.
Seals_________________________________________
Consideration is a screening device that separates, at
least in theory, executory deals the law will enforce from
executory deals that it will not. Another device that
served this purpose was the seal. This formality was sufficiently definite and intentional that the law took it to
mean that the promisor really intended to be bound by
his promise and, thus, would enforce it (even without
consideration). By the 20th century, however, the significance of a seal as consideration substitute or otherwise
was nil in all 50 states. Therefore, to the extent that a
seal is used, it bears not legal significance. See UCC § 2203 & R2d § 95(1).
Chapter 6. Quasi-Contracts
Instances when offer, acceptance, or consideration is
lacking, and yet a contract-like recovery is permitted (for
reasons of public policy). This is through the theory of,
“implied contract” also called “quasi-contract” or “constructive contract”. Here, the cause of action was called
“quantum meruit.”
What constitutes unjust enrichment?
What is the difference between an express contract
and an implied contract?
They have the same legal effect—both are true contracts
formed by a “mutual manifestation of assent”; the different is in how the parties demonstrate their agreement.
“The general rule is founded upon the owner’s fundamental right of free choice: the exclusive right to determine whether his property shall be repaired and if so, by
whom. That right of choice necessarily includes the right
not to play for services rendered without [the owner’s]
knowledge or consent.” CB 201.
So what is an implied in law/quasi-contract?
“Quantum meruit” is Latin, meaning “as much as he deserves”
Exception to element 2, awareness:
Emergency medical services do not require awareness of
benefit.
Elements of a quasi-contract:
1. Π conferred a measurable benefit on Δ, one that
is typically compensated;
2. Appreciation/awareness by Δ of such benefit;
3. Acceptance and retention by Δ of such benefit
under such circumstances that it would be inequitable [unjust enrichment to Δ] to retain the
benefit without payment of the reasonable value
of the services.
This is for practical purposes, to sustain recovery for
physicians and nurses who render services for infants,
mentally impaired persons, intoxicated persons, and persons unconscious or helpless by reason of injury or sickness.
What is underlying this doctrine?
Where there is some interaction between the parties that
does not constitute a contract, but this doctrine functions
as an equitable remedy based on unjust enrichment.
What is the measure of recovery under the quasi-contract doctrine?
A reasonable value of the benefit conferred. This does
NOT mean that the recovery will be for the full value of
the enrichment. Only a reasonable value of the unjust
enrichment.
Determining the value of such is a question for the factfinder.
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This answer hinges on element 2, awareness. Where an
individual lacks awareness of the benefit, they will not
have to provide restitution. In other words, did the owner
have the ability to decline/stop the service/benefit?
Chapter 7. Pre-Existing Duty & Past Consideration
Ex nudo pacto non oritur action: no right of action arises
from a contract entered into without consideration.
General Rule:
A modification requires separate consideration.
Nadum pactum: a contract made without consideration;
it is called a nude or naked contract because it is not
clothed with the consideration required by law in order
to give an action.
There are two exceptions:
What is the pre-existing duty rule all about?
The essence of the so-called pre-existing duty rule is that
performance or the promise to perform a preexisting
duty does not constitute consideration for a promise to
pay more or do something not already required by the
original contract.
Why not?
If the duty is pre-existing, then it’s not a detriment or
benefit, so no legal sufficiency done in bargained for exchange (“BFE”) for the promise.
Is a promise to take less than the full amount of a liquidated [undisputed] debt enforceable?
It needs consideration. So, there needs to be either a benefit to the promisor or a detriment to the promise.
What might count as consideration here?
A promise to take less than the full amount of a debt before maturity. I.e., timing; I promise to pay you a week
earlier than the deadline in exchange for paying less than
the full amount.
This would count as consideration because it benefits the
other to have the money early.
Modification___________________________________
A mutual agreement to change the terms of a contract.
(It’s actually a new contract and the promises in the new
contract require consideration).
A modification discharges the previous contract.
A modification cannot occur once the contract has been
executed.
Executory_____________________________________
Executory promises/agreements are not yet “executed”
or performed.
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UCC § 2-209. Modification, Recission and Waiver.
(1) An agreement modifying a contract within this Article needs no consideration to be binding
In other words § 2-209 says that a modification
to a contract for the sale of goods does NOT require consideration—just good faith.
This does NOT mean that contracts for the sale
of goods need no consideration at all! Only that
agreements for modification need no NEW consideration.
2-209 Comment 2:
Subsection (1) provides than an agreement modifying a sales contract needs no consideration to
be binding. However, modifications made thereunder must meet the test of food faith imposed
by this Act. The effective use of bad faith to escape performance on the original contract terms
is barred, and the extortion of a “modification”
without legitimate commercial reason is ineffective as a violation of the duty of good faith. Nor
can a mere technical consideration support a
modification made in bad faith.
§ 89. Modification of Executory Contract.
A promise modifying a duty under a contract not fully
performed on either side is binding:
(a) if the modification is fair and equitable in view of
circumstances not anticipated by the parties when
the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in
view of material change of position in reliance on
the promise.
In other words Restatement § 89 is a narrow
enumerated list of exceptions for certain service
contracts that do not need consideration when
modified.
Where does economic duress fit into the equation?
(1) One party must be in good faith in requesting a modification and this will usually flow form unanticipated
circumstances that create hardship;
(2) Once the good faith request is made, any resulting
agreement cannot be the product of economic duress,
i.e., a threat to breach the contract unless there is an
agreed modification and the other party is backed
into a corner (i.e., no reasonable alternatives, damages remedies uncertain); and
(3) The resulting modification must be fair and equitable
in light of the unanticipated circumstances.
In general past consideration is not a valid consideration.
By “past consideration” the book really just means that
there was legal sufficiency followed by a promise.
“It is well settled that a moral obligation is sufficient
consideration to support a subsequent promise to pay
where the promisor ahs received a material benefit, although there was no original duty or liability resting on
the promisor.”
§ 86. Promise for Benefit Received.
(1) a promise made in recognition of a benefit previously
received by the promisor form the promise is binding
to the extent necessary to prevent injustice:
(2) a promise will not be binding under subsection (1) if
the promise conferred the benefit as a gift or for other
reasons the promisor has not been unjustly enriched;
or to the extent the value is disproportionate to the
benefit.
*Not that restatement §86 is not widely accepted across
jurisdictions.
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Accord and Satisfaction__________________________
An accord is a promise or agreement to accept substituted performance; and
A satisfaction is the performance of the accord.
This is a kind/type of modification.
Chapter 8. Promissory Estoppel
Promissory estoppel—“you cannot go back on your
promise” for some legal or equitable reason.
§ 90. Comment b deals with the character of the protected
reliance:
Questions posed by this material:
Under what circumstances (and in what contexts) will
a promise not supported by consideration be enforced
because it induces reliance by the promise?
The principle of this Section is flexible. The promisor is
affected only by reliance which he does or should foresee,
and enforcement must be necessary to avoid injustice.
If the promise is enforced as a contract, what should
the remedy be, damages based upon the promisee’s expectations [post breach] or upon reliance [prebreach]?
Promissory Estoppel____________________________
§ 90 (1). Promise Reasonably Inducing Action or Forbearance.
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the
promise or a third party and which does induce such
action or forbearance is binding if injustice can be
avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires.
Equitable Estoppel______________________________
The doctrine which promissory estoppel grew out of, equitable estoppel is a doctrine that prevents one form doing
an act differently than the manner in which another was
induced by word or deed to expect; it applies to prevent a
party from assuming a position or asserting a right to another’s disadvantage inconsistent with a position previously taken.
We need to be clear on the difference between equitable
estoppel based on a fact [used defensively—you cannot
deny this fact since I relied on it] and promissory estoppel
based on a promise—commitment to do something in the
future [used offensively—you cannot take back this
promise and must now perform it in the future].
With equitable estoppel, the party is precluded from denying a present fact; in promissory estoppel, the party is precluded from withdrawing from a promise to do something
in the future.
It’s the difference between being estopped to deny an affirmation of fact (that box is full of money) and being held
to a promise (I will give you that box of money).
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Satisfaction of the latter requirement may depend on the
reasonableness of the promisee’s reliance, on its [the reliance’s] definite and substantial character in relation to the
remedy sought, on the formality with which the promise
is made, on the extent to which the evidentiary, cautionary, deterrent and channeling functions of form are met
by the commercial setting or otherwise, and on the extent
to which such other policies as the enforcement of bargains and the prevention of unjust enrichment are relevant.
The force of particular factors varies in different types of
cases: thus, reliance need not be of substantial character
in charitable subscription cases but must in cases of firm
offers and guaranties.
Reliance v. Expectation Interests___________________
Reliance Damages put the plaintiff in their pre-reliance
position had there been no contract.
Expectation Damages put the plaintiff in the position had
there been no breach.
R2d § 90 (2). Promise Inducing Action or Forbearance.
(2) A charitable subscription or a marriage settlement is
binding under subsection (1) without proof that the
promise induced action or forbearance.
Chapter 9. Misunderstanding & Mistake
Contractual capacity is the ability to understand the nature, purpose, and consequences of the contract.
Also known as the “reality of consent.”
Another way to think about this is as defects in the bargaining process:
Misunderstanding: here, we question whether the parties have demonstrated the necessary manifestation of
mutual assent when there was a misunderstanding between the parties about a term or obligation.
Mistake: One or both parties’ contract on assumptions
about facts external to the agreement, which turn out to be
incorrect.
Fraud: One party contracts in reliance upon misrepresentations of fact made by the other party.
Duress: One party’s choices are constrained by conduct
of the other but there is, usually, adequate information.
Undue Influence: One party is surprised by terms in the
agreement just assented to, the effect of which is to create
an apparent imbalance in the exchange.
CAPACITY____________________________________
R2d § 12. Capacity to Contract
(1) No one can be bound by contract who has not legal
capacity to incur at least voidable contractual duties.
Capacity to contract may be partial and its existence in
respect of a particular transaction may depend upon
the nature of the transaction or upon other circumstances.
(2) A natural person who manifests assent to a transaction
has full legal capacity to incur contractual duties
thereby unless he is:
(a) under guardianship, or
(b) an infant, or
(c) mentally ill, or
(d) intoxicated.
-
-
-
What is the typical result of lacking contractual capacity for the party lacking capacity?
The contract is voidable.
What is the typical result of lacking contractual capacity for the other party—the party WITH capacity?
The contract is characterized depending on the party
in question.
When is contractual capacity determined?
At the time of contracting.
What is the consequence of this timing?
Capacity can be fluid.
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Minority______________________________________
Generally speaking, those who have not yet reached the
age of 18. Under most state laws, the age of majority is
18.
R2d § 14. Infants
Unless a statute provides otherwise, a natural person has
the capacity to incur only voidable contractual duties until
the beginning of the day before the person’s eighteenth
birthday.
ISSUE 1: Is the contract voidable?
The general rule is that contracts made by minors are
voidable at the option of the minor—meaning, the minor
has a choice to either declare the contract void or ratify
the contract [once they reach majority].
EXCEPTION to the general rule:
Some statues provide that certain kinds of contracts with
minors are valid [i.e., not voidable];
1. Military Enlistment Contracts;
2. Sports and Entertainment Contracts approved by a
court;
3. Marriage Contracts;
4. Student Loan Contracts.
When can a minor void/disaffirm a voidable contract?
The minor can avoid this contract at any time during their
minority, and for some reasonable time after reaching majority.
What is a “reasonable time”?
There is no hard and fast rule for this; but in general, no
longer than one year after reaching majority.
How can the minor avoid/disaffirm?
Either expressly written/spoken or by conduct.
Could the minor choose to ratify/affirm the voidable
contract?
Yes, but only after they turn 18!
How can a minor ratify/affirm?
Either expressly written/spoken or by conduct.
ISSUE 2: If the contract is voidable, does the minor
need to make restitution?
Separate and distinct from the validity of these contracts
is the concept of restitution upon avoidance.
If the contract made by the minor is voidable, what is
the minor’s restitution responsibility, if any, after disaffirmance?
General rule: the minor pays nothing; they give back what
they got, in whatever shape it is in, if they still have it, and
then they can walk away with no further obligation.
The contract is rescinded. This is RESTORATION (not
restitution)
How can we protect minors due to their presumed incapacity, but still encourage third parties to enter into
those contracts we think the minors truly need?
Drafters of the restatement answered this question by recognizing contracts for necessaries.
But if it is for a necessary like antibiotics?
Then they have a quasi-contract responsibility to pay the
reasonable value of what they got. So, if it’s a contract for
penicillin, they must give back the remaining pills and pay
a reasonable value for the pills they used.
TAKE AWAY:
When presented with a fact pattern involving a minor, ask
yourself:
1. Can the minor avoid this contract, and if so, what is
their restitution responsibility?
First, focus on voidability. As long as the contract is not
one that is on the list of contracts that are enforceable
against minors, then the minor can avoid the contract.
2. Timing Analysis
R2d. § 12. (cmt. f) Necessaries.
Persons having no capacity or limited capacity to contract
are often liable for necessaries furnished to them or to
their wives or children. Though often treated as contractual, such liabilities are quasi-contractual; the liability is
measured by the value of the necessaries rather than by
the terms of the promise.
What is a “necessary”?
For the purposes of this class, necessaries include food,
shelter, clothing, and medical treatment.
3. Does the minor have to pay restitution? I.e., what is
the subject matter of the contract: necessaries or not?
If it is not for necessaires, then the minor has no restitution
responsibility and simply gives back what they got in
whatever shape it is in, if they still have it, and walks
away. If it is for a necessary, the minor has a quasi-contract responsibility to pay for the value of what they got.
Bottom line: how do these contracts play out?
1 of 3 scenarios:
What is the result of the approach? How is a contract
between a minor and an adult for necessaries characterized?
The contract is STILL VOIDABLE. The contract is not
enforceable, so the minor has no liability on the contract
going forward.
BUT, since the minor made a contract to purchase something that is a necessity of life, the minor is not totally off
the hook and has some restitution responsibility—he has
a quasi-contract obligation to make the other party whole.
Meaning they are liable in restitution for the value of the
goods or services received, under a quasi-contract theory.
Restitution v. Restoration_________________________
Suppose a minor has entered into a contract a nonnecessary, and now seeks to avoid it during his minority or within a reasonable time after reaching majority, do they have any restitution responsibility?
No. They just need to give back what they got, in whatever shape it is in. So, if it is an iPad and they busted the
screen, they just need to give the busted iPad back. Or if
they lost it, they give back nothing.
- 22 -
Valid: some contracts entered into by minors, by statute,
are NOT voidable—they are binding and enforceable, and
therefore the minors have full liability on these contracts.
Voidable with no restitution: the majority of contracts
entered into by minors are voidable, with no restitution
responsibility, just restoration because the contract is not
for necessities: just give back what you got, if you still
have it.
Voidable but with a quasi-contract restitution responsibility: some contracts are voidable but trigger a restitution responsibility because the subject matter of the contract is a necessary.
What if the minor misrepresented their age to the
other contracting party?
It’s a mixed bag, but most courts say it doesn’t matter and
the contract is STILL VOIDABLE, so the courts permit
the minor to disaffirm despite their bad behavior; a few
use an estoppel argument to prohibit the minor from raising this lack of capacity when the other party has reasonably relied on the minor’s misrepresentation of majority.
Mental Illness__________________________________
Determining how to characterize contracts made by a person who is mentally incompetent requires the reconciliation of two conflicting policies as set out in comment (a)
to R2d § 15.
- The protection of justifiable expectations of the
parties and of the security of transactions, and
- The protection of persons unable to protect themselves against imposition of binding contractual
obligations.
Intoxication___________________________________
R2d § 15. Mental Illness or Defect.
(1) A person incurs only voidable contractual duties by
entering into a transaction if by reason of mental illness or defect
(a) he is unable to understand in a reasonable manner
the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction and the other party has
reason to know of his condition.
(2) Where the contract is made on fair terms and the other
party is without knowledge of the mental illness or defect, the power of avoidance under subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have
so changed that avoidance would be unjust. In such
cases a court may grant relief as justice requires.
§ 16 comment b. What Contracts Are Voidable.
The standard of competency in intoxication cases is the
same as that in cases of mental illness. If the intoxication
is so extreme as to prevent any manifestation of assent,
there is no contract. Otherwise, the other party is affected
only by intoxication of which he has reason to know.
What about guardians?
R2d § 13. Person Affected by Guardianship
A person has no capacity to incur contractual duties if
their property is under guardianship by reason of an adjudication of mental illness or defect.
§ 13. Illustration 1.
Annie, under guardianship by reason of mental illness,
buys an old car from Bette from $300, giving a promissory note for that amount. Annie subsequently abandons
the car. Is Annie liable on the promissory note?
No, it is a void contract.
§ 13. Illustration 2.
Shortly after commitment to a hospital for mental illness,
Annie conveys land to Bette, taking back a purchasemoney mortgage. Subsequently Carol is appointed guardian of Annie’s property. On Annie’s behalf, Carol ratifies
the conveyance and sues to enforce the mortgage by foreclosure.
What if Bette wants out of the contract?
- Bette is bound.
What if Annie wants out of the contract?
- Annie is also bound here because she contracted
before Carol was appointed as her guardian.
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R2d § 16. Intoxicated Persons
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know
that by reason of intoxication:
(a) he is unable to understand in a reasonable manner the
nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation
to the transaction.
A contract made by a person who is so drunk he does not
know what he is doing is voidable if the other party has
reason to know of the intoxication.
Where there is some understanding of the transaction despite intoxication, avoidance depends on a showing that
the other party induced the drunkenness or that the consideration was inadequate or that the transaction departed
from the normal pattern of similar transactions; if the particular transaction in its result is one which a reasonably
competent person might have made, it cannot be avoided
even though entirely executory.
§ 16. Illustration 1.
Annie, while in a state of extreme intoxication, signs and
mails a written offer on fair terms to Bette, who has no
reason to know of the intoxication. Bette accepts the offer.
Can Annie avoid the contract?
No. Bette must have reason to know of Annie’s intoxication.
MISUNDERSTANDING________________________
MISTAKE____________________________________
R2d § 20. Effect of Misunderstanding
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
(a) neither party knows or has reason to know the
meaning attached by the other; or
(b) each party knows or each party has reason to
know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of
the parties if
(a) that party does not know of any different meaning
attached by the other, and the other knows the
meaning attached by the first party; or
(b) that party has no reason to know of any different
meaning attached by the other, and the other has
reason to know the meaning attached by the first
party.
R2d § 151. Mistake Defined
A mistake is a belief that is not in accord with the facts.
§ 20 Comment b. The Need For Interpretation
The meaning given to words or other conduct depends to
a varying extent on the context and on the prior experience of the parties.
R2d § 152. Comment h. Mistakes as to Different Assumptions
The rule stated in this Section applies only where both
parties are mistaken as to the same basic assumption.
Their mistakes need not be, and often they will not be,
identical. If, however the parties are mistaken as to different assumptions, the rule states in § 153, rather than that
stated in this section applies.
Almost never are all the connotations of a bargain exactly
identical for both parties; it is enough that there is a core
of common meaning sufficient to determine their performances with reasonable certainty or to give a reasonably
certain basis for an appropriate legal remedy. See § 33.
But material differences of meaning are a standard cause
of contract disputes, and the decision of such disputes
necessarily requires interpretation of the language and
other conduct of the parties in light of the circumstances.
- 24 -
R2d § 152. When Mistake of Both Parties Makes A Contract Voidable
(1) Where a mistake of both parties at the time a contract
was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by
the adversely affected party unless he bears the risk of
the mistake under the rule stated in § 154.
What is a “basic assumption”?
§ 152 comment (b) tells us that market conditions and the
financial situation of the parties are ordinarily not such
assumptions, and, generally, mistakes as to market conditions or financial ability do not justify avoidance under
the rules governing mistake.
So, if both parties are mistaken with respect to an assumption of existing facts, does that always give a reason for avoiding the contract?
§ 152 Comment a.
“The mere fact that both parties are mistaken with respect
to such an assumption does not, of itself, afford a reason
for avoidance of the contract by the adversely affected
party. Relief is only appropriate in situations where a mistake of both parties has such a material effect on the
agreed exchange of performances as to upset the very basis for the contract.”
When will a mistake have a material effect on the
agreed upon exchange?
§ 152 comment (c) tells us that it is not enough for a party
to prove that he would not have made the contract had it
not been for the mistake.
Instead, he must show that the resulting imbalance in the
agreed exchange is so severe that he cannot fairly be required to carry it out.
Ordinarily he will be able to do this by showing that the
exchange is not only less desirable to him but is also more
advantageous to the other party.
R2d § 154. When A Party Bears The Risk Of A Mistake.
A party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties,
or
(b) he is aware, at the time the contract is made, the he has
only limited knowledge with respect to the facts to
which the mistake relates but treats his limited
knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground
the it is reasonable in the circumstances to do so.
R2d § 157. Effect of Fault of Party Seeking Relief
A mistaken party’s fault in failing to know or discover the
facts before making the contract does not bar him from
avoidance or reformation under the rules stated in this
Chapter, unless his fault amounts to a failure to act in
good faith and in accordance with reasonable standards of
fair dealing.
R2d § 153. When Mistakes Of One Party Makes A Contract Voidable
Where a mistake of one party at the time a contract was
made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performance that is averse to him, the contract is voidable by
him if he does not bear the risk of the mistake under the
rule stated in § 154 and
(a) the effect of the mistake is such that enforcement of
the contract would be unconscionable, or
(b) the other party had reason to know of the mistake or
his fault caused the mistake.
- 25 -
UCC Article 3.4—Definition of Mistake
Mistake is an erroneous assumption relation to facts or to
law existing when the contract was concluded.
Chapter 10. Misrepresentation
Bad behavior:
Fraud shows up in degrees ranging from intentional misrepresentations to negligent representations to innocent
representations of “material” facts.
Duress is compelling compliance through fear; not all
threats constitute duress.
If the buyer threatens to take his business elsewhere if
seller doesn’t lower the price, that is not duress. But,
if he threatens to cut off seller’s hand if seller doesn’t
lower that price, that is duress.
Undue influence is present when someone takes unfair
advantage of another person's trust and confidence or imposes unfairly on their weakened mental state.
R2d § 167. When a Misrep. is an Inducing Cause
A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent.
The plaintiff can choose not to void the contract, and instead sue the other party for damages for the misrepresentation. What damages would be available to a plaintiff
who chooses not to void the voidable contract?
The difference between what was contracted for and what
plaintiff actually got.
^ This is the theme of damages ^
VOID________________________________________
Also known as Fraud in the Execution
I.e., when you sign something, thinking that it is something else, the contract is void.
Here, the fraud is about the nature of the transaction!
R2d § 159. Misrepresentation Defined.
A misrepresentation is an assertion that is not in accord
with the facts.
When a contract contains a misrepresentation, the contract may be:
- Voidable under § 164;
- Void under § 163; or
- Valid.
R2d § 163. When a Misrep. Prevents Formation of a
Contract
If a misrepresentation as to the character or essential terms
of a proposed contract induces conduct that appears to be
a manifestation of assent by one who neither knows or has
reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.
VOIDABLE___________________________________
Also known as Fraud in the Inducement
What is the difference between fraud in the execution/in factum [§ 163] and fraud in the inducement [§
164]?
R2d § 164. When a Misrep. makes a Contract Voidable
(1) if a party’s manifestation of assent is induced by either
a fraudulent or a material misrepresentation by the
other party upon which the recipient is justified in relying, the contract is voidable by the recipient.
Fraud in the execution is when the misrepresentation is
about the nature of the transaction, typically with regard
to the contents of the instrument.
R2d § 162. When a Misrep. Is Fraudulent or Material
(1) A misrepresentation is fraudulent if the maker intends
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, or
(b) Does not have the confidence that he states or implies in the truth of the assertion, or
(c) Knows that he does not have the basis that he states
or implies for the assertion.
(2) A misrepresentation is material if it would be likely to
induce a reasonable person to manifest his assent, or if
the maker knows that it would be likely to induce the
recipient to do so.
- 26 -
Fraud in the inducement is when the injured party is induced to enter into the contract by a fraudulent misrepresentation resulting in a voidable contract.
R2d § 160. When Action is Equivalent to an Assertion
[Concealment]
Action intended or known to be likely to prevent another
form learning a fact is equivalent to an assertion that the
fact does not exist.
R2d § 161. When Non-Disclosure Is Equivalent To An
Assertion
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:
(a) Where he knows that disclosure of the fact is necessary
to prevent some previous assertion form being a misrepresentation or from being fraudulent or material.
(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 contract and if
non-disclosure of the fact amounts to a failure to act in
good faith and in accordance with reasonable standards of fair dealing.
(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or
effect of a writing, evidencing, or embodying an
agreement in whole or in part.
(d) where the other person is entitled to know the fact because of a relation of trust and confidence between
them.
§ 161 Comment a. Concealment Distinguished
Concealment necessarily involves an element of nondisclosure, but it is the act of preventing another from learning of a fact that is significant, and this act is always
equivalent to a misrepresentation.
Non-disclosure without concealment is equivalent to a
misrepresentation only in special situations. A party making a contract is not expected to tell all that he knows to
the other party, even if he knows that the other party lacks
knowledge on some aspects of the transaction. His nondisclosure, as such, has no legal effect except in the situations enumerated in this Section.
If you speak, speak truthfully. He may not, of course, tell
half-truths and his assertion of only some of the facts
without the inclusion of such additional matters as he
knows or believes to be necessary to prevent it from being
misleading is itself a misrepresentation.
How do § 161(b) and the rules on mistake stack up?
According to § 161 comment (d): Known mistake as to a
basic assumption… The rule stated in clause (b), is, however, broader than these rules for mistake because it does
not require a showing of a material effect on the agreed
exchange and is not affected by the fact that the party
seeking relief bears the risk of the mistake (§ 154).
- 27 -
Nevertheless, a party need not correct all mistakes of the
other and is expected only to act in good faith and in accordance with reasonable standards of fair dealing, as reflected in prevailing business ethics. A party may, therefore, reasonably expect the other to take normal steps to
inform himself and to draw his own conclusions. If the
other is indolent, inexperienced, or ignorant, or if his
judgment is bad or he lacks access to adequate information, his adversary is not generally expected to compensate for these deficiencies.
So, how do we distinguish mistake and fraud?
§ 151 is for “belief” and § 159 is for an “assertion”
Both mistake and fraud require that the untrue fact be central to the contract. But fraud requires that the manifestation of assent be INDUCED by the misrepresentation, and
mistake just requires that the mistake be made as to a material assumption on which the contract was made.
Merger Clause:
A merger clause, also called and “entire understanding”
clause is a boilerplate term where the parties agree that the
four corners of the document control. So, anything not
said in the agreement is not party of the agreement.
Chapter 11. Duress & Undue Influence
Duress________________________________________
See Totem Marine Tug v. Alyeska Pipeline:
Theory behind the defense of duress:
Contractual duties are based on the consent of the parties.
So, if one of the party’s assent was not freely given, a necessary element of the contract is not present.
Rule: “the concept of duress ‘has been broadened to include myriad forms of economic coercion which force a
person to involuntarily enter into a particular transaction.
The test has come to be whether the will of the person
induced by the threat was overcome rather than that of a
reasonably firm person.”
What do we need to show to raise the defense of duress?
Must show that the individual was deprived of their ability to consent to contract.
*This is one of the very few times in contract law that
measures things subjectively.
R2d § 174. When Duress by Physical Compulsion Prevents Formation of a Contract
(when is a contract is VOID due to physical force duress)
If conduct that appears to be a manifestation of assent by
a party who does not intend to engage in that conduct is
physically compelled by duress, the conduct is not effective as a manifestation of assent.
R2d § 175. When Duress By Threat Makes a Contract
Voidable
(1) 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.
R2d § 176. When a Threat Is Improper
(1) 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, or
(d) the threat is a breach of the duty of good faith and
fair dealing under a contract with the recipient.
(2) A threat is improper if the resulting exchange is not on
fair terms, and
(a) the threatened act would harm the recipient and
would not significantly benefit the party making
the threat,
(b) the effectiveness of the threat in inducing the
manifestation of assent is significantly increased
by prior unfair dealing by the party making the
treat, or
(c) what is threatened is otherwise a use of power for
illegitimate ends.
- 28 -
Economic Duress exists where: “(1) one party involuntarily accepted the terms of another, (2) circumstances permitted no other alternative, and (3) such circumstances
were the result of coercive acts of the other party.”
Undue Influence_______________________________
Undue influence is an unrelenting effort to persuade.
What is the difference between duress and undue influence?
Undue influence is when one obtains another party’s assent by acting in an impermissibly overbearing way—
there is no threat.
And duress requires a threat.
When do we see undue influence?
Typically, in fiduciary or other confidential relationships
like trustee/beneficiary; attorney/client; parent/child; doctor/patient.
R2d § 177. When Undue Influence Makes A Contract
Voidable
(1) 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.
(2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.
(3) If a party’s manifestation of assent is induced by one
who is not a party to the transaction, the contract is
voidable by the victim unless the other party to the
transaction in good faith and without reason to know
of the undue influence either gives value relies materially on the transaction.
Chapter 12. Unconscionability
Why do we need a doctrine like unconscionability?
There are doctrines like duress, fraud, and undue influence to deal with pressure situations, right?
So, when there may be elements of pressure, deception or
unfair persuasion that are NOT duress, and NOT undue
influence and NOT fraud but that nonetheless makes us
question the validity of the consent to be bound in the contract, we look for unconscionability.
Are there solid rules and definitions to guide our exploration of unconscionability?
Sadly, no. Nobody has developed any good, hard rules for
unconscionability. Most of what we have are some categories and some reasoning—the cases are all over the
map, as we will see today.
What’s the argument against a doctrine like this?
It’s basically a freedom of contract argument. Some commentators and judges think it’s improper for courts to set
aside agreements when they contain substantive provisions the court finds objectionable that the parties seemingly agreed to.
As a general matter, when is a contract unconscionable?
A contract is unconscionable when the entire contract or
portion of a contract that imposes an unfair burden on one
party to the point that the court’s conscience is offended
thereby precluding enforcement.
It is an extreme form of unfairness that prompt a court not
to enforce a contract that meets all the other requirements
of contract law.
R2d § 208. Unconscionable Contract or Term
If a contract or term thereof is unconscionable at the time
the contract is made a court may refuse to enforce the contract or may enforce the remainder of the contract without
the unconscionable term, or may so limit the application
of any unconscionable term as to avoid any unconscionable result.
R2d § 208 Comment e. Unconscionable terms.
Particular terms may be unconscionable whether or not
the contract as a whole is unconscionable. Some types of
terms are not enforced, regardless of context; examples
are provisions for unreasonably large, liquidated damages, or limitations on a debtor’s right to redeem collateral. Other terms may be unconscionable in some contexts
but not in others. Overall imbalance and weakness in the
bargaining process are then important.
- 29 -
Under UCC § 2-302 the court can:
(1) refuse to enforce the entire contract,
(2) enforce the conscionable portions of the contract without the unconscionable clause—in other words, refusing to enforce a part of it, or
(3) limit the application of any unconscionable clause as
to avoid any unconscionable result
UCC § 2-302. Unconscionable Contract or Clause
(1) If the court as a matter of law finds that contract or any
clause of the contract to have been unconscionable at
the time it was made the court may refuse to enforce
the contract, or it may enforce the remainder of the
contract without the unconscionable clause, or it may
so limit the application of any unconscionable clause
as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the
parties shall be afforded a reasonable opportunity to
present evidence as to its commercial setting, purpose
and effect to aid the court in making the determination.
What is the purpose of § 2-302?
Comment 1 tells us it’s to “allow the court to pass directly
on the unconscionability of the contract or particular
clause therein and to make a conclusion of law as to its
unconscionability.”
What is the “basic test” for unconscionability under
this section?
Again, from Comment 1: Whether, in light of the general
commercial background and the commercial needs of the
particular trade or case, the clauses involved are so onesided as to be unconscionable under the circumstances
existing at the time of making the contract.
Who has the burden of proof?
The party claiming the unconscionability has the burden
of proof. So, if you raise unconscionability as a defense,
you must come forward with evidence showing a prima
facie case and then the burden shifts back to the plaintiff
to show the language was not in fact unconscionable.
Who determines the unconscionability of a contract?
Unconscionability is an issue of law to be decided by the
court under both the UCC and Restatement.
UCC § 2-302(2) gives both sides the right to present evidence of a contract’s commercial setting, purpose and effect for the trial court’s consideration.
PROCEDURAL UNCONSCIONABILITY
SUBSTANTIVE UNCONSCIONABILITY
This deals with the process of making the contract [lack
of knowledge and/or lack of voluntariness] and evaluates
whether a party was deprived of meaningful choice in the
process.
This form of unconscionability involves harshness or onesidedness of contract provisions—it deals with the actual
terms of the contract looking for extreme unfairness under
the totality of circumstances including unfair or oppressive contract terms. A contract is substantively unconscionable when its terms are oppressively one sided.
The focus here is on whether the negotiation process was
fair, focusing on the manner in which the deal was struck,
and the contract entered into. [It looks a lot like economic
duress].
This form of unconscionability includes:
Oppression,
Typically, these cases involve either excessive prices or
creditors unduly restricting the debtor’s remedies or unduly expanding its own remedial rights—terms that are
harsh, unfair, or unduly favorable to one party.
Unfair surprise,
Lack of meaningful choice,
Disparate bargaining power, and
Adhesion Contracts.
Rule of thumb:
A contract is procedurally unconscionable when
one of the parties lacked a meaningful choice in
entering into the contract.
Is mere disparity of bargaining power sufficient to
constitute unconscionability?
In other words, is procedural unconscionability sufficient on its own?
- 30 -
Is a showing that a contract is substantively unfair
alone sufficient to void a contract for unconscionability?
In other words, is substantive unconscionability sufficient on its own?
Chapter 13. Statute of Frauds
Generally speaking, the SOF requires either that the entire
contract or its essential terms be represented in a writing
“signed by the party to be charged”—i.e., the party
against whom enforcement is sought—if the contract is:
1.
2.
3.
4.
For the sale of land
For the sale of goods for over $500 (UCC)
To be performed in over one year
To answer for the debt of another (i.e., a guarantee or
suretyship)
5. In consideration of marriage.
What constitutes a “writing” for SOF purposes?
At minimum, we need the signature of “the party to be
charged.” This is normally the defendant/promisor who is
trying to avoid performance under the reputed contract.
We also need the material terms to be discernable.
R2d § 131. General Requisites of a Memorandum
Unless additional requirements are prescribed by the particular statute, a contract within the Statute of Frauds is
enforceable if it is evidenced by any writing, signed by or
on behalf the party to be charged, which
(a) reasonably identifies the subject matter of the contract,
(b) is sufficient to indicate that a contract with respect
thereto has been made between the parties or offered
by the signer to the other party, and
(c) states with reasonable certainty the essential terms of
the unperformed promises of the contract.
R2d § 110
(1) the following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding
enforcement unless there is a written memorandum or
an applicable exception—so the contract, while valid,
is UNENFORCEABLE.
(a) a contract to answer for the duty of another (i.e.,
suretyship provision) [see § 112 and § 116 for the
“main purpose exception];
(b) a contract of an executor or administrator to answer
for a duty of his decedent [see § 111];
(c) a contract made upon consideration of marriage
[see § 124];
(d) a contract for the sale of an interest in land [see §
127];
(e) a contract that is not capable of full performance
within one year from its formation [see § 130].
The 6th SOF category is contracts for the sale of goods for
$500 or more.
- 31 -
Another way to think about these categories is through the
acronym: MY LEGS!
M—Marriage provision
Y—Year (or longer to complete) provision
L—Land provision
E—Executor provision
G—Goods ($500 or more) provision
S—Suretyship provision
Note:
look for language like “Mary and Bob orally contracted
for x.”
Key word: Oral Contract!
Why do we have this SOF list?
Because there are two kinds of fraud that would, arguably,
arise without SOF:
- Plaintiffs would claim the existence of a contract
when one did not exist;
- Defendants would deny the existence of a contract
when one did exist.
Suretyship Contracts: § 110 (1) (a)
A contract to answer for the duty of another.
General Rule: The promise to pay the debt of another requires writing.
Exception:
R2d § 116. Main Purpose; Advantage of Surety
A contract that all or part of a duty of a third person to the
promise shall be satisfied is not within the Statute of
Frauds as a promise to answer for the duty of another if
the consideration for the promise is in fact or apparently
desired by the promisor mainly for his own economic advantage, rather than in order to benefit the third person. If,
however, the contract is within the Statute.
In other words, if the main purpose of the suretyship is to
benefit oneself, then no writing is required.
Executor Promise: § 110 (1) (b)
A contract of an executor or administrator to answer for a
duty of his decedent.
General Rule: The promise to answer for a decedent requires writing.
This rule hinges on the distinction between
Primary and Secondary Promises.
Marriage Provision: § 110 (1) (c)
A contract made upon consideration of marriage.
R2d § 124. Upon Consideration of Marriage
A promise for which all or part of the consideration is either marriage or a promise to marry is within the Statute
of Frauds, except in the case of an agreement which consists only of mutual promises of two persons to marry
each other.
One Year Analysis:
First look to see when the contract was formed, then make
a list of both parties’ contractual duties.
Then see if it is objectively possible to complete within
one year of its formation.
If not, then the contract falls within the SOF and requires
writing.
R2d § 127. Interest in Land
An interest in land within the meaning of the Statute is
any right, privilege, power or immunity, or combination
thereof, which is an interest in land under the law of property and is not “goods” within the in UCC.
Sale of Goods $500 or More:
UCC § 2-201. Formal Requirements; Statute of Frauds
(1) Except as otherwise provided in this section a contract
for the sale of goods for the price of $500 or more is
not enforceable by way of action or defense unless
there is some writing sufficient to indicate that a contract for sale has been made between the parties and
signed by the party against whom enforcement is
sought or by his authorized agent or broker. A writing
is not insufficient because it omits or incorrectly states
a term agreed upon but the contract is not enforceable
under this paragraph beyond the quantity of goods
shown in such writing.
General Rule: Contracts that involve an interest in land
require writing.
General Rule: The SOF requires contracts for the sale of
goods for the price of $500 or more to be in writing.
Exception:
R2d § 129. Action in Reliance; Specific Performance
A contract for the transfer of an interest in land may be
specifically enforced notwithstanding failure to comply
with the Statute of Frauds if it is established that the party
seeking enforcement, in reasonable reliance on the contract an don the continuing assent of the party against
whom enforcement is sought, has so changed his position
that injustice can be avoided only by specific performance.
So, what happens under § 2-201 if a term is incorrect
or missing?
The contract is still enforceable but is governed by the
terms that actually appear in the contract.
General Rule: a promise to marry requires writing unless
it is a mutual promise.
Land Provision: § 110 (1) (d)
A contract for the sale of an interest in land.
One Year Provision: § 110 (1) (e)
A contract that is not capable of full performance within
one year form its formation.
Exception:
R2d § 130. Contract Not to Be Performed Within a Year
(1) Where any promise in a contract cannot be fully performed within a year from the time the contract is
made, all promises in the contract are within the Statute of Frauds until one party to the contract completes
his performance.
(2) When one party to a contract has completed his performance, the one-year provision of the Statute does
not prevent enforcement of the promises of other parties.
In other words, if one party fully performs their part of
the contract, then the contract is NOT within the SOF and
is enforceable.
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Exception:
UCC § 2-201(2). The Merchant’s Exception
(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient
against the sender is received and the party receiving
it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless
written notice of objection to its contents is given
within 10 days after it is received.
In other words, subsection (2) deals with transactions between merchants, defined in § 2-104 (1) as a person who
deals in goods of that kind. If both parties are merchants,
and one sends a writing confirming the oral contract
within a reasonable time and the recipient has reason to
know its contents, § 2-201(1) is satisfied UNLESS the recipient provides a written objection within 10 days.
Additionally, under this section, silence is equivalent to a
signature!
Specialty Goods: UCC § 2-201 (3)
(3) A contract which does not satisfy the requirement of
subsection (1) but,
(a) if the good are to be specially manufactured for
the buyer and are not suitable fore sale to others
in the ordinary course of the seller’s business
and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has
made either a substantial beginning of their
manufacture or commitments for their procurement; or
(b) if the party against whom enforcement is sought
admits in his heading, testimony, or otherwise
in court that a contract for sale was made, but
the contract is not enforceable under this provision beyond the quantity of the goods admitted;
or
(c) with respect to goods for which payment has been
made and accepted or which have been received
and accepted.
In other words, subsection (3) gives us guidance on applying SOF to situations involving specially manufactured or custom-made goods. If § 2-201(1) is not satisfied,
this subsection offers other ways that an oral contract can
still be held enforceable.
- Special manufacture (3(a))
- Admission of contract (3(b))
- Payment made/accepted or payment received/accepted (full performance) (3(c)) [like § 145].
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Chapter 14. The Parol Evidence Rule
Parol Evidence is both written and spoken evidence that
is NOT included in the final version of the parties’ written
and signed contract, but one of the parties is seeking to
bring it into evidence.
The Parol Evidence Rule (PER) is a gatekeeper that tells
us whether parol evidence will be admitted.
The PER provides that extrinsic evidence of prior or contemporaneous [written or oral] agreements between the
parties to a contract that is a complete and integrated expression of their agreement is inadmissible to vary or contradict that complete and integrated written contract.
In other words, the PER excludes evidence of oral agreements made prior to or contemporaneously with the adoption of a binding, integrated writing.
What should happen to conversations or other agreements between the parties that precede or happen at
the same time as the signing of a contract?
It depends on the intention of the parties:
Did they mean this written agreement to be integrated [final] as to all of the terms in the agreement [complete integration] or as to just some of the terms of the agreement
[partial integration].
R2d § 213. Effect of Integrated Agreement On Prior
Agreements (Parol Evidence Rule)
(1) A binding integrated agreement discharges prior
agreements to the extent that it is inconsistent with
them.
So, in order to have the extrinsic evidence EXCLUDED
under PER:
We need a binding agreement that constitutes an “integrated” agreement AND We need the prior agreement
to be inconsistent with this binding integrated agreement.
Integrated agreement = FINAL expression of the parties
intent.
Does the PER exclude oral modifications the parties
have agreed to after the adoption of the written contract?
No; the PER does not affect the introduction of evidence
that the written contract was subsequently changed by either oral agreement or written modification.
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So, the PER has no place in an analysis of the effectiveness of a subsequent modification of a written contract.
[instead we would look to § 2-209 or § 89 for that analysis].
So, what’s the point of the PER?
It is a substantive rule of contract law [not a procedural
rule of evidence] designed to preserve the integrity of
written contracts. It forces folks to stick to what they
agreed to in the contract by excluding any agreements
made prior to or contemporaneous with the signing of the
written contract [absent some exceptions].
Benefits of the PER:
- It promotes certainty in the contracting process.
- It limits the parties’ opportunity to commit perjury.
- It permits the exclusion of evidence that may be
unreliable or dishonest.
- It prevents fraudulent attempts to persuade a jury
that terms not actually agree to were part of a contract.
- It avoids the necessity of depending on fading and
variable memories of the negotiations that preceded the contract signing.
- It restricts the jury’s ability to rescue sympathetic
parties from bad deals.
- It reduces the costs imposed on court and the parties in searching for evidence about the terms of
the contract.
Drawback of the PER:
- It may prevent a party from proving what was actually agreed to.
- It may allow a party to evade its promise just because the term was inadvertently excluded when
the contract was written up.
- It may permit dishonest folks to use false promises to deliberately induce someone into a deal,
and then benefit from the exclusion of the terms
to back out of its agreement.
Note that the rule simply dictates whether the evidence is
admissible. It is still up to the trier of fact to determine its
credibility, weight, and probative value.
ANALYSIS UNDER THE RESTATEMENT_________
Before starting a PER analysis, we assume that a contract
has been formed. In other words, we assume there is no
misunderstanding of the terms to prevent formation of a
contract, and no reality of consent issues, and that there is
a valid offer, acceptance, and consideration.
Step 1:
Is the proffered parol evidence of a prior or contemporaneous agreement?
If yes, then go to step 2.
Step 2:
Is the proffered parol evidence offered to prove
the TERMS of the parties’ contract?
If yes, then go to step 3.
Step 3:
Is the written agreement partially or completely
integrated?
If the agreement is completely integrated,
the evidence is barred.
If the agreement is partially integrated:
The evidence is barred to the extent it
would vary or contradict the terms; the
evidence may be admissible to supplement or explain terms.
If the parties intended for their writing to be final as to
ALL the terms of their agreement, then the agreement is
completely integrated.
BUT if the parties intended their writing to be final as to
only SOME of the terms in their agreement, then the
agreement is partially integrated.
In other words, when a party proffers parol evidence, and
the other party objects, the judge must decide whether the
evidence is admissible. This is two-step process:
- Is the contract fully or partially integrated; and
- If the PE is admissible, is it credible?
R2d § 209. Integrated Agreements
(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an
agreement.
An agreement is final when it represents the ultimate
agreement of the parties. So, drafts are not final, memos
prepared but not shown to the other party are not final.
Whether a contract is fully or partially integrated is a
question of law!
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R2d § 210. Completely and Partially Integrated Agreements
(1) A completely integrated agreement is an integrated
agreement adopted by the parties as a complete and
exclusive statement of the terms of the agreement.
(2) A partially integrated agreement is an integrated
agreement other than a completely integrated agreement.
Result?
If the judge determines that the written agreement is fully
integrated [full & final agreement of the parties], the
judge will refuse to let the parole evidence be considered
by the trier of fact & the writing is the sole evidence to be
considered by the fact finder.
However, if the judge determines that the contract is partially integrated under § 210 (2), any parole evidence that
is NOT INCONSISTENT with the integrated portion of
the writing is admissible under § 216 (1).
In other words, the writing can be supplemented but not
contradicted by evidence of prior understandings that
comes into supplement or flesh out the parts of the agreement that are NOT complete and final.
R2d § 216. Consistent Additional Terms
(1) Evidence of a consistent additional term is admissible
to supplement an integrated agreement unless the court
finds that the agreement was completely integrated.
Credibility Issues:
If the judge finds the evidence admissible [meaning, the
agreement is not fully integrated], then it is presented to
the fact finder to determine the credibility of the evidence.
Just because evidence is admitted under the PER does not
mean the trier of fact will be persuaded.
ANALYSIS UNDER THE UCC___________________
What do we do with consistent additional terms?
Four Corners v. Contextual Approach:
The four corners approach taken by the restatement is being overshadowed by a more contextual approach where
judges will look beyond the “four corners of the document” in an effort to try and figure out the parties’ intent.
See UCC § 2-202.
§ 2-202. Final Written Expression: Parol or Extrinsic
Evidence
Terms with respect to which the confirmatory memoranda
of the parties agree or which are otherwise set forth in a
writing intended by the parties as a final expression of
their agreement with respect to such terms as are included
therein may not be contradicted by evidence of any prior
agreement or of a contemporaneous oral agreement but
may be explained or supplemented
(a) by course of dealing or usage of trade (§ 1-205) or by
course of performance (§ 2-208); and
(b) by evidence of consistent additional terms unless the
court finds the writing to have been intended also as a
complete and exclusive statement of the terms of the
agreement.
In other words, UCC § 2-202 tells us that fully integrated
agreements may not be contracted by evidence of prior or
contemporaneous agreements; BUT fully integrated
agreements may be explained or supplemented by evidence of a course of dealing, usage of trade, or course of
performance under § 2-202(a).
This approach differs from the Restatement!
Under the restatement, the finding of a fully integrated
agreement bars PE of any kind, while the UCC is more
liberal and allows course of dealing, usage of trade, and
course of performance to come in anyway to “explain” or
“supplement” the writing.
Under both Restatement and UCC, any PE that contradicts the writing will be barred!
What is a Merger or Integration Clause?
A clause that states that the parties agree that the written
contract is their entire agreement on all the terms of the
contract.
- 36 -
Under both the Restatement and UCC we try to determine
if the parties intended to include a term as part of their
agreement but didn’t include it in their final writing.
▪
▪
An argument can be made that the parties intended to include it; this means the written agreement was NOT intended as a final and complete
expression of the agreement, so the agreement is
NOT integrated on this term and evidence of this
missing term should be allowed in.
But the counter argument is that they intended to
exclude it. this means the written agreement
WAS intended as a final and complete expression
of the agreement, so the agreement is integrated
on this term and evidence of this missing term
should NOT be allowed in.
Threshold Question: Is this the kind of term that might
naturally have been the subject of a separate agreement?
Under § 2-202 (b), consistent additional terms, not reduced to writing, may be proved unless the court finds that
the writing was intended by both parties as a complete and
exclusive statement of all the terms. If the additional
terms are such that, if agreed upon, they would certainly
have been included in the document in the view of the
court, the evidence of their alleged making must be kept
from the trier of fact.
What is the difference in the focus of R2d § 216 and
UCC § 2-202(b)?
In each case, we have an agreement, and a term that would
be consistent with the subject matter [not contradictory]
and we need to figure out what to do:
Restatement:
The restatement looks at whether the additional,
consistent term “might naturally be omitted” and
says if it might naturally be omitted by the parties,
their agreement is not completely integrated—so
we may be able to allow PE in order to help the
court figure it out.
Bottom line: We admit PE if the additional consistent term might naturally be excluded and be
part of a separate agreement.
UCC:
The UCC looks at whether the term would have
“certainly been included” in the agreement had
the term actually been agreed to. If it would certainly have been included, and wasn’t, the evidence is excluded. The idea is that the parties
have chosen to exclude this term that would certainly have been included in this agreement and
would not have been contained in another separate agreement.
Bottom line: We exclude PE if the additional
consistent term would certainly have been included.
R2d § 214. Evidence of Prior or Contemporaneous
Agreements and Negotiations
Agreements and negotiations prior to or contemporaneous
with the adoption of a writing are admissible in evidence
to establish:
(a) That the writing is or is not an integrated agreement;
(b) That the integrated agreement, if any, is completely
or partially integrated;
(c) The meaning of the writing, whether or not integrated;
(d) Illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
(e) Ground for granting or denying rescission, reformation, specific performance, or other remedy.
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Chapter 15. Interpretation
When may a court look at extrinsic evidence to help determine what the written contract means, and when must
it go by the document alone?
What happens when the parties to a contract have a dispute and the court has to step in to determine the meaning
of the terms of the contract?
Interpretation: A court’s effort to determine the intent of
the parties.
Construction: A court’s effort to determine the legal effect of a contract, without reference to the intent of the
parties.
Approaches to interpretation:
Plain meaning/textual: interpret words according to their
common meaning
Contextual interpretation: determine the meaning of a
term in light of all the surrounding circumstances
R2d § 212 (1)
The interpretation of an integrated agreement is directed
to the meaning of the terms of the writing or writings in
the light of the circumstances, in accordance with the
rules stated in this chapter.
What outside factors should we keep an eye on when
interpreting or construing contracts?
We need to be mindful of any usage of trade, course of
dealing, or course of performance.
UCC § 1-303. Course of Performance, Course of Dealing, and Usage of Trade
(c) A “usage of trade” is any practice or method of dealing
have such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be
observed with respect to the transaction in question.
The existence and scope of such a usage must be
proved as facts. If it is established that such a usage is
embodied in a trade code or similar record, the interpretation of the record is a question of law.
Note: The custom need not be universal, it just needs to
justify an expectation.
Can a usage of trade be binding even if the parties are
not aware of it?
YES.
Course of Dealing______________________________
A course of dealing is a more private custom that arises
between these particular parties in their past dealings with
each other.
This analysis looks at the customary practice these parties
have developed between themselves in the course of their
past dealings.
UCC § 1-303. Course of Performance, Course of Dealing, and Usage of Trade
(b) A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a
particular transaction that is fairly to be regarded as
establishing a common basis of understanding for interpreting their expressions and other conduct.
Usage of Trade_________________________________
Course of Performance__________________________
Usage of trade is the customary practice of people engaged in some particular trade or industry or community
and it can supplement the express terms of a contract and
can be used to construe the contract’s meaning.
This analysis looks at industry wide or geographic customs; customary practice of others in the industry or region.
Here, the UCC and Restatement § 222 are very consistent
in their approaches.
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A course of performance is even more narrow than a
course of dealing; it comes from the conduct of the parties
from THIS contract.
This analysis looks at the customary practice the parties
have developed between themselves in the course of the
performance of the particular transactions involved in this
contract. The idea is that how the parties are actually performing their agreement is good evidence of what they
intended.
UCC § 1-303. Course of Performance, Course of Dealing, and Usage of Trade
(a) A “course of performance” is a sequence of conduct
between the parties to a particular transaction that exists if:
(1) the agreement of the parties with respect to the
transaction involves repeated occasions for performance by a party; and
(2) the other party, with knowledge of the nature of the
performance and opportunity for objection to it, accepts the performance or acquiesces in it without
objection.
…
(e) Except as otherwise provided in subjection (f), the
express terms of an agreement and any applicable
course of performance, course of dealing, or usage
of trade must be construed whenever reasonable as
consistent with each other. If such a construction is
unreasonable:
(1) express terms prevail over course of performance, course of dealing, and usage of trade;
(2) course of performance prevails over course of
dealing and usage of trade; and
(3) course of dealing prevails over usage of trade.
Maxims of Construction and Interpretation__________
-
Give words their common meaning, if possible;
Construe terms as consistent, if possible;
Specific terms govern general terms;
Negotiated terms govern boilerplate terms;
Contra proferentum;
Courts can supply omitted essential terms.
§ 204. Supplying an Omitted Essential Term
When the parties to a bargain sufficiently defined to be a
contract have not agreed with respect to a term which is
essential to a determination of their rights and duties, a
term which is reasonable in the circumstances is supplied
by the court.
The process of supply an omitted term has sometimes
been disguised as a literal or a purposive reading of contract language directed to a situation other than the situation that arises. Sometimes it is said that the search is for
the term the parties would have agreed to if the question
had been brought to their attention. Both the meaning of
the words used and the probably that a particular term
would have been used if the question had been raised may
be factors in fact no agreement, the court should supply a
term which comports with community standards of fairness and policy rather than analyze a hypothetical model
of the bargaining process.
- 39 -
Pacific Gas Case
“The test of admissibility of evidence to explain the meaning of a written instrument is not whether it appears to the
court to be plain and unambiguous on its face, but whether
the offered evidence is relevant to prove a meaning to
which the language of the instrument is reasonably susceptible.”
“A rule that would limit the determination of meaning of
written instrument to its court-corners merely because it
sems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or
presuppose a degree of verbal precision and stability our
language has not attained.”
Chapter 25. Sales & Contract Performance Under
the UCC
The Perfect Tender Rule________________________
In a single lot delivery contract, if the goods do not
conform to the contract, can the buyer reject the
goods?
Yes, the buyer can reject the goods under the Perfect Tender Rule (PTR); if the seller fails to tender delivery in the
manner promised or the quantity or quality of goods does
not conform to the contract IN ANY WAY, buyer generally has the right to REJECT the goods under the PTR.
§ 2-601. Buyer’s Rights on Improper Delivery
Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise
agreed under the sections on contractual limitations of
remedy (§ 2-718 and 2-719), if the good or the tender of
delivery fail in any respect to conform to the contract, the
buyer may,
(a) reject the whole; or
(b) accept the whole, or
(c) accept any commercial unit or units and reject the
rest.
Is PTR unduly harsh?
No, for 4 reasons:
1. PTR rule only applies to single lot deliver contracts—if its an installment contract, the buyer can
reject only if defects substantially impair the value
of the goods to the buyer.
(See § 2-612).
2. In order to reject, buyers have to carefully comply
with the requirement of giving timely notice of
their intent to reject or lose their right to reject.
(See § 2-602).
3. Breaching sellers usually have the right to cure a
defective tender if there is time left to perform under the contract; thus the buyer’s rejection may not
put an end to the contract. (See § 2-598)
4. The terms of the contract might be sufficiently
flexible to restrain the buyer’s ability to reject
goods due to a minor imperfection and there could
be warranty protection as well. So the parties can
essentially OPT OUT of the PTR.
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How do we know if the goods are conforming?
§ 2-106. Definitions… “Conforming”
(2) Goods or conduct including any part of a performance
are “conforming” or conform to the contract when
they are in accordance with the obligations under the
contract.
§ 2-513. Buyer’s Right to Inspection of Goods.
(1) Unless otherwise agreed and subject to subsection (3),
where goods are tendered or delivered or identified
to the contract for sale, the buyer has a right before
payment or acceptance to inspect them at any reasonable place and time in any reasonable manner. When
the seller is required or authorized to send the goods
to the buyer, the inspection may be after their arrival.
§ 2-602. Manner and Effect of Rightful Rejection.
(1) Rejection of goods must be within a reasonable time
after their delivery or tender. It is ineffective unless
the buyer seasonably notifies the seller.
(2) Subject to the provisions of the two following sections
on rejected goods (§ 2-602 & 2-604),
(a) after rejection any exercise of ownership by the
buyer with respect to any commercial unit is
wrongful as against the seller; and
(b) if the buyer has before rejection taken physical
possession of goods in which he does not have
security interest under the provisions of this Article (subsection (3) of § 2-711), he is under a
duty after rejection to hold them with reasonable care at the seller’s disposition for a time sufficient to permit the seller to remove them; but
(c) the buyer has no further obligations with regard
to goods rightfully rejected.
In other words, the buyer must hold the goods with reasonable care until the seller can come and pick it up.
What if the buyer who is rejecting the goods is a
merchant? See next page.
§ 2-603. Merchant Buyer’s Duties as to Rightful Rejected
Goods.
(1) Subject to any security interest in the buyer (subsection (3) of § 2-711), when the seller has no agent or
place of business at the market of rejection a merchant buyer is under a duty after rejection of goods
in his possession or control to follow any reasonable
instructions received from the seller with respect to
the goods and in the absence of such instructions to
make reasonable efforts to sell them for the seller’
account if they are perishable or threated to decline
in value in speedily. Instructions are not reasonable
if on demand indemnity for expenses is not forthcoming.
(2) When the buyer sells goods under subsection (1), he
is entitled to reimbursement from the seller or out of
the proceeds for reasonable expenses of caring for
and selling them, and if the expenses include no selling commission, then to such commission as is usual
in the trade or if there is none, to a reasonable sum
not exceeding ten percent of the gross proceeds.
In other words, if the buyer is a merchant in the goods that
they are rejecting, then they have to follow the instructions given.
If no instructions are given, buyer has to try to sell the
goods if they are perishable or threaten to decline quickly
in value.
And the buyer is entitled to reimbursement, within reason, for the costs of dealing with the seller’s goods.
If buyer rejects the goods, can seller cure the imperfect
tender?
§ 2-508. Cure by Seller of Improper Tender or Delivery;
Replacement
(1) Where any tender or delivery by the seller is rejected
because non-conforming and the time for performance
has not yet expired, the seller may seasonably notify
the buyer of his intention to cure and may then within
the contract time make a conforming delivery.
(2) Where the buyer rejects a non-conforming tender
which seller had reasonable grounds to believe would
be acceptable with or without money allowance the
seller may if he seasonably notifies the buyer have a
further reasonable time to substitute a conforming tender.
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What constitutes an acceptance by the buyer?
There are three different scenarios for acceptance:
First, if buyer had a reasonable opportunity to inspect the
goods [remember § 2-513] and signifies to the seller that
the good are conforming OR that he will take or retain
them in spite of their non-conformity, he has accepted the
goods.
Next, if the buyer fails to make an effective rejection after
the buyer has had a reasonable opportunity to inspect
them, that’s also an acceptance under
§ 2-606(b).
Finally, if buyer does any act inconsistent with the
seller’s ownership, that’s an acceptance under
§ 2-606(c)
§ 2-606. What Constitutes Acceptance of Goods.
(1) Acceptance of goods occurs when the buyer
(a) after a reasonable opportunity to inspect the goods
signifies to the seller that the goods are conforming
or that he will take or retain them in spite of their
non-conformity, or
(b) fails to make an effective rejection (subsection (1)
of § 2-602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
(c) does any act inconsistent with the seller’s ownership; but if such act is wrongful as against the seller
it is an acceptance only if ratified by him.
After acceptance, what are the buyer’s obligations?
After acceptance, buyer has to pay the contract price for
the goods but can seek damages under § 2-714 for any
nonconformity in tender.
§ 2-607. Effect of Acceptance; Notice of Breach;
(1) The buyer must pay at the contract rate for any goods
accepted.
Damages for Breach of Warranty:
The measure of damages for breach of warranty is the difference at the time and place of acceptance between what
you actually go and what you were promised in the contract.
§ 2-714. Buyer’s Damages for Breach in Regard to Accepted Goods
(1) Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any non-conformity of tender
the loss resulting in the ordinary course of events
from the seller’s breach as determined in any manner
which is reasonable.
(2) The measure of damages for breach of warranty is the
difference at the time and place of acceptance between the value of the goods accepted and the value
they would have had if they had been as warranted
unless special circumstances show proximate damages of a different amount.
(3) In a proper case any incidental and consequential damages under the next section may also be recovered.
If the buyer has accepted the goods, can buyer revoke
acceptance? YES!
§ 2-608. Revocation of Acceptance in Whole or in Part
(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
(a) on the reasonable assumption that its non-conformity would be cured, and it has not been seasonable
cured; or
(b) without discovery of such non-conformity if his acceptance was reasonably induced wither by the
difficulty of discovery before acceptance or by
the seller’s assurances.
(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have
discovered the ground for it and before any substantial change in condition of the goods which is not
caused by their own defects. It is not effective until
the buyer notifies the seller of it.
(3) A buyer who so revokes has the same rights and duties
with regard to the goods involved as if he had rejected them.
Is there a higher stander under the UCC for revocation versus rejection?
Yes. Remember, § 2-601 [the PTR] is for rejections, NOT
revocation of acceptances.
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Installment Contracts________________________
UCC § 2-612. Installment Contract; Breach
(1) An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be
separately accepted, even though the contract contains a clause “each delivery is a separate contract”
or its equivalent.
(2) The buyer may reject any installment which is nonconforming if the non-conformity substantially impairs the value of that installment and cannot be
cured or if the non-conformity is a defect in the required documents; but if the non-conformity does
not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept
that installment.
(3) Whenever non-conformity or default with respect to
one or more installments substantially impairs the
value of the whole contract there is a breach of the
whole. But the aggrieved party reinstates the contract
if he accepts a non-conforming installment without
seasonably notifying of cancellation or if he brings
an action with respect only to past installments or demands performance as to future installments.
Buyer’s Remedies___________________________
§ 2-711. Buyer’s Remedies in General
(1) Where the seller fails to make delivery or repudiates
or the buyer rightfully rejects or justifiably revokes
acceptance then with respect to any goods involved,
and with respect to the whole if the breach goes to
the whole contract (§ 2-612), the buyer may cancel
and whether or not he has done so may in addition to
recovering so much of the price as he has been paid.
(a) “cover” and have damages under the next section
as to all the goods affected whether or not they
have been identified to the contract;
(b) recover damages for non-delivery as provided in
this Article (§ 2-713).
The Code divides the buyer’s remedies between remedies
with respect to accepted goods and remedies for goods not
delivered or accepted.
Goods that have not been accepted includes goods that
were not accepted either because:
(1) seller fails to deliver the goods, or
(2) buyer rightfully rejects the goods, or
(3) buyer accepts the goods but then validly revokes
his acceptance.
These are all situations where the buyer DOES NOT
WANT the goods contracted for from the seller. So, we
are looking for a remedy that will make the buyer whole
that does not involve possession of the goods from the
seller.
§ 2-712. “Cover”
(1) After a breach within the preceding section the buyer
may “cover” by making in good faith and without
unreasonable delay any reasonably purchase of or
contract to purchase goods in substitution for those
due from the seller.
(2) The buyer may recover from the seller as damages the
difference between the cost of cover and the contract
price together with any incidental or consequential
damages as hereinafter defined (§ 2-715), but less
expenses saved in consequence of the seller’s breach.
In other words, The buyer can [but is not required to]
“cover” which means the buyer can buy substitute goods
without unreasonable delay and thus be made completely
whole (§2-712(1)). Cover is an action in mitigation of the
buyer’s damages, and if reasonable, will attract the approval of the court.
Official Comment 1
This section provides the buyer with a remedy aimed at
enabling him to obtain the goods he needs thus meeting
his essential need. This remedy is the buyer’s equivalent
of the seller’s right to resell.
If it cost the buyer more to buy the substitute goods than
the buyer had to pay under the contract, then the seller
must pay damages equal to the difference between the
buyer’s cost of cover and the contract price, PLUS any
incidental or consequential damages incurred in buying
the substituted goods, less the cost of any expenses that
buyer saves by the seller’s breach (§ 2-712(2)).
- 43 -
Under the UCC, both incidental and consequential damages are permitted.
§ 2-715. Buyer’s Incidental and Consequential Damages.
(1) Incidental damages resulting from the seller’s breach
include expenses reasonably incurred in inspection,
receipt, transportation and care and custody of goods
rightfully rejected, any commercially reasonable
charges, expenses or commissions in connection
with effecting cover and any other reasonable expense incident to the delay or other breach.
(2) Consequential damages resulting from the seller’s
breach include:
(a) any loss resulting from general or particular requirements and needs of which the seller at the
time of contracting had reason to know and
which could not reasonably be prevented by
cover or otherwise; and
(b) injury to person or property proximately resulting
from any breach of warranty.
Pursuant to comment 4 regarding this section:
“Loss may be determined in any manner which is reasonable under the circumstances” and does not require mathematical precision.
Official Comment 2.
The definition of “cover” under subsection (1) envisages
a series of contracts or sales, as well as a single contract
or sale; goods not identical with those involved but commercially usable as reasonable substitutes under the circumstances of the particular case; and contracts on credit
or delivery terms differing from the contract in breach, but
again reasonable under the circumstances.
The test of proper cover is whether at the time and place
the buyer acted in good faith and in a reasonable manner,
and it is immaterial that hindsight may later prove that
the method of cover used was not the cheapest or most
effective.
Cover under § 2-712 is a perfect expectation remedy.
The buyer is EXACTLY where she would have been if
the seller had not breached.
Goods Never Delivered__________________________
Goods Accepted________________________________
§ 2-713. Buyer’s Damages for Non-delivery or Repudiation.
(1) Subject to the provisions of this Article with respect
to proof of market price (§ 2-733), the measure of
damages for non-delivery or repudiation by the seller
is the difference between the market price at the time
when the buyers learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (§ 2-715),
but less expenses saved in consequence of the
seller’s breach.
(2) Market price is to be determined as of the place for
tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
§ 2-714. Buyer’s Damages for Breach in Regard to Accepted Goods.
(1) Where the buyer has accepted the goods and given
notification (subsection (3) of § 2-607) he may recover as damages for any non-conformity of tender
the loss resulting in the ordinary course of events
from the seller’s breach as determined in any manner
which is reasonable.
(2) The measure of damages for breach of warranty is the
difference at the time and place of acceptance between the value of the goods accepted and the value
they would have had if they had been as warranted,
unless special circumstances show proximate damages of a different amount.
(3) In a proper case any incidental and consequential
damages under the next section may also be recovered.
What is the referred to as a hypothetical cover?
Because it assumes the buyer went into the marketplace
and purchased substituted goods, even though the buyer
didn’t—this remedy is specifically NOT available if the
buyer actually DOES cover.
What are the differences between cover and hypothetical cover?
With cover, damages equal the difference between the actual purchase price; with hypothetical cover, damages
equal the difference between the market price at the time
that buyer learned of the breach.
Does buyer have to give notice of breach on goods he
has accepted?
§ 2-607. Breach; Burden of Establishing Breach After
Acceptance; Notice of Claim or Litigation to Person Answerable Over.
(3) Where a tender has been accepted
(a) the buyer must within a reasonable time after he
discover any breach notify the seller of breach
or be barred from any remedy;
Breach of Warranty Claim________________________
What if seller tenders non-conforming goods but the
buyer has validly accepted and is keeping the non-conforming goods?
Buyer can bring a breach of warranty or breach of contract
claim and buyer gets the difference between the contract
price and the value of the goods received plus incidental
and consequential damages under
§ 2-714.
- 44 -
§ 2-716. Buyer’s Right to Specific Performance or Replevin.
(1) Specific performance may be decreed where the good
are unique or in other proper circumstances.
BUYERS REMEDIES FOR SELLER’S BREACH:
SELLER’S REMEDIES:
First, Seller tenders the goods.
Start with § 2-703: List of seller’s remedies in general.
- If buyer fails to pay when due, or wrongfully rejects
or revokes his acceptance, seller can:
(a) withhold delivery of such goods;
(b) stop delivery by any bailee as hereafter provided
(§ 2-705);
(c) proceed under the next section respecting goods
still unidentified to the contract;
(d) resell and recover damages as hereafter provided
(§ 2-706);
(e) recover damages for non-acceptance (§ 2-708) or
in a proper case recover the price (§ 2-709);
(f) cancel.
Second, Buyer has the right to inspect the goods to make
sure they conform to the warranty (This is for a single lot
delivery). See § 2-513.
Option 1: Conforming Goods
- § 2-606: Buyer can accept the conforming goods, and
all is well in the world.
Option 2: The Goods Do Not Conform
- §§ 2-601 & 2-602: Buyer notices upon inspection that
the goods do not conform and can reject the goods—
this is a “rightful” rejection under PTR.
- § 2-508: Seller has a limited right to cure the defects.
If the time for performance is up, then the seller does
not have the right to cure.
- § 2-711: If the defects are uncured, buyer can pursue
his remedies including cancellation, cover or damages.
§ 2-711 is the launching pad for remedies.
Option 3: Buyer Notices Goods Too Late to Reject But
Not Too Late to Revoke.
- § 2-608: If after a buyer has accepted the goods, and
then the buyer discovers a defect, it’s too late for a
“rightful” rejection but buyer can “justifiably” revoke
the acceptance in certain circumstances [defect must
be substantial, difficult to discover before acceptance
and revocation is timely]; revoked acceptance operates just like a rejection.
- § 2-711: If the defects are uncured, buyer can pursue
their remedies including cancellation, cover, or damages.
Option 4: Buyer Notices Goods Too Late to Reject &
Too Late to Revoke
- § 2-606: Buyer accepted the goods [so they can’t reject and cannot revoke].
- § 2-607 (3)(a): Buyer gives notice of breach.
- § 2-714: Buyer sues for damages in regard to accepted
goods.
- § 2-715: Buyer may be able to get incidental and consequential damages also.
- 45 -
If the buyer still has the goods in their possession, then we
look to (d) & (e).
Resale: Under § 2-706, seller can resell the goods and
hold the buyer liable for the difference between the contract price and the resale price, plus incidentals less expenses saved.
Seller must act in good faith and conduct the resale in
commercial reasonable manner and give buyer notice.
This is the parallel remedy to buyer’s right to cover under
§ 2-612.
If the seller resells but gets less than the contract price,
then the seller gets the difference.
Hypothetical Resale: Under § 2-708(1), seller gets the
difference between the contract price and the market price
at the time and place of delivery, plus incidentals less expenses saved. This is the parallel remedy to buyer’s right
to hypothetical cover under § 2-713.
Lost Volume Seller: When someone has a lot of inventory and a lot of buyers, they are a lost volume seller.
In these cases, we use § 2-708(2), when the contract price,
less the market price at place of tender, less expenses
saved is “inadequate to put the seller in as good a position
as performance would have done.” Here, § 2-708(1) is inadequate to cover profit plus reasonable overhead plus
salvaged reliance expenditures.
Action for the Price: Under § 2-709, if the seller can’t
resell or the circumstances indicate that efforts to resell
will be futile, seller can sue for the contract price. Buyer
keeps the goods and seller gets the contract price. This is
the seller’s equivalent of specific performance.
§ 2-708. Seller’s Damages for Non-acceptance or Repudiation
(1) Subject to subsection (2) and to the provisions of this
Article with respect to proof of market price (§ 2-723),
the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market
price at the time and place for tender and the unpaid
contract price together with any incidental damages
provided in this Article (§ 2-710), but less expenses
saved in consequence of the buyer’s breach.
(2) If the measure of damages provided in subsection (1)
is inadequate to put the seller in as good a position as
performance would have done then the measure of
damages is the profit (including reasonable overhead
which the seller would have made form full performance by the buyer, together with any incidental damages provided in this Article (§ 2-710), due allowance
for costs reasonably incurred and due credit for payments or proceeds of resale.
§ 2-709. Action for the Price.
(1) When the buyer fails to pay the price as it becomes
due the seller may recover, together with any incidental damages under the next section, the price.
(a) of goods accepted or of conforming goods lost or
damaged within a commercially reasonable time
after risk of their loss has passed to the buyer; and
(b) of goods identified to the contract if the seller is
unable after reasonable effort to resell them at a
reasonable price or the circumstances reasonably
indicate that such effort will be unavailing.
- 46 -
Why can’t Seller recover consequential damages?
It is unlikely that sellers will have consequential damages.
If the buyer breaches that contract, the seller can resell to
someone else. The breach does not adversely affect the
seller’s business other than the revenue lost because of the
sale, which the seller can recover under § 2-708 if the
goods have been accepted.
What about Incidental Damages for the Seller?
§ 2-710. Seller’s Incidental Damages.
Incidental damages to an aggrieved seller include any
commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation,
care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.
§ 1-304. Obligation of Good Faith.
Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement.
§ 2-103. Definitions
(1) In this Article unless the context otherwise requires,
(a)…
(b) “Good Faith” in the case of a merchant means
honesty in fact and the observance of reasonable
commercial standards of fair dealing in the
trade.
§ 1-201. General Definitions
…
(20) “Good faith,” expect as otherwise provided in Art. 5,
means honesty in fact and the observance of reasonable
commercial standards of fair dealing.
Chapter 16. Warranties
A warranty is a promise that certain facts are true.
You can warrant any present or past fact.
Rebuttable Presumption of Reliance: we can presume
that seller’s statements are part of the basis of the bargain
“unless good reason is shown to the contrary.”
Typically, the seller makes a representation about the
quality or some other characteristics of the goods or services it provides.
When a warranty is breached the injured party can sue
for damages measured by the difference between (1) the
value of the performance as warranted, and (2) the value
of the performance as performed.
Consequential and incidental damages may also be possible. See later chapters.
At CL, typically for the warranty of habitability that has
been imposed in certain real estate contracts;
Statutory Law → Article 2 provides for:
- Express warranties under § 2-313;
- Implied warranty of merchantability under § 2314
- The implied warranty of fitness for a particular
purpose under § 2-315
Express Warranties_____________________________
§ 2-313. Express Warranties by Affirmation, Promise,
Description, Sample.
(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the
seller to the buyer which relates to the goods
and becomes part of the basis of the bargain creates an express warranty that the goods shall
conform to the affirmation or purpose.
(b) Any description of the goods which is made
part of the basis of the bargain creates an express warranty that the goods shall conform to
the description.
(c) Any sample or model which is made part of the
basis of the bargain creates an express warranty
that the whole of the goods shall conform to the
sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention
to make a warranty, but an affirmation merely of the
value of the goods or a statement purporting to be
merely the seller’s opinion or commendation of the
goods does not create a warranty.
- 47 -
Implied Warranties_____________________________
§ 2-314. Implied Warranty: Merchantability; Usage of
Trade.
(1) Unless excluded or modified (§ 2-316), a warranty that
the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.
(2) Goods to be merchantable must be at least such as
(a) pass without objection in the trade under the contract description; and
(b) in the case of fungible goods, are of fair average
quality within the description; and
(c) are fit for the ordinary purpose for which such
goods are sued; and
(d) run, within the variations permitted by the agreement, of even kind, quality, and quantity within
each unit and among all units involved; and
(e) are adequately contained, packaged, and labeled as
the agreement may require; and
(f) conform to the promises or affirmations of fact
made on the container or label if any.
(3) Unless excluded or modified (§ 2-316) other implied
warranties may arise from course of dealing or usage
of trade.
§ 2-315. Implied Warranty: Fitness for Particular Purpose.
Where the seller at the time of contracting has reason to
know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or
judgement to select or furnish suitable goods, there is unless excluded or modified under the next section, an implied warranty that the goods shall be fit for such purpose.
A “particular purpose” differs from the ordinary purpose
for which the goods are used in that it envisages a specific
use by the buyer which is peculiar to the nature of his
business whereas the ordinary purposes for which goods
are used are those envisaged in the concept of merchantability and go to uses which are customarily made of the
goods in question.
Chapter 17. Defenses to Warranty Liability
Disclaiming Implied Warranties___________________
This chapter, especially, § 2-316, displays the tension between commercial interest and consumer protection interests in legislative drafting.
The implied warranties under §§ 2-314 & 2-315 are default rules that the parties can contract around, as long as
they follow the correct procedure in the UCC and use the
prescribed language.
There is a difference under Art. 2 between agreements
that disclaim or limit warranties, § 2-316, and agreements
that limit or exclude damages resulting from breach of
warranty, § 2-719.
What is the difference between a disclaimer and an exclusionary clause?
A Disclaimer reduces the scope or existence of a warranty. It’s a statement by the seller that limits or excludes
the warranty itself. So the seller is simply limiting the
scope of the warranty, or in some cases, NOT making a
warranty at all.
An Exclusionary Clause reduces the damages upon
breach of warranty. These clauses restrict the remedies
available to a party when a breach has been shown. So
exclusionary clauses do not limit what warranties arise
but instead limit what obligations exist if they are
breached.
See Schroder v. Fageol Motors:
“A disclaimer clause is a device used to exclude or limit
the seller’s warranties; it attempts to control the seller’s
liability by reducing the number of situations in which the
seller can be in breach. An exclusionary clause, on the
other hand, restricts the remedies available to one or both
parties one a breach has been established.”
Example:
Seller won’t say the oranges they are selling is not “grade
A”—that would be a disclaimer of an express warranty.
Instead, Seller will just say that if the oranges turn out not
to be “grade A,” then all the buyer is entitled to is the return on their money or a replacement under § 2-719 (a).
Note that a seller CAN’T both make an express warranty
AND disclaim its existence. So attempts to disclaim express warranties are not always successful.
- 48 -
Note that sellers’ efforts to disclaim implied warranties
are heavily regulated by federal and state consumer protection legislation.
§ 2-316. Exclusion or Modification of Warranties.
(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever
reasonable as consistent with each other; but subject
to the provisions of this Article on parole or extrinsic
evidence (§ 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it,
the language must mention merchantability and in
case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness is
sufficient if it states, for example, that “There are no
warranties which extend beyond the description on
the face hereof.”
(3) Notwithstanding subsection (2)
(a) unless the circumstances indicated otherwise, all
implied warranties are excluded by expressions
like “as is,” with all faults,” or other language
which in common understanding calls the
buyer’s attention to the exclusion of warranties
and make plain that there is no implied warranty;
(b) When the buyer before entering into the contract
has examined the goods or the sample or model
as fully as he desired or has refused to examine
the goods there is no implied warranty with regard to defects which an examination ought in
the circumstances to have revealed to him;
(c) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.
In other words, § 2-316(1) says that whenever possible,
express warranties and “words tending to negate or limit
warranty” are to be construed as consistent whenever reasonable. So a warranty trumps a disclaimer whenever they
are both in the contract and they are inconsistent.
If a disclaimer or limitation of warranty is inconsistent
with an express warranty, it will be construed as inoperative to the extent such construction is not reasonable.
In other words, under § 2-316(2), the implied warranty of
merchantability may be disclaimed orally because the
statute says, “IF it is writing.” However, issues of proof
make this a complicated choice for sellers.
Under the same, the implied warranty of fitness for a particular purpose CANNOT be disclaimed orally. It MUST
be in writing that is conspicuous.
A writing is conspicuous under § 1-201 (b)(10), where it
is written such that a reasonable person ought to have noticed it.
In other words, under § 2-316(3)(a), to disclaim “all implied warranties,” you need to use language like “as is” or
“with all faults” or other language that makes it plain to
buyer that there are no implied warranties—so the seller
doesn’t have to use the word “merchantability” after all.
Roadmap__________________________________
There are 2 ways to disclaim the Warranty Of Merchant…
- Under § 2-316 (2):
o Mention “merchantability”;
o Permitted to orally disclaim;
o If disclaimed in writing, it must be conspicuous.
- Under § 2-316 (3):
o Use expressions like, “as is,” “with all
faults,” or other language that calls the
buyers attention to the disclaimer and
make it clear there is no implied warranty.
There are 2 ways to disclaim the Warranty Of FFPP…
- Under § 2-316 (2):
o Must be in writing;
o Must be conspicuous.
- Under § 2-316 (3):
o See above—same rule.
- 49 -
There are 2 other ways to disclaim warranties under § 2316:
- Under § 2-316(3)(b), the buyer’s inspection or refusal to inspect waives defects to the extent inspection ought to have disclosed them.
- Under § 2-316 (3)(c), an implied warranty can be
excluded or modified by a course of dealing,
course of performance, or usage of trade.
Damages__________________________________
Incidental Damages are extra expenses that would not
have been incurred but for the breach. Under § 2-715 (1),
incidental damages resulting from the sellers’ breach include expenses reasonably incurred in inspection, receipt,
transportation, and care and custody of goods rightfully
rejected as well as expenses incident to effecting cover.
Consequential Damages arise as a consequence of the
breach and under § 2-715(2) include:
(a) any loss resulting from general or particular requirements and needs of which the seller at the time of
contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting
from any breach of warranty.
§ 2-719. Contractual Modification or Limitation of
Remedy.
(1) Subject to the provisions of subsections (2) and (3) of
this section and of the preceding section on liquidation and limitation of damages,
(a) the agreement may provide for remedies in addition to or in substitution for those provided in
this Article and may limit or alter the measure
of damages recoverable under this Article, as by
limiting the buyer’s remedies to return of the
goods and repayment of the price or to repair
and replacement of non-conforming goods or
parts; and
(b) resort to a remedy as provided is optional unless
the remedy is expressly agreed to be exclusive,
in which case it is the sole remedy
(2) Where circumstances cause an exclusive or limited
remedy to fail of its essential purpose, remedy may
be had as provided in this Act.
(3) Consequential damages may be limited or excluded
unless the limitation of damages where the loss is
commercial is not.
What is the standard to limit or exclude consequential
damages?
The provision must be unconscionable.
Is there a different standard for consumer contracts
versus commercial contracts?
Yes, in the case of consumer goods, the provision is prima
facie unconscionable.
How does § 2-719 (2) work?
The parties can agree upon a limited remedy as a substitute for statutory remedies, such as repair or replace. And
the buyer would be stuck with those options and have no
other recourse.
Note: If the repair or replace “fails of its essential purpose,” it will not be enforceable and the injured party may
have access to the statutory remedies that would otherwise have been available to it under the UCC, one of
which is consequential damages.
A remedy fails its essential purpose where circumstances
make it exceedingly impracticable to carry out the essence
of an agreed upon remedy.
Comment (1) to § 2-719:
… under subsection (2), where an apparently fair and reasonable clause because of the circumstances fails in its
purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general
remedy provisions of this Article.
Note: Some courts will not enforce a limitation on consequential damages when the limited remedy fails of its essential purpose because the limitation is viewed as being
tied to the remedy not failing of its purpose.
So, the big question is whether the consequential damages provision should be analyzed separately under § 2719(3) or should be considered ineffective if the limited
repair or replace provision under § 2-719(2) fails.
In other words, if the remedy “fails of its essential purpose,” does that invalidate the clause excluding consequential damages automatically, or does buyer have to
show it would be unconscionable not to exclude the
clause? Are the repair/replace provision and the limitation on consequential damages tied together?
- 50 -
§ 2-608. Revocation of Acceptance in Whole or in Part.
(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it,
(a) on the reasonable assumption that it’s non-conformity would be cured and it has not been seasonably cured; or
(b) without discovery of such non-conformity if his
acceptance was reasonably induced either by
the difficulty of discovery before acceptance or
by the seller’s assurances.
(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have
discovered the ground for it and before any substantial change in condition of the goods which is not
caused by their own defects. It is not effective until
the buyer notifies the seller.
§ 2-209. Modification, Recission, & Waiver.
(1) An agreement modifying a contract within this Article
needs no consideration to be binding.
(3) The requirements of the statute of frauds section of
this Article (§ 2-201) must be satisfied if the contract
as modified is within its provisions.
(4) Although an attempt at modification or recission does
not satisfy the requirements of subsection (2) or (3)
it can operate as a waiver.
§ 2-725. Statute of Limitations in Contracts for Sale
(1) An action for breach of any contract for sale must be
commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less
than one year but may not extend it.
(2) A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge
of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty
explicitly extends to future performance of the goods
and discovery of the breach must await the time of
such performance the cause of action accrues when
the breach is or should have been discovered.
Chapter 18. Damages
A valid, binding and enforceable contract is like a yardstick to measure the parties’ conduct.
Once we have evaluated the formation issues [offer/acceptance/consideration/SOF] and have dealt with any reality of consent issues [capacity/mistake/misrepresentation/undue influence/ unconscionability] and dealt with
any PER/interpretation issues, we move on to evaluate the
performance.
Issue: Did the parties do what the contract required of
them?
- If yes, no need for damages.
- If not, we must determine the consequences—i.e.
breach & damages.
How to succeed in a breach of contract action?
(1) Prove the breach:
Was the breach the substantial cause of the loss
complained about?
(2) Prove Damages:
Party must be reasonably certain on the amount
of the loss, and they must be able to show they
were foreseeable to defendant at the time of contracting.
(3) Plaintiff’s Duty to Mitigate:
The plaintiff must take all reasonable efforts to
avoid the consequences of the breach.
The Court’s goal of compensation is to either:
- Put Π in their pre-contract position;
- Put Π in the position they would have been in had
there been no breach;
- Take away the benefit incurred by a breaching Δ.
Punitive Damages__________________________
Punitive damages are sometimes also called, “exemplary
damages” and they are typically not considered compatible with the goal of compensating the injured party for its
lost expectations. So, they are typically not available for
breach of contract actions, unless the breaching party’s
conduct rose to the level of an intentional tort.
As a result, the UCC makes no mention of punitive damages.
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Restatement § 355. Punitive Damages.
Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a
tort for which punitive damages are recoverable.
Equitable Remedies_________________________
Equitable Remedies are the exception to the rule and is
generally only ordered when money damages are not adequate to give the prevailing party the benefit of its bargain.
Specific Performance is typically NOT the aim under US
law; but as noted in Ch. 25, specific performance may be
ordered where money damages won’t make the plaintiff
whole. But overall, Courts prefer to award money damages when money can make the plaintiff whole.
Compensatory Damages______________________
Compensatory Damages generally seek to give the prevailing party the amount of money that would place the
non-breaching party in as good a monetary position as
she would have been had the contract been performed
(this is the benefit of her bargain). These damages are not
intended to punish the defendant. They are a pure expectation remedy.
Remedies other than money damages, generally by the
choice of the plaintiff, includes recession and restitution
(i.e., cancel the contract, get money and property back)
and reliance damages (i.e., refund expenditures made in
reliance of the contract).
§ 1-305 (1): The remedies of the UCC must be liberally
administered to try to put the injured party in as good a
position as if the breaching party had fully performed.
The Restatement, on the other hand, details three different
interests of the promise that may be protected by a damages award: expectation, restitution, & reliance.
Discussion of expectation damages are on the next page;
discussion of restitution & reliance interests will be covered in Ch. 20.
Expectation Damages___________________________
Expectation damages, which are a type of compensatory
damages, aim to put Π in the position they would be in if
the contract were completed—if Δ had fully performed
and there was no breach.
In other words, this is what Π expected to get out of the
contract, so it gives Π the benefit of their bargain; Π must
perform also, though, since that was part of the expectation/contract.
§ 344. Purposes of Remedies.
Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promisee:
(a) his “expectation interest,” which is 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 contract been performed.
§ 347. Measure of Damages in General.
… the injured party has a right to damages based on his
expectation interest as measured by,
(a) the loss in value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not
having to perform.
“Loss in value” is the value of the performance which
was not given. It is what the non-breaching party was supposed to receive under the contract but didn’t receive, because of the breach.
Any “other loss” includes incidental damages (i.e., additional costs incurred after the breach in a reasonable attempt to avoid loss, even if the attempt is unsuccessful.
Example:
If the injured party who has not received the promised
performance pays a fee to a broker in a reasonable but
unsuccessful attempt to obtain a substitute, that fee is
recoverable as an incidental damage.
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Any “other loss” also includes consequential damages
(i.e., damages that would not have occurred but-for the
breach—they are a CONSEQUENCE of the breach).
Example:
If services furnished to the injured party are defective
and cause damage to his property, that loss is recoverable.
“Cost Avoided” includes things like not having to pay
the breaching party of the contract price, not having to incur the cost of doing the work required by the contract and
keeping the value of the property that was supposed to be
transferred under the contract. These need to be subtracted from any damage award.
We also have to consider any salvage value of the goods
the injured party is stuck with—that salvage value needs
to be backed out as well.
§ 2-312. Warranty of Title & Against Infringement;
Buyer’s Obligation.
(1) Subject to subsection (2), there is in a contract for sale
a warranty by the seller that,
(a) the title conveyed shall be good, and its transfer
rightful; and
(b) the goods shall be delivered free from any security interest or other lien or encumbrance of
which the buyer at the time of contracting has
no knowledge.
Calculation of Damages__________________________
There are two approaches to calculate damages in nonUCC cases:
(1) The Restatement Method; or
(2) The Comparison Method
We can look at the position the non-breaching party
is in after the breach and compare it to the position
she would have been in if the contract had been performed. This is just an application of the principle
that the purpose of contract damages is to put the
non-breaching party in the position she would have
been in if the contract had been performed.
Step 1: Determine the position the non-breaching
party would have been in if the contract had been
performed (i.e., how much better off would they
have been than they were when they entered into the
contract).
Step 2: Determine the position the non-breaching
party is in after the breach (i.e., how much better off,
or worse off, are they than they were when they entered into the contract)
Step 3: Determine how much money it would take
to get her from Step (2) to Step (1).
The comparison method gives us the correct amount
because the purpose of contract damages is to put the
non-breaching party in the same position that performance would have. That’s what the method outlined
above does. It moves the non-breaching party from
the position they’re in now to the position they would
have been if the contract had been performed.
§ 2-708. Seller’s Damages for Non-acceptance or
Repudiation.
(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good
a position as performance would have done then
the measure of damages is the profit (including
reasonable overhead) which the seller would
have made from full performance by the buyer,
together with any incidental damages provided
in this Article (§ 2-710), due allowance for costs
reasonably incurred and due credit for payments
or proceeds of resale.
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Chapter 19. Limitations on Contract Damages
Certainty______________________________________
The basic rules of expectancy damages for breach of contract are subject to three principal limitations:
1. Foreseeability;
2. Certainty; &
3. Avoidability.
Damages cannot be speculative; there must be reasonable
certainty. What “would” the buyer have received/What
the buyer “might have” received.
Foreseeability__________________________________
§ 352. Uncertainty as a Limitation on Damages.
Damages are not recoverable for loss beyond an amount
that the evidence permits to be established with reasonable certainty.
Damages must be reasonably foreseeable at the time of
contracting; the rule build on the objective theory of contracts that allows the parties to define and then honor the
choices they made when they entered into the contract.
See Hadley v. Baxendale
“Where two parties have made a contract which on of
them has broken, the damages which the other party ought
to receive in respect of such breach of contract should be
such as may fairly and reasonably be considered either
arising naturally, i.e., according to the usual course of
things, from such breach of contract itself, or such as may
reasonably be supposed to have been in the contemplation
of both parties, at the time they made the contract, as the
probable result of the breach of it.”
UCC § 2-715. Buyer’s Incidental and Consequential
Damages.
(2) Consequential damages resulting from the seller’s
breach include,
(a) any loss resulting from general or particular requirements and needs of which the seller at the
time of contracting had reason to know and
which could not reasonably be prevented by
cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of warranty.
R2d § 351. Unforeseeability and Related Limitations on
Damages.
(1) Damages are not recoverable for loss that the party in
breach did not have reason to foresee as a probable
result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a
breach because it follows from the breach
(a) in the ordinary course of events, or
(b) as a result of special circumstances, beyond the
ordinary course of events, that the party in
breach had reason to know.
(3) A court may limit damages for foreseeable loss by
excluding recover for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice
so requires in order to avoid disproportionate compensation.
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Avoidability___________________________________
The non-breaching party has a duty to behave reasonably
and minimize damages.
§ 350. Avoidability as a Limitation on Damages.
(1) Except as stated in subjection (2), damages are not
recoverable for loss that the injured party could have
avoided without undue risk, burden, or humiliation.
(2) The injured party is not precluded from recovery by
the rule stated in subsection (1) to the extend that he
has made reasonable but unsuccessful efforts to
avoid loss.
Emotional Distress/Disturbance___________________
§ 353. Loss Due To Emotional Disturbance.
Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or
the breach is of such a kind that serious emotional disturbance was a particularly likely result.
Chapter 20. Other Remedies
§ 344. Purposes of Remedies.
(b) his “reliance interest,” which is his interest in being
reimbursed for loss caused by reliance on the contract by being put in as good a position as he would
have been in had the contract not been made, or
(c) his “restitution interest,” which is his interest in having restored to him any benefit that he has conferred
on the other party.
§ 349. Damages Based on Reliance Interest.
As an alternative to the measure of damages stated in §
347, the injured party has a right to damages based on his
reliance interest, including expenditures made in preparation for performance or in performance, less any loss that
the injured party would have suffered had the contract
been performed.
See Security Stone v. American Railways Express
“Defendant contends that plaintiff ‘is endeavoring to
achieve a return of the status quo in a suite based on a
breach of contract. Instead of seeking to recover what he
would have had, had the contract not been broken, plaintiff is trying to recover what he would have had, had there
never been any contract of shipment;’ that the expenses
sued for would have been incurred in any event.”
§ 371. Measure of Restitution Interest.
If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either (a) the reasonable value to the other party of what he
received in terms of what it would have cost him to obtain
it from a person in the claimant’s position, or (b) the extent to which the other party’s property has been increased
in value or his other interests advanced.
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Chapter 21. Liquidated Damages
Liquidated damages are the cost of damages which the
parties can provide in advance of a breach.
The benefits of liquidated damage provisions are that
they help the parties limit their potential exposure so they
can enter into contracts without worrying about possible
damages undercutting the value of the deal to them.
They help the non-breaching parties with damages that
they cannot prove with sufficient certainty. With an enforceable liquidated damages clause, the injured party
simply proves the breach, but has no obligation to prove
[or have] damages.
§ 2-718. Liquidation or Limitation of Damages
(1) Damages for breach by either party may be liquidated
in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm
caused by the breach, the difficulties of proof of loss,
and the inconvenience or non-feasibility of otherwise
obtaining an adequate remedy. A term fixing unreasonably large, liquidated damages is void as a penalty.
They also help reduce litigations costs because proving
damages is VERY costly.
§ 356. Liquidated Damages and Penalties.
(1) Damages for breach by either party may be liquidated
in the agreement but only at an amount that is reasonable in light of the anticipated or actual loss caused by
the breach and the difficulties of proof of loss. A term
fixing unreasonably large, liquidated damages in unenforceable on grounds of public policy as a penalty.
If the LD clause is unenforceable, the rest of the contract
is still enforceable. So, the party gets to/has to prove their
damages in the usual manner based on expectation interests. Here, the injured party must prove the breach, and
then also prove their damages.
§ 356. Comment (b).
The greater the difficulty either of proving that loss has
occurred or of establishing its amount with the requisite
certainty… the easier it is to show that the amount fixed
is reasonable.
Liquidated damages are enforceable if they represent a
legitimate effort to predict the extent of the harm which
will be caused by the breach.
Test for an Enforceable LD provision:
1. Are actual damages hard to prove or ascertain?
2. Is the amount picked not so big so it’s a penalty?
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Chapter 22. Specific Performance
Equitable remedies: traditionally available only when
money damages could not make the plaintiff whole. The
two most common types of equitable remedies in contract
disputes are injunctions [permanent and temporary] and
specific performance.
§ 359. Effect of Adequacy of Damages.
(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the
expectation interest of the injured party.
UCC § 2-716. Buyer’s Right to Specific Performance or
Replevin.
(1) Specific performance may be decreed where the
goods are unique or in other proper circumstances.
R2d § 345 (b) permits a court order to a judgement requiring specific performance of a contract or enjoining its
non-performance.
When is specific performance and injunctive relief
available outside the UCC?
Injunction_____________________________________
An injunction is a court order to do something or not to
do something.
Injunctions encourage performance by restraining defendant form conduct that is incompatible with breach.
§ 362. Effect of Uncertainty of Terms.
Specific performance or an injunction will not be granted
unless the terms of the contract are sufficiently certain to
provide a basis for an appropriate order.
When will a court NOT grant specific performance?
Injunctions are sometimes used to maintain the status quo
while an action for specific performance is pending.
-
If the act to be performed is contrary to public policy
[§ 365];
Standard for a preliminary injunction:
- Likelihood of success on the merits,
- Irreparable harm: irreparable injury to plaintiff
without the injunction.
- Balancing of the equities: balancing the hardships
between Π and Δ, a remedy in equity is warranted;
- Public Interest considerations: Public interest
would not be disserved by a permanent injunction.
-
If the enforcement or supervision of the order would
burden the court more than the advantages gained by
enforcement [§ 366];
-
Contracts to render personal services are not specifically enforceable [§ 367].
Specific Performance____________________________
Specific performance is a court order to perform the contract under threat of imprisonment for contempt.
Unlike money damages, specific performance puts the injured party in exactly the position it expected, by forcing
Δ to perform. It’s a nearly perfect example of an expectation remedy.
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Chapter 23. Express Conditions
§ 224. Condition Defined.
A condition is an event, not certain to occur, which must
occur, unless its nonoccurrence is excused, before performance under a contract becomes due.
Kinds of Conditions:
- By Timing:
o Condition precedent
o Condition subsequent
o Concurrent condition
- Express Condition: the parties articulate the conditional nature of their obligations [insurance company’s promise to pay is expressly conditioned on the
occurrence of specific kind of loss]
- Constructive/Implied Conditions: these conditions
are imposed by a court, through operation of law.
A modification of contract (deleting the condition) is done
BILATERALLY and would normally need to be supported by additional consideration to be enforceable [unless it’s for the sale of goods § 2-209 or unless it fits into
§ 89]. But courts make exception to consideration doctrine and modification rules to allow waiver when the condition precedent was “not the consideration for the contract.”
Is reliance a requirement for a valid waiver?
At common law, reliance WAS required. These days, reliance is NOT required for a valid waiver, BUT if there
has been reliance on the waiver, the waiver cannot be retracted. So the existence of § 2-209(5) implicitly states
that waivers can exist without reliance.
§ 225. Effects of the Non-occurrence of a condition
(1) Performance of a duty subject to a condition cannot
become due unless the condition occurs or its nonoccurrence is excused.
(2) Unless it has been excused, the non-occurrence of a
condition discharges the duty when the condition can
no longer occur.
§ 2-209. Modification, Rescission and Waiver
(1) An agreement modifying a contract within this Article
needs no consideration to be binding.
(5) A party who has made a waiver affecting an executory
portion of the contract may retract the waiver by reasonable notification received by the other party that
strict performance will be required of any term
waived, unless the retraction would be unjust in view
of a material change of position in reliance on the
waiver.
How does § 255 operate?
It’s a defense raised by parties seeking to avoid a duty because a condition failed. “I don’t have to perform my duty
because performance was conditional, and that condition
failed.”
Example:
I offer to sell you my house for $500,000. You respond,
“I accept, as long as the house appraisal comes in at a minimum of $500,000.” What happens when the appraisal is
for $450,000?
So, when a condition fails to occur, the party whose duty
depended on the occurrence of the condition is discharged
from their contractual duties, UNLESS the condition is
excused.
You have no obligation to buy my house. Neither of us
made any sort of binding promise that the house would
appraise at more than $500,000, so neither of us can successfully sue the other.
What is a waiver?
A waiver is an intentional and voluntary relinquishment
of a known right. The promisor can waive the condition—
and that excuses the condition.
However, if the buyer bribes the appraiser to come in
lower value, the non-occurrence of this express condition
will be excused by prevention—the satisfaction of the
condition was prevented from happening.
What is the effect of a waiver of condition? How does
it compare to a modification?
Waiver of condition increases promiser’s duty to pay beyond the terms of the original contract. But it’s done UNILATERALLY.
§ 245. Effect of a Breach by Non-performance as Excusing the Non-occurrence of a Condition.
Where a party’s breach by non-performance contributes
materially to the non-occurrence of a condition of one of
his duties, the non-occurrence is excused.
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Chapter 24. Constructive Conditions
What happens to the other performances required by a
contract if one party’s performance isn’t done, or is done
incompletely, or if there are unforeseen circumstances?
If the parties use express conditions, they can allocate, for
themselves, the risk in their contract.
BUT if they fail to use express conditions to allocate their
risks, then a court can step in and force a post-breach allocation of risk “informed only though the distorted lens
of litigation.”
So what are “constructive” conditions of exchange?
Constrictive conditions are default rules fashioned in the
absence of agreement. So there are NO express conditions
to deal with these issues in the contract.
Constructive conditions are implied by a court where the
parties have failed to adequately document their deal and
relationship and performance obligations.
§ 234. Order of Performances
(1) Where all or part of the performances to be exchanged
under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary.
(2) Except to the extent stated in Subsection (1), where
the performance of only one party under such an exchange requires a period of time, his performance is
due at an earlier time than that of the other party, unless the language or circumstances indicate the contrary.
After we sort out WHO has to perform first, the next
question is how much performance is needed before
the performer is entitled to payment under the contract?
There is spectrum of performance ranging from full performance where both parties did all they were required to
do, when and how they were required to do it, to an immaterial breach, to a material breach of contract.
Three Categories of Covenants:
1. Independent Covenants: performance of each covenant is independent of the other party’s performance. So
even if seller hasn’t performed, buyer still needs to perform and can sue seller for his breach.
2. Mutual Dependent Covenants: the performance of
one depends on the prior performance of the other, so until performance of the first condition, the other party is not
liable for an action on his covenant.
3. Mutual/Simultaneous Conditions: The conditions
must be performed at the same time and the failure of one
party to perform is a ground for alleging breach.
Who needs to perform first?
Put differently, in the absence of agreement, what is the
default rule on order?
Another way to ask the question of WHO has to perform
first is to examine whether the conditions are dependent
or independent of each other.
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§ 235. Effect of Performance as Discharge and of NonPerformance as Breach
(1) Full performance of a duty under a contract discharges the duty.
(2) When performance of a duty under a contract is due
any non-performance is a breach.
To evaluate how much performance is required, we look
at whether perfect performance is required or whether the
performer can get by with “substantial” performance.
If substantial performance is permitted, how much performance is “substantial”?
A breach has two possible consequences:
(1) the injured party is entitled to some remedy [typically
money damages] and
(2) depending on the relative seriousness of the breach,
the injured party may also be entitled to temporarily
suspend his/her own performance obligations, or
sometimes even terminate or rescind the contract.
Types of Breaches______________________________
Material Breach: Temporarily suspends the non-breaching party’s duty to perform but may be cured.
What is the effect of a material breach on the rights of
the aggrieved party?
In essence, if there is a material breach, the aggrieved
party can cancel the contract and sue for damages and has
no duty to perform herself.
How do we know if a breach is material?
There are no precise standards for determining whether a
party has committed a material breach. Read R2d § 241,
which lists five “circumstances” that are “significant” in
determining whether there has been a material breach.
§ 241. Circumstances Significant in Determining
Whether a Failure is Material.
(a) the extent to which the injured party will be deprived
of the benefit which he reasonably expected [expectation interest];
(b) the extent to which the injured party can be adequately
compensated for the part of that benefit of which he
will be deprived;
(c) the extent to which the party failing to perform or to
offer to perform will suffer forfeiture [forfeiture];
(d) the likelihood that the party failing to perform or to
offer to perform will cure his failure, taking account
of all the circumstances including any reasonable assurances [timing];
(e) the extent to which the behavior of the party failing to
perform or to offer to perform comports with standards of good faith and fair dealing.
Total Breach: a material breach can ripen into a total
breach which cannot be cured and excuses the nonbreaching party from performing forever.
How do we know if a breach is total?
R2d § 242 sets forth the factors to be taken into account
in determining whether a breach is a total breach. As with
a material breach, the test is flexible and open-ended.
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§ 242. Circumstances Significant in Determining When
Remaining Duties are Discharged.
In determining the time after which a party’s uncured material failure to render or to offer performance discharges
the other party’s remaining duties to render performance
under the rules stated in §§ 237 and 238, the following
circumstances are significant:
(a) those stated in § 241;
(b) the extent to which it reasonably appears to the injured
party that delay may prevent or hinder him in making
reasonable substitute arrangements;
(c) the extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to perform on a stated day does not
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 day is important.
Immaterial Breach/Substantial Performance:
unexcused failure to perform that is not a big deal; it does
not go to the heart of the contract, and it does not excuse
performance but will give rise to an action for damages
by the non-breaching party.
What is the effect of a Non-material breach on the
rights of the aggrieved party?
If the breach is not material, the aggrieved party cannot
cancel and still has a duty to perform but can offset any
damages caused by the breach form its own performance.
Chapter 26. Anticipatory Repudiation
Prospective Non-performance: What if the time for performance has not yet come, but a party makes it clear they
are not going to perform?
A repudiation is when a party renounces its contractual
duty before the time fixed for performance has arrived.
It requires a definite and final communication of intent to
NOT perform—expressions of difficulty in tendering required for performance are insufficient.
The threatened breach must be one that would qualify as
a material breach.
Repudiation is not technically a breach, but it has the same
effect as a material breach: it permits the injured party to
suspend performance, and [subject to any cure rights] to
terminate the contract, cease performance of its own duties, and bring an immediate action for damages.
§ 250. When a Statement or an Act is a Repudiation.
A repudiation is
(a) a statement by the obligor to the oblige indicating that
the obligor will commit a breach that would of itself
give the oblige a claim for damages for total breach
under § 243, or
(b) a voluntary affirmative act which renders the obligor
unable or apparently unable to perform without such
a breach.
§ 2-601. Anticipatory Repudiation.
When either party repudiates the contract with respect to
a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may
(a) for a commercially reasonable time await performance
by the repudiating party, or
(b) resort to any remedy for breach (§ 2-703 or § 2-711),
even though he has notified the repudiating party that
he would await the latter’s performance and has
urged retraction; and
(c) in either case suspend his own performance or proceed
in accordance with the provisions of this Article on
the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods
(§ 2-704).
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§ 2-610. Comment (2).
It is not necessary for repudiation that performance be
made literally and utterly impossible. Repudiation can result from action which reasonably indicates a rejection of
the continuing obligation. And a repudiation automatically results under the preceding section on insecurity
when a party fails to provide adequate assurance of due
future performance within thirty days after a justifiable
demand therefor has been made.
§ 2-611. Retraction of Anticipatory Repudiation.
(1) Until the repudiating party’s next performance is due,
he can retract his repudiation unless the aggrieved
party has since the repudiation cancelled or materially changed his position or otherwise indicated that
he considers the repudiation final.
§ 2-609. Right to Adequate Assurance of Performance.
(1) A contract for sale imposes an obligation on each
party that the other's expectation of receiving due
performance will not be impaired. When reasonable
grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and
until he receives such assurance may if commercially
reasonable suspend any performance for which he
has not already received the agreed return.
(4) After receipt of a justified demand failure to provide
within a reasonable time not exceeding thirty days
such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
§ 251. When a Failure to Give Assurance May Be
Treated as a Repudiation.
(1) Where reasonable grounds arise to believe that the
obligor will commit a breach by non-performance
that would of itself give the obligee a claim for damages for total breach 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
Summary:
First, a breach can only occur as a technical matter when
the promised performance is due and is not performed.
So, there is no requirement for the injured party to mitigate their damages until there is a breach since there are
no damages until there is a breach.
Statutory Roadmap for Anticipatory Repudiation:
§2-609(1) → §2-609(4) → §2-610(b) → either §§ 2-711
or 2-703, as appropriate.
-
§2-609(1): Show reasonable grounds for insecurity & demand adequate assurance.
But there are certainly circumstances where repudiation
[saying you are going to breach] will be actionable. So, if
before performance is due, a party makes it clear they are
not going to perform. This creates “reasonable grounds
for insecurity” in the other party.
-
§2-609(4): no adequate assurance within 30 days.
-
§ 2-610(b): equals repudiation which substantially impairs the value of the contract so you can
resort to any remedy for breach.
Before Hoechester v. De La Tour, there was nothing at all
for that insecure party to do. But Hoechester validated the
doctrine of anticipatory repudiation, which has been
fleshed out in both the UCC and common law.
-
§2-711 or §2-703, as appropriate.
The party with “reasonable grounds for insecurity” has
the right to ask for adequate assurances. If non are provided under the UCC within a reasonable time not to exceed 30 days, this party can avail herself of her statutory
remedies for breach.
And there is no possibility of retracting the repudiation by
the other party—the lapse of the reasonable time not to
exceed 30 days buttons this up and it becomes a breach.
Period.
- 62 -
Note: The doctrine of anticipatory repudiation does not
apply to unilateral contracts or to bilateral contracts where
the injured party has fully performed before the repudiation—parties in these circumstances have to sit and wait
for the “actual” breach.
Chapter 27. Impossibility & Impracticability
Events that occur after the parties conclude their bargain
may make performance of a contractual obligation by one
party impossible or extraordinarily difficult or uneconomical.
How could the party protect itself from these contingent possibilities?
The parties may have anticipated such a possibility and
expressly agreed that the occurrence of such events would
excuse a party’s obligation to perform (an express condition).
Or they could include a “force majeure” clause that excuses performance in certain stated cases for things beyond the parties’ control or a clause that does the opposite,
called a “hell or high water” clause which says that a party
has liability NO MATTER WHAT.
R2d 11. Introductory note.
“Even where the obligor has not limited his obligation by
agreement, a court may grant him relief. An extraordinary
circumstance may make performance so vitally different
from what was reasonably to be expected as to alter the
essential nature of that performance.
In such a case the court must determine whether justice
requires a departure from the general rule that the obligor
bear the risk that the contract may become more burdensome or less desirable. This Chapter is concerned with the
principles that guide that determination.
The question is generally considered to be one of law rather than fact, for the court rather than the jury. In recent
years courts have shown increasing liberality in discharging obligors on the basis of such extraordinary circumstances.”
Impossibility___________________________________
What if there is no express condition between the parties?
In the absence of an express condition between the parties, a party’s performance of its obligation may still be
discharged without liability in some cases under the contract rule of impossibility or under the more modern and
broader formulation, the contract rule of commercial impracticability.
At common law, this escape hatch was originally limited
to situations where change in circumstances made performance of the contract actually impossible—e.g., destruction of the subject matter; death or incapacity of a person
whose physical ability to perform was indispensable to
the performance of the contract.
Impracticability________________________________
We can think of impracticality and frustration of purpose
as another type of implied/constructive condition.
We have look at the topic of mistake, focusing on how the
law treats mistakes the parties make about existing circumstances. As long as the mistake is about a basic assumption on which the contract was made, the law will
consider setting aside the contract.
Now we look at how to treat the parties’ inaccurate predictions about the future.
The issue here is to figure out if a promisor should be excused when, without the fault of either party, circumstances make performance as agreed impracticable?
Now, the doctrine of impossibility has been expanded to
cover situations where the change in circumstances does
not make performance actually impossible but where the
burden of performing has changed in a way that was beyond the risks assumed by the parties when they made the
contract. This doctrine is called impracticability, which
we will think of as a default “performance” condition.
Impracticability shows up in 2 forms:
- Existing impracticability: when the party’s performance is impracticable at the time of the contract formation (§ 266(1)).
- Supervening impracticability: when the party’s
performance becomes impracticable after the
contract is made (§261).
The difference between the two is timing!
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Both sections apply in the absence of “fault” by the party
seeking relief and require the non-occurrence of the event
was a basic assumption on which the contract was made
and that events have made the performance impracticable.
§ 266. Existing Impracticability
(1) Where, at the time a contract is made, a party’s performance under it is impracticable without his fault because of a fact of which he has no reason to know and
the non-existence of which is a basic assumption on
which the contract is made, no duty to render that performance arises, unless the language or circumstances
indicate the contrary.
§ 261. Discharge by Supervening Impracticability
(1) Where, after a contract is made, a party’s performance
is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a
basic assumption on which the contract was made, his
duty to render that performance is discharged, unless
the language or the circumstances indicate the contrary.
§ 264. Prevention by Governmental Regulation or
Order
If the performance of a duty is made impracticable
by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a
basic assumption on which the contract was made.
Doctrine of Frustration of Purpose_____________
The law later expanded coverage to provide relief
where performance was frustrated by unanticipated
circumstances. The obligor may claim that some circumstances has so destroyed the value to him of the
other party’s performance as to frustrate his own purpose in making the contract.
There are two possibilities here, when the principal
purpose is substantially frustrated at the time of the
contract formation (§ 266(2)) and where the principal
purpose is substantially frustrated after the contract
is made (§ 265).
Three common specific instances of impracticability:
- Contracts are deemed discharged for impracticability upon the death/incapacity of someone central to the contract;
- The destruction of the subject matter; or
- By operation of law.
§ 266. Existing Impracticability or Frustration
(2) Where, at the time a contract is made, a party’s principal purpose is substantially frustrated without his
fault by a fact of which he has no reason to know and
the non-existence of which is a basic assumption on
which the contract is made, no duty of that party to
render performance arises, unless the language or circumstances indicate the contrary.
§ 262. Death or Incapacity of Person Necessary for Performance.
If the existence of a particular person is necessary for the
performance of a duty, his death or such incapacity as
makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the
contract was made.
§ 265. Discharge by Supervening Frustration
Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a
basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.
§ 263. Destruction, Deterioration or Failure to Come
Into Existence of Thing Necessary for Performance.
If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a
basic assumption on which the contract was made.
In a frustration case, the promisor has the capacity to
perform, and performance would not produce severe
financial hardship.
Rather, the promisor has no incentive to perform because the purpose for which the other party’s performance was purchased has changed dramatically.
In light of that change, the promisor would not now
enter into the same contract.
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When, if ever, should the promisor be excused?
Excuse is warranted only where the purpose of the
contract has been frustrated because of the occurrence of an event the nonoccurrence of which was a
basic assumption for making the contract.
The intervening event must have been beyond the
control of the party seeking excuse
The risk of occurrence of the event must not have
been assumed by the party seeking relief.
The frustrating event might have been foreseeable, or
even foreseen, as long as it was unexpected.
The unexpected event must substantially frustrate the
principal purpose of the contract.
§ 2-615. Excuse by Failure of Presupposed Conditions.
Except so far as a seller may have assumed a greater
obligation and subject to the preceding section on
substituted performance:
(a) Delay in delivery or non-delivery in whole or in
party by a seller who complies with para. (b) and
(c) is not a breach of his duty under a contract for
sale if performance as agreed has been made impracticable by the occurrence of a contingency the
non-occurrence of which was a basic assumption
on which the contract was made or by compliance
in good faith with any applicable foreign or domestic governmental regulation or order whether
or not it later proves to be invalid.
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Chapter 28. Good Faith
1. There is general obligation of good faith that applies
to all contracts.
2. A party to a contract has a duty to avoid doing anything that will injure the ability of the other party to
receive the contemplated benefits.
3. It is impossible to say exactly what good faith is, but
it consists of avoiding conduct that does not conform
to accepted norms of decency, fairness, and reasonableness.
4. Good faith means avoiding “opportunistic behavior,”
which, in turn, is defined as using a contract term to
get an unbargained for advantage, usually because of
circumstances not contemplated when the contract
was made.
5. The obligation of good faith does not override the express terms of the contract.
6. The obligation of good faith should not be used to
protect parties from things they should have protected
themselves from when they negotiated and documented the deal.
§ 205. Duty of Good Faith and Fair Dealing.
Every contract imposes upon each party a duty of good
faith and fair dealing I its performance and its enforcement.
§ 1-203. Obligation of Good Faith.
Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
So what is good faith?
Under § 1-201(20), good faith means “honesty in fact in
the conduct or transaction concerned.”
Under § 2-103(b), for merchants, good faith also requires
“the observance of reasonable commercial standards of
fair dealing in the trade.”
What is bad faith, and what can the other party do
about it?
Sometimes we know good faith by its absence—i.e., Restatement § 205 comment tells us what good faith is NOT.
It excludes a variety of types of conduct characterized as
involving “bad faith” because they violate community
standards of decency, fairness or reasonableness. The
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appropriate remedy for a breach of the duty of good faith
also varies with the circumstances.
R2d § 205. Comment (d). Good Faith performance give
us more color on what constitutes bad faith:
… bad faith may be overt or may consist of inaction, and
fair dealing may require more than honesty.
A complete catalogue of types of bad faith is impossible,
but the following types are among those which have been
recognized in judicial decisions: evasion of the spirit of
the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse a power to specify terms, and interference with or failure to cooperate in
the other party’s performance.
R2d § 202. Comment (d). Good Faith Performance.
Subterfuges and evasions violate the obligation of good
faith in performance even though the actor believes his
conduct to be justified.
§ 1-102(3).
The effect of provisions of this Act may be varied by
agreement, except as otherwise provided in this Act and
except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be
disclaimed by agreement, but the parties may by agreement determine the standards by which the performance
of such obligations is to be measured if such standards are
not manifestly unreasonable.
§ 1-304. Obligation of Good Faith comment 1:
This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather,
this section means that a failure to perform or enforce, in
good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, are medial
right or power.
This distinction makes it clear that the doctrine of good
faith merely directs a court towards interpreting contracts within the commercial context in which they are
created, performed, and enforced, and does not create a
separate duty of fairness and reasonableness which can
be independently breached.
Chapter 29. Non-Party Rights
What is privity of contract?
A doctrine of contract law that prevents any person from
seeking the enforcement of a contract, or suing on its
terms, unless they are a party to that contract.
Privity of contract is a special relationship between parties
to a contract that allows them to sue each other.
There are two exceptions to the privity rule:
1. Assignments/Delegations
2. Beneficiaries
Assignments are transfers of rights, and delegations are
transfers of duties.
After an assignment, the assignor’s right to receive the
performance is extinguished and vested into the assignee.
After a delegation, the delegators’ obligation to perform
is NOT discharged.
Assignments___________________________________
An assignment means one party voluntarily conveys the
rights in a contract to another who is not a party to the
undertaking.
The party making the assignment is called the assignor,
and the one whom the rights are assigned is called the
assignee. The non-assigning party is called the obligor—
he’s the party who is required to render performance.
In general, the assignee can sue directly on the contract,
in the name of the assignor.
Form of an assignment: an assignment can be made by
either operation of law or by the act of the parties.
By operation of law: these assignments are effective
without any act of the parties.
- Death: the law assigns rights and duties [except for
personal services] of the deceased to the executor or
administrator of the estate.
- Bankruptcy: the law assigns the rights an duties of
the debtor to the trustee in bankruptcy.
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By the act of the parties: these assignments can be either
written or oral; but it must be clear that a present assignment of an interest held by the assignor is intended.
As a general rule, most types of contract rights are assignable. However, there may be public policy prohibiting assignments, or circumstances where assignment materially
increases the obligor’s risk [assigning insurance policies],
or contractual limitations [anti-assignment or approval
clauses].
§ 317. Assignment of a Right
(1) An assignment of a right is a manifestation of the assignor’s intention to transfer it by virtue of which the
assignor’s right to performance by the obligor is extinguished in whole or in party and the assignee acquires
a right to such performance.
(2) A contractual right can be assigned unless:
(a) the substitution of a right of the assignee for the
right of the assignor would materially change the
duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or
(b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or
(c) assignment is validly precluded by contract.
An anti-assignment clause (also sometimes called a nonassignment clause) essentially prevents one or both contracting parties from assigning some or all of their respective contractual obligations or rights to a third party.
An approval clause means that before a party may create
an assignment, vesting right(s) to a third-party, they must
obtain approval from the other party
In general no notice is required to make an assignment
valid, but when an assignor makes an assignment of a
right under a contract, the assignee should notify the obligor that (1) the assignment has been made; and (2) performance must be rendered to the assignee.
Delegations____________________________________
Delegation of Duties: Delegation describes a transfer of
the duties or contractual obligations alone, without a
transfer of rights. The party who transfers his duty is the
delegator; the party to whom the duty is transferred is
the delegate. The party whom the obligation is owed is
the obligee.
In general, all duties can be delegated unless the delegation would conflict with public policy or would violate the
terms of the original obligor’s promise or if the duties are
personal in nature [§ 318(2)]—contracts involving personal services frequently anticipate that the skill, judgement, or discretion of a particular person will be involved
in the performance of those services.
§ 318. Delegation of performance of duty
(1) An obligor can properly delegate the performance of
his duty to another unless the delegation is contrary
to public policy or the terms of his promise.
(2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that
the obligee has a substantial interest in having that
person perform or control that acts promised.
(3) Unless the obligee agrees otherwise [through a novation], neither delegation of performance nor a contract to assume the duty made with the obligor by the
person delegated discharges any duty or liability of
the delegating obligor.
Personal Service Contracts Calling for the Exercise of
Personal Skills, Discretion, or Expertise: Contracts for
the provision of personal services are generally not delegable. So, if it would change the obligation under the contract if it were performed by someone else, the duties cannot be delegated.
Effect of Delegation of Duties: if the delegation is valid,
the obligee [to whom performance is owed] must accept
performance from the delegate [the one to whom the duties have been delegated].
Note: The delegate is only liable if he accepts the delegation.
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§ 2-210. Delegation of Performance; Assignment of
Rights.
(1) A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a
substantial interest in having his original promisor perform or control the acts required by the contract. No
delegation of performance relieves the party delegating of any duty to perform or any liability for breach.
(2) Unless otherwise agreed, all rights of either seller or
buyer can be assigned except where the assignment
would materially change the duty of the other party or
increase materially the burden or risk imposed on him
by his contract or impair materially his chance of obtaining return performance. A right to damages for
breach of the whole contract or a right arising out of
the assignor's due performance of his entire obligation
can be assigned despite agreement otherwise.
Third-Party Beneficiary Contracts_________________
The difference between TPB and assignments and delegations focus on the point in time when the TP comes into
the deal. With TPB’s, the TP’s rights are created when
the contract is formed.
With assignments and delegations, the TP’s rights are created after the contract is made.
Whether a third party to a contract can enforce the contract depends on the intent of the actual parties to the contract. We divide all third-party beneficiaries into two categories: intended beneficiaries and incidental beneficiaries.
§ 302. Intended and Incidental Beneficiaries
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the
beneficiary is appropriate to effectuate the intention of
the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the
promised performance.
(2) An incidental beneficiary is a beneficiary who is not
an intended beneficiary.
Intended Beneficiaries___________________________
When contracts are made between parties for the express
purpose of benefiting a third parties outside the contract,
called third party beneficiaries [TPB], these TPB are intended to get some benefit from the contract.
The intended TPB can enforce the contract against the
party who promised to render performance. The TPB enforces the contract subject to any defense against the original contracting parties. This means that the TPB takes
the contract “as is”-- if there are time limits or other restrictions in the contract, the TPB is subject to them as
well.
§ 308. Identification of Beneficiaries
It is not essential to the creation of a right in an intended
beneficiary that he be identified when a contract containing the promise is made.
First type of ITPB
ITP creditor beneficiary: a TP who is a creditor of the
promisee whose claim will be at least partially satisfied as
a result of the promisor’s performance.
§ 310. Remedies of the Beneficiary of a Promise to Pay
the Promisee’s Debt; Reimbursement of Promisee
(1) Where an intended beneficiary has an enforceable
claim against the promisee, he can obtain a judgement or judgments against either the promisee or the
promisor or both based on their respective duties to
him.
A creditor TP exists when the purpose of the contract between the original parties is to satisfy an obligation of a
third party; typically, some a third person is owed some
debt or duty by the promisee, and this debt or duty will be
discharged in whole or in part by the promisor’s rendering
performance to the third party.
Example: When Ann makes a contract with Bob to pay
Bob’s debt to Carrie, Carrie is the creditor beneficiary
of the contract between Ann and Bob.
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This situation usually arises when,
(1) A debtor borrows money from a creditor to purchase
some item;
(2) The debtor signs an agreement to pay the creditor the
amount of the loan plus interest;
(3) The debtor sells the item to another party before the
loan is paid; and
(4) The new buyer promises the debtor that he will pay
the remainder of the loan amount to the creditor.
This happens often with the sale of houses.
The creditor is the new intended creditor beneficiary to
this second contract between the new buyer [the promisor] and the debtor [the promisee]. If the promisor fails
to perform according to the contract, the creditor beneficiary can either,
(1) Enforce the original contract against the debtor/promisee; or
(2) Enforce the new contract against the buyer/promisor—but the creditor can collect only once.
Second type of ITPB
ITB donee beneficiary: when the purpose of the contract
is to confer a benefit or to make a gift an intended thirdparty. A donee beneficiary can enforce the contract only
against the promisor, not against the promisee.
Example: Life insurance contract between the insured and
the company will benefit the beneficiary.
The parties involved are the promisee [the contracting
party who directs that the benefit be conferred on another,
in this case, the policy holder]; the promisor [the contracting party who agrees to confer performance for the
benefit of the TP, in this case, the insurance company];
and the donee beneficiary [the TP on whom the benefit
is conferred, in this case, the beneficiary under the policy.]
If the promisor fails to perform the contract, the donee
beneficiary can sue the promisor directly. So when the
policy holder dies, if the insurance company won’t pay
up, the beneficiary under the policy can sue on the policy.
But the TPB cannot sue the promisee because an unexecuted gift cannot be enforced.
Incidental [or remote] beneficiaries________________
Not everyone who benefits by performance of a contract
between others is properly considered a TPB with rights
under that contract. When the parties to a contract unintentionally benefit a third party, the party is called an incidental beneficiary. This person is only remotely or incidentally benefited by a contract and cannot enforce the
agreement-- this TPB has NO contract rights and NO
cause of action if the parties fail to perform.
Example: A contracts with B to build a house and specifies in the contract for B to use a certain kind of lumber. If B fails to use that kind of lumber required by
the contract, does the local supplier of that kind of
lumber has any rights under the contract?
Vesting—modification or recission/termination of
TPB contracts:
Until the TPB’s rights “vest” or take effect, the parties can
change the rights. The states are not uniform in the rules
for vesting.
§ 311. Variation of a Duty to a Beneficiary
(1) Discharge or modification of a duty to an intended
beneficiary by conduct of the promisee or by a subsequent agreement between promisor and promisee
is ineffective if a term of the promise creating the
duty so provides.
(2) In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by
subsequent agreement.
(3) Such a power terminates when the beneficiary, before
he receives notification of the discharge or modification, materially changes his position in justifiable reliance on the promise or brings suit on it or manifests
assent to it at the request of the promisor or promisee.
The general rule is that if the contract so provides, the
TPB can be irrevocable without the consent of the TPB;
otherwise, the original parties may rescind or vary the obligations to a creditor beneficiary until (1) the beneficiary
brings suit on the promise; or (2) materially changes his
position in reliance upon the promise.
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