This outline is for the spring semester of 2021
The professor was Stephanie Hoffer
The school is IU Robert McKinney School of Law
1
Defenses against formation of a contract

Incapacity  R(2d) 12:
o A persona cannot be bound by a K unless she has the capacity to incur at least voidable contractual duties. A person has capacity unless:
 Under guardianship (Britney Spears),
 Minor (Disney Star),
 Mentally ill (Mary Todd Lincoln), or
 Intoxicated (Charlie Sheen)

What is a voidable K?
o It’s still K, even though it’s voidable.
o It can be enforced by the statutorily protected person
o It cannot be enforced by non-protected person.
o Non-protected party can hold of on performance and ask for guardianship.
[1] Capacity Defense against Formation  Infancy


Infants  R(2d) 14:
o “Unless a statute provides otherwise a natural person has the capacity to incur only voidable contractual duties until the beginning of the
day before that person’s 18th birthday.”
 The minor – or “infant,” term frequently used in legal literature – has long been accorded special contractual immunity.
o Exceptions:
 Minors are required to honor K for necessary items such as food, clothing, shelter, education, etc.
Hypothetical:
o You represent movie producer and want to K with a minor. How do you make K binding?
 First Approach – K with parents: Provide parents with benefit and in return they agree to deliver child to the set.
 If parents are unable to deliver child, liquidated damages clause could determine what parents owe. This could be pegged
to money that is already paid to parents, plus any extra costs associated with her defection from the K.
o This could serve to deter breach.
 Second Approach – K with minor’s corporation: Suppose minor forms a corporation. The corporation doesn’t have the minor
problem.
 Corp agrees to deliver minor the set and to maintain a minimum amount of money on hand to cover damages in the event
of her breach.
 Best Approach – Write in K that governing law is either NY or CA where minors have capacity to K.

Who Is an Infant?
o A person remains an infant until the first moment of the day preceding his or her 18th birthday and remains an infant despite
emancipation and despite marriage.

Is Infant’s Promise Void or Voidable?
o A contract made by an infant is voidable at the option of the infant.
 However, the infant may not disaffirm certain contracts because public policy or a statute so provides or because the infant has
done something or promised to do something which the law would compel even in the absence of contract
 (e.g. support his out-of-wedlock child).
Tort Liability:
o An infant may avoid a contract, but is liable for torts. At times, it is difficult to distinguish tort liability from contractual liability, such as in
the area of fraud and warranty.


Avoidance:
o The infant may avoid (disaffirm) the K at any time prior to ratification.
o The avoidance may be made during the period of infancy and once made is irrevocable.
2
o
In the case of real property, however, the majority rule is that the infant’s promise may be avoided only after majority.

Ratification:
o The infant may ratify (affirm) the K after reaching majority.
 This may take place in three ways:
 (a) express ratification,
 (b) conduct manifesting an intent to ratify (retention and enjoyment of benefits and services), and
 (c) failure to disaffirm within a reasonable time after majority.

Ignorance of Law and Fact:
o A ratification is ineffective if the former infant is unaware of the facts upon which the ratification depends.
 There is a split of authority as to whether the infant must know that the law gives a power of avoidance.

Effect of Misrepresentation of Age:
o
According to the majority view, infants may disaffirm even if they misrepresented their ages.
 The authorities are about evenly split on the question of whether infants are liable in tort for misrepresenting their ages.
o
Infants and Subsequent Purchasers for Value:
o If a minor disaffirms a conveyance of real property, the land may be reclaimed from a subsequent good faith purchaser for value without
notice.
 The rule is different in the case of a sale of goods and a sale of securities. 7.
Restitution After Disaffirmance  Infant as Defendant:
o Upon disaffirmance, the infant is liable for the return (or the value) of any tangible benefits the infant has received and still has.



Restitution After Disaffirmance  Infant as Plaintiff:
o If upon disaffirmance an infant sues for the return of the consideration the infant has supplied, under the now prevailing view the infant’s
recovery is offset by the value of use and depreciation of any property obtained from defendant.
 The more traditional view is that only property the infant still has need be returned.

Restitution After Disaffirmance  Necessaries:
o An infant is liable in quasi-contract for the reasonable value of necessaries the infant has received.

Quasi-Contract:
o A quasi contract is a fictitious contract constructed by the law to provide a remedial device to give redress to deserving parties who are not
protected by a contract.
For example:
o Where an enforceable contract is not created because of indefiniteness or the Statute of Frauds, a party who partly performs can get
redress in quasi contract.
 It is also employed where a contract is avoided because of fraud or the like and where a contract is discharged for impracticability.
 A quasi contract is sometimes called a contract implied-in-law.


[1.2] Capacity Defense against Formation  Mental Illness

Mental Incapacity  R(2)d 15:
o Contractual duty is voidable if:
 Confusion – Person is unable to understand the nature and consequences of the transaction, or
 Compulsion – Person is unable to act reasonably with regard to the transaction and the other party has reason to know of his
condition.
o If the K is made on fair terms, and the other person does not know of the mental illness, the power of avoidance does not apply in the
following circumstances:
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

To the extent the K has been performed in whole or in part; or
Where the circumstances have changed so that avoidance would be unjust.

Tests of Mental Incompetency:
o Where there is no prior adjudication of incompetence, the great majority of the cases utilize the test of whether the party was able to
understand the nature, purpose, and consequences of the act at the time of the transaction.
 The more modern view adopts in addition the test of whether by reason of mental illness or defect a person is unable to act in a
reasonable manner in relation to the transaction, and the other party has reason to know of this condition.
o Under either test, the promise of the incompetent is voidable.
 If, however, the party had been adjudicated as incompetent prior to the transaction and a guardian had been appointed, the
transaction is void.

Restrictions on Power of Avoidance:
o
The promise of an unadjudicated incompetent that is still executory is voidable; but executed transactions are not voidable (contrary to infancy
cases) unless the incompetent can restore the other party to the status quo ante.

If the incompetence was obvious, however, the incompetent must make restitution only to the extent that tangible benefits remain.

Necessaries:
o
As in the case of infants, incompetents are liable for the reasonable value of necessaries furnished them.
[1.3] Capacity Defense against Formation  Intoxication

Intoxication:
o Intoxication will give a party the power of avoidance only if:
 (1)  he is so intoxicated that he cannot understand the nature of his transaction; and
 (2)  the other party has a reason to know that this is the case.

Intoxication  R(2d) 16 :
o A person incurs only voidable duties if the other party has reason to know that due to intoxication:
 Confusion – Person is unable to understand the nature and consequences of the transaction, or
 Compulsion – Person is unable to act in a reasonable manner in relation to the transaction.

Ervin v. Hosanna Ministry 11995 Conn. Super. (1995):
o Facts:

Ervin (P) entered a rehab program of Hosanna (D). Prior to admittance D allegedly required P to sign waiver releasing D from all
liability for any claims. P brought suit of negligence.
o Issue:
 Did P have the capacity agree to the contract?
o Discussion and Rationale:
 No, A party cannot be bound to K if they were intoxicated when they entered into it.
 Is that really what R(2d) 16 says?
o No, ct. goes on to clarify in opinion.
o Rule:
 The test of mental capacity to make a K or deed is whether, at the time of execution – signature, party possessed an
understanding of the transaction, and incapacity was so severe as to prevent manifestation of assent, or other party had reason
to know of it.
o Did she understand the extent of the K at the time she entered into it?
 We must look at mental state before, at, and after the K to know mental state.
 Was she able to consent?
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[2] Mistake  Defense against Formation

What is a mistake:
o A factual error regarding a fundamental matter that has a material effect on the agreed exchange.
 If a party has this issue, then the adversely affected party may then avoid the K, provided she did not bear the risk of the mistake.
o
A mistake is a belief that is not in accord with the facts. R(2d) 151.
 Belief as the facts:
 Mistake is used to refer to an erroneous belief.
o A party’s erroneous belief is therefore said to be a “mistake” of that party.
 This defense relates to beliefs about the facts as they existed at the time of K, not predictions about the future.

Types of Mistakes to Consider:
o (1)  Mutual Mistakes   R(2d) 152
 Both parties in the K suffer from the factual error.
 See Sherwood v. Walker.
o (2) Unilateral Mistake  R(2d) 153
 Only one party makes the mistake of material fact.
 One major exception is the Palpable unilateral mistake.
o Only one party made mistake but it was obvious.

Unilateral Mistake under R(2d) 153 If:
o One party makes a mistake at the time the K is made.
 The mistake is a basic assumption underlying the K.
 It has materially adverse effect on the mistaken party.
o Then K may be voidable.
 This only applies to the party that makes the mistake.

When K is voidable under R(2d) 153?
o Two instances:
 Enforcement of K would be unconscionable, or
 The non-mistaken party either had reason to know of the mistake or caused the mistake.
o When a K is voidable, a contractual obligation has formed.

Risk of Mistake
o K is not voidable if the mistaken party “bears the risk of the mistake.”
o Allocated by agreement.
o Mistaken party knows he has insufficient info for but K anyway.
o Allocated by Ct.
Hypothetical Problem:
o (A) contracts to sell land to (B). (A) and (B) both believe (A) has good title to the land. Neither one has done a title search. K says (A) will
convey such title as he has and makes no representation of good title. Party’s later discover (A) does not have good title. What
happens?
 Agreement actually allocates the risk. So (B) knows title might not be good because (A) is not representing that there is good title so
(B) is kind of on notice that he is taking title on an as is condition. (B) cannot avoid the contract. If the party bears the risk of the
mistake than the defense of unilateral mistake is unavailable.


Boise Junior College Dist. v. Mattefs Construction Co. (ID., 1969):
o Facts:
 Mattefs (D) was awarded a construction contract based on a bid that it submitted, but it refused to sign the contract because the
bid erroneously omitted a significant item.
o Issue:
 Is a contractor entitled to the equitable relief of rescission if it has submitted a bid that contains a material clerical mistake?
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o
o
Decision and Rationale:

(Spear, J.) Yes  Mattefs is entitled to the equitable relief of rescission.
 Mattefs’ mistaken omission of the bid item was an omission of a material amount and enforcement would be
unconscionable because Mattefs (D) would lose at least $10,000.
Rule:

A bidder who makes an error in preparing a bid for a public works K is entitled to the equitable relief of rescission if he proves
that the mistake is material, enforcement of a K based on the terms of the erroneous bid would be unconscionable, the mistake
did not result from violation of a positive legal duty or from culpable negligence, the party to whom the bid is submitted will not
be prejudiced except by the loss of his bargain, and prompt notice of the error is given.

Mutual Mistake under R(2d) 152:
o If both parties are mistaken as to a basic assumption of the K, and
o The mistake has a material effect on the parties’ performance, then
o The K is voidable by the adversely affected party unless he bears the risk of loss.

Sherwood v. Walker (MI., 1887) – Mutual Mistake:
o Facts:
 Sherwood (P) and Walker (D) agreed in writing for Sherwood’s (P) purchase of a cow both parties believed to be barren, but Walker
(D) refused to deliver the cow to Sherwood (P) after discovering the cow was with calf.
o Issue:
 Does a mutual mistake that goes to an agreement’s substance or nature warrant rescission of the contract?
o Discussion and Rationale:
 Yes  Seller was granted recission. If the mutual mistake between parties relates to the substance of the agreement, rescission is
an appropriate remedy.

(P) and (D) mutual belief that the cow was barren went to the substance of their agreement because the agreed price
related only to the cow’s value as beef.
o Absent this mutual mistake, the agreed price would have been substantially higher because the cow would have
been purchased for breeding. Reversed.
o Rule:

When a K is made based on the mutual mistake of the parties that relates to a material fact such as the subject matter of the sale,
the price, or some other fact which materially affects the agreement, the parties may rescind the K once they learn of the mistake.
o Dissent:
 There was a unilateral mistake here. The purchaser was taking a gamble (probably believed the cow wasn’t barren, just farrow) and
he won, so he should get to keep the cow.

Beachcomber v. Boskett (NJ., 1979) – Mutual Mistake
o Facts:
 P, retail dealer in rare coins, sought to rescind the purchase from D, another dealer, of a dime that bore a certain mark. Having
completed purchase, P, on the point of reselling the dime at a profit, submitted coin for certification. It was found dime was
counterfeit.
o Issue:

Does that fact that the coin dealer was negligent in his inspection of the coin bar him from his claim of recession due to mutual
mistake of fact?
o Results:

Finding that the transaction reflected a “mistake” on the part of both dealers, Ct. held for the P and allowed the transaction to be
rescinded.
 The mistake was mutual, apparently, because the D had paid a high price for the coin when he bought it, obviously
supposing it to be the genuine article.
 The outcome can be explained by pointing to the circumstance that P and D were equally expert in appraising coins; hence,
neither was more “at fault” than the other and neither bore the greater burden of risk.
 P did not assume the risk of the mistake.
o Rule:
 Where parties enter a K and are under a mistake regarding a fact that forms the basis for the transaction, the K is voidable by either
party if enforcement of the K would be materially more difficult than it would have been had the fact been as the parties believed it
to be.
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
For the stated rule to apply, the parties must be conscious that the pertinent fact may not be true and make their
agreement at the risk of that possibility.
o Assume the risk of the mistake.

Remedies for Mistake:
o Recission:
 Typical remedy is a declaration that K is (a) voidable affected party, and (b) restitution for either party.
 Law attempts to put parties in pre-K position.
o Reformation:
 Where writing does not accurately reflect oral k, Ct. can order reformation of writing.
 Applies when P shows clear and convincing evidence that actual agreement differs from subsequent writing and that
difference was mistake.

Quiz Hypotheticals:
o A buys a widget "as is." A cannot assert the defense of mistake because A has assumed the what?

risk of mistake
o If both A and B are mistaken about an important aspect of the contract, we call their mistake what?

Mutual mistake
o A believes X about the subject matter of a contract. B, the counterparty, believes Y instead of X. Neither party is aware of the other's belief. Y
is correct, and X is incorrect. If the defense of mistake applies, who is entitled to enforce the contract?

A  The defense is available only to the party in whose favor the defense runs. Here, A, the mistaken party, can choose to avoid the
contract or enforce it.
o A believes X about the subject matter of a contract. B, the counterparty, believes Y instead of X. Y is correct, and X is incorrect. Under what
circumstances may A assert the defense of mistake?

Enforcement would be unconscionable, or B caused or had reason to know of the mistake.
[3] Misrepresentation:

What is misrepresentation?
o R(2d). 159

Misrepresentation is “an assertion that is not in accord with the facts.”
o R(2d). 160. Concealment.

An action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.

When is Misrepresentation a Defense?  Using  R(2d) 164
o Misrepresentation must be fraudulent or material or it is not actionable.

If A’s assent is induced by either a fraudulent or a material misrepresentation of counterparty B, and

A is justified in relying on the misrepresentation, then

The K is voidable by A.

What is Fraudulent Assertion?
o
R(2d) 162: Assertion is fraudulent if:

(a) A knows or believes that her assertion is not in accord with the facts;

(b) A does not have the confidence that she implies in truth of the assertion, or

(c) A knows that she doesn’t have the basis she states for the assertion.
What is Material Assertion?
o
R(2d) 162: Assertion is material if:

It would be likely to induce a reasonable person to manifest assent; or

A knows that it would be likely to induce the recipient of the assertion to manifest assent.


Hill v. Jones (Ariz. Ct. App., 1986) See R(2d) 161–Non-Disclosure
o Facts:

The Joneses (D) sold their residence to the Hills (P) without voluntarily disclosing that the property was infested with termites.
o Issue:

Must the seller of a residence disclose to the buyer facts pertaining to past termite infestation?
o Discussion and Rationale:
7

(Meyerson, J.) Yes. Nondisclosure may be given same legal effect as fraud and misrepresentation if a seller knows facts that are known or
accessible only to him and that materially affect the property’s value.

A matter is material if it is one that a reasonable person would attach importance in determining his course of action in the
transaction.
o Prior termite damage was a material fact because it was reasonable that if (P) had been aware of the past termite
presence, they would not have purchased residence.
Reversed and remanded for trial.

Rules:

Under R(2d) 161  Non-disclosure = an assertion if:

(1)  Disclosure is necessary to prevent a prior assertion from being a misrepresentation,

(2) Other party is mistaken, and non-disclosure = failure to act in good faith and in accordance with reasonable standards of fair
dealing,

(3)  Disclosure corrects other party’s mistake about the contents or effect of a writing, or

(4)  Other person is entitled to know because of a relationship of trust between the two parties.
Misrepresentation justifies rescission when:
o (1) it is fraudulent or
o (2) it relates to a material fact.
Material:
o
A reasonable person would attach importance to it when choosing whether to enter the K.
Remember, we still need justified reliance under R(2d) 161.
o




Hypothetical Problems:
o EP signed her prenup just 4 days prior to wedding to millionaire. Fiancé promised to tear up prenup after they had children. After
children, he refused to tear up prenup. EP spent 7 years fighting to have it nullified. Brooklyn appellate court upheld the decision to void
the K.
 Court held in favor of EP on the grounds of fraud in the inducement. Meaning husband misled EP in the K. He lied to get her to sign
the K.
[4] Duress:


Explaining duress:
o In duress, there is unfair force or coercion that robs the affected party of his or her free will to give consent to the deal.
When can it come up?
o Prenups . . . Fiancé says they will call it off there will be no prenup.

What is Duress?
o A defense against enforcement, typically of modifications or settlement agreements
o Party Would have preferred not to agree but was faced with:
 Physical Force (K void), or
 Doesn’t exist
 Threat of adverse action (K voidable).
 Enforceable if they want to have it.

Rubenstein v. Rubenstein (N.J., 1956)
o Facts:
 P brought suit against the D seeking rescission due to duress, of a K whereby he conveyed all of his property to D. D made threats
of gangster violence and specific reference to arsenic.
o Issue:
 Should a court consider a party’s state of mind in determining whether that party acted under duress?
o Discussion and Rationale:
 (Heher, J.) Yes. Actual violence is not an essential element of duress.
 Moral compulsion or psychological pressure may constitute duress if it deprives a person of his free will.
o (P) circumstantial account of threats of gangster violence and arsenic poisoning made a prima facie showing of a
yielding to the estranged wife’s demand for the transfers, rather than the husband’s volitional act of a free mind.
8


o
Therefore, the lower courts should have considered Horace Rubenstein’s (P) state of mind at the time of the transfer in
order to determine whether he made the transfer under duress.
o Reversed and remanded.
K procured through duress are voidable by the victim.
o No true meeting of the minds. Consent if the very essence of the K. If there is compulsion, then there is no actual
consent.
Duress is a threat sufficient to overcome the will of the threatened party.

Rules:
 New Test – Whether or not a particular person entering into a K was in fact overcome by the threat.
 Ct. says controlling factor is the condition at the time of the mind of the person subject to coercive measures rather than
the means by which the state of mind was induced.
o Subjective Test. State of mind is more important than the means by which the state of mind was induced.
 Was the person’s will overcome by the improper threat.

Austin Instrument Inc. v. Loral Corporation, 29 N.Y.2d 124, 324 N.Y.S.2d 22, 272 N.E.2d 533 (1971)
o Facts:
 Austin (P) threatened to cease deliveries of parts it was supplying to Loral (D) pursuant to a subcontractor agreement unless Loral
(D) awarded Austin (P) a second subcontract and agreed to a price increase on the items Austin (P) was supplying under the initial
subcontractor agreement.
o Issue:

Is an agreement made under economic duress if one party’s agreement to another party’s breach is made because the threatened
party could not obtain the goods from another source and a breach of contract remedy would be inadequate?
o Discussion and Rationale:

(Fuld, J.) Yes. The existence of economic duress is demonstrated by proof that “immediate possession of needful goods is
threatened.”
 This proof requires that, in addition to a threat by one party to breach a K to deliver the required items, the threatened
party could not obtain the goods from another source and a breach of K remedy would be inadequate.
o Contrary to the trial court’s finding, (D) clearly established that none of the other vendors that had bid on the
subcontracts could deliver the required items within the deadlines required by (D) contact with the Navy.
 Also, a breach of K remedy would be inadequate because (D) would still need to obtain the required
items elsewhere, and none of its sources could guarantee timely delivery.
 Therefore, Loral’s (D) present, as well as any future, contracts with the Navy were in jeopardy. Order affirming the
dismissal of Loral’s claim reversed and remanded.
o Black Letter Rule:
 To establish economic duress, a party that has been threatened by the breach of another party to a contract must show that the
threatened party could not obtain the goods from another source and that a breach of contract remedy would not be adequate.
o Analysis:
 Economic Duress:
 Possession of needed good or service is threatened, and
 threatened party cannot obtain the goods from another source, and
 remedy for breach is not adequate.
 Economic duress requires proof that the threatened party could not obtain the goods from another source and that a breach of K
remedy would be inadequate.
 The Austin Instrument court implied that (D) could have contacted other vendors regarding the delivery of the required
subcontract items.
o However, it determined that because the required items had to meet strict engineering standards, it was
unreasonable to require (D) to procure a vendor with which it was not familiar or found unsatisfactory.
 As in Rubenstein v. Rubenstein, the court focused on the fact that the plaintiff’s actions effectively deprived Loral (D) of its free
will.

R(2d) 175  Duress by threat makes a K voidable.
o If assent is induced by improper threat, and
9
o
o
o
Threat leaves the victim no reasonable alternative to assent, then
K is voidable by threated Party. ‘
Threat must be “wrongful” “oppressive” or “unconscionable.”
 This may include an unreasonable use of superior economic power in a commercial context. Such as Austin Instrument.

Examples of Improper threats:
o Crime or a tort,
 Godfather . . .
o Threaten criminal prosecution improperly,
 Threaten to improperly throw in prison if you don’t do what I say
o Bad faith threat of civil suit,
 Don’t do what I say I will sue you.
o Breach of duty of good faith and fair dealing.

Quiz Hypotheticals:
o (1) Bad Guy pins Good Guy's arm behind his back until Good Guy sells his car to Bad Guy at fair market value.
 The contract is void, and Bad Guy cannot enforce it.
o (2) B is terrified of spiders. A slams a jar of them on his desk & says she will open it unless he contracts with her.
 Contract is voidable
o (3)  A Corp threatens non-performance on its K with B Corp unless B Corp increases the K price.
 This may be economic duress.
o (4) A threatens not to do future business with B if B will not buy supplies from C. This is economic duress.
 False
o (5) You tell a ClickList employee you are a lawyer and will sue them if they don't change your order. It's duress.
 True
[5] Unconscionability:

Unconscionability:
o
If a court finds that a K or clause is so unfair as to be “unconscionable,” the court may decline to enforce that contract or clause. See
UCC §2-302(1).

Statutory Definitions:
o Today many states have adopted statutory definitions of unconscionability.
 Indiana has one as well.
 It includes things like:
o Taking advantage of Known physical or mental infirmities.
o Entering into a transaction where the seller knows the buyer can never pay the full amount.
o Claiming your price beats your competitors when it actually doesn’t.
 You can find these in the state consumer protection laws.

Doctrine of Unconscionability:
o Inquiry into the deal’s fairness.
o Unconscionability draws the Ct back into that idea of equity where its able to craft a remedy that it thinks fits the situation.

(1)  No definition:
o There is no accepted definition of unconscionability.
o The issue is whether the clause is so one-sided, so unfair, that a court should as a matter of judicial policy refuse to enforce it.

(2)  Consumers:
o Courts have very rarely allowed businesspeople to claim unconscionability; only consumers are generally successful with an
unconscionability defense.
10

(3)  Varieties:
o Clauses can be divided into two categories for unconscionability analysis:
 (1) “procedural” unconscionability; and
 (2) “substantive” unconscionability.

(3.a)Procedural:
o The “procedural” sort occurs where one party is induced to enter the contract without having any meaningful choice.
 Here are some possible types:
 (1) burdensome clauses tucked away in the fine-print boilerplate,
 (2) high-pressure salespeople who mislead the uneducated consumer, and
 (3) industries with few players, all of whom offer the same unfair “adhesion contracts” to defeat bargaining
o (e.g., indoor parking lots in a downtown area, all disclaiming liability even for gross negligence).

(3.b)Substantive:
o The “substantive” sort of unconscionability occurs where the clause or contract itself (rather than the process used to arrive at the
contract) is unduly unfair and one-sided.

(3.b.i)  Excessive price:
o An important example of substantive unconscionability is where the seller charges an excessive price.
 Usually, an excessive price clause only comes about when there is also some sort of procedural unconscionability (e.g., an
uneducated consumer who doesn’t understand what he is agreeing to), since otherwise the consumer will usually simply find
a cheaper supplier.

(3.b.ii)Remedy-meddling:
o Also, a term may be substantively unfair because it unfairly limits the buyer’s remedies for breach by the seller.
 Types of remedy-meddling that might be found to be unconscionable in a particular case include:
 (1) disclaimer or limitation of warranty, especially prohibiting consequential damages for personal injury,
 (2) limiting the remedy to repair or replacement, where this would be a valueless remedy,
 (3) unfairly broad rights of repossession by the seller on credit,
 (4) waiver of defenses by the buyer as against the seller’s assignee, and
 (5) a cross-collateralization clause by which a secured seller who has sold multiple items to a buyer on credit has the
right to repossess all items until the last penny of total debt is paid.

(4)  Arbitration clauses:
o A large number of unconscionability claims are attempts to strike down so-called “mandatory arbitration” clauses.
 By such a clause, both parties to the K agree that any dispute between them must be subject to arbitration rather than
resolved by a lawsuit.
o Consumers and small businesses that are required to sign such clauses as part of a large market-leading company’s “take it or leave it”
adhesion contract are usually the ones who, after signing, claim that the arbitration clause is unconscionable.

(a)   Class-action waivers combined with arbitration clauses:
o A claim that a mandatory-arbitration clause is unconscionable is especially powerful when the clause combines a mandatory
arbitration provision with a waiver of the right to bring a “class” arbitration.

(4.a.i)  Ban on class arbitration:
o The issue arises because large corporations often specify, in the mandatory-arbitration clause, that any arbitration must be “one on
one” (or “bilateral”), i.e., must involve only a single plaintiff.
 (The big company hopes that where each contract and claim tends to be for a small amount, no lawyer is likely to find it
worthwhile to take a one-on-one arbitration case on contingent fee, since only a small recovery, and thus a small attorney
fee award, is likely.)
(4.a.ii)  Struck down by state courts:

11
o
State courts have often been sympathetic to the claims of plaintiffs — especially consumers — that a combined mandatory-arbitration
and no-class-arbitrations clause is unconscionable because it tends to leave plaintiffs in small-dollar-amount contract cases without an
effective remedy. [Cf. Scott v. Cingular Wireless]
[6] Public Policy:

What constitutes illegality with respect to contractual agreements?
o
If either the consideration or the object of the contract is illegal, the bargain is treated as an illegal contract.
 Some K are illegal because they are expressly prohibited by statute
 For example, gambling agreements or promises for usurious interest  R(2d) 179(b).
 Whereas others are classified as illegal because they violate public policy
 For example, contracts in restraint of trade or contracts to impair family relations  R(2d) 179(b).
12
Parol Evidence



Parol Evidence Rule:
o Under the “parol evidence rule,” prior and contemporaneous oral expressions and prior written expressions are not admissible to
vary or contradict the terms of a writing that both parties intended to be the final and complete integration of their agreement.
This rule is subject to many exceptions and qualifications.
Parol Evidence  What the Rule Does:
o The parol evidence rule limits the extent to which a party may establish that discussions or writings prior to the signed written K
should be taken as part of the agreement.
  In some circumstances, the rule bars the factfinder from considering any evidence of certain preliminary agreements
that are not contained in the final writing, even though this evidence might show that the preliminary agreement did
in fact take place and that the parties intended it to remain part of their deal despite its absence from the writing.

(1) “Integration”:
o A document is said to be an “integration” of the parties’ agreement if it is intended as the final expression of the agreement. (The
parol evidence rule applies only to documents which are “integrations,” i.e., final expressions of agreement.)

Statement of rule:
o The “parol evidence rule” is in fact two sub-rules:
 (1)Total integration
 (2)Partial integration

(1)  Partial integration:
o A partial integration (a writing that the parties intend to be final but not complete) may not be contradicted but may be
supplemented by consistent additional terms.
 When a writing is a partial integration, no evidence of prior or contemporaneous agreements or negotiations (oral or
written) may be admitted if this evidence would contradict a term of the writing.

(2) Total integration:
o A total integration (a writing that the parties intend to be final and complete) may not be contradicted or supplemented.
 When a document is a total integration, no evidence of prior or contemporaneous agreements or negotiations may be
admitted which would either contradict or add to the writing.
(3)  Summary:
o Putting the two sub-parts together, the parol evidence rule provides that evidence of a prior agreement may never be admitted to
contradict an integrated writing, and may furthermore not even supplement an integration which is intended to be complete.


(4)  Prior writings and oral agreements:
o The parol evidence rule applies to oral agreements and discussions that occur prior to a signing of an integration.
 It also applies to writings created prior to an integration
 (e.g., draft agreements that were not intended to be final expressions of agreement).

(5)  Contemporaneous writing:
o If an ancillary writing is signed at the same time a formal document is signed, the ancillary document is treated as part of the
writing, and will not be subject to the parol evidence rule.
13

(6)  Subsequent agreements:
o The parol evidence rule never bars consideration of subsequent oral agreements.
 That is, a written contract may always be modified after its execution, by an oral agreement.

(6a)  “No oral modifications” clause:
o However, if the written document contains a “no oral modification” clause, that clause will usually be enforced by the court, unless
the court finds that the defendant waived the benefits of that clause.

UCC Approach (UCC § 2-202):
o Section 2-202 of the UCC essentially follows the common-law parol evidence rule as summarized above.

(1)  UCC § 2–202(b):
o Clause (b) states the common law rule that a total integration may not be contradicted or supplemented, but it does not determine
the existence of a total integration according to any of the rules previously discussed.
 Rather, the clause creates a presumption that a writing is only a partial integration.
o This presumption is overcome if the parties actually intend the writing to be a total integration (Corbin), or if it is certain that
parties similarly situated would have included the term in the writing, a variation of Williston’s third rule.
 Most courts have followed the traditional rule that a merger clause is conclusive even in cases that arise under the UCC.
(2)  UCC § 2–202(a):
o Under this clause, a course of dealing or a Trade Usage may be used to supply a consistent additional term even though the
writing appears to be a total integration.


(3)  Confirmations:
o Parties often reach agreement orally and follow up by sending a written confirmation of the terms of the agreement.
 Also, sometimes agreement is reached by a series of letters, faxes, conversations, etc.
o When the parties declare that they have a deal, it is common for one party to write a confirmation summarizing its understanding
of the deal.
 Under the common law, a confirmation often acts as a total integration if the other party makes no response to it prior
to performance.
o It could be argued that this solution could arise under the UCC only if there were common terms in both parties’ memoranda; the
provision states:
 “Terms to which the confirmatory memoranda of the parties agree.”
o But there are cases where one confirmatory memorandum has been held to be a total integration.

Parol Evidence Rule (PER) – What it is not:
o It is not the statute of frauds.
 We are asking for parol evidence is K in writing and whats in it however, the purposes are very different from the SoF.
o PER is how to determine the scope of the written agreement.
 Question is what is the role of the writing?
 Whether the Ct can look outside the four corners of the K depends on the PER.

Different Goals – PER v. SoF:
o Parol evidence rule: what are the terms?
 Only applies when there is a writing.
 Does not apply to ‘what do the terms mean?’
o Statute of frauds: is an oral contract enforceable, or is a writing required to protect the defendant against fraud?
 Determines whether a writing is required.

Quick Overview of PER:
o Applies only when there is an “integrated” [term of art] writing.
o Ct may admit outside evidence to determine whether doc is integrated.
14

o
o
This is done only in front of the judge, not the jury.
 This is called in camera or In Chambers review.
 After done with judge, judge will decide as a matter of law.
A writing is integrated if some or all of it is a final expression of the terms.
May be partial or total.

Quick Overview of PER [Cont’d]:
o Total integration  writing is final embodiment of the entire deal.
 If writing is a total integration, evidence from outside of the four corners of the document cannot be admitted to prove:
 Additional/consistent terms, or
 Contradictory terms.
 Integration [merger] Clause  Clause that states  This is total and complete embodiment of the deal.”
 This signals that the writing is a final or total integration.
o Partial integration = final expression of some terms, but not all terms are included in the writing.
 If writing is a partial integration, evidence from outside of the four corners of the document cannot be admitted to prove:
 Contradictory terms.
 Evidence of additional consistent terms is admissible.

Scope of PER:
o Parol evidence rule does not apply to:
  Subsequent agreements,
  Separate agreements,
  Evidence used to interpret terms within the writing,
  Evidence of the validity of the contract itself. (E.g., any of the defenses Mistake, fraud, etc.)

Two Important Questions:
o How does a Ct determine when a writing or a portion of a writing is integrated?
o How do courts determine whether the offered terms are additional, contradictory, or collateral?

How to Determine Finality:
o Any relevant evidence is admissible to establish finality.

(1)  Discussion:
o The first issue in a parol evidence problem is the parties’ intent—whether the given writing represents the final embodiment of the
parties’ intended agreement; completeness of the writing is a second issue.
 The final writing need not be signed and need not be in any particular form.
o The crucial requirement is that the parties have regarded the writing as the final embodiment of their agreement, and any relevant
evidence is admissible to determine this question of fact.
 The more complete and formal the instrument, the more likely it is that it is intended as an integration.
o Most writings that evidence a valid contract are final and therefore are at least partial integrations.

Examples of Non–Final Writings(1):
o A memorandum prepared by one party and not shown to the other party.
 Such a document is not final because the party who has not seen it cannot possibly consider it to be the final embodiment
of the agreement.
Examples of Non–Final Writings(2):
o A draft of a contract shown to but not assented to by the other party.

15

o
The question of finality, although actually one of fact, is often decided by the trial judge because the courts feel that
unsophisticated jurors could be easily beguiled by an artful presentation and thus would not give the writing the protection
it deserves.
Where there is conflicting evidence as to whether a party had manifested assent to the writing, the question may be determined
by the jury.

How to Determine Completeness:
o Once it is determined that a writing is final, the next question is whether the writing is complete so that it is a total integration.
 It’s difficult problem since there is no unanimity on how to determine this. Here are the six most widely accepted
approaches.

(1)  Four Corners Rule:
o If the instrument is complete on its face, the instrument is presumed to be a total integration.
 The court determines whether the writing is complete on its face solely by looking at the instrument.
o Comment:
 Although the Four Corners Rule is somewhat illogical because it is impossible to tell whether an agreement is complete on
its face simply by looking at the writing, many jurisdictions follow it.

(2)  The Collateral Contract Rule:
o Unfortunately, there are two versions of this rule. Fortunately, this rule is losing favor.
  Under one version, if the term offered does not contradict the writing, it may be received in evidence.
 In effect, this means that the writing is only a partial integration.
 Under the other version, the important issue is whether the term offered has to do with a subject that is dealt with in
the writing.
 If the term offered is dealt with at all in the writing, it is a total integration.
 If the term offered relates to a subject matter that is not mentioned in the writing, the writing is treated as a partial
integration.

(3) Williston’s Rules:
o Probably more cases follow Williston’s Rules than any other.
 Professor Williston states three rules.
o Rule (1)  If the writing expressly states that it is a final expression of all the terms agreed upon and that it is a complete and
exclusive statement of these terms—often referred to as a merger clause—this declaration conclusively establishes that the
writing is a total integration.
 There are exceptions for when the document is obviously incomplete or the merger clause itself was included as a result of
fraud or mistake, etc.
 However, even a merger clause does not prevent enforcement of a separate agreement supported by a separate
consideration on both sides. This statement is accepted under all versions of the rule.

o
Rule (2)  In the absence of a merger clause, the determination of whether the writing is a total integration is made by looking at
the writing.
 If the writing is obviously incomplete on its face, consistent additional terms may be proved. In other words, the writing is a
partial integration.
 However, even if the writing appears to be complete, the writing will still only be a partial integration when the
writing expresses the undertaking of one party only, as in the case of deeds, bonds, and bills and notes.
o
Rule (3)  Where the writing appears to be a complete instrument expressing the rights and obligations of both parties, the
writing is deemed a total integration unless reasonable persons in the position of the parties to the agreement might naturally
exclude the alleged additional terms from the writing.
(4) Corbin’s View:
16
o
o
Professor Corbin is determined to search out the actual intent of the parties on this issue of total integration rather than some
fictional or presumed intent.
 He states that all relevant evidence should be taken into account in making the determination.
Thus, he would admit evidence of prior negotiations.
 Furthermore, he states that a merger clause is only one of the factors to consider in determining whether there is a total
integration. Under his view, a writing is ordinarily only a partial integration.

Masterson v. Sine (1968).
o Facts:
 Masterson (P) conveyed property to Sine (D) with an option to repurchase, and when Masterson (P) and the trustee in his
bankruptcy case brought an action to enforce the right to repurchase, Sine (D) sought to introduce evidence that the
option could not be assigned.
o Issue:
 Did the trial court properly exclude evidence of the collateral agreement on the assignability of the option?
o Decision and Rationale:
 (Traynor, C.J.) No. Evidence of a collateral agreement will be excluded only if the fact finder is likely to be misled by its
admission.
 The rule excluding parol evidence should be based on the credibility of the evidence.
 The agreement regarding assignability of the option is the type of agreement that might naturally be made as a separate
agreement and is therefore not the type of agreement that would certainly have been included in the deed. Reversed.
o Analysis:
 Interpretation of the evidenced
 To find integration, interpretation of terms may be important.
 Integration depends on parties’ intent.
 Look to document itself, and
 Circumstances at time of writing.
 R(1d):
 Integration is partial if oral agreement might naturally have been made separately, or
 UCC:
 Evidence of collateral agreement is excluded from trial only if it would certainly have been included in the integrated
writing.
o Dissent:
 (Burke, J.) The majority opinion undermines the traditional parol-evidence rule.
 Documents that convey land are now suspect on their face, and less reliance may be placed on written instruments.
o The majority’s opinion also unintentionally creates a new way to defraud creditors.

Alaska N. Dev. v. Alyeska Pipeline Serv. Co. (Alaska 1983).
o Facts:
 Alaska Northern Development (P) attempted to introduce evidence that a term in a writing that said, “subject to the final
approval of the owner committee,” meant that final approval required only a determination that the price was fair and
reasonable.
o Issue:
 Was parol evidence as to the meaning of the terms used in the contract properly excluded?
o Decision and Rationale:
 (Compton, J.) Yes. Parol evidence may not be admitted if it would be inconsistent with the integrated portion of a written
contract.
 An integrated writing is one that is intended by the parties to be a final expression of their agreement, and the trial
court correctly found that Alyeska Pipeline’s (D) letter was partially integrated.
 Alaska Northern’s (P) interpretation of the approval clause was inconsistent with that part of the contract that was
integrated.
 Parol evidence will be considered inconsistent if there is an absence of reasonable harmony in terms of the
language and respective obligations of the parties. Affirmed.
17
o

Analysis:
 If a writing is not fully integrated, it is not the final statement of the parties’ intent as to the agreement as a whole.
 It is instead only a statement as to part of the agreement.
 The court does not explain why adding an additional term—that the owner committee review would be for fairness of the
price only—is inconsistent with the written agreement.
 If the agreement is only “partially final,” parol evidence would normally be allowed to explain or add to the
contractual terms.
Suburban Leisure v. AMF Bowling Products:
o Facts:
 Suburban Leisure(P) had oral agreement with AMF (D). P would become a distributor of D. Later P agreed to deliver
products that D sold on D’s website. Second agreement contained an arbitration and integration clause [Merger clause]. D
terminated P’s license. P wanted to continue to sell for D; thus, P sued. Integration specified that the doc constituted the
entire agreement between parties and supersedes all prior agreements oral and written.
o Issue:
 Does merger clause apply? Is the evidence unrelated agreement?
o Discussion and Rationale:
 Integration [Merger] clause creates presumption that writing supersedes all prior related oral agreements.
 But PE rule does not exclude evidence of separate, unrelated agreements.
 Court looks to Collateral K Doctrine.
 Court considers any relevant evidence to determine scope of merger clause.
 Big hole for PE to come through.
o Analysis:
 Useful demonstration of the limits of the parol evidence rule.
18
Contract Interpretation  Part 1

Interpretation  Modern View:
o Most courts today allow parties to introduce extrinsic evidence to aid in the interpretation of a contract, even if the writing is an
integration.
 However, courts vary on the details of how and when extrinsic evidence is allowed.

(1)  Extrinsic Evidence in the case of ambiguous terms:
o
All courts agree that if a term is found by the trial court to be ambiguous — capable of more than one meaning — extrinsic evidence
must be allowed.

(1a)  Evaluated by jury:
o Furthermore, courts are in near-universal agreement that this extrinsic evidence is to be evaluated by the jury, not by the judge.

(1b)Evidence of parties’ own pre-contract negotiations:
o
Finally, courts are in unanimous agreement that the types of extrinsic evidence that are to be allowed to help resolve the meaning of the
ambiguous term are extremely broad.
 In particular, courts agree that evidence about what the parties’ own pre-contract negotiations indicated to be the meaning of
the ambiguous term is to be admitted and heard by the jury.
Example:
o Seller sells a business to Buyer. Part of the purchase price is a delayed payment equal to 10% of the “Gross Profit” of the business in the
first year after sale. The parties have a dispute about what “Gross Profit” means. If the trial court finds that the term is ambiguous, the
judge will then let the jury hear testimony from each side about any statements either party made during the negotiations that might
bear on what the term means.


(2) Unambiguous terms:
o Now, let’s suppose that the trial judge decides that the term in question is completely unambiguous.
 Since the term is unambiguous, it is for the judge, not the jury, to say what the term means.
o Consequently, the jury will be instructed by the judge on the term’s meaning, and the jury will never hear any sort of extrinsic evidence
about what the term means.

(3) How judge determines existence of ambiguity:
o The area of main disagreement among courts is how the judge should decide whether the term is ambiguous. There are three main
approaches:
 (1) the “four corners” rule,
 (2) the “plain meaning” rule, and
 (3) the “liberal” rule.

(3a) The “four corners” rule:
o The “four corners” rule is the most stringent of the three. Under this approach, when the judge decides whether the term is ambiguous,
the judge may not consult any extrinsic evidence whatsoever.
 That is, the existence of ambiguity is to be determined solely by looking within the “four corners” of the contract itself.
o Thus, not only will the court not consider evidence about the parties’ negotiations, it will not even consider evidence about the context
surrounding the making of the agreement.
 This hyper-strict rule is followed by relatively few courts.

(3b) The “plain meaning” rule  Ambiguity:
o The most significant aspect of the plain meaning rule is that when the court goes to decide whether a term used in the agreement is
ambiguous, the court will not hear evidence about the parties’ preliminary negotiations.
 (However, the court will hear evidence about the circumstances, or “context,” surrounding the making of the agreement.)
o The Plain Meaning Rule states that if a writing or the relevant term has a plain meaning that meaning must be given effect without resort
to extrinsic evidence of any kind.
19








Discussion:
o In many jurisdictions, for example, New York, the plain meaning rule prevails.
 In many other jurisdictions, for example, New Jersey, the rule is applied sporadically.
 In still others, for example, California, the rule is rejected.
o When it is applied, whether there is plain meaning or its opposite, ambiguity, is a question of law to be determined first by the trial judge
looking solely to the writing.
 Some of the modern cases hold that the trial judge should consider extrinsic evidence before determining whether the meaning is
plain, but these are in the minority.
o If the trial judge finds the term is ambiguous, extrinsic evidence is admissible for clarification.
 The term “extrinsic evidence” includes prior and contemporaneous statements made in negotiations, surrounding circumstances,
subjective intent, what the parties said to each other about meaning, trade usage, course of performance and course of dealing.
o “Extrinsic evidence” may be written or oral.
Example:
o On the facts of the above example, suppose the judge is deciding whether the term “Gross Profit” is ambiguous. A court following the
“plain meaning” rule would probably hear testimony about what the term usually means in contracts of this sort (just to help the judge
determine whether the term is or isn’t ambiguous), but would not hear testimony about what the parties said during their negotiations
(e.g., testimony by Seller that “Buyer told me that ‘everybody knows that Gross Profit means [thus-and-such]’”).
(3c) The “liberal” rule:
o Finally, what might be called the “liberal” rule rejects — or at least significantly weakens — the plain meaning approach.
 Under the liberal view, evidence of the parties’ statements during their pre-contract negotiations is admissible for the limited
purpose of letting the trial judge determine whether the term is ambiguous.
Example:
o On the facts of the above example, a court following the liberal approach would, when trying to decide whether the term Gross Profit is
ambiguous, hear Seller’s testimony about what Buyer told him during the pre-contract negotiations about the meaning of the term.
(3d)  Williston’s Rules:
o Williston rejects the plain meaning rule and sets up rules for interpretation that vary, depending on whether or not the writing is an
integration.
(3d1)   Integration:
o
As to integrated writings, Williston’s standard of interpretation is the meaning that would be attached to the integration by a reasonably
intelligent person acquainted with all operative usages and knowing all of the circumstances prior to and contemporaneous with the
making of the integration.
 However, Williston would exclude what the parties said to each other about meaning (e.g., “buy” was to mean “sell”) and what
the parties subjectively believed the writing meant at the time of agreement.
 But when these rules are applied and the result is ambiguity, then Williston’s non-integration rules will be applied.
(3d2)  Non–Integration:
o Where there is no integration and no ambiguity, Williston’s standard is the meaning that the party making the manifestation should
reasonably expect the other party to give it—the standard of reasonable expectation—a test based primarily on the objective theory of
contracts.
 In the case of a non-integration, where there is no ambiguity, all extrinsic evidence is admissible except evidence of subjective
intention.
o If there is an ambiguity, in the case of a non-integration, evidence of subjective intention is also admissible and, when it is introduced,
Williston argues that the rules indicated in the example below apply.
Example:
o S agreed to sell, and B agreed to buy, certain cotton. Shipment was to be from Bombay on the ship, Peerless. It happened that there were
two ships, Peerless. One was to sail from Bombay in October; the other in December. The evidence was to the effect that B meant the
ship Peerless that sailed in October, and S meant the one that sailed in December. The possible results in this type of situation are as
follows.
 (1) If both parties meant the same ship, Peerless, there is a contract based on that meaning.
 (2) If one party knew or had reason to know of the ambiguity, and the other did not know or did not have reason to know,
there is a contract based upon the meaning of the party who was not at fault.
 (3) If both parties knew or should have known of the ambiguity or neither party knew or should have known of the
ambiguity, there is no contract if they meant different ships, Peerless. Notice that Williston’s rule does not weigh fault—that is to
say, it makes no difference whether one party knew and the other merely should have known.
20




Pacific Gas & Electric v. G.W. Thomas Drayage & Rigging.
o Facts:
 G.W. Thomas Drayage (D) performed work for Pacific (P) pursuant to contract that called for (D) to indemnify (P) “against all loss,
damage, expense and liability resulting from . . . injury to property, arising out of or in any way connected to the performance of
this contract.” While work was being done, property of (P) was damaged.
o Issues:
 Is extrinsic evidence admissible to prove the meaning of terms used in a contract?
o Decision and Rationale:

(Traynor, C.J.) Yes. The parol evidence rule allows the admission of outside evidence to determine the meaning of words in a
contract.
 It is not always feasible to determine the true intent of the parties from the written words of a contract alone.
o Interpretation of a contract requires at least a preliminary consideration of evidence offered to show that
intent.
 If this evidence shows that the language of the contract is susceptible of two or more different interpretations,
extrinsic evidence will be admitted to prove either of such interpretations. Reversed.
o Analysis:
 Extrinsic evidence admissible if offered to prove a meaning to which the document is reasonably susceptible.

[what would average person in position of parties think]
 “Rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the
parties.”
 Determining what the term means . . . trying to figure out what they intended in the agreement.
 Evidence will show subjective state of mind; however, we only care about what an objective reasonable person would
perceive.
 Court must place itself in situation of parties at time of contracting.
 Making the interpretation to determine whether evidence is admissible.
 Must interpret in light of all the circumstances that reveal the sense in which the writer used the word.
 (P) argued against an interpretation of the indemnity clause that was the usual reading of such a clause.
 The dictionary definition of “indemnify” supports the reading of the clause offered by (D).
 Note that the liability insurance policy obtained by (D) provided liability coverage for damage to (P) property.
 Insurance coverage is not admissible to show liability, but, arguably, it could be evidence of the intent of the parties
regarding liability.
Takeaway of Pacific:
o Extrinsic evidence admissible if offered to prove a meaning to which the document is reasonably susceptible.
 Many courts take this approach. However, this is not everywhere . . .i.e., New York
o Exercise of interpreting a contract and applying the parol evidence rule are inextricably linked.
 What is the meaning of the integration?
 Interpretation is predecessor to applying the parol evidence rule.
R(2d) 212(1):
o Court must interpret writing in light of circumstances.
 Acceptable evidence includes but is not limited to:
 Situation and relationship of the parties,
 Preliminary negotiations,
 Customs of trade, and
 Prior dealings between the parties.
We wrote it ourselves!
o Facts:
 Divorcer K  “I, Ex-Husband, hereby agree to pay $1,200 per month to Ex-Wife for the support of Child, until such time as
Child enters college.” Upon graduating high school child enters military.
o Issue/Result:
 Is husband still obligated to pay ex-wife support?
o Discussion and Rationale:
 With circumstances outside of the K more than likely no, also look at R(2d) 202 and obviously it will be in favor of ex-husband.
 Course of dealings outweigh usage or trade.
21
Contract Interpretation  Part 2

Frigaliment v. Int’l Sales.
o Facts:
 Frigaliment Importing (P) bought chickens from B.N.S. International Sales (D), which shipped stewing chickens instead of
the broilers Frigaliment (P) said it wanted.
o Issue:
 Is (P) definition of “chicken,” which was not apparent from the contract itself, correct?
o Decision and Rationale:
 (Friendly, J.) No. The party that advocates a special meaning for a contractual term has the burden of proving that the
special meaning was the one intended by both parties.
 (P) was unable to prove conclusively that both parties understood “chicken” to mean “broiler.”
 (P) was also unable to prove that the term had a common meaning in the poultry industry, and (D) had
reason to believe that it could comply with the contract by shipping stewing chickens.
 Complaint dismissed.
o Analysis:
 Court admits extrinsic evidence to resolve the ambiguity:
 Parties’ negotiations,
 Trade usage [effective if D new about trade usage or so present that people don’t thing about it they just
incorporate it],
 Commercial conditions (market price),
 Course of performance.
 The ultimate effect of the court’s ruling is somewhat unclear: is the court holding that there was no contract because of the
ambiguity, or is it holding that the contract was not breached?
 As far as this particular case is concerned, it may not matter much, but it could be important if, for example, (D)
turned the tables and sued (P) for non-payment for the chickens delivered.

If there is no contract, (D) would be limited to seeking restitution for the chickens delivered, which could be considerably
less than the price set out in the contract.

R(2d) 202.
o Parties’ principal purpose given great weight.
o Writing(s) interpreted as a whole.
o Words are given generally prevailing meaning.
o Course of performance accepted without objection given great weight.

Hierarchy of Interpretation:
o if the court allows the admission of extrinsic evidence to resolve the contractual ambiguity, it follows a hierarchical sequence to
interpret the agreement as it moves from the express wording of the parties’ agreement to the surrounding circumstances.

(1)  Course of Performance?
o Does the conduct of the parties in the course of performing the contract provide an answer?
 According to R(2d) § 202(4) , “[w]here an agreement involves repeated occasions for performance by either party with
knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance
accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.”
o Ask: have the parties begun performing the contract?
 If so, then their conduct in performing may provide evidence of what they intended by the ambiguous language.

(2)  Course of Dealing?
o Have the parties engaged in prior dealings which may help to interpret the term in dispute in the present transaction? R(2d) 223.
22

(3)  Trade Usage?
o Is there an applicable usage of trade?
 A usage of trade in which the parties are engaged or one of which they know may be considered in giving meaning to their
agreement. R(2d) 222.

(4)  Essential Omitted Terms?
o Did the parties fail to include a term which has turned out to be essential to a determination of the rights and duties of the
parties?
 If so, the court may supply a term which is reasonable in the circumstances and if it possible to do so “by logical deduction
from agreed terms and the circumstances[.]” R(2d) 204 cmt.

In re Katrina Canal Breaches.
o Facts:
 Homeowners, renters, and business owners brought suit against their insurance companies after the Hurricane Katrina
flooding, arguing that the levee breakdowns that caused their losses were non-natural occurrences and therefore not
subject to the flood exclusions in their policies.
o Issues:
 Did the insurance policies’ flood exclusions apply to water damage resulting from the negligent design, construction, and
maintenance of the levees?
o Decision and Rationale:

(King, J.) Yes. An insurance policy is a contract between the parties and should be construed using the general rules of
contract interpretation.
 The interpretation of a contract involves the determination of the common intent of the parties, and the words
of a contract must be given their generally prevailing meaning.
o When the words are clear and explicit, no further interpretation may be made in search of the parties’
intent.
 Where, however, the policy includes ambiguous provisions, the meaning must be ascertained by construing the
policy as a whole; one clause should not be sacrificed for the sake of another.
o And ambiguous clauses must be construed against the drafter (here, the insurance companies).
 Equivocal provisions seeking to narrow an insurer’s obligation are therefore strictly construed against the
insurer.

R(2d.) § 206  Contra Proferentem:
o If all else fails . . . .
o When choosing between reasonable meanings, court should choose interpretation that works against the contract’s drafter.
o Only in “cases of doubt . . . so long as other factors are not decisive.”
Duty of Good Faith and Fair Dealing

R(2d) & UCC Agree!
o R. (2d) 205:

Every contract imposes upon each party duty of good faith and fair dealing in its performance and enforcement.
o UCC 1-304:

Every contract or duty within [the UCC] imposes an obligation of good faith in its performance and enforcement.
o UCC 1-201(20):

“Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”

Implied obligation of good faith:
o In both UCC and non-UCC contracts, an important type of term the court will supply is an obligation of good faith and fair dealing.

See, e.g., UCC 1-304, which says that “every contract or duty within this Act imposes an obligation of good faith in its performance or
enforcement.”

(1-201(19) then defines good faith as “honesty in fact and the observance of reasonable commercial standards of fair dealing.”)
23


(1) Consistency with other party’s expectations:
o An important aspect of this duty of good faith is that a party is required to behave in a way that is consistent with the other party’s reasonable
expectations about how the contract will work.
Example:
o Insurer writes a homeowner’s policy on Owner’s home. The policy says that in the event Owner suffers a loss, Owner must report the loss “in
detail” and in writing to Insurer within 30 days. 28 days after Owner’s home is burglarized, he submits a one-sentence description of the loss to
Insurer. Insurer says merely, “Your description is not specific enough,” but refuses to tell Owner what type of detail must be added. (Assume that
Insurer’s evasiveness is an intentional attempt to prevent Owner from submitting a claim meeting the requirements of the policy.) The deadline
passes without Owner’s rewriting the description, and Insurer refuses to pay to the claim.

A court would probably find that Insurer’s intentionally evasive behavior violated its implied duty of good faith, because the behavior was
an attempt to deprive Owner of his reasonable expectation that his loss would be covered by the policy.

4 General Categories of Cases:
o Prevention or hindrance of performance/failure to cooperate (Patterson)
o Exercise of discretion (Centronics v. Genicom)
o Contract modifications (Alaska Packers-type cases)
o Termination of contracts for reasons other than cause (Feld, Austrian Air)

Centronics v. Genicom.
o Faith:

A contract for the sale of business assets between Centronics (P) and Genicom (D) provided for the deposit of funds in escrow pending the
resolution of a dispute. Genicom (D) refused to allow release of the escrowed funds prior to resolution of the dispute.
o Issue:

Does Genicom’s (D) refusal to release the funds in escrow constitute bad faith?
o Decision and Rationale:

(Souter, J.) No. A party’s performance of a contract is in bad faith if that party’s exercise of discretion in how the contract is performed
deprives the other party of a substantial portion of the value of the contract.

(D) has limited discretion in how it performs the contract, and the exercise of that discretion cannot deprive (P) of the value of
the contract.

The contract does not require payment of the escrowed funds prior to resolution of the dispute, and the language of the contract seems
to assume that payment will not be made until final settlement of the purchase price.
o Analysis:

Duty of good faith is implied in three categories of cases:

Formation (no misrepresentation, duress etc.),

Termination of employment at will (good faith = not firing employee out of malice or bad faith), and

Exercise of discretion in performance.
o Applicable in this case.

The court’s opinion notes that (D) did not stand to gain anything by its refusal to release the funds, and this failure to gain an advantage
showed a lack of bad faith.

The court thus links bad faith to actions taken with an economic motive.

Query whether acts done for motives other than economic ones (e.g., a desire for revenge, or some other personal animus) should be
considered bad faith in contractual performance.
o Good Faith is . . .

Understood as excluding behavior that is inconsistent with:

Common standards of decency, fairness, and reasonableness,

The parties’ agreed-upon common purposes and

The parties’ justified expectations.

And:

Where K gives A the discretion to deprive B of a substantial portion of the contract’s value; duty of good faith requires A to
observe reasonable limits in exercising its discretion.
o Takeaway:

 Where a K grants discretion to one party and the discretion allows one party to deprive another party a vale under the K, the duty of
good faith applies.

 Good faith boils down to not being a jerk

 What is the reasonable expectation of the parties.

Question of Fact to be determined by the jury.
24

Burton’s Functional Analysis.
o Identify economic opportunities that were bargained away by the defendant during contract formation.
o Determine whether the defendant is exercising its discretion for the purpose of recapturing the opportunity that it bargained away.

Billman v. Hensel.
o Facts:
 Billman (D) agreed to purchase a house from Hensel (P), subject to Billman’s ability to obtain financing. Billman (D) did not obtain
financing and did not purchase the house.
o Issue:
 Did the failure to obtain financing—a pre-condition set forth in the contract—excuse the Billmans’ (D) nonperformance?
o Decision and Rationale:
 (Garrard, J.) No. A provision in a contract that makes a party’s performance subject to a condition creates an implied obligation on
the part of that party to satisfy that condition.
 The (D) did not make a good faith effort to obtain financing:
o They talked to only one loan officer, they never made a formal application for a loan, they never informed the
(P) that the deal was contingent on obtaining money from their parents, and they did not explore financing
options when the (P) offered to reduce the price of the house.
 Accordingly, the (D) did not live up to their end of the bargain.
o Case Break Down:
 Party’s performance was not due until satisfaction of a condition
 (here, the condition was buyer getting a loan).
 Party must make a good faith effort to satisfy the condition.
 Party is not acting in good faith if buyer prevents the occurrence of the condition.
  Effectively what the (D) did.

Austrian Air v. UT Finance.
o Facts:
 When the buyer rejected the goods for nonconformance, the seller sued for the violation of the duty of good faith that is present
in every contract.
o Issue:
 Did Austrian Airlines (P) have a valid breach of contract claim against UTF (D)?
o
Decision and Rationale:

(Kaplan, J.) No. The general rule that parties to a contract must, in order to act in good faith, adhere to reasonable commercial
standards in the trade does not apply when the contract sets forth specific terms to the contrary.
 It is true that every contract imposes an obligation of good faith in its performance or enforcement.
 Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
o Analysis:
 UCC 2-103(1)(b) Good faith for sales of goods is honesty in fact and the observance of reasonable commercial standards of fair
dealing in the trade.
 Industry custom is relevant to whether something is “fair dealing in the trade.”
 Parties can specifically contract for something that is not customary in the industry.
 In that case, following the contract, which is against industry custom, is not bad faith.
 Here, UT specifically bargained for the right to reject non-conforming goods.

It’s motivation—to avoid the contract for financial reasons– doesn’t matter. It is getting the “benefit of its bargain.”
o Analysis:
 The Court affirmed the district court’s decision in this case, upholding the right of the aircraft purchaser to reject aircraft based on
nonconformities with contractual delivery conditions.
 The case demonstrates the importance of clear delivery conditions and terms that address the issue of compensation for
nonconformities.
o Nonconformities are often addressed through monetary compensation, but the understanding of this practice is
not clear even within the industry itself.
o Takeaway:
 It’s okay for a party to stand firm and demand what they bargain for.
25

Satisfaction Clauses:
o Where K requires satisfaction of a party, party must use good faith in determining satisfaction.

Example 1:
o I will buy one hundred pounds of potatoes from you if they are suitable for making French fries.
o Objective standard applies for determining good faith.
o Would a reasonable person be satisfied.
o Objective standard applies to things like commercial value or quality, operative fitness, and mechanical utility

Example 2:
o I will pay you $1,000 to paint a portrait of my dog to my personal satisfaction.
o Subjective standard applies.

Duty of Cooperation:
o Whenever the cooperation of one party is necessary to the performance of the other party, the contract contains an implied
promise that cooperation will be given.
 Our example is Patterson v. Meyerhofer.

Feld v. Levy.
o Facts:
 Feld (P) agreed to purchase all the breadcrumbs produced by Henry S. Levy (D), but (D) stopped production of the crumbs.
o Issue:
 Does a contract to sell a party’s entire output of a certain product include an implied agreement to make good faith efforts
to continue to produce that product for the term of the contract?
o Decision and Rationale:
 (Cooke, J.) Yes. The question in this case, however, depends on the resolution of factual issues at the trial level.
 The production of breadcrumbs was only a part of (D) business, so, short of cancellation as permitted by the
contract, the defendant was obligated to continue producing and supplying them unless the losses from the
contract were more than trivial, or if performance of the contract threatened the very existence of the business.
o The factual record does not allow a decision as to (D) good faith.
 The order affirming the denials of the motions for summary judgment is affirmed.
o Analysis:
 (D) termination of the contract in this case could actually indicate either good faith or the lack thereof.
 It could be argued that the termination shows a lack of good faith, as the contract had been performed for nearly a
year without significant problems, and (D) may have just wanted out of a bad deal.
 On the other hand, it could be argued that it shows good faith, or a lack of bad faith, as the contract did contain a clause that
allowed either party to terminate; if (D) just wanted out of a less-than-profitable deal, the business could have held on a
little longer and given notice per the terms of the contract.
 The apparently sudden termination of production arguably shows that termination was an “emergency” measure,
taken out of desperation.
o Why is this a case about good faith?
 UCC 2-306 output & requirements contracts are measured by “actual output or requirements as may occur in good faith.”
o How does the court analyze the seller’s refusal to make breadcrumbs?
 Whether an action is taken in good faith depends on the actor’s motives.
 “[A] bankruptcy or genuine imperiling of the very existence of its entire business,” could justify halting production.
o A mere loss of profit would not.
26

Hillesland v. Federal Land Bank.
o Facts:
 Hillesland (P) was discharged from his employment with the Federal Land Bank (D) for violating written standards of
conduct, damaging the image and reputation of the Federal Land Bank (D), and poor business judgment, and Hillesland (P)
claimed breach of an implied covenant of good faith and fair dealing.
o Issue:
 Did Hillesland’s (P) discharge violate an implied covenant of good faith and fair dealing?
o Decision and Rationale:

(Erickstad, C.J.) No. (P) was an employee at will, and there is no implied covenant of good faith and fair dealing in at-will
employment contracts.
 By statute, employment at will may be terminated at the will of either party.
o The statute does not set out any good faith requirement, and adoption of such an exception to the
general provisions of the statute should be created by legislative action, not by court decision.
o Dissent:
 (Pederson, J.) In all relationships between “civilized persons,” there is an obligation not to act in bad faith.
 There should be a remedy for an aggravated breach, or unconscionable conduct.
o Analysis:
 Even assuming that there was a good faith exception to the employment at will doctrine, (P) may have had a hard time
making his case.
 The transaction with the Westbys seems to have been, at best, questionable.
 Arguably, the (D) showed some inconsistency in how it dealt with the matter, but (P) probably knew that the initial approval
of the board of directors was not the final word on the matter.
o Is there an implied covenant of good faith and fair dealing in employment-at-will contracts?
 Courts vary by jurisdiction.
 California courts have found a violation of the duty of good faith where employers have violated their own stated
policies about termination.
 North Dakota court refuses to imply a duty of good faith into the employment-at-will context.
o Employer fire employee for a good reason, a bad reason, or no reason at all (subject to legislative
restrictions).
o At-Will Definition:
  Subject to one’s discretion; as one wishes or chooses; especially (of a legal relationship), able to be discharged by either
party without cause.
27
Warranties

Warranties:
o They are risk shifting measures.

What is warranty?
o A warranty is a representation by one of the parties that a fact is true.
 The representing party will compensate the counterparty if the warranted representation turns out to be false.
o There are two kinds of warranties:
 (1)  express,
 Express warranty is affirmatively communicated
 (2)  implied.
 Implied warranty is a term implied either by the UCC or by some other customary practice assumed by the parties.

Types of Warranties:
o Under the UCC, a seller may make several warranties that are of importance:
 (1) an express warranty  UCC 2-313,
 (2) an implied warranty of merchantability  UCC 2-314, and
 (3) a warranty of fitness for a particular purpose  UCC 2-315.
o If the seller breaches any of these warranties, the buyer may bring a damage action for breach of warranty, which can be viewed as
a special type of breach-of-contract action.

Definition of Express warranty:
o An express warranty is a description, affirmation of fact, or promise with respect to the quality or future performance of goods
that becomes part of the basis of the bargain.
 The affirmation may be in words or by sample or model.
 An affirmation merely of the value of the goods or merely of the seller’s opinion of the goods is not a warranty.
o An express warranty is an explicit (not just implied) promise or guarantee by the seller that the goods will have certain qualities.

Express Warranties:
o If a seller gives
 Assertions of fact and promises about the goods,
 A description of the goods, or
 Samples or models of the goods
o And these become a part of the bargain,
 Then an express warranty arises that the goods will conform to the representation.
 This happens even if the parties don’t use words like “warranty” of “guarantee.”

Warranty v. Puffery:
o Puffery  Example language:
 Puffery lacks specificity.
 Goods were of high quality,
 Good results would be obtained,
 Few repairs would be required, etc.
o Warranty:
 Goods will be free from defect for one year.
o What is the difference?
 Definiteness – the latter is sufficiently definite to allow a court to know when it’s been breached.

Rogath v. Siebenmann.
28
o
o
o
o
Facts:
 Seller of a painting expressly warranted in the bill of sale that the painting was authentic, but claimed the buyer actually
knew otherwise and purchased the painting anyway; the buyer sued for breach of warranty after his attempt to resell the
painting failed.
Issues:
 Was the buyer of the painting entitled to summary judgment in his favor on his breach of warranty claim against the seller?
Discussion and Rationale:
 (McLaughlin, J.) No, under the UCC 2-313 any description of goods that is made part of the basis of the bargain creates an
express warranty that the goods will conform to the description.

If it is merely common knowledge that the facts warranted are false, or the buyer was informed of the falsity of the
facts by a third party, the buyer may still prevail on his claim of breach of warranty.
o It is not unreasonable to assume that the buyer purchased the seller’s warranty as insurance against future
claims.
 When, however, the seller himself discloses up front the inaccuracy of certain of his warranties, it cannot be said
that the buyer believed he was purchasing the seller’s promise as to the truth of the warranties.
o Accordingly, what the buyer knew and whether he got that information from the seller are critical questions.
 Here, there is some dispute as to what the critical communication between the buyer and seller entailed. As such, the
matter cannot be resolved on a motion for summary judgment.
What does “basis of the bargain” mean?

Basis of the Bargain:
o Buyer must believe that she is buying the warranty as part of the deal.
 “[T]he critical question is not whether the buyer believed the truth of the warranted information . . . but whether he
believed he was purchasing the seller’s promise as to its truth.”
o If buyer knows that the warranted representations are false because of facts disclosed by the seller, the warranty clause is
unenforceable.
 But . . . if there is a known dispute about whether the warranted representations are false, and the buyer knows of it, it is
possible that he is buying a sort of insurance from the seller.
o K must make clear that buyer preserves rights by expressly stating that
 (1) the dispute exists and
 (2) buyer doesn’t waive right to the warranty even though he’s aware of the dispute.

UCC § 2-312  Title & Non-Infringement:
o In all sales of goods, seller warrants that:
 Seller has title,
 Title will be rightfully transferred, and
 Goods will not be subject to any liens, etc.
o If seller is a merchant, seller warrants that goods are not subject claim of infringement on another party’s intellectual property
rights.

UCC § 2-314  Merchantability:
o Unless excluded or modified,
o If the seller is a merchant of the type of goods contracted for, then
o Seller warrants that they will be fit for the ordinary purpose for which such goods are used.

Discussion of UCC 3-314:
o Perfection is not required. If goods of a certain description are acceptable in the trade despite 3% or less of the lot being rotten,
the warranty is not breached by rotten goods within this range.
 In many cases where the warranty of merchantability is raised, personal injury or physical injury to property has occurred
and tort thinking about strict product liability dominates.
 The following examples are limited to purely economic losses:
29

(1)  Examples:
o B purchased a used car from S, a dealer in used cars. While B was driving the car home, the transmission fell out. This was repaired,
and soon thereafter the brakes failed. B returned the car and properly revoked acceptance of it.
 A car with a defective transmission and brakes is not fit for the ordinary purpose—driving—for which a car is used. S, a
merchant, should not have sold it in the regular course of business.

(2)  Example:
o B purchased floor tiles from S, a merchant. Shortly after installation, the tiles began to yellow. B sues for damages.
 B recovers. The tiles are unmerchantable, not fit to be sold. A tile that discolors shortly after installation is not of fair
average quality.

UCC § 2-315  Fitness for Particular Purpose:
o If seller has reason to know:
 Of any particular purpose for which buyer will use the goods, and
 That buyer is relying on seller’s skill and judgment to select them, then
o A warranty arises that the goods will be fit for the particular purpose.
 (unless the warranty is excluded or modified at the time of contracting)

Example:
o B, a sawmill operator, went to S, a Mobil dealer, and asked for oil that would be suitable for use in the sawmill’s hydraulic system.
When asked by S to describe the system, B accurately described it. S checked with Mobil and suggested Ambex 810, which B used
for two-and one-half years, at which time B discovered not only that Ambex 810 was unsuitable for the hydraulic system, but was
also the cause of frequent breakdowns and production losses.
 S is liable for general and consequential damages for breach of warranty of fitness for a particular purpose. B relied on the
Mobil organization in selecting the appropriate oil. Mobil was aware that inappropriate oil would lead to the breakdown of a
sawmill.

Comment:
o In the illustration above the buyer expressly discussed the particular purpose with the seller, but all that is required is that the
seller have reason to know the buyer’s purpose and reason to believe that the buyer is relying on the seller’s judgment and skill.
 Note that even a non-merchant may make this warranty.

Warranty Disclaimers:
o The implied warranties are default rules.
 “This contract contains no warranties express or implied. This Clause includes but is not limited to the implied warranties
of merchantability and fitness.”
o “Item sold as is.”

Implied warranties Disclaimers:
o Disclaimers of the two implied warranties (merchantability and fitness for particular purpose) are tightly limited by the Code:

(1)  Explicit disclaimers:
o The seller may make an explicit disclaimer of these warranties, but only by complying with strict procedural rules:

(1.a)  Merchantability:
o A disclaimer of the warranty of merchantability must mention the word “merchantability.” §2-316(2).
 The disclaimer does not have to be in writing, but if it is in writing, it must be “conspicuous.”
 In other words, the disclaimer cannot be buried in the fine print of the contract.
o (Usually, capital letters, bold face type, bigger type, or a different color type are used to meet the
“conspicuous” requirement where the disclaimer is written.)
30

(1.b)  Fitness for a particular purpose:
o A disclaimer of the warranty of fitness for a particular purpose must be in writing and must also be conspicuous.
 (But it does not need to use any particular words, in contrast to a disclaimer of the warranty of merchantability.)
 (Example: The following language, if in writing and conspicuous, would suffice: “THERE ARE NO WARRANTIES WHICH
EXTEND BEYOND THE DESCRIPTION ON THE FACE HEREOF.”)

(2)  Implied limitations and disclaimers:
o There are also several ways in which the implied warranties may be implicitly limited or disclaimed:

(2.a) Language of sale:
o The language of the sale may implicitly disclaim the warranty.
 Most importantly, if the sale is made “as is,” this will implicitly exclude all implied warranties.

(2.b)  Examination of sample or model:
o If the buyer is asked to examine a sample or model, or the goods themselves, there is no implied warranty with regard to defects
which an examination ought to have revealed. UCC §2-316(3)(b).
 (Example: Buyer buys a floor sample T.V. from Dealer. If inspection of the cabinetry would have shown a dent, Buyer cannot
claim that the dent is a violation of the implied warranty of merchantability.)

(2.c)  Course of dealing:
o An implied warranty can be excluded or modified by course of dealing, course of performance, and usage of trade.
 (Example: The dealings of the parties on prior contracts might create a “course of performance” to the effect that the goods
are bought “as is” in return for a lower price.)

UCC 2-316(3):
o  If a buyer has inspected goods as fully as she desires, or has refused to inspect them, implied warranties do not apply to the
extent the defect should have been discovered.
o  Implied warranties can be modified by
 course of dealing (the parties’ past deals) or
 course of performance (what they’ve done in the current deal.
o  K language can limit remedies for breach of warranty.

UCC 2-719:
o K can designate remedies that will be available upon breach
 (typically repair or replace).
o If K specifies that these remedies are exclusive, no others are available.
o K can also limit consequential damages, but limit “cannot operate in an unconscionable manner.”
o If specified remedy fails to accomplish its “essential purpose,” court will not enforce it.

Limitation on Remedies:
o Even if there is no disclaimer, remedies for breach of warranty may be limited pursuant to the provisions of UCC §§ 2–718 and 2–
719.

Standard Warranty Provisions:
o Disclaimer of all implied warranties;
o Express warranty against defects in materials or workmanship;
o Limit on buyer’s remedies for breach;
o Limit on time to claim against express warranty (usually three months – one year);
o Exclusion of liability for consequential damages (won’t pay for damage to countertop caused by toaster fire); and
o Mandatory arbitration of buyer’s claims.
31

Disclaimer of Express Warranties:
o It is lawful for a contract to provide that no express warranties are given. Problems arise primarily in two situations:
 (1)  In the first, suppose that a written contract provided that there are no express warranties, but elsewhere in the
writing affirmations of fact or promises are made that constitute express warranties as defined in UCC 2–313.
 A rule of construction is provided in UCC 2–316(1) that mandates that whenever possible the two contractual
provisions be construed as consistent with each other.
o If consistency cannot be attained, the disclaimer is inoperative, and an express warranty exists. (If both the
express warranty and the disclaimer are oral the same rule prevails.)
 (2)  In the second situation, the written contract disclaims express warranties, but an express warranty has been made
elsewhere by statements in an advertisement or orally by an authorized agent of the seller.
 The substantive rule is again the same, but the practical question is whether the parol evidence rule will bar evidence
extrinsic to the contract.
o This, of course, depends on whether a court deems the writing to be the final and complete expression of the
parties’ intent.
 Even if it so finds, remember that some warranties may constitute misrepresentations and be
admitted on that theory in a tort or restitution action.
32
Conditions
[1] Express Conditions:

What is a Condition?
o R. (2d) § 224: An event that is not certain to occur, but which must occur, before performance under a contract becomes due.
 Example: If it rains on Tuesday, I will sell you a puppy for $1.
 I am only obligated to sell the puppy to you *IF* it rains on Tuesday.
o A condition is an act or event, other than the lapse of time, that, unless excused,
 (1) must occur before a duty to perform a promise becomes due (condition precedent) or
 (2) that discharges a duty of performance that has already arisen (condition subsequent).
o A promise may be conditional, or it may be unconditional (independent, absolute).

(1) Example:
o A promises to pay B $10,000 if B finds a buyer for Xanadu Acres on A’s terms. A’s promise is conditional. A’s duty to perform the
promise becomes unconditional only if the event occurs.
 Here, A has made an offer to a unilateral contract. B’s performance creates the contract and operates as a condition to A’s
duty to pay.

(2) Example:
o A promises to pay B $10,000 if B finds a buyer for Xanadu Acres on A’s terms. A bargains for and receives B’s promise to use best
efforts to find a buyer. The contract is bilateral, but A’s promise is again conditional.
 The contract is formed by the mutual agreement of the parties, but A’s duty to pay is conditioned on B’s performance.

(3) Example:
o For a consideration, A promises to pay B $10,000 on July 5. A’s duty to perform arises after a lapse of time.
 Because a lapse of time is the only event that must occur before A must pay, A’s promise is, by definition, unconditional.

What does a condition do?
o R. (2d) § 225:
 If performance is subject to a condition, the performance isn’t due unless either:
 The condition occurs, or
o (It rains; I must sell the puppy to you.)
 The non-occurrence of the condition is excused by the counter-party.
o (It doesn’t rain. I have no legal duty to sell.)
 Failure of the condition discharges the conditional performance.
 Failure of the condition is not a breach of a party unless that party has a duty to make the condition occur.

Why use a Condition?
o You can use conditions to allocate risk.
o Conditions serve two broad purposes:
 Enforcement – one party’s duty to perform is conditional upon some level of compliance or achievement by the
counterparty: or
 Performance – Duty to perform is triggered or discharged by external conditions.
33



Dove v. Rose Acre Farms 434 NE.2d.931. (Ind. Ct. App., 1982)
o Facts:
 P was employed by D, a construction company. D’s president created an incentive program that involved paying bonuses to
employees for certain positive acts. Under terms of program, if an employee was late for one minute or missed one day of
work, he would forfeit opportunity to earn a bonus.
o P/D Arguments:
 P brought suit against D in IN Ct, arguing that he substantially performed the bonus agreement and thus should be awarded
the full bonus. The trial court entered judgment for Rose Acre, and Dove appealed.
 P also argued that his performance was impossible due to illness.
o Impossibility is a defense against performance.
o Issues/Results:

Was perfect attendance a condition or a promise?
 Case interpretation case – To distinguish a condition from a promise, the Ct must interpret the K and figure out the
intent of the parties. [Find principal purpose]
o Purpose of K is to get perfect attendance not complete project.
 Ct says that terms of K is a condition
o Therefore, K needed to be strictly satisfied
o Rules:
 Condition must be strictly satisfied in order to trigger counter-party’s duty to perform.
 Unless otherwise specified by the K, a promise only needs to be substantially performed in order to trigger the counterparty’s duty to perform.
Takeaway of Dove:
o Know distinction between a condition, strictly satisfied in order to trigger the legal duty of the person toward whom that
condition runs, and a promise which is just part of consideration, where substantial performance can satisfy or trigger the other
party’s duty to perform.
 Promise  promise for promise.
In re carter’s claim:
o Facts:

Kardon (P) agreed to purchase a business, but the business was not in the promised financial condition and Kardon (P)
sought to recover damages for breach of warranty.
o Issues:
 May Kardon (P) recover damages for breach of warranty?
o Decision and Rationale:
 (Jones, J.) No. If a contracting party fails to comply with a condition of performance, the other party is under no obligation to
continue performance but may not recover damages if it elects to waive the condition and continue performance.
o To determine whether language was a warranty or a condition, court interpreted the contract.
 It was a condition.
 Ct looks at Circumstance of K.
o Document was carefully and meticulously prepared by able and competent council after long and thorough
negotiations.
 Circumstances are trustworthy.
 Ct then looks at contents of document.
o Document is free of ambiguity.

o Legal effect:
 when buyer completed sale despite the non-occurrence of the condition, the condition was waived.
o What does that mean?

K became fully binding on buyer, and buyer had no claim for damages based on non-occurrence of condition.
 Remember that this is in R(2d) § 225.
 Condition is “a shield but not a sword.”
o Damages may not be recovered for a party’s failure to comply with a condition.
34
[2] Waiver of Conditions:

Avoidance of forfeiture:
o However, courts often avoid applying the “strict compliance” rule where a forfeiture would result.
 A forfeiture occurs when one party has relied on the bargain (e.g., by preparing to perform or by making part performance),
and insistence on strict compliance with the condition would cause him to fail to receive the expected benefits from the
deal.

Excuse of Condition:
o A condition can be excused (avoided) in a variety of ways:
 Both parties agree to modify the contract to remove the condition;
 Party in whose benefit the condition runs waived the condition;
 Changed circumstances make compliance with the condition impracticable; or
 Condition is discharged by a court.

Excuse of Conditions Involving Forfeitures:
o A condition may be excused if
 (1) it involves an extreme forfeiture,
 (2) its occurrence is not a material part of the agreed exchange and
 (3) if one of the foundations for equitable jurisdiction exists.

Discussion of Excuse of Condition:
o If a case is an equity case in the sense that earlier in our history the case would have been brought in a separate court of equity,
certain special rules and maxims apply, including the maxim that “equity abhors a forfeiture.”
 Whenever a party seeks, and plausibly is entitled to, specific performance, specific restitution (except replevin), or an
injunction, the case is an equity case even though in nearly every jurisdiction law and equity are administered in the same
court.

Example:
o Holiday Inns obtained a 4½ year option to purchase certain vacant land from Knight for $200,000. The consideration for the
option was $10,000 paid on acquiring the option and four additional $10,000 payments payable on July 1 of each of the next four
years. The option agreement provided that the dates of payments were of the essence. Two of the annual installments were duly
made. The third, tendered on July 2, was rejected. Equity jurisdiction exists because each parcel of land is deemed unique.
 The court rules that the option is in effect. The failure of condition is slight, and the forfeiture is extreme—$30,000 already
paid for the option. The plaintiff is not attempting to extend the option period, but only to obtain relief from forfeiture that
would be caused by a late installment payment.

Waiver:
o Party in whose favor the condition runs Performs even though condition on performance is not satisfied

A party who owes a conditional duty may indicate that he will not insist upon the occurrence of the condition before
performing.
 A court will often take the party at his word and enforce that party’s willingness to forego the benefit of the condition.
In this event, the party is said to have waived the condition.
35

Clark v. West:
o Facts:
 Clark (P) claimed that West (D) waived a clause in a publishing contract that required him to abstain from liquor
in order to receive additional fees for his work. (P) sued for breach, alleging that he performed, except that he
did not abstain from liquor. (D) argued that it could not waive this condition without additional consideration.
o Issues:
 Is additional consideration necessary for waiver of the intoxicating liquor clause?
o Decision and Rationale:
 (Werner, J.) No. Additional consideration is not necessary for the waiver of a condition that is not part of the
subject matter of the contract.
 The contract was a contract for writing books, not remaining abstinent.
o The requirement that (P) abstain from drinking intoxicating liquor was a condition precedent to
receiving full payment for the books.
 A condition such as that may be waived without additional consideration, since it is not an essential part of
the agreement, but only incidental to performance. Reversed.
o Is the requirement that Clark not drink a promise or a condition?
 It is a condition.
o How does the court decide?
 Court interprets the K by looking at its primary purpose.
 Abstention is not the consideration for which West bargained.
o Instead, it is meant to aid the quality of the consideration.
o Waiver is intentional relinquishment of a known right.
 If West waived the condition, he must pay Clark the additional $4 per page, because he relinquished the right not
to.

Takeaway of Clark :
o (1)  If the condition is waived this is an intentional act on the part of one party to relinquish a right of enforcement
against that other party.
o (2)  The effect of that waiver is to make the contract as though the condition never existed in the first place, making
the performance to which condition is attached binging.

Cont. From Takeaway   How Does Waiver happen?
o Election-based waiver:
 Promisor knows that condition has failed but begins performance anyway.
o Estoppel-based waiver:
 Promisor says that it will not insist on the condition, and promisee changes her position in reliance.
o Judge-ordered waiver. R. (2d) § 302:
 A condition may be excused without other reasons if its requirement:
 Will involve extreme forfeiture or penalty, and
 Its existence or occurrence forms no essential part of the exchange for the promisor’s performance.
36

Dynamic Machine Works v. Machine & Electrical Consultants:
o Facts:
 Dynamic (P) purchased a lathe from Machine (D) but experienced difficulties upon delivery; at first Dynamic (P) granted
Machine (D) more time to cure the defects, but then it retracted the extension once it learned that the lathe would never
meet its expectations.
o Issue:
 Under the UCC, does a buyer have the right to retract a written extension of time for the seller to cure defects in a delivered
product, when the seller has not relied on the extension?
o Decision and Rationale:
 (Judge Undisclosed.) No. When an extension of time to cure defects in delivered goods constitutes a waiver of an executory
portion of the agreement, the buyer may retract it by reasonable notification received by the seller that strict performance
will be required, unless the retraction would be unjust in view of the seller’s material change of position in reliance on the
waiver.
 If a written extension constitutes a modification of the agreement to purchase the product, the buyer may not
unilaterally retract it.
o Under the UCC, an agreement modifying a contract needs no consideration to be binding.
 And even if the requirements of the Statute of Frauds are not met, the modification or rescission of an
agreement can operate as a waiver. The UCC does not define modification or waiver.
 Determining whether the letter granting the extension constitutes a waiver or a modification in this case is in large part
a question of fact.
o The answer turns on whether (P) and (D) mutually agreed to extend the commissioning deadline. The fact that
the extension was granted in a signed writing does not establish that the extension was intended to be a
modification and not a waiver.
 A waiver can be inferred from a party’s conduct and the surrounding circumstances, but it can also be
express.
o Was the postponement of the deadline a waiver or a modification of the contract?
o Why does it matter?
 Modification is an agreement of both parties and cannot be unilaterally retracted by one of them.
 Waiver is one party deciding to forgo a bargained-for benefit,
 Can be unilaterally retracted as long as the other party hasn’t relied on it.
o Whether it’s a waiver or a mutual modification is a question of fact.

Takeaway of Dynamic:
o Legal distinction between a turn of that’s not a condition and a turn of a contract that is a condition
 Condition is really this unilateral thing.
o When you see modification of a condition or a terms,  it was once a unilateral item now it’s become mutual.
 We need both parties.
o Thus, if you have modification of a condition by both parties.
 That condition is no longer unilateral

Distinction between conditions and promises:
o The fact that an act is a condition does not by itself make it also a promise.
 If the act is a condition on the other party’s duty, and the act fails to occur, the other party won’t have to perform.
 If the act is a promise, and it doesn’t occur, the other party can sue for damages. But the two don’t automatically go
together.

Example:
o Landlord promises Tenant that Landlord will make any necessary repairs on the leased premises, provided that Tenant gives him
notice of the need for such repairs. Tenant’s giving notice of the needed repairs is an express condition to Landlord’s duty to
perform the repairs. But such notice is not a promise by Tenant.
 Therefore, if Tenant does not give the notice, he has not committed any breach of contract, but a condition to Landlord’s
duty has failed to occur. Landlord is relieved from having to make the repairs, but cannot sue Tenant for breach.
37

(1)  Distinguishing:
o To determine whether a particular act is a condition, a promise, or both, the main factor is the intent of the parties.
  Words like “upon condition that” indicate an intent that the act be a condition,
  Words like “I promise” or “I warrant” indicate a promise (though as described below, failure to keep the
promise will also generally constitute the failure of a constructive condition).
[3] Constructive Conditions:

Use in bilateral conditions:
o Remember that a constructive condition is a condition which is not agreed upon by the parties, but which is
supplied by the court for fairness. The principal use of constructive conditions is in bilateral contracts (where each
party makes a promise to the other).

(1)  General rule:
o Where each party makes one or more promises to the other, each party’s substantial performance of his promise is
generally a constructive condition to the performance of any subsequent duties by the other party.

Example:
o Contractor agrees to build a house for Owner for $100,000. The contract provides that Owner will pay $10,000 upon
completion of the foundation and provides a schedule on which the work is to proceed. No language of condition is
used anywhere in the document. Contractor builds the foundation on schedule, but Owner without cause refuses to
pay the $10,000 charge.
 Owner’s fulfillment of his promise — to pay $10,000 — is a constructive condition of Contractor’s duty to
continue with the work. Therefore, Contractor does not have to continue with the work until Owner pays
the $10,000, even though the contract does not expressly make Contractor’s duty of continuation
conditional upon Owner’s making the first payment. The court simply supplies this “constructive condition”
for fairness, reasoning that Contractor shouldn’t have to keep doing work if Owner hasn’t been keeping his
part of the bargain.

Constructive Conditions  Implied Conditions by court or law Default Rules:
o Constructive Conditions General answer three questions about a contractual relationship:
 (1)  Does one party’s breach relieve the other of the duty to perform?
 Dependent obligations:
o If Party A breaches, Party B’s performance is excused.
 Independent obligations:
o Party required to perform even if Party B does not.
 (2)  In what order must the parties perform?
 Is Party A’s performance an implied condition to Party B’s duty to perform?
 (3)  If yes, how complete must Party A’s performance be to trigger Party B’s duty to perform?
 Default rule is that unless Party A’s breach is material, Party B still must perform.
o If Party A’s breach is a substantial one (meaning that it is “material”), Party B can sue for
breach without performing.
38

Palmer v. Fox:
o Facts:

o
o
o

Palmer (P) brought suit against Fox (D) for the balance of the purchase price for property, and Fox (D) claimed that the agreement
to pay was dependent upon Palmer’s (P) promises to perform work and tender a deed.
Issues:

Were the agreements independent?
Decision and Rationale:

(Toy, J.) No. Agreements will not be construed to be independent unless it clearly appears that it was the intent of the parties that
the agreements be independent.

It is clear from the language of the contract between the parties that they considered the agreements to be dependent.
o
The contract does not, on its face, contain any language from which it may be concluded that the agreements are
to be independent, but seems to contemplate that all improvements would be completed before the final
payment of the purchase price. Reversed.
How does the court determine whether the party’s obligations are dependent or independent?

Parties’ duties under the K are dependent or independent “according to the intentions of the parties and the good sense of the
case.”

Courts will find the parties’ duties independent only if “there is no other mode of construing the instrument, and unless it
clearly appears to have been the deliberate intention of the parties at the time the instrument was executed.”
o “A party should not be forced to pay out his money, unless he can get that for which he stipulated.”

If Party A does not substantially perform and performances are dependent, Party B is not obligated to perform.
Quiz Problems:
o A offers to pay B an extra $60 if B can mow the grass in half an hour. B mows the grass in 32 minutes. What is most likely to be true?

A does not owe the extra money to B because B did not satisfy the condition.

Mowing the grass quickly is a condition precedent to A's contractual duty to pay the bonus. A's duty to pay does not arise
unless B strictly satisfies the condition.
o Amazon can deliver A's groceries by 5:00 p.m. tomorrow for $10, or it can deliver them by 10:00 p.m. today for $18. A chooses to have the
groceries delivered today for $18. The groceries are late, and do not arrive until 7:00 a.m. tomorrow. Assume no contractual limitations of
liability. Which of the following is most likely true?

A is required to pay most or all of the $18 fee.

In this case, Amazon's earlier deliver window is a promise and not a condition. How do we know? $18 is the consideration
given for the delivery service as a whole. A has expressed willingness to pay this amount for delivery today. In contrast, if
timely delivery were a condition of payment, the contract would make payment of the additional $8 contingent on delivery
today instead of tomorrow. As it stands, Amazon has merely promised to deliver today, and by failing it has breached that
promise. A is entitled to damages for the breach, but of course, they won't amount to much.
o The mayor hires Spiderman to climb to the top of the city's tallest building as part of a festival. The contract price is $250, with an
additional $100 if Spiderman can make the climb wearing a 200 pound weight. On the day of the climb, it is 95 degrees. The mayor tells
Spiderman not to worry about the weight, and that he will pay the full price regardless. Spiderman, who could have done it but would
have been exhausted, is relieved and starts to climb without it. The crowd loses interest instantly, and the mayor says that Spideman must
wear the weight after all. Spiderman continues to climb without the weight, and the mayor refuses to pay the additional $100. Which of
the following is most likely true?

The mayor must pay the additional $100 because Spiderman relied on the mayor's waiver.

Although the mayor's payment of the additional $100 is conditioned upon Spiderman wearing the weight during his climb,
the mayor's waiver of the condition (that Spiderman climb wearing the weight) removes the condition from the contract
and cements his duty to pay the additional amount. The mayor could retract his waiver, but only if Spiderman has not
relied on it. In this case, Spiderman does rely on the waiver by beginning to climb without the weight. As a result, the
mayor's duty to pay the additional amount remains binding.
o A promises to pay B $8 an hour to work in car sales. In addition, B will receive an additional day of paid vacation for each luxury car that B
sells. B sells several budget cars, but never sells even a luxury car- not even one! B has not breached the employment contract with A.

True.

B has not promised to sell any luxury cars. A has merely promised to provide additional compensation in the event that B
does so.
o A offers to paint a B's room for $100. B says, "Yes, I will pay you $100, but only if you use three coats of paint." A uses only two coats of
paint. Which of the following is most likely true?

A is in breach, and B is required to pay A for the work.

A promised to use three coats of paint in exchange for $100, but she only used two. B is entitled to damages for A's breach.
39
Impracticability







Types of Impracticability (2 forms):
o Existing, the problem was already there just not aware
o Supervening, something has come up that the parties couldn’t have anticipated at the time of the K.
What is it:
o The general rule is that when a contractual promise is made, the promisor must perform or pay damages for the failure to perform no matter how
burdensome performance has become as a result of unforeseen changes.

The doctrine of impracticability is an exception to this rule of no-fault liability.
Doctrine of Impracticability – When:
o When a performance becomes impracticable because of an event that the parties assumed would not occur when making the contract, the
duty is discharged, unless the language or situation points to a contrary result.
Three Part Test of Impracticability:
o In determining whether the defense of impracticability applies, three questions are considered.

(1) Was there, contrary to a basic assumption of both parties, an unexpected contingency?

(2) Did this event make performance impossible, or under the modern and UCC view, impracticable?

(3) Upon whom should the risk of the unexpected contingency be placed?
Taylor v. Caldwell 122 Eng. Rep. 309. (1863).
o Facts:

P rents D’s music hall for four nights. Music hall burns down prior to P’s events. P sues to recover loss of the events
o Issue/Results:

Did the destruction of the concert hall excuse Caldwell’s performance?
o Decision and Rationale:

Yes. Continued existence of the concert hall was the very essence of the K.

Court creates an implied condition: parties must perform so long as subject matter of the contract does not perish.

Parties are excused from performance.
The proverbial small potatoes . . .
o Facts:

Seller promises to deliver 2,000 tons of potatoes, grown on S’s farm, to a buyer. Pestilence strikes the farm and destroys the potato crop.
Seller is excused from performance.

Seller’s performance in the example is “vitally different” from what the parties anticipated.
o Basic assumption is that there was to be no pestilence.
United States v. Wegematic Corp. 360 F.2d 674 (2d Cir. 1966).
o Facts:

Wegematic (D) agreed to sell a computer to the Federal Reserve Board (P) but did not make delivery, citing engineering difficulties that
were allegedly impracticable to fix. D requested release of K without damages.
o Issue:

Is Wegematic (D) excused from performance on the grounds of impossibility where it failed to live up to its own standards?
o Decision and Rationale:

(Friendly, J.) No. A party will not be excused from contractual performance due to that party’s inability to meet performance standards set
by that party.

(D) submitted a proposal to build a computer system to specifications that were set by (D).
o (D) assumed the risk that it would not be able to make delivery on time by agreeing to the liquidated damages clause.

In addition, although re-engineering the computer system would have been costly, the cost must be compared not to the price of
the single computer ordered by the (P), but to the potential profits that could be obtained by selling other computers of the same
model to other customers. Affirmed.
o Governed by UCC §2-615 – Default rule that may be K around.

Unless the seller has contractually assumed a greater obligation, the seller’s failure or delay in delivery is not a breach if

It is made impracticable by an event, and

Non-occurrence of the event was a basic assumption on which the contract was made.
o
It’s all about Allocation of Risk.

Is non-occurrence of an event a “basic assumption” on which the K was made?

No, it is not a basic assumption.
o Look for it in the K.
o
Explicit allocation of risk means that parties contemplated occurrence of the event.
40




R. (2d) 261 – Impracticability – Default rule parties can K around.
o If, after the contract is made, A party’s performance is made impracticable Without the party’s fault, By the occurrence of an event, the nonoccurrence of which is a basic assumption upon which the contract is made, (lack of market shift and financial ability to perform are not basic
assumptions)

Then the party does not have to complete performance, unless

The language or the circumstances indicate to the contrary.
Supervening Events
o Include but are not limited to:

Death or incapacity of a person necessary for performance (R.2d 262),

Could person in question delegate his role without permission, if yes then party is not significant enough

Destruction of the thing necessary for performance (R.2d 263), and

Supervening prohibition or prevention by law (R.2d 264).
Example 1 – R(2d) 261
o On June 1, A agrees to sell and B to buy goods to be delivered in October to a designated port. The port is subsequently closed by quarantine
regulations during the entire month of October, no commercially reasonable substitute performance is available, and A fails to deliver the goods.
A’s duty to deliver the goods is discharged, and A is not liable to B for breach of contract.

May be additional remedy – Restitution

If B has paid A for goods, A will be required to render restitution to B and give that money back.
UCC 2-613 & 2-614
o
UCC 2-613: If Goods are destroyed in a casualty; Without the fault of either party; Before the risk of loss passes to the buyer, Then the K is
avoided. If loss or deterioration is partial, buyer can demand to inspect and accept the goods at a lesser price (and if inspection isn’t favorable,
buyer can still avoid the K).
o UCC 2-614: If the manner of transport or payment become impracticable, the parties must use a commercially reasonable substitute if one can be
found.
Frustration of Purpose

Impracticability v. Frustration
o
Impracticability:

Party A sues Party B because Party B has failed to perform due to an event that makes performance extremely burdensome.
o Frustration of purpose:

Party A no longer wants Party B’s performance because changed circumstances make it meaningless, and Party B sues Party A for refusing
to accept it.

Krell v. Henry 3.K.B. 740 (Ct. App. 1903)
o Facts:

P advertised his apartment as available for use for viewing the coronation procession of King Edward VII. R responded, and a K was agreed
upon whereby R was to have the use apartment for two days in exchange money. The coronation due to illness of the King. P had already
received one-third of the agreed price and sued to recover the balance due.
o Petitioner/Respondent:

R has the defense of frustration.

Note that there is no impossibility of performance.
o R can pay, and P can let R have the rooms.
o P has not breached. He has not promised that the coronation would take place. Yet it is clear that the coronation was the
basis on which both parties entered into the K.
o Issues/Results:

Does R have to pay the entirety of the K?
o Decision and Rationale:

No, The Ct ruled that the coronation parade was the basic foundation of the contract and that its cancellation discharged the parties from
the contract.

The K was senseless but for the expected coronation and P’s K was senseless but for the expected coronation and Krell’s enrichment
was unearned.
o Rules:

Rule in Taylor not limited to destruction of contract’s subject matter, it also applies to destruction of the contract’s purpose.

Where an unanticipated event has substantially frustrated the principal purpose of the contract, performance is excused.

Ct in Krell looked at two things:

(1) What was the substance of the contract?
41

(2) Does it require parties to base contract on assumption that a particular set of circumstances will continue to exist?
o If so, their continued existence is a condition precedent to the parties’ duty to perform.
o




Notes:

In some cases, supervening events do not make performance impossible or even more difficult, but instead merely frustrate the purpose
of one of the parties.
R.(2d) 265
o If a party’s principal purpose is frustrated;
o Without his fault;
o After the contract is made;
o By an occurrence of an event, the non-occurrence of which was a basic assumption of the contract, then
o Parties’ remaining duties may be discharged.
o (unless the contract says otherwise!)
What is frustration? (Putting on baby’s shoes!) – Pointless
o Frustration – a change in circumstances that makes one party’s performance virtually worthless to the other.
o Principal purpose of contract is affected.

It is “so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.”
o Must be “substantial,” not a mere loss in profitability.

Problem is so severe that it can’t be regarded as one of the risks allocated by the K.
o Real Question – Which party assumed the risk of the occurrence.

Ct looks at the terms and circumstances to find this answer.

Ct also looks at the strength of the bargaining position and wither they could have allocated the risk. [Punishing strong party for not having
foresight to allocate risk].

Allocations of Risk Clause
Force Majeure Clause
o Example – A party is not liable for failure to perform the party's obligations if such failure is as a result of Acts of God (including fire, flood,
earthquake, storm, hurricane or other natural disaster), epidemics, quarantine restrictions, war, invasion, act of foreign enemies, hostilities
(regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities,
nationalization, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity, telephone, or
internet service.
Washington State Hop Producers, Inc. v. Goschie Farms, Inc. 773 P.2d 70 (Wash. 1989).
o Facts:

Washington State Hop Producers (P) sold government-required allotments for growing hops to Goschie Farms (D), which refused to
perform the contract after the government no longer required the allotments.
o Issues:

Did the termination of the allotment program amount to a frustration of purpose?
o Decision and Rationale:

(Smith, J.) Yes. When the principal purpose of a contract is frustrated, so that performance of the contract makes little sense, the duty to
render performance is discharged.

After the federal government announced termination of the hop allotment program, there was no point in buying the allotments.
o The frustrating event was not the decline in value of the allotments, but the fact that there would be no need to have an
allotment in order to market hops.

It does not matter that the termination of the program may have been foreseeable.
o Foreseeability is only a relevant factor in determining whether nonoccurrence of a frustrating event was a basic
assumption on which the contract was made.

Affirmed.
o Notes:

In Goschie a K for the sale of governmental marketing allotments for hops was frustrated when the US Dept Ag cancelled its allotment
program and permitted hop growers to market their hops without a governmentally approved allotment.

In this and other frustration-of-purpose cases, both parties shared the same underlying ultimate purpose for the K.
o When unanticipated events made performance pointless, the parties were excused.
42
Performance
[1] Recap of Constructive Conditions



What is Breach?
o Any non-performance is breach.
 If I promise to sell you a veggie burger with ketchup and a pickle on Tuesday morning at 9:00 a.m. EST and I miss any of the
five requirements, I’ve breached.
o Then what happens?
 Are you still required to pay me?  Yes
 Do you have to give me an opportunity to bring you the right burger? 
 Do you have the right to sue me? 
Constructive Conditions:
o We infer an order of performance from contracts.
What does this mean:
o If party A’s performance is due before party B’s, then party A’s performance is a constructive condition of party B’s performance.
 Unlike express conditions, constructive conditions do not have to be strictly satisfied.
o Substantial performance is enough!

What is the effect of the constructive condition?
o Same as any condition (except that substantial performance is enough)!
o If Performance B is constructively conditioned on Performance A,
o Performance B is not due until Performance A is completed, and
o When Performance A can no longer be completed, Performance B is discharged (i.e. never becomes due/is excused).

How do you know when performance is due?
o  Read K. If it specifies an order of performance, that’s the order.
o  If it does not specify an order of performance, one is implied using these guidelines from R(2d) 234:
  If the performances can be done simultaneously, then they are due simultaneously.
  If one performance takes time, but the other doesn’t, the one that takes time goes first.
 Ex: A builds a B’s tree fort for $250. A performs first.
[2] Material Breach

When Is Breach “Material”?
o The determination “turns on a standard of materiality that is necessarily imprecise and flexible.” See R(2d)241 (comment a).
o Consider the following from R(2d) 241:
 (1)  Extent to which the injured party will lose a benefit which they reasonably expected.
 (2)  Extent to which injured party can be adequately compensated for that loss.
 Is it ephemeral?
o If so, it’s probably not material.
 Is injured party asking for specific performance?
o That may work in favor of materiality
 (3)  Extent to which party failing to perform acted in accordance with standards of good faith and fair dealing.
o On the Side of the party failing to perform; Court Considers:
 (4)  Extent to which the party failing to perform will suffer forfeiture.
 (5)  Likelihood that party failing to perform will cure the failure.
 Must take into account all circumstances including reasonable assurances.
43

Example:
o Harrison, a dry-cleaner, leased a sign for a three year term at $150 per month. During the term of the lease, Walker was obligated to
maintain the sign. At the expiration of the lease, Harrison was to receive title to the sign. After the first month, someone splattered
the sign with a tomato. Walker ignored many telephone demands by Harrison that it send someone to clean the sign. Angrily,
Harrison telegraphed Walker that he was canceling the contract. Walker sues for the rent.
 Judgment for Walker. The damage was easily curable. If Harrison had hired someone to clean the sign, he could have
recovered this sum from Walker. Harrison had the substantial benefit of the sign and cancellation of the contract would
result in a harsh forfeiture of Walker’s performance.

Comment:
o Students must remember that substantial performance and material breach are usually opposite sides of the same coin.
 If a party has substantially performed, any breach by this party can only be immaterial.
 Conversely if a party has committed a material breach, this party’s performance cannot be substantial.
o Thus, the way in which the issue is stated is ordinarily not of great importance.
 However, there are instances where the two ways of framing the issue are not interchangeable—when the two are not
opposite sides of the same coin.
o For example, if one party has not yet performed at all, substantial performance has not been rendered, but a material breach has
not necessarily occurred.

Examples (1):
o A promises to restore B’s antique automobile and to fix a flat spare tire. B, in exchange, promises to pay $28,500. A delivers the
restored automobile but fails to fix the tire. When the car was delivered, A had substantially performed and therefore there was no
material breach. A is entitled to $28,500, minus B’s damages for A’s failure to fix the tire.
Example (2):
o Vendor agreed to deliver title to a certain lot and to pave the streets in the subdivision in which the lot is located. Vendor tenders a
conveyance of title but has not paved the streets. Vendee rejects the tender and refuses to pay. Vendor has not substantially
performed. Paving the streets is more important than fixing the flat tire was in the previous illustration. Although Vendor has not
substantially performed, it may be that Vendor is not yet guilty of material breach. Consequently, on the bare facts stated we
cannot determine if the developer is guilty of a material breach that would justify an action by the vendee for total breach.


Factors Used to Determine Substantial Performance (May the Defaulting Party Recover?):
o (1)  To what extent has the injured party obtained the benefits sought by contracting?
o (2)  To what extent may the injured party be adequately compensated in damages?
o (3)  To what extent has there been performance or preparation for performance?
o (4)  How great is the hardship if the breaching party is not permitted to recover?
o (5)  Was the breach willful?
o (6)  How certain can the court be that the party in breach would have completed performance?

Example:
o A agrees to build a house for B. One of the promises made in the contract is that Reading brand pipe will be installed. A’s plumbing
subcontractor installs mostly Cohoes brand pipe. Although the piping is just as good as Reading, this is a breach by A. This breach
was not discovered until after most of the plumbing is encased in plaster walls. B refuses to pay A the final payment.
 The court found for A. B has obtained the desired result: a house that generally conforms to his contract. A’s deviation was
not willful. A may recover the agreed price minus B’s damages, if any. A contrary result would impose a harsh forfeiture.

Effect of Delay:
o If the contract makes “time of the essence,” ordinarily any lateness will be considered a material breach.
 Otherwise, a reasonable delay will not be considered a material breach.
 In the case of contracts for the sale of goods, however, the UCC makes time of the essence except in the case of
installment contracts.
44

Examples  (1):
o S contracts to deliver a lathe to B’s plant on November 15. S tenders delivery on November 16.
 Under the “perfect tender” rule of the UCC, B may reject the goods and hold S liable for total breach.

Note, however, that sellers rarely contract for delivery on a date certain.

Examples  (2):
o Builder agrees to build a warehouse for Wholesaler to be completed by June 30. On June 30 the work is incomplete and it appears
that it will take two more weeks to finish. Wholesaler purports to cancel the contract. Absent extraordinary circumstances known to
Builder at the time of contracting that makes completion by June 30 essential, such as the warehouse was needed on July 1 for
Wholesaler to win a contract from a third-party supplier, Builder’s delay is not a material breach.
 Wholesaler’s purported cancellation is a wrongful repudiation.
 Note carefully that although Builder’s delay is not material, the delay is a breach and Builder is liable for delay
damages.

Examples  (3):
o A agrees to convey Xanadu Acres to B for $20,000 on June 30. The contract states that “time is of the essence.” On June 30, A is
unable to convey marketable title because of an ancient mortgage that is still of record. A’s lawyer informs B that a proceeding to
clear the records had been started and a decree quieting title will likely issue in a day or two. B cancels.
 B’s cancellation is proper.
 The phrase “time is of the essence” indicates an intent that tender of performance by the date stated is an express
condition precedent. Consequently, as in the case of other express conditions, the general rule is that strict compliance
is required. However, there is a growing school of thought that indicates that “such stock phrases” do not necessarily
have this effect. They are to be considered along with other circumstances in determining the effect of delay.
Nonetheless, most courts employ the traditional rule and treat this stock phrase as creating an express condition.

What Is Forfeiture?
o Forfeiture is the loss that a party will have.

Example:
o A has invested all of her time for the last two weeks building a garage for B. The garage is finished, except A used vinyl siding
instead of the wood siding that B requested.

What happens if a court finds that A materially breached?

B is not required to pay A and can sue A for breach.
 A will lose the benefit of being paid promptly for her work.
o FORFEITURE IS LOSS TO A
 A may eventually get restitution, which means that B will have to return to A the value of what A has given to B, but
this takes time and may not account for A’s expected profit.

How do courts use good/bad faith in determining material breach?
o Good faith won’t save a party who has committed material breach, but
o Bad faith can weigh against a finding of substantial performance.
o It’s not dispositive though.
o See example 6: Jacob & Youngs v. Kent.


R (2d) 241 (commentary (f)(7))
When does breach become material?
o R(2d) 242: Consider all of the circumstances that determine whether breach is material. Then add:
 Extent to which it reasonably appears that delay will prevent or hinder the injured party from making substitute
arrangements; and
 Whether the agreement requires performance without delay. (Often this is a “time is of the essence” clause.)
 Not dispositive. Must determine whether performance without delay is actually important.
45
o
Consider agreement AND facts & circumstances

Factors for determining cure period:
o R(2d) 242 (comment (b)):
 Extent that delay will deprive injured party of an expected benefit,
 Extent that injured party can be adequately compensated for the delay,
 Extent of forfeiture of breaching party,
 Likelihood that injured party’s withheld performance will induce cure by breaching party,
 Reasonableness of injured party’s communication of its grievance to the breaching party,
 A continuing relationship, like installment delivery, should allow more time to cure,
 Nature of the behavior of the breaching party (acting in good faith?).

Condition v. “Time Is of the Essence”:
o R.(2d) 242 (comment (d)(8)
 A charters a ship from B “on the condition that the vessel arrive in New York ready for loading by March 1.” The ship isn’t
ready until March 2.
 Result?
o A is excused because B failed to satisfy the condition.
 Remember, strict compliance is required for express conditions.
 What if the contract said instead that A would charter the ship, which would be ready to load on March 1, and “time is of the
essence?”
 Facts & circumstances inquiry now, but clause is evidence that date is important.

Quiz Hypotheticals:
o Party A has agreed to replace the roof of Party B's house and recap Party B's chimney. Replacing the roof will take two days and
require $7,000 of materials. Recapping the chimney will take two hours and will require $100 worth of materials. Party A
completes the roof but forgets the chimney. Which of the following is most likely true?
 Party B's performance is due.
 A has substantially performed, which satisfies the constructive condition of B's performance. B can sue for breach, but
not until B has substantially performed.
o
Party A agrees to cater Party B's wedding. Party B will pay Party A $5,000, with an additional $1,000 if 20 or more unexpected
guests attend. There are 19 unexpected guests, and Party A serves each one a meal and drinks. Party B is required to pay most
of the $1,000 additional amount to Party A because Party A has substantially performed.
 False
 The condition is an express condition, so substantial performance by A is not enough to trigger B's duty to pay the
additional $1,000. Express conditions require strict compliance.
[3] UCC and Performance

UCC 2-507  Tender:
o Seller’s tender of goods is a condition of buyer’s duty to accept and pay for them, unless otherwise specified.
 To “tender” is to put conforming goods at buyer’s disposition and to notify buyer of it. (UCC 2-503)
 “Tender entitles the seller to acceptance of the goods and to payment according to the contract.”

1  UCC 2-601Perfect Tender Rule:
o If the tendered goods fail in any respect to conform to the contract, the buyer may:
 Reject the whole tender,
 Accept the whole tender, or
 Accept any commercial unit(s) of the tender and reject the rest.
46
o
Default rule  it can be modified explicitly or by implied terms arising from course of performance, course of dealing, or trade
custom.

(1a)  “Perfect tender” rule:
o UCC 2-601 says that as long as the contract does not involve installments (i.e., multiple deliveries), “Unless otherwise agreed…if the
goods or 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.”
 On its face, this section seems to impose the “perfect tender” rule — that is, it seems to give the buyer the right to cancel the
contract, and refuse to pay, if the goods deviate from the contract terms in any respect, no matter how slight.

(1b)  Not so strict:
o But in reality, there are loopholes in this “perfect tender” rule.
 Courts usually only allow buyers to reject the seller’s delivery if the defect is a substantial one.
 Also, the buyer must follow strict procedures for rejecting the delivery, and the seller generally has the right to “cure” the
defect.

2  UCC 2-602  Rejection of Goods [if there is not perfect tender]:
o Buyer’s rejection must be within a reasonable time of seller’s tender.
o Buyer must notify seller of the rejection.
o If buyer has physical possession of the goods, it must hold them with reasonable care for a time sufficient for seller to remove them.

(2a)  Mechanics of rejection:
o The buyer may “reject” any non-conforming delivery from the seller.
 As noted, in theory this right exists if the goods deviate in any respect from what is required under the contract. But the
buyer’s right of rejection is subject to some fairly strict procedural rules:

(2a1)  Time:
o Rejection must occur within a “reasonable time” after the goods are delivered. The buyer must give prompt notice to the seller that
buyer is rejecting. §2-602(1).

(2a2)  Must not be preceded by acceptance:
o The buyer can only reject if he has not previously “accepted” the goods. He will be deemed to have “accepted” them if either:
 (1)  after a reasonable opportunity to inspect, buyer has indicated to the seller that the goods are conforming or that he
will keep them despite non-conformity; or
 (2)  buyer fails to make a timely rejection (though this cannot happen until buyer has had a reasonable inspection
opportunity); or
 (3) buyer does “any act inconsistent with the seller’s ownership” (e.g., using the goods as part of a manufacturing process).
See §2-606(1).

3  UCC 2-508(1)  Cure:
o (1) If a non-conforming tender is made; and
o (2) Time for performance hasn’t expired; and
o (3) Seller notifies buyer of its intention to cure, then
o Seller can make a conforming delivery within the contracted-for time.

(3a)  Cure:
o Both the buyer’s right to reject and his right to revoke an acceptance are subject to the seller’s right to cure the non-conformity. See
§2-508(1)

(3b)  UCC §2–508(1) Within the Contract Time.
o If a non-conforming tender is made and the time for performance has not yet expired, the seller may seasonably notify the buyer of
the seller’s intention to cure and may then within the contract time make a conforming delivery.
47

Example:
o B contracts to purchase a new Aston–Martin automobile from S. On tender of delivery, B notices some small dents and scratches
that were made in the course of shipment from the factory to S. S offers to cure by delivering a conforming undamaged
replacement, and the time for delivery has not expired.
 S has the right to cure.

(3c)  Beyond contract:
o
Even after the time for performance under the contract has passed, the seller has a limited right to cure: he gets additional time to
cure once the time for delivery under the contract has passed, if he reasonably thought that either:
 (1) the goods, though non-conforming, would be acceptable to the buyer; or
 (2) the buyer would be satisfied with a money allowance. See UCC §2-508(2).

4 UCC 2-508(2)  Seller Expects Acceptance:
o  If a buyer rejects non-conforming goods when seller had reasonable grounds to think that buyer would accept them, With or
without a money allowance for the defect,
o  If seller notifies buyer of seller’s intent to cure, then Seller may have “a further reasonable time” to substitute conforming goods.
(Remember Austrian Air?)
o Example 1:
 Seller delivers better goods than buyer ordered.  seller will be given opportunity to cure.
o Example 2:
 Seller doesn’t know about the non-conformity, and there is no history of non-conformity (for instance, goods shipped in
sealed boxes to seller, who doesn’t open them and sends them on to buyer).  seller will be given opportunity to cure.

(4a)  UCC §2–508(2) A Further Reasonable Time:
o Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or
without a money allowance the seller may, if it seasonably notifies the buyer, have a further reasonable time to substitute a
conforming tender.

5
o
o
o
o

(5a1)  Express Acceptance  2-606(1)(a):
o If, after a reasonable opportunity to inspect the goods, the buyer signifies to the seller that the goods are conforming or that they
will be kept despite their non-conformity, the buyer has accepted.
 A buyer who signs a seller’s form stating the goods have been inspected and are conforming has not accepted under this rule
unless there genuinely was a reasonable opportunity to make more than a cursory inspection.

(5a2)  Failure to Make an Effective Rejection  2-606(1)(b):
o Failure to reject does not operate as an acceptance until the buyer has had a reasonable time to inspect the goods.
 To make an effective rejection, the buyer must seasonably notify the seller of the rejection.
 After a rejection is properly communicated, it is to be remembered that the seller often has the right to cure.
o Consequently, the UCC provides in 2-605 that when goods are rejected the buyer must state all defects that are discoverable by
reasonable inspection.
 To justify a rejection or a claim of breach, the buyer cannot rely on any discoverable unstated defect that the seller could
have cured.
o Between merchants, a more drastic rule prevails.
UCC 2-206  Acceptance occurs when:
(1)  Buyer tells seller that either goods are conforming or that buyer will take them despite non-conformity; or
(2)  After a reasonable opportunity to inspect the goods, buyer fails to reject them, or
(3)  Buyer does any act inconsistent with seller’s ownership.
(4)  If goods are non-conforming, buyer must notify seller in a reasonable amount of time (UCC 2-607).
48

When a seller requests in writing a full and final statement of all defects on which the buyer proposes to rely as grounds for
rejection, the buyer cannot rely upon unstated defects (even if the defects could not be cured) that reasonably could have
been discovered.

(5a3) “Acts Inconsistent With the Seller’s Ownership”:
o According to UCC 2-606(1)(b), acceptance takes place if the buyer does “any act inconsistent with the seller’s ownership.”
 This provision is not to be read literally, because the right to inspect often includes the right to use.
o For example, a vehicle inspection requires a test drive. However, the use of the vehicle after the defects are known may be
inconsistent with the seller’s ownership. Use after a rejection is certainly wrongful. (UCC 2-602(2)(a)).
 When the acceptance is by wrongful conduct, there is an acceptance only if the seller opts to treat it as an acceptance.

(5b)  Acceptance (UCC 2-606)
o Once goods have been accepted, rejection is no longer possible, although revocation of acceptance may be an available alternative.

6  UCC 2-208  Revocation of acceptance
o Once buyer has accepted goods, rejection is no longer possible. But buyer can revoke acceptance of a unit the non-conformity of
which substantially impairs its value to buyer IF:
  Buyer accepted goods on the reasonable assumption that its non-conformity would be seasonably cured, and it hasn’t
been,
  Buyer accepted goods without discovery of the non-conformity, and buyer’s acceptance was induced by either
 Difficulty of discovery before acceptance, or
 By seller’s assurances.
o Thus once acceptance has happened, revocation is limited to these circumstances, if revocation is not possible, buyer is limited in
suing for breach.

(6a)  Revocation of Acceptance  UCC 2-608:
o UCC 2-608(1) The buyer may revoke acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to
the buyer provided
 (a) the goods were accepted on the reasonable assumption that the seller would cure and the non-conformity has not been
seasonably cured or
 (b) acceptance was reasonably induced by the difficulty of discovery or by the seller’s assurances.

(6a1)  “Substantially Impairs the Value to the Buyer”:
o  Revocation of acceptance is grounded on material breach rather than on perfect tender.
o  Materiality of the breach under the UCC is based on a personal standard (“value to the buyer”) of the effect of the nonconformity upon the particular buyer.

(6a2)  Time Limitation:
o Revocation must take place “within a reasonable time after the buyer discovers or should have discovered the ground for it and
before any substantial change in the condition of the goods which is not caused by their own defects.” Notification is required.
 For example, B purchases a new station wagon and accepts delivery. During the next 12 months it was returned to the dealer
for repair on 30 occasions. New piston rings, a new carburetor, and a new fuel pump were installed. The vehicle continued to
break down and consumed oil heavily. Revocation of acceptance is permitted. The value of the vehicle was seriously
impaired. The seller’s repair attempts were continued assurances of cure, justifying retention and use of the vehicle for 11
months.

(6b)  Effect:
o After a valid revocation, the buyer has the same rights and duties with respect to the goods in question as if the goods had been
rejected.

(6c)  Revocation of acceptance:
o Even if the buyer has “accepted” the goods, if he then discovers a defect he may be able to revoke his acceptance.
49


7  Revocation vs. rejection:
o

If he revokes, the result is the same as if he had never accepted — he can throw the goods back on the seller and refuse to
pay.
The buyer who wants to revoke an acceptance must make a stronger showing of non-conformity than the buyer who rejects — the revoker must
show that the non-conformity “substantially impairs” the value of the goods, whereas the rejecter must merely show that the goods fail to
conform “in any respect.”

On the other hand, a buyer probably gets more time to revoke than to reject.
Quiz Hypotheticals:
o (1)  A has agreed to sell 100 red widgets to B on March 30. On March 15, A delivers 98 blue widgets. B does not accept them.
If A then delivers 100 red widgets on March 30, which of the following is most likely true?
 B owes A full payment, and A has not breached the contract.
 Under UCC 2-508, A can cure the defect in its delivery so long as the delivery date has not yet passed (and, of course,
assuming that the contract doesn't say otherwise).
o
(2)  A agrees to sell 100 red widgets to B. B receives 98 blue widgets, inspects them, and then incorporates them into
component parts of the goods that B manufactures. B never notifies A of acceptance. After B begins using the widgets, it notifies
A of the non-conformity, claims that it never accepted the widgets, demands that A take back the remainder of the unused
widgets, and refuses to pay for them. A can sue B for breach.
 True
 Under UCC 2-206, a buyer accepts goods if the buyer fails to reject them after a reasonable opportunity for inspection
or if buyer does any act inconsistent with seller’s ownership.
o Here, the buyer both had a reasonable opportunity for inspection and took action inconsistent with seller's
ownership by incorporating the widgets into its own goods. It's possible to revoke acceptance when the
buyer believed that the non-conformity would be cured or when the buyer didn't discover the defect until
later for a good reason.
o Here, buyer knew of the non-conformity but did not contact seller, so buyer couldn't have expected cure and
can't rely on non-discovery as grounds for revocation. As a result, buyer has accepted the goods and now
must pay for them.
o
(3)  A agrees to sell 100 red widget to B on March 30. A delivers 60 red widgets and 40 blue widgets instead. Which of the
following is most likely true?
 B can reject all of the goods.
 B can accept some of the widgets and reject others.
  B can accept all of the widgets.
 B can choose to accept all, some, or none of the non-conforming tender unless the contract specifies otherwise.
o
(4)  B rejects A's non-conforming widgets by notifying A. B can put the widgets outside at the curb because B has no legal
ownership and no responsibility for them.
 False

Following rejection, the UCC requires the buyer to keep rejected goods safe for a reasonable period until the seller can
collect them.
o
(5)  A agrees to sell B 100 red widgets on March 30. On March 30, A notifies B that the widgets, which are conforming, are
ready for pickup. B notifies A that it will not accept the widgets. Which of the following is most likely to be true?
 B is in breach.
 UCC 2-507 specifies that conforming tender entitles the seller to acceptance. Here, A has tendered the goods by
notifying B that they are made available to B. The problem tells us that the goods are conforming. As a result, A is
entitled to acceptance. B's refusal to accept is breach.
50
Efficient Breach

Efficient Breach Definition:
o An efficient breach is one where the party in breach gains enough from the breach to have a net benefit, even after
compensating the injured party for its loss. In other words, the defendant comes out ahead by breaching the K and paying
damages.
 Judge Richard Posner is a leading advocate of the concept: “Even if the breach is deliberate, it is not necessarily
blameworthy. The promisor may simply have discovered that his performance is worth more to someone else. If so,
efficiency is promoted by allowing him to break his promise, provided he makes good the promisee’s actual losses.”
o This theory holds that if a party breaches and is still better off paying damages to compensate the victim of a breach than going
ahead with performance, the result is Pareto (Pa-ray-to) Superior.
 That is, considered as a unit, the parties are better-off, and the breach makes no party worse off.
 Consequently, the party who will benefit from the breach should breach, and the courts should not deem
such a breach to be blameworthy.

Efficient Breach Critique:
o (1) The theory fails to account for transaction costs—the costs of litigation or settlement negotiations.
o (2) The theory fails to account for damages that are real but noncompensable because of the rules of foreseeability and certainty.
o (3) The theory does not reflect the law except to some extent in the 7th Circuit. The tort of interference with a K reflects the legal
system’s reality; the breach and the incitement to breach are treated as legal wrongs.

Northern Indiana Public Service Co. v. Carbon County Coal Co.,799 F.2d 265 (7th Cir. 1986) .
o Facts:
 (P), electric company, agreed to buy coal from Carbon County (D) for 20-yr period. After 7 yrs, it was cheaper to buy
electricity from other companies. (P) requested declaratory judgment that excused from K. (D) counterclaimed for
breach and requested a preliminary injunction and specific performance.
o Issue:

If a party breaches a K because it is no longer economically feasible, may the non-breaching party be granted the
remedy of specific performance?
o Decision and Rationale:

(Posner, J.) No. If specific performance would force the continuation of production that has become uneconomical,
then specific performance is improper and unnecessary.
 Forcing economically unfeasible and wasteful production would impose greater costs than benefits on society.
o Therefore, (D) is not entitled to specific performance.
o Analysis:
 Court based much of its decision on the waste of what it deemed to be scarce resources.
 If (D) had been successful in obtaining order for specific performance, and (P) could have gotten coal for half
price elsewhere, society would have been forced to bear the extra cost.
 Court saw no reason for society to bear this burden when (D) could easily be compensated for its losses by monetary
damages.
o Specific performance may not be appropriate to enforce a fixed-price K.

What is efficient breach?
o Continuation of the K “would force the continuation of production that has become uneconomical.”
o The coal “costs far more to get out of the ground than it is worth in the market.”
o “Continuing [the K] . . . would impose costs on society greater than the benefits.”
51
o
(P) must pay damages for breach because it bore the risk of coal no longer being worth the K price to which it agreed, but it is not
required to continue in an uneconomical K.
Anticipatory Repudiation
[1] Anticipatory Repudiation

Anticipatory Repudiation  General rule:
o If a party makes it clear, even before his performance is due, that he cannot or will not perform, he is said to have anticipatorily repudiated
the contract.
 All states except Massachusetts allow the victim of such an anticipatory repudiation to sue before the repudiator’s time for
performance has arrived.
 This is sometimes called the rule of Hochster v. De La Tour.

Example:
o Star promises Movie Co. that Star will act in Movie Co.’s movie, shooting for which is scheduled to commence in the U.S. on July 1. On June
1, Star announces to the press that he is going to live abroad for a year beginning the next day and will not do the movie.
 Under the rule of Hochster v. De La Tour, in force is nearly all states, Movie Co. can sue Star for breach as soon as he issues his press
statement; Movie Co. need not wait until July 1, the time at which Star’s performance is due.

Hochster v. De La Tour.
o Facts:
 A prospective employer canceled a contract to hire a courier before the contract was to be performed.
o Issue:

If a party to a contract renounces the contract before the contract’s start date, may the non-repudiating party immediately sue the
repudiating party?
o Discussion and Rationale:
 (Lord Campbell, C.J.) Yes. If party to a K renounces the K before its provided start date, the non-repudiating party may immediately
sue the repudiating party.
 From the moment the (D) repudiates the K, he has made it impossible for (P) to perform.
o
Not permitting the (P) to sue immediately on the K implies that the K remains in force until the (D) fails to perform as
scheduled.
 In this case, that would require the (P) to honor his share of the bargain and refrain from finding other work until the (D)
breached the K, unfairly prejudicing the (P) and preventing him from finding work and earning a wage.

The only just means to resolve the situation is to allow the plaintiff to sue under the contract immediately upon the defendant’s
repudiation and to allow the plaintiff to find other employment. Judgment for the plaintiff.

Contractual relationship creates an implied promise between the parties:
o Neither party will do anything inconsistent with the relationship that would prejudice the other party.
o Defendant broke the implied promise. Therefore, plaintiff can sue for breach.
 But what if the defendant didn’t really repudiate the K?

R(2d) 250  When statement or act is a repudiation:
o A repudiation is one of the following:
 (1) a statement by A to B indicating that A will commit a breach that would give B a claim for damages; or
 (2) a voluntary affirmative act that makes A apparently unable to perform, and failure to perform would result in breach.

R(2d) 250  What constitutes Repudiation:
o According to the R(2d), a repudiation can be either through words or conduct.
o Further, it can be either express or implied. Case law has interpreted an express repudiation to be a “clear, positive, unequivocal
refusal to perform[.]” (Taylor v. Johnson)
52

This means that the statement must be sufficiently absolute and certain so as to be reasonably understood that a party will
not or cannot perform.

Mere expressions of doubt as to willingness or ability to perform are insufficient.

Not Repudiation  Hypothetical:
o April 1: A contracts to transfer land to B in exchange for $100K on July 30. May 1: B says to A, “I don’t think that I can get the money
in time.”
 Not a repudiation, just a statement of doubt.

Repudiation  Hypothetical:
o April 1: A contracts to transfer land to B in exchange for $100K on July 30. May 1: A transfers the land to C.
 Definitely a repudiation. A’s act made it apparently unable to perform.
 But what about less obvious cases, like horse whoopie?
Taylor v. Johnston.
o Facts:
 The Johnstons (D) entered into a contract to provide their thoroughbred stallion’s services to breed two of Taylor’s (P)
thoroughbred mares.
o Issue:

If an injured party disregards the repudiation of a contract and treats the contract as still in force, is the repudiation still in
effect?
o Discussion and Rationale:
 (Sullivan, J.) No. If an injured party ignores a promisor’s repudiation of a contract and treats the contract as still in force, the
repudiation is nullified.
 If the injured party chooses to ignore the repudiation, it is in effect nullified, and the injured party must wait until the
time for performance has passed before it sues.
o The injured party may elect any damages available for breach of contract if by that time the repudiating party
has not performed under the contract.
 Once repudiation has been nullified, there can no longer be an anticipatory breach unless the repudiation is expressly
or impliedly repeated. Reversed.
o Analysis:
 Express repudiation:
 Clear, positive and unequivocal refusal to perform.
 Implied repudiation:
 Promisor puts it out of his power to perform so as to make substantial performance impossible.
 Courses of action:
 Sue immediately, or wait & see

 R(2d) 251(1) provides: “that where reasonable grounds arise to believe that the obligor will commit a material breach, the
obligee may demand adequate assurance of due performance for which he has not already received the agreed exchange until
he receives such assurance.”
 R(2d) further provides that “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.”
 Commentators have noted that (P) should have taken that route in this case.
 However, given the unpredictable nature of the breeding business and the shareholders’ allegedly superior right to use
the stud service, an assurance of performance would likely not have held much weight.


Taylor Cont.  Consequence of wait & see approach?
o The defendant may retract the repudiation and treat the contract as though it were still in force.
 If this happens:
 Repudiation is nullified.
 Contract returns in full force.
 Plaintiff can no longer sue for anticipatory repudiation.
53
o
What if the defendant performs, but plaintiff doesn’t?

R(2d) 251  When failure to give assurance may be treated as a Repudiation:
o When an obligee has reasonable grounds to believe that an obligor will breach through non-performance,
o The obligee may demand assurance of performance, and
o May suspend her own performance pending assurance.
o If no assurance is given within a reasonable time, obligee may treat the failure as a repudiation.

Understanding the R(2d):
o The R(2d) follows the lead of the UCC and permits the insecure party to demand adequate assurances and suspend performance until such
assurances are received.
o If assurances are not furnished within a reasonable time, the demanding party may treat the failure to provide them as a repudiation.
 Under the R(2d) the right to demand assurances replaces other permissible reactions to prospective inability or unwillingness, except
the permissible responses to a repudiation or insolvency.
o Thus, except in the case of a repudiation or insolvency, the insecure party can cancel or change position only at its peril.
 If the other party tenders or demands timely performance, the insecure party will be in breach if it is no longer able or willing to
perform.

Insolvency or financial inability:
o If a party is insolvent or otherwise financially incapable of performing, this will entitle the other party to stop performance.

Example:
o
An electronics store located in Los Angeles, California, purchases electronics from an electronics corporation located in San Antonio, Texas.
On January 19, the electronics store mailed to the corporation an order for $200,000 worth of electronics, specifying that delivery was to be
no later than February 25, F.O.B. South Texas Railroad Depot, San Antonio, Texas. The corporation delivered the electronics to the railroad
depot on February 15 and notified the electronics store by fax that its order was scheduled to arrive at the Southern Pacific Railroad Depot
in Los Angeles on February 20. On February 17, the corporation learned that the electronics store was insolvent. The corporation demands
immediate payment in cash for the electronics. Is this demand permissible?
 Yes, because the electronics store is insolvent.
 The corporation’s demand is permissible. If a buyer is insolvent, UCC section 2-702 permits the seller to refuse to deliver
except for cash, including payment for all goods previously delivered under the contract. It does not matter that title passed
on delivery to the Southern Pacific Railroad Depot.
[2] Anticipatory Repudiation in the UCC

Anticipatory Repudiation under the UCC:
o Under UCC 2-609, if a party has reasonable grounds for insecurity, that is, reasonably fears that the other party is unable to or
unwilling to perform, that party may demand adequate assurance of performance and also has the right to suspend performance
until such assurance is received.
 Failure to give adequate assurance within a reasonable time, not exceeding 30 days, operates as a repudiation.

AMF, Inc. v. McDonald’s.
o Facts:
 McDonald’s (D) paid $20k to AMF (P) for a prototype electronic cash register. Prototype started giving problems and was
removed. (P) requested that (D) should reduce its order of machines. (D) didn't accept and both mutually cancelled the
contract. (D) sued Plaintiff in seeking to recover. (P) also filed suit against (D) seeking damages for the wrongful repudiation.
o Rule:
 UCC 2-609:
 When reasonable grounds for insecurity arise with respect to the performance of one party,
 The other party may “in writing demand adequate assurance of due performance . . . .” and
 If commercially reasonable, may suspend performance until it is received.
 If no adequate assurance is given within a reasonable time not exceeding 30 days, the failure is repudiation.
o Interesting thing about this case:
54

McDonald’s never explicitly demanded assurance.


Assurance does not have to be in writing.
Thus, AMF engaged in anticipatory repudiation.

UCC 2-610  Repudiation:
o When Party A repudiates, and
o Party A’s failure to perform will substantially impair the value of the contract to Party B, then Party A may:
 (1)  Wait a reasonable amount of time for performance or
 (2)  Resort to any available remedy [Meaning bring on lawsuit.], or
 (3)  Suspend her own performance.

Mitigation required:
o After a repudiation occurs, the repudiatee may not simply ignore the repudiation and continue the contract, if this would
aggravate her damages.
 That is, the repudiatee must mitigate her damages by securing an alternative contract, if one is reasonably available. If
she does not do this, she cannot recover the damages that could have been avoided.

UCC  Mitigation:
o The UCC, in §2-610(a), expresses this mitigation requirement by saying that the repudiatee may “for a commercially
reasonable time await performance by the repudiating party.…”
 Comment 1 to this section then says that “If [the repudiatee] awaits performance beyond a commercially reasonable
time he cannot recover resulting damages which he should have avoided.”

UCC 2-611  Retraction of Repudiation:
o If Party A has repudiated, she can retract her repudiation, before the next performance is due
 If Party B has not
 (1)  cancelled the k,
 (2)  materially changed her position, or
 (3)  indicated that she considers the repudiation final.
o Retraction must clearly indicate an intent to perform, and it must provide any assurance justifiably demanded under UCC 2209.

UCC Retraction pf Repudiation:
o In most courts, the repudiator’s time to retract ends as soon as the other party:
 (1) sues for breach,
 (2) changes her position materially in reliance on the repudiation, or
 (3) states that she regards the repudiation as final. See UCC §2-611(1).

ALPAC v. Eagon.
o Facts:
 Due to changes in the relevant market, a log seller became concerned that a log buyer would not honor their agreement
and, after postponing the time of delivery for a while, notified the uncertain buyer that it would not be providing the
goods.
o Issue:
 Was the log buyer entitled to summary judgment in its favor because the seller did not ship the logs?
o Decision and Rationale:
55

o
o
(Agid, J.) Yes. If both parties to K allow the time for delivery to pass, the court may infer that the parties have extended
the time for performance, but the seller still has a duty to deliver the goods within a reasonable time and its failure to
do so constitutes a breach.
 Under the UCC, 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 may suspend performance until he
receives such assurances.
o (P) argues that the assurances need not be in writing, or, in the alternative, that it did make a written
request.
 However, like the oral demands made in this case, a statement that is not clear and unequivocal is sufficient only
when the interaction between the parties is such that they understand that the demanding party will withhold
performance unless assurances are tendered.
o An intent to repudiate may be expressly asserted or impliedly manifested by conduct.
 A court will not infer repudiation from doubtful and indefinite statements that a
performance may or may not take place.
 An anticipatory breach must be a clear and positive statement or action that expresses an intention not to
perform the K.
o Washington courts have refused to hold that a communication between contracting parties that raises
doubt as to the ability or willingness of one party to perform, but is not an outward denial, is a repudiation
of the contract.
 Thus, as a matter of law, neither (D) expressed unhappiness
Alpac five arguments:
 (1)  that Alpac did not breach because timing of delivery was not a material term of the K,
 (2)  that Party modified the delivery date,
 (3)  that Eagon waved delivery date,
 (4)  that summary judgment was not appropriate because there was an issue of material fact about whether Alpac
requested assurance from Eagon that Eagon would perform, and
 (5)  that Eagon anticipatorily repudiated the K prior to the delivery dates.
Analysis:
 General Rule  demand for adequate assurance usually must be in writing.
 Exception  pattern of interaction demonstrating clear understanding between parties that if demanding party’s
concerns aren’t addressed, it will suspend performance. (AMF v. McDonalds.)
 “The demand for assurances . . . must generally be clear and unequivocal.”
 Similarly, repudiation must be “a clear and positive statement or action that expresses an intention not to perform
the contract.”
o It can be express or it can be communicated through conduct/circumstances.
 An indefinite statement that performance may or may not occur is not enough.

The trouble with repudiation is . . .
o To make a case, a party must show that they:
 (1)  Non-performance will substantially impair K value [material breach item],
 (2)  Have reasonable grounds for insecurity,
 (3)  Made a demand for adequate assurance (writing), and
 (4)  Have not received adequate assurance.
o If any of these things is missing, claim will fail because the complaining party will have materially breached!!!
 FURTHERMORE, the complaining party must not have waived the right to cancel for breach.

Quiz for Both Sections  Hypothetical Problems:
o Jan hires Barnes Nursery to plant six peach trees in her side yard. The contract specifies that the trees will be planted on April 5.
On March 24, Barnes contacts Jan to tell her that all of the peach trees on its lot were killed by a bizarrely severe and unexpected
ice storm and that it will not deliver any trees to her. Which of the following is most likely true?
56

Barnes' performance is excused for impracticability.
 This is likely to be the right answer, assuming that the parties have not contracted around the impracticability
defense. As a result, Barnes has not anticipatorily repudiated the contract. Instead, the contract is avoided.
o
A contracted to sell real estate named Greenacre to B. The contract specified that the sale would close on May 1. (This means
that on May 1, the parties would exchange their final performances.). On April 15, A transferred the title of Greenacre to C in
exchange for $20,000 more than B would have paid under the contract. Which of the following is most likely true?
 A has breached through implied repudiation.
 A has done an act that makes it very unlikely that A will perform (has put it out of A's power to perform.). This
repudiation is implied because A has not used words to tell B about it.
o
Company A agreed to sell 20,000 widgets to Company B, for use in Company B's manufacturing process. The delivery date was
May 30. On April 15, Company A's president appeared on a popular cable news show and told a reporter that Company A was in
poor financial condition and might not be able to carry on activities past the end of April. Which of the following is most likely
true?
 Company B should request adequate assurance of Company A's performance.
 The statement of Company A's president is not an express repudiation because she has not said that Company A cannot
or will not perform. The financial condition of the company is not an implied repudiation either, since it still may be
possible for A to perform. The statement of Company A's president, though, gives B sufficient grounds for insecurity,
and B can request adequate assurance from A under UCC 2-209. If A cannot adequately assure B that it will perform, B
can treat A as having anticipatorily repudiated the contract.
o
Company A agrees to sell 20,000 widgets to Company B on May 30. Company A's president calls Company B's president and, in
casual conversation, mentions that Company A's facility was found to be out of compliance with federal environmental
regulations. B knows that the penalty for A's non-compliance might be a forced shut-down until the problem can be fixed. B's
president asks A's president whether A will be able to perform. A's president says, "Maybe? Honestly, it depends on the EPA.
Who knows what those buffoons are going to do?" A day later, B's general counsel contacts A's general counsel to say that A is in
breach and that B will buy the widgets from another company instead. Which of the following is most likely to be true?
 B is in breach.
 Under UCC 2-209, B has not properly requested adequate assurance because it made no written request. As a result,
A's failure to provide assurance is not a breach. In addition, A's president did not expressly repudiate, since she merely
expressed doubt about A's ability to perform. As a result, B, by declaring that it would not complete the contract,
anticipatorily breached.
57
Damages
[1] Damages: Introduction into Remedies:

Three forms of breach:
o Unjustified failure to perform a contractual promise at the agreed-upon time,
o Repudiation of the promise or bargain, and
o Hindering the other party’s performance or failing to cooperate in bad faith.

Burden of Proof:
o Nonbreaching party has burden of proof to show reason for damages.

Sullivan v. O’Connor, 363 Mass. 579, 296 N.E.2d 183 (1973).
o Facts:
 Sullivan (P) contracted with O’Connor (D) to perform plastic surgery on her nose. Sullivan (P) sued O’Connor (D) for
breach of contract in failing to achieve the promised result.
o Issue:
 Can a plaintiff, seeking to recover from a physician for breach of contract, recover damages for the worsening of her
condition and for pain and suffering, as part of her expectancy recovery?
o Decision and Rationale:
 (Kaplan, J.) Yes. A (P) bringing suit against a physician for breach of K for failure to perform as promised can recover
damages for the worsening of her condition and pain and suffering as part of her expectancy damages.
 When a (P), by reason of the operation, was put to more pain than she should have had to endure had the
doctor performed as promised, she should be compensated for that difference as a proper part of her
expectancy recovery.
o These damages may be calculated on either an expectancy or a reliance view.
 Furthermore, Court does a survey of damages before settling:
 Expectation: Plaintiff put in position in which she would have been but for the breach. What is it in this case?
o Value of Hedy Lamar nose (-) value of disfigured nose
 Restitution: Defendant put in pre-contract position when benefits that plaintiff conferred on defendant are
returned to plaintiff. What is it in this case?
o Price of surgery returned to her
 Reliance: Plaintiff put in pre-contract position. What is it in this case?
o Price of surgery returned + amount of damage to nose
 Therefore, (P) received monetary damage with price of the current value of the nose.

Some General Rules:
o  Courts prefer monetary damages over specific performance.
 This happens when money damages are note enough. Quintessential case for specific performance is breach in a sale of
real estate because each piece is unique.
o  Purpose of money damages is to compensate injured party, not to punish the breaching party.
 Try to put them where they would have been had the bargain worked out.
 We will hardly see a punitive damage award in contracts.
 Parties can limit available remedies in the contract itself.
58
o
 Parties themselves can limit the remedies available in the contract itself.
 Also can specify damages – this is called “liquidated damages.”

On the subject of Loss:
o  (P) must prove that breach caused the loss,
 Non breaching party must prove that the Breach caused the loss.
o  Loss must be determinable with reasonable certainty,
 Must be able to prove what the loss would have been.
 If you don’t you typically get nominal damages i.e., $1.
o  (P) has a duty after the breach to make reasonable effort to limit the loss.
 P cannot recover loss that she could reasonably have avoided.
 Some reasonable course of action the P has to take to make it not as bad.
o This is called mitigation.
 For breach of seller, buyer’s acquisition of replacement goods is called “cover.”
 For example, let’s assume A agrees to buy apples from B. Apples will be delivered on July 30th. On July 1st, A
anticipatorily repudiates the K. Is B permitted to just let the apples rot?
o No, B has to make a reasonable effort to find some third party to sell the apple too.

R(2d) 344  Purpose of Remedies:
o  The “expectation interest” represents what the injured party expected to receive if the contract had been fully performed
and is often referred to as the “benefit of the bargain.”
o The “reliance interest” represents the injured party’s loss caused by reliance on the contract and seeks to put the plaintiff
in as good a position as she would have been in had the contract not been made.
o  The “restitution interest” represents the plaintiff’s interest in having restored to her any benefit she has conferred on the
other party.

R(2d) 347  Expectation:
o Loss of what injured party would have received if defendant had performed, plus
o Incidental and consequential losses caused by the breach, minus
o Costs or other losses that plaintiff avoided by not having to perform.
o In other words, damages should put plaintiff in financial position that she would have occupied if K had been fully performed
on both sides.

R(2d)  Reliance:
o Expenditures made in preparation for performance; plus
 Courts may include financial injury to the plaintiff here.
o Expenditures made in performance, minus
o Any loss that defendant can prove plaintiff would have suffered if K had been performed.
 [$25K +$25k] – 30K = 20K loss
o Puts plaintiff in position she would have been in had the contract never happened.

Restitution:
o Return of benefit conferred on defendant.
o Reasonable value to defendant of what he received.
59
o
o

Determined by what it would have cost to obtain the benefit from someone like the plaintiff or by the increase in monetary
value of the defendant.
Put defendant in position she would have been in had there been no contract.
o FRAUD + Restitution – defendant to disgorge profit received as a result of the fraud.
When Is Restitution Available?
o Restitution is available in six principal kinds of contractual situations:
 (1)  Total Breach of Contract.
 (2)  Avoidance of a Contract for Incapacity, Duress, Misrepresentation, Mistake, etc.
 (3)  The Agreement is not a Contract Because of Indefiniteness, Misunderstanding, Agent’s Lack of Authority, etc.
 (4)  The Agreement is Unenforceable Because of the Statute of Frauds and Certain Kinds of Illegality.
 (5)  The Agreement is Discharged Because of Impracticability or Frustration.
 (6)  The Defaulting Party Seeks to Recover for Part Performance.
o Restitution under all of these categories, except Total Breach of Contract, is quasi-contractual. Discussion here is limited to
restitution’s role as a remedy for a total breach of contract.

Consequential Damages:
o Damages arising from lost work or lost product resulting from breach of contract.
o A buys equipment from B to be used in making widgets.
o B delivers defective equipment, and A loses two days of widget production.
o The value of the lost widgets is consequential damage.
 Recoverable only if foreseeable.

Incidental Damages:
o Costs of dealing with the situation caused by the breach.
o A buys defective equipment from B. A pays the cost of return shipment
o The cost of shipment is incidental damage.

UCC 2-715  Incidental & Consequential:
o (1) UCC incidental

Buyer’s cost of inspection, receipt, transportation, care, and custody of rejected goods
 Transactional costs of “covering” (obtaining conforming goods from another source)
o (2)  UCC Consequential
 Loss resulting from buyer’s needs that can’t be cured by cover
 Injury to person or property proximately resulting from breach of warranty

Expectation Damages Defined:
o Expectation damages are the usual measure of damages for breach of contract.
 The court tries to put the plaintiff in the position he would have been in had the contract been performed by the defendant.
o The plaintiff should end up with a sum equal to the profit he would have made had the contract been completed.

Example 1:
o On March 1, D, the owner of Blackacre, contracts to sell it to P on July 1 for $500,000. Real estate prices rise, and D reneges. On July
1, D sells the property for $700,000 (which is the highest price any likely buyer would have paid).
 P will be permitted to recover $200,000 from D, the difference between the contract price and the market price at the time
of breach, since that amount will put P in the position he would have been in (making a $200,000 profit) had the contract
been performed.

Formula for calculating:
o Here’s a good general formula for computing a plaintiff’s expectation damages:
 [1]  the amount by which the value of the defendant’s actual performance was less than the value of the promised
performance minus
 [2]  whatever benefits, if any, the plaintiff received from not having to complete his own performance.
60
o

Generally, the benefits in [2] are expenditures which the plaintiff would have had to make to complete his performance under the
contract, but which he didn’t have to make because the defendant breached first.
Example of formula:
o Contractor contracts with Owner to renovate an office building owned by Owner. The contract requires that the renovation be
completed in time for Tenant, the sole tenant, to take possession by August 1. Tenant is scheduled to pay Owner August rent of
$10,000. It would cost Owner $2,000 in utilities to operate the building for August if Tenant is there, but $0 if Tenant has not moved
in yet. Contractor breaches by not completing the work until August 30, so that Tenant moves in on September 1. The only
consequence to Owner from the delay is the loss of August’s rent.
 Owner’s expectation damages are:
 (1) the value to Owner of the August rent that he didn’t receive because of the delay ($10,000) less

(2) the $2,000 that Owner saved in utilities by virtue of the delay.

So Owner can recover only $8,000.
[2] Examples:

[1] Hypothetical Problem:
o Facts:
 (1) Buyer pays Seller $1K today for a car worth $1.5K, delivery in one week.
 (2) She tells seller that she has opened a private car service and has clients beginning in one week.
 (3) Seller breaches and sells the car to someone else for $1.5K.
 (4) Buyer has to rent a car for her first week as a private car service, and the rental costs $600.
o Damages:
 Expectation Damages:
 Explanation:
o Value of the K:
 1.5k – 1k = 500
o Consequential Damages:
 600
o Expectation award:
 600 + 500 = 1100
 Result:
o $1100
 Restitution:
 Amount of the damage award would be 1000
o Because that is the amount the buyer conferred upon the seller that the seller now must restore to that buyer.
 Reliance:
 Looking solely at performance and immediate and direct damages to add to the case.

[2] Hypothetical Problem:
o Facts:
 Paris Hilton appeared in National Lampoon’s “Pledge This!” She also agreed to promote the film. She failed to make many of
the promotional appearances requested by the producers, but none of them were set forth as specific terms in the contract.
The film cost $8.3 million to make, and Paris was paid $1 million for promoting it. What damages are available?
o Damages:
 Expectation Damages:
 No expectation damages because it was way to speculative.
 Restitution:

 Reliance:
 Reliance does not work in this case.
61
[3] Consequential Damages  Common Law

Consequential Damages:
o  Sometime called “special damages.”
o  They are the consequence of damages caused by the breach. Caused by damages.
 Example: A has a contract to perform maintenance on B’s conveyor belt. A breaches the contract by performing poor
service, and B’s conveyor belt is damaged as a result.
 A will have to compensate B for damage to the conveyor belt (compensatory damages).
 In addition, as a result of the conveyor belt damage, B can’t make widgets, and B loses profit (consequential
damages).

Consequential Damages General rule:
o The “rule of Hadley v. Baxendale” limits the damages which courts will award for breach of contract.
o  The “rule” says that courts will not award consequential damages for breach unless the damages fall into one of two
classes:
(1)  Arise naturally:
o The damages were foreseeable by any reasonable person, regardless of whether the defendant actually foresaw them; or
(2)  Remote or unusual consequences:
o The damages were remote or unusual, but only if the defendant had actual notice of the possibility of these consequences.



Hadley v. Baxendale.
o Facts:
 Hadley (P) contracted with Baxendale (D) to transport a broken crank shaft for repair, but Baxendale (D) failed to
deliver the shaft on time, and the delay prevented Hadley (P) from reopening the mill on time.
o Issue:
 Should a defendant be liable for a plaintiff’s lost profits arising from the defendant’s breach if the plaintiff has not
communicated his special needs to the defendant?
o Decision and Rationale:
 (Alderson, J.) No. A party may receive compensation for lost profits resulting from a breach of contract only if the
damages were in contemplation of the parties at the time of the contract, as a probable result of a breach.
 The damages a party should receive are limited to those that fairly and reasonably either arise naturally from
the breach or those that may reasonably have been contemplated by both parties at the time they made the
contract, as the probable result of a breach.
 If the special circumstances under which the contract was actually made were communicated by the plaintiff to the
defendant, the damages resulting from the breach would be the amount of injury that would ordinarily follow from a
breach under these special circumstances, as they were known and communicated.
 However, if the breaching party did not know the special circumstances, it could be supposed only to have
contemplated the amount of injury that would arise generally from the breach. If the parties had known the
special circumstances, they might have specifically provided for the breach by special terms regarding damages.
o Analysis:
 Damages are limited to those:
 Fairly and reasonably considered to arise naturally from the breach, or
 Reasonably supposed to have been contemplated by both parties at the time that they made the contract.
 Damages arising from “special circumstances” only available if the defendant knew of those circumstances.
 You cannot price a risk into a contract you do not know about.
62

Spang Industries, Fort Pitt Bridge v. Aetna.
o Facts:
 A steel manufacturer, which contracted to provide a construction company with structural steel, was sued for
damages caused by a delay in furnishing the steel.
o Issues:
 Is a non-breaching party entitled to special damages for any cost it incurs as a result of a delay if the contract sets
out a specific timeframe for performance and performance is not completed within that timeframe?
o Decision and Rationale:
 (Mulligan, J.) Yes. If damages flowing from a breach of contract were within the reasonable contemplation of the
parties at the time they entered into the contract, then the non-breaching party may recover for special damages
that do not flow directly from the breach.
 The purpose of an award of damages for breach of contract is to place the plaintiff in the same position in
which he would have been if no breach had occurred.
o If parties enter into a contract that provides that the time for performance is to be fixed at a later
date, knowledge of the consequences of a failure to perform is imputed to the defaulting party.
 The question of whether the contract was initially valid despite its indefiniteness or only became valid
when a firm delivery date was set is not relevant. Affirmed in part and remanded.
o Analysis:
 Court can only award damages that parties could reasonably have anticipated when they entered into the
contract.
 But what if they haven’t completed their agreement at that time?
 When parties agree to leave an open term, foreseeability test applies at time when parties agree on the term.
 Key question is whether parties had an opportunity to bargain on the basis of foreseeable risk.

R(2d) 351:
o Damages are not recoverable for loss if:
 At the time the contract was made,
 Breaching party did not have reason to foresee the loss as a probable result of the breach.
o Loss is foreseeable when it results from:
 The ordinary course of events; or
 Special circumstances that breaching party had reason to know.

R(2d) 351  Limitation of damages:
o Courts may limit damages by:
 Excluding recovery for lost profits, or
 Otherwise limiting recovery, if
 Justice requires the limitation.
 Damages disproportionate to transaction’s value?

Consequential Damages Rule under Common law:
o Consequential Damages are the damages that are caused by the damage of the breach and that there only
recoverable if the breaching party could reasonably have foreseen their occurrence.
63
[4] Consequential Damages in the UCC

Hydraform v. American Steel.
o Facts:
 Hydraform Products Corp. (P), a stove manufacturer, sued American Steel and Aluminum Corp. (D), a steel
manufacturer, for damages resulting from breach of contract and negligent misrepresentation, claiming lost
profits and a loss on the sale of its business because of American Steel’s (D) late steel delivery.
o Issue:
 If a supplier breaches a contract, may the buyer sue the supplier for damages for future lost profits that were
foreseeable, readily ascertainable and unavoidable?
o Decision and Rationale:
 (Souter, J.) Yes. If a supplier breaches a contract, the buyer may sue the supplier for any consequential damages
that were foreseeable consequences of the breach, readily ascertainable, and unavoidable.
 The damages sought must be limited to those necessary to compensate for the readily ascertainable
consequences of the breach.
o The damages need not be proved to a mathematical degree, but they must rest on evidence
demonstrating that the profits claimed were reasonably certain in the absence of the breach.
 Speculative losses are not recoverable.
 Also, the non-breaching party has a duty to mitigate its damages if possible.
 Reversed.
o Analysis:
 Damages must be reasonably foreseeable to the parties at the time of contracting.
 Damages must be reasonably ascertainable.
 Consequential damages are only recoverable if they couldn’t have been prevented by cover or other mitigation.

UCC 2-715:
o Incidental damages of buyer  reasonable expenses for inspection, receipt, transportation, custody of rejected goods,
cost of cover, etc.
o Consequential damages of buyer  any loss arising from general or particular requirements of which seller had reason
to know at time of contracting.
 But not if loss could have been avoided by cover or other mitigation.
o Cover is one of the buyer’s most important remedies.
 Under UCC 2-712(1), a buyer may “ ‘cover’ by making in good faith and without unreasonable delay any
reasonable purchase of or contract to purchase goods in substitution for those due from the seller.”
Remember:
o Consequential Damages are the consequence of the damage caused by the breach, that are only recoverable if they’re
reasonably foreseeable to that breaching party.
 Why is that?
 We want to give the breaching party the opportunity to price that risk into the contract or to bargain its
way out of that risk. It’s all coming down to risk.

64
Damages to Seller & Buyer, Economic Waste, and Syllabus Wrap-Up
[1] Seller's Damages When Buyer Breaches

American Mechanical Corp. v. Union Machine.
o Facts:

A sale of real estate, machinery and equipment fell through and American Mechanical Corp. (P), the seller, sued Union Machine Co. (D), the
buyer, for breach of contract. The superior court awarded American Mechanical (P) only nominal damages. American Mechanical (P)
appealed.
o Issue:

Can the general formula for contract damages, the difference between the contract price and the market value on the date of breach, be
applied to real estate sale contracts?
o Decision and Rationale:

(Fine, J.) Yes. There is no logical reason to treat RE-purchase agreements differently from any other general K for the purpose of measuring
damages.

The general formula for measuring damages for breach of a real estate purchase agreement is merely a different formulation of
the general rule for measuring K damages, which is the difference between the K price and the market value on the date of the
breach.

General K law principles provide that the purpose of measuring damages in the event of a breach is to place the injured party in as good a
position as it would have been in if the K had been performed.

If a party has sustained a loss as a result of a breach and the parties should have reasonably foreseen the loss or it was within
their contemplation at the time the K was made, then that loss can be recovered in a suit for breach of K.
o Analysis:

Generally, damages for breach in sales of real estate = difference between K price and FMV of property on date of breach.

But P can recover damages in excess of above amount if reasonably foreseeable to defendant at time of contracting.

Example  Union knew that bank would foreclose, and that foreclosure would result in below market price.

Would be different if mitigated damages.

Locke v. Wade.
o Facts:
 Wade (D) leased a jukebox from Locks (P), but, after Wade (D) repudiated the contract, Locks (P) did not install the machine.
TC awarded (P) $836, an amount equal to the $20 minimum per wk for 2yr, less than the costs (P) would have incurred in
maintaining the jukebox.
o Issue:
 Should a (P) award for breach of a rental K for common tangible goods, be reduced by the amount the (P) is able to obtain by
letting the property to another party?
o Decision and Rationale:
 (Clapp, S.J.) No. In actions for breach of K relating to sale of readily available goods, a (P) recovery should not be reduced by
the value received under a new K for the goods.
 To reduce a (P) recovery by such amount would be unfair because if there had been no breach and another customer
had appeared, the (P) could have made a sale.
o A seller who has a large quantity of goods to sell should be entitled to the benefit of each bargain he makes. (P)
damages were foreseeable at the time the parties entered into the K.
 Affirmed.
o Analysis:

Lease rule  If real property is leased to someone else after D’s breach, damages are limited to K price minus subsequent
lease price.
 Rule the court uses  Lease rule only applies where second lease could not have happened but for D’s breach.
 With real estate this will always be the case.
65
o
 If P could have performed on both leases, damages are  (K price) – (cost of performance).
 Lost volume seller.
K damages for the lease of common goods are equal to the K amount less the cost of performing the K.

UCC 2-703  Seller’s Options:
o If buyer breaches, seller may:
 Withhold delivery of the goods if not yet delivered, or
 Sue for the price of goods already delivered, or
 Resell undelivered goods and sue for damages.

Damages with Resale:
o UCC 2-706:
 If seller makes a good faith effort to resell the goods, and
 Goods are sold in a commercially reasonable manner, then
 Damages = (contract price – resale price) + (incidentals – expenses saved by the breach).
o UCC 2-708:
 If seller does not resell, it still can recover the difference between (the market price and the K price).
 This is a form of mitigation.
o UCC provides that either measure of damages is inadequate because of lost volume the damages are
going to equal the profit the seller would have made.
 And this applies when the seller has customers and also has the capacity to make the additional
sale represented by the breach.
o In other words, would the seller have made the sale, regardless of the breach.

Seller’s damages for breach:
o Where it is the buyer who breaches, by wrongfully refusing to accept the goods (or by repudiating the contract before
shipment is even made), the seller has several possible remedies:

(1)  Contract/resale differential:
o Normally, the seller will resell the goods to a third party.
 Assuming that the resale is made in good faith and in a “commercially reasonable” manner, seller may recover the
difference between the resale price and the contract price, together with incidental damages.

(2)  Contract/market differential:
o If the seller does not resell the goods, he may recover from the breaching buyer the difference between the market price at
the time and place for delivery, and the unpaid contract price, together with incidental damages. §2-708(1). (Probably a seller
who has resold the goods may not use this contract/market differential, but must use the contract/resale differential.)

(3)  Lost profits:
o The contract/resale differential (for a reselling seller) and the contract/market differential (for a non-reselling seller) may not
make the seller whole.
 Where this is the case, 2-708(2) lets the seller recover his lost profits instead of using either of these differentials.

(3i)  “Lost volume” seller:
o Most importantly, this means that the “lost volume” seller may recover the profit he has lost by reason of the breach.
 In the usual case of a seller who has resold the item, a “lost volume” seller is one who
 (1) had a big enough supply that he could have made both the contracted-for sale and the resale,
 (2) probably would have made the resale anyway as well as the original sale had there been no breach, and
 (3) would have made a profit on both sales.
66
[2] Buyer's Damages When Seller Breaches

Reliance Cooperage v. Treat (1952).
o Facts:
 The seller of bourbon staves renounced a contract and informed the buyer that he would not deliver in accordance
with the contract.
o Issue:
 If one party to a contract anticipatorily breaches the contract, does the non-breaching party have an immediate duty to
mitigate its damages?
o Decision and Rationale:
 (Sanborn, J.) No. If one party to a contract anticipatorily breaches a contract, the non-breaching party is under no duty
to mitigate damages until the time for performance under the contract has passed.
 Repudiation does not accelerate the time for performance or change the damages to be awarded. Ordinarily, no
duty to mitigate damages arises until there are damages to mitigate.
o No logical reason exists for requiring the non-breaching party, upon receiving notice of the anticipatory
breach, to await performance while using their own resources to buy the goods from another source in
an effort to reduce the damages they might suffer if the contract is indeed breached.
 Reversed and remanded.
o Analysis:
 In case of anticipatory repudiation, damages are calculated using the market price on date that performance was due.
 No duty to mitigate under UCC in this case.
 This is true whether or not the non-breaching party accepts the repudiation.
 Why? The non-breaching party is entitled to what it bargained for, regardless of when the other party breaches.

UCC 2-712:
o After breach (including repudiation), buyer can “cover” by making a reasonable purchase of substitute goods, as long as the
purchase is in good faith and done without unreasonable delay.
 The most important is her right to “cover,” i.e., to buy the goods from another seller, and to recover the difference
between the contract price and the cover price from the seller. 2-712(2).
 The buyer’s purchase of substitute goods must be “reasonable,” and must be made “in good faith and without
unreasonable delay.” 2-712(1).
o If buyer seeks cover damages will be calculated differently  Damages will be the difference between the cost of cover and
the contract price, plus incidentals and consequentials.
 Buyer is not required to cover in order to receive ‘direct’ damages.
 (Cover is required for consequential damages by another section of the UCC.)

Jacob & Youngs v. Kent .
o Facts:
 Jacob & Youngs (P) agreed to build a house for Kent (D) using only Reading brand pipe for the plumbing, but
inadvertently used pipe from other manufacturers that was of identical quality. The architect of the house asked Jacob
& Youngs (P) to replace the pipe, but replacing it would have involved demolishing substantial parts of the house. Jacob
& Youngs (P) did not change the pipe and asked for a certificate that the final payment was due. The certificate was
refused, and Jacob & Youngs (P) brought suit.
o Issue:
 Did the failure to supply the correct brand of pipe excuse Kent (D) from making the final payment?
o Decision and Rationale:
67

(Cardozo, J.) No. A trivial, innocent omission will not always be a failure of a condition that causes forfeiture of the
contract.
 In deciding if an omission is trivial, the finder of fact must look at the purpose to be served by the condition,
o the “desire to be gratified” by the condition,
o the excuse for the failure to meet the condition, and
o

o
o

the harshness of forcing the party to comply with the condition.
When the significance of the failure to meet the condition is, as it is here, grossly out of proportion to the
harshness of forcing a party to forfeit the contract, the courts will not assume that full performance is
dependent on meeting that trivial condition.
Dissent:
 (McLaughlin, J.) Jacob & Youngs (P) did not perform its obligation. Substantial performance depends upon the good
faith of the party performing. Jacob & Youngs (P) did not explain why it used pipe from different manufacturers.
Analysis:
 Conforming and non-conforming pipe were of equivalent value.
 Cost to replace the non-conforming pipe would exceed loss in value resulting from breach.
 House would have to be torn down and rebuilt.
 Court awarded plaintiff the difference in value between the conforming and non-conforming pipe.
 Nominal damages
R(2d) 348 Failed Construction:
o Three forms of recovery for failed construction:
 (1) Loss in value to the injured party.  idiosyncrasy request  houses pecific purple.
 This is a subjective measure.
 (2) Loss in market price of the property.
 (3) Reasonable cost of completing performance or fixing the defect.
 This is the most common result.
o But watch out for the economic waste doctrine where cost to remedy exceeds diminution in value as a
result of the breach!
[3] Economic Waste 

Economic Waste:
o This principle is often applied where the defect is minor, and remedying it would involve “economic waste,” such as the
destruction of what has already been done.
 In cases like this and Jacobs & Kent  the court tells us the damage award should not be the cost of fixing the problem,
or finishing the project but rather the difference between what the (P) contracted for and what the (P) received.

Peevyhouse v. Garland Coal.
o Facts:
 The Peevyhouses (P) leased their farm to Garland Coal & Mining Company (D) for strip mining, but Garland Coal (D)
failed to perform the specified remedial work at the end of the lease term. The Peevyhouses (P) sued Garland Coal (D)
for $25,000 in damages for breach of contract. The district court awarded the plaintiffs damages in the amount of
$5000, and the plaintiffs appeal the damages award.
o Issue:
 Is the appropriate measure of damages the cost of performance if a lessee fails to perform restorative work required
under a lease agreement?
o Decision and Rationale:
 (Jackson, J.) No. The appropriate measure of damages for failure to perform restorative measures under a lease
agreement is determined using the value rule.
68


o

According to 346 of the Restatement the cost of performance is the proper measure of damages “if this is
possible and does not involve unreasonable economic waste”; and the diminution in value caused by the breach
is the proper measure “if construction and completion in accordance with the contract would involve
unreasonable economic waste.”
o The plaintiffs are prohibited from recovering damages greater than the benefit they would have received
after full performance on both sides.
 If a contract has been almost completely performed, an award for cost of performance would
unjustly enrich the plaintiffs.
 In such a situation the plaintiffs should be awarded only the amount their
property value has diminished by the restorative work not being performed.
o Therefore, here, because of the disproportion between the potential $300 increase in the land’s value and
the $29,000 cost of the remedial work, damages should be limited to the difference in value.
Judgment reduced to $300 and affirmed.
Analysis:
 Economic waste – cost to complete would exceed the value created by completion
 Here, cost of completion was $29K, but it would increase the value of the farm by only $300.
 A rational person, if given the $29K, would not pay to have the work completed. They would pocket the money
instead. This would create a windfall for the plaintiffs.
 Peevyhouse is not the majority position.
American Standard v. Schectman (1981).
o Facts:
 American Standard, Inc. (P), after deciding to close its plant, entered into a contract with Schectman (D), a demolition
and excavating contractor, pursuant to which the plaintiff agreed to convey the buildings and equipment to defendant
in return for the defendant’s payment of $275,000 and his promise to remove the equipment, demolish the structures
and grade the property.
o Issue:
 If work is improperly performed in breach of a construction contract, is the measure of damages the cost of
completion?
o Decision and Rationale:
 (Hancock, J.) Yes. If work is improperly or incompletely performed in breach of a construction contract, the measure of
damages is the cost of completion.
 The general rule of damages for the breach of a construction contract is that the injured party may recover any
damages that are the “direct, natural, and immediate consequence of the breach and which can be said to have
been in the contemplation of the parties when the contract was made.”
o The fact that fulfilling the promises would add little or nothing to the property’s value does not change
the fact that the defendant breached the contract.
 Even though the burden placed on the defendant is heavier than anticipated and the completion cost is out of
proportion to the end achieved does not, without more, alter the rule that the measure of plaintiff’s damages is
the cost of completion. Affirmed.
o Analysis:
 If defendant completed substantial performance, and
 Performance was done in good faith; and
 Correction of the defect would result in unreasonable economic waste, then
 Damages = difference in value of property as constructed and value of property if performance were properly
completed. (See Jacob & Youngs v. Kent.)
o Majority Rule for Economic Waste:
 How does a court determine whether the economic waste is “unreasonable?”
 Usually applies when fixing the fault would involve tearing down already-completed construction, or
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

 The broken promise is merely incidental to the main purpose of the contract.
Disparity in cost of performance and its value does not automatically = economic waste.
Economic waste Post Lecture:
o This principle is often applied where the defect is minor, and remedying it would involve “economic waste,” such as the
destruction of what has already been done.
[4] Damages Miscellany & Specific Performance

R(2d) 353  Mental Anguish Common law Summary:
o Contract damages for mental anguish are not available except in cases of:
o Breach that causes bodily harm, or
o Breach is of such a kind that serious emotional disturbance is particularly likely to result.

Kaplan v. Mayo Clinic.
o Facts:
 The plaintiff was operated on for a disease he never had, and he sued the hospital and doctors in both tort and
contract; he lost the tort case, so he attempted to recover tort damages in the contract case.
o Issue:
 Is evidence of pain and suffering and emotional distress admissible in proving damages in a breach of contract case?
o Decision and Rationale:
 (Tunheim, J.) No. Although pain and suffering and emotional distress damages might seem to be the natural proximate
result of a breach in certain types of contracts, Minnesota courts prohibit the recovery of such damages in a breach of
contract action even when they could be reasonably within the contemplation of the parties based on the nature of the
contract.
 Minnesota law appears to restrict recoverable contract damages more generally to those that are pecuniary in
nature.
o Courts limiting recoverable damages for breach of a contract by a physician have done so in part to
maintain a clear distinction between tort and contract claims, emphasizing that although malpractice and
breach of contract may arise out of the same transaction, they are distinct as to theory, proof, and
damages.
 Therefore, the court will preclude the Kaplans (P) from presenting evidence of pain and suffering or emotional distress
at trial.
o Analysis:
 Contract damages are those arising naturally from the breach, which could reasonably have been contemplated by the
parties at the time of contracting.
 “Extra-contractual damages” are those which do not flow naturally from the breach and are not reasonably anticipated
by the parties.
 Extra-contractual damages are recoverable only when accompanied by an independent tort.
o Only if pain and suffering arose naturally from the breach.
o Approaches to take (Minnesota has Held) :
 First approach: Damages “incapable of definite calculation” that “rest in the discretion of the jury” are extracontractual.
 Must have an independent tort to get the damage award.
 Second approach: If contract is not concerned with trade or commerce, but is personal, so that pain and suffering from
breach is foreseeable, damages are not extra-contractual.
 No independent tort required
Pain and Suffering:
o Looking for tort, or

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o
Something very traumatic in the breach.

Punitive Damages Generally:
o Usually unavailable unless the breach involves tort-like behavior.
o Commonly formulated as “willful tort accompanied by fraud, malice, wantonness, or oppression.
o In Indiana, you must prove all of the elements of the accompanying tort.

Boise Dodge v. Clark (1969).
o Punitive damages are available if defendant’s behavior was willful, wanton, gross, or outrageous.
o They must bear a reasonable relation to actual damages found.
 Cannot be “so disproportionate to actual damages as to be a result of passion or prejudice rather than reason.”
 Must bear some relation to actual damages.
 Must bear some relation to the cause of the actual damages.
o What factors does a court use to evaluate reasonableness of punitive damage awards?
 Amount of actual damages,
 Deterrent effect on other possible offenders,
 Defendant’s motives,
 Degree of calculation in defendant’s conduct, and
 Extent of defendant’s disregard for the rights of others.

Liquidated damages generally:
o These are damages to which the parties agree in advance.
o Must be a reasonable approximation, at the time of contracting, of actual damages.
o In most jurisdictions, these clauses will be upheld, even if at the time of breach, the parties can prove different actual
damages.
o Be careful! If the liquidated damages are disproportionate or a disguised penalty, courts will strike them as unconscionable or
as violative of public policy.

Penalties Distinguished:
o Liquidated damages clauses are valid. Penalty clauses are void.
 A clause will be deemed a valid liquidated damages clause if it is a reasonable and good faith attempt to pre-estimate
the economic harm that would flow from breach.
 In contrast, penalty clauses are designed to deter breaches by the prospect of punishment.
o Distinguishing the two is important—penalty clauses are often disguised as liquidated damage clauses.
 Traditionally, the test is whether the pre-estimate was reasonable as of the time of contracting.
o The modern view is to validate the clause if it is reasonable in the light of foresight or in the light of the actual harm done.

Comments:
o (1) Note that the key element in distinguishing a liquidated damages clause from a penalty clause is its purpose.
o (2) Note also that courts are more prone to uphold a provision as a liquidated damages clause if the injury caused by the
breach is difficult or impossible to estimate accurately.

Example:
o P, an oral surgeon, hired D, also an oral surgeon, to work as an assistant in P’s Gloversville office. A clause provided that D
would not practice oral surgery in Gloversville, except in association with P. It further provided that if D violated this promise,
D would pay the sum of $60,000 to P. Courts will uphold the clause if it seems that the sum realistically deals with the
probable financial injury that a breach would cause.
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
The clause in this case is particularly likely to be upheld because actual damages are very difficult to prove with a
reasonable degree of certainty.

Formulas Are Acceptable:
o Valid liquidated damages clauses are often expressed in formulas rather than in exact dollar amounts.
 Such an expression does not affect the validity of the clause.

Example:
o V contracts to sell a residence to P. A deed of conveyance and possession are to be delivered on October 1. P, who is married and
has four children, intends to move into the house on October 1 and explains this to V prior to contracting. At P’s insistence, the
contract provides that for each day’s delay in delivery of possession V will pay liquidated damages of $500.
 The sum is reasonable in the light of alternative lodging costs in the area, increased cost of food, storage of furniture, etc. The
clause will be upheld.

A liquidated damages clause is enforceable if:
o (1)  damages are difficult to ascertain at the time of the making of the contract, and
o (2)  the damages are a reasonable forecast of compensatory damages. (Cf Barbri)

Specific Performance  Generally:
o An injunction is a court order directing the subject of the order to engage in or refrain from conduct.
o Failing to comply is contempt of court, punishable by fines or imprisonment.
o An order for specific performance is a form of injunction, and it requires actual performance of the party’s duties under the
contract.
o It is not available if monetary damages would be sufficient to protect the other party’s expectation interest in the contract

Factors to Consider:
o How do courts determine whether monetary damages are inadequate to protect the injured party? They consider:
 Whether damages can be proven with certainty,
 The difficulty of buying substitute performance,
 Likelihood that the damage award cannot be collected.

No specific performance if:
o The contract is a personal services contract,
o The terms are too uncertain for a court to enforce,
o A defense against formation applies,
o Specific performance would create unreasonable hardship or loss for the breaching party, or
o The exchange is grossly inadequate or otherwise unfair.

Two types of Equitable Remedies:
o Sometimes the court will award “equitable remedies” instead of the usual remedy of money damages.
 There are two types of equitable relief relevant to contract cases:
 (1) specific performance; and
 (2) injunctions.

Specific performance:
o A decree for specific performance orders the promisor to render the promised performance.



Example:
o A contracts to sell Blackacre to B on a stated date for a stated price. A then wrongfully refuses to make the conveyance.
 A court will probably award specific performance. That is, it will order A to make the conveyance.
Injunction:
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o


An injunction directs a party to refrain from doing a particular act.
 It is especially common in cases where the defendant is sued by his former employer and charged with breaching an
employment contract by working for a competitor.
Example:
o D signs a contract with P, his employer, providing that D will not work for any competitor in the same city for one year after
termination. D then quits and immediately goes to work for a competitor.
 If P sues on the non-compete, a court will probably enjoin D from working for the competitor for the year.
Land Sell/ Lease Hold  No Specific Performance:
o While money damages generally are considered inadequate when a transfer of an interest in land is involved (including a transfer of
a leasehold estate), a court will not grant specific performance if the subject matter of the contract has been transferred to a bona
fide purchaser for value.
 A third-party lessee who was unaware of the agreement between the agent and the student would be considered a bona fide
purchaser for value.
 Thus, even assuming that all of the elements for specific performance are present, the court still would not order the
rental agent to lease the apartment to the student here.
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EXAMPLES FOR ESSAY QUESTIONS
Parol
#2  I will examine first whether General’s cancellation of the contract constituted a breach, and will then discuss the
question of damages.
The cancellation:
I think General can make a fairly strong case that it was entitled to cancel the contract when it did. For a definite
answer, a number of UCC sections, particularly those dealing with installment contracts, must be examined.
The contract was clearly an “installment contract,” since it authorized in “separate lots,” and since each lot
would obviously be “separately accepted” (or rejected), due to the relatively long time periods between them. §2612(1)). The real crux of the breach issue is presented by §2-612(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.…”
Frank will undoubtedly argue that the delay with respect to Lot III did not “substantially impair the value of the
whole contract,” and that General therefore had no right to cancel. Frank will base this argument on the evidence that
General could not have used the steel had it been delivered on time, since it would have been submerged by the flood
and would have cost a significant amount to clean. Thus, Frank will argue, the delay did not substantially impair the
value of the contract, since it didn’t make things any worse for General than they otherwise would have been.
I think General can make a fairly convincing response to this, to the effect that not only the delay on Lot III, but
also the uncertainty about whether Frank could make a timely delivery (or any delivery at all) on Lots IV and V, must be
considered in determining whether there was a “substantial impairment” of the whole contract.
Frank in turn can respond that if it was anxiety about Lots IV and V that induced General to cancel, General’s
proper remedy was to “demand assurances” pursuant to §2-609, and not to cancel. However, I think that General can
reply, successfully, that Frank’s April 12th fax was itself a failure to furnish reasonable assurances in response to
General’s request for assurances on April 9th. In that event, General had the right to treat the lack of assurances as a
repudiation (§2-609(4)), thus allowing it to cancel §2-711(1)). Alternatively, General can contend that Frank’s April 12th
fax was an anticipatory repudiation (§2-610), giving General a right to cancel. However, this is not as powerful an
argument, in my opinion, as the “failure to give assurances” argument previously stated.
Frank might attempt to avoid liability for breach by asserting the doctrine of impracticability or impossibility. He
could say that his source of supply dried up unforeseeably, making performance by him “… impracticable [because of]
the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was
made.…” §2-615(a). But assuming that the Frank-General contract had not specified a particular source from which
Frank was to obtain the deal, and assuming that a shortage of steel ingots is reasonably foreseeable in the industry, it is
unlikely that he would prevail with this defense.
In summary, I am fairly confident that: (1) General can establish that it had the right to cancel the entire
contract on grounds of Frank’s breach; and (2) Frank should not escape liability by virtue of any “impossibility” or
“impracticability” defense.
Damages:
Under §2-607(1), “[t]he buyer must pay at the contract rate for any goods accepted.” Thus General will be liable
to Frank for the two lots of steel it accepted, although determination of the “contract rate,” and the possibility of a
countervailing damage claim by General against Frank, complicate the damage issue.
I suppose that General could argue that the “contract rate” is $1.75 million per lot, and the $250,000 per lot
retainage is a separate sum which serves as compensation for completion of the whole project, not as part of the
payment for the lot in question. But I don’t think we will get far with this argument, since it seems to me that the
retainage scheme really relates to the time for payment, not the items for which payment is to be made. In any event, I
think the question is academic. If the “contract rate” is held to include the $250,000 retainage, we will recover this
$250,000 in the form of the contract/cover differential, which is discussed in the next paragraph. Assuming that
General’s deal with States Steel is “in good faith” and “reasonable” (§2-712(1)), General can recover from Frank the
difference between the cost of the cover contract with States, and the cost of the original contract.
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Assuming that the court treats the first two installments as having cost a total of $4 million, the difference
between the cost of cover and the cost of completion under the original contract is $1.5 million ($7.5 million - $6
million). This recovery must be offset against the remaining $2.25 million which General would owe Frank on the first
two lots. If the “contract rate” on the first two lots is held to be $1.75 million, not $2 million, the net result is still the
same: General would owe Frank $750,000.
However, General has a right to “consequential damages” in addition to this cover/contract differential (§2715(2)). Consequential damages would probably include any delay damages suffered by General, as General’s need for
prompt delivery was a “particular requirement of which the seller at the time of contracting had reason to know.” (§2715(2)). The contract fixes delay damages at $5,000 per day. However, since this contract clause fixes damages at
$5,000 for each day delivery is delayed, and not every day completion of the building is delayed, it is not clear whether
a court would enforce this clause, or would attempt to make its own estimate of damages. Frank will have a good
chance of arguing that the damages clause applies only to a slightly delayed delivery, not to breach or other
cancellation of the contract, and that ordinary damage rules should apply in the latter event.
Frank will also have a good contention that its non-delivery of Lot III saved General upwards of $1 million, since
the steel would have been covered by the flood, and would have cost that much to clean off. Frank could point to §2715(2), which allows subtraction from the cover/contract differential of any “expenses saved in consequence of the
seller’s breach.”
In summary, I would say that General will owe Frank $750,000, plus any consequential delay damages (probably
measured by usual standards, not by the $5,000 per day clause), but that the consequential damages may be reduced
by the amount which de-rusting the additional lots would have cost.
If General elects to abandon the building, and not make the deal with States, the only part of the analysis which
would be different is that General would use the difference between the contract price and the “market price at the
time when [General] learned of the breach,” not the contract/cover differential. (§2-713(1)). I have no idea what this
market price is. Nor do I know whether the “time when [General] learned of the breach” will be held to be April 10th
(when delivery was due), April 12 (when the “repudiation” took place), or whatever the date was on which General
cancelled the contract; a good argument can be made that it should be this last date, since that would best protect
General’s right to have “for a commercially reasonable time await[ed] performance by the repudiating party.” (§2610(a)).
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Parol and Interpretation
(1) The issue is whether the contract term regarding payment for electricity is subject to interpretation.
Interpretation is the process by which a court determines the meaning to give the language used by the parties
in their contract where the language is ambiguous. Language is ambiguous when it is reasonably susceptible to more
than one meaning.
Here the ambiguity is whether electricity is fuel because the lease states the lessor will pay for “electricity” and
it also states the lessee “will pay for gas or fuel used in the preparation of food.” If electricity is “used in the
preparation of food,” then it would appear to be “fuel” and the lessee, not the lessor, must pay for it.
In support of her interpretation, Jessica will offer extrinsic evidence of trade usage because in the restaurant
industry, “fuel” includes electricity. Indeed, even Murray is aware that in the restaurant industry “fuel” has been
interpreted to include electricity.
First, Murray will point to the express terms of the lease. The lease provision expressly provides that if Murray
were to install a new electric range, then he would pay for the electricity used by the range. The logical inference
supported by the general rules of construction where the expression of one thing excludes another, is that in all other
cases, Barry would pay for electricity.
Second, Murray will point to the parties’ course of performance over the past ten years to give meaning to the
term “electricity.” Barry has paid Seven’s electric bill for the entire lease period. This course of performance of the
parties’ lease gives meaning to the language that the lessor will pay for “electricity.” Given the parties’ course of
performance over the past ten years and the lease provision, it is likely that the court will order Jessica to pay for
Seven’s use of electricity.
(2) The question is whether parol evidence bars evidence of Murray’s discussions with Barry Maris before he signed
the lease.
The purpose of the parol evidence rule is to give legal effect to the parties’ intent to make their writing at least
a final and perhaps also a complete expression of their agreement to the exclusion of all prior or contemporaneous
negotiations, whether oral or written. If the parties has such an intention, the agreement is “integrated,” and the parol
evidence rule bars evidence of prior negotiations for some purposes. If the parties had no such intention, the
agreement is “unintegrated,” and the rule does not apply.
The first question is whether the parties’ lease agreement was integrated or unintegrated: did the parties
intend the writing to be a final embodiment of their agreement? Here, the parties intended an integration because the
lease agreement was in writing and signed by the parties.
The next question is whether the lease was fully or partially integrated. If the writing is a final expression of the
parties agreement and complete with respect to all of its terms, then it is a total integration and cannot be
contradicted by any type of evidence nor supplemented by consistent (non-contradictory) additional terms. A partial
integration is final as to the terms it contains but not complete as to all the terms so it may be supplemented by
consistent additional terms but cannot be contradicted.
Here, it could be argued that the lease was fully integrated because it was reduced to a writing with terms
regarding the rent amount and an option to renew. On the other hand, it could be argued that it was only partially
integrated because there was no mention that matters could be handled orally or any way other than in writing. It is
likely that the lease was only partially integrated.
With a finding of partial integration, the next question is whether evidence of Murray and Barry’s oral
agreement is admissible. Evidence is admissible to supplement but never to contradict the written agreement. Here,
Murray could argue that the parol evidence rule does not bar evidence of the oral agreement because it is just an
additional term allowing Murray to give notice by a means other than in writing. It is an additional method of
communication and does contradict but merely supplements the written lease agreement. Conversely, Jessica could
argue that the oral agreement is barred by the parol evidence because it contradicts an express term of the writing: the
lease contains a provision that notice of renewal must be written. Consequently, the oral agreement contradicts the
writing and would be inadmissible. If the court finds that notice by another means is supplementary rather than
contradictory, then evidence of the oral agreement would be admissible.
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Performance and Condition
The question is whether the “Sarah Bernhardt” peony was a condition or a promise of Len’s performance.
A condition is an event, not certain to occur, but which must occur for the other party’s duty to perform to arise. If a
party’s performance is treated as a condition to another’s duty, non-performance completely discharges the latter from her
obligation, even though the failure of the condition has damaged her little or not at all.
It may be argued that the contract language is one of express condition because it refers to a specific type of peony, the
“Sarah Bernhardt.” Robyn identified the particular type of peony and was very specific in that it had to be pink, only pink, and
double-petaled. Such specificity would indicate an express condition.
If the type of peony is found to be an express condition, then Len did not satisfy the condition by planting another type of
peony, the Rose Reverence. As a result, he would not be entitled to payment for the peonies because he failed to meet the
condition. However, finding that the type of peony was an express condition of Robyn’s duty to pay would be very harsh to Len
because he would be penalized far beyond the amount by which Robyn is damaged by the slight deviation from the contract
terms. Len would lose the $1000 balance remaining on the contract and would have to rip up the entire garden, not just the
peonies, to meet Robyn’s express condition of providing a pink-only garden. This would quadruple his cost, which would be
exorbitant in relation to the cost of the overall project.
Conversely, if it were only a promise to provide pink peonies, then it could be argued that Len substantially performed his
promise. A party who breaches a promise is only liable for the damages caused by the breach. If a party’s performance deviates
only slightly from that specified in a contract, then she is liable for only nominal damages. This result is far less harsh than if her
performance were treated as a condition to the other party’s performance, in which case the latter’s duty is discharged
completely.
Here, Len promised to get “pink” peonies for Robyn’s garden of a type known as “Sarah Bernhardt.” The name was used
to describe a type of pink, double-flowered peony and did not mean that it expressly had to be “Sarah Bernhart” peonies. If the
type of peony was a promise, then Len’s failure to get exactly the right peony—the peonies he planted had a purple edge and
were only semi-double blossoms—would be treated as a breach and his performance would be evaluated to determine whether it
was substantial.
[The following analysis would be the appropriate next step but it requires knowledge of material we will not cover until
Chapter 11. It is included here because it follows from the facts of the problem and it is typical of what you would be
expected to discuss on an exam. You might want to come back to this question after you complete Chapter 11.]
In determining whether a party has substantially performed, a court considers several factors. First, it considers the
extent to which the breaching party has already performed. Here, Len planted the entire garden, including all 50 peonies, and
they were in full bloom in time for the wedding. Second, it considers whether the breach was wilful, negligent, or purely innocent.
Len’s breach was innocent because he used reasonable efforts to find the right peony by going to a well-known flower farm.
Further, he searched through over 140 types of peonies until he found what looked like what Robyn asked for, eliminating those
that did not fit her specifications in compliance with her request. He ordered what he believed was the right peony based on price
and color, which are objective and reasonable criteria.
Third, the court considers the extent to which the injured party has obtained the substantial benefit for which she
bargained. Robyn bargained for a garden full of pink flowers and pink peonies, not just peonies. She received exactly this—a
beautiful, blooming garden of pink flowers in time for her daughter’s wedding. On the other hand, there are touches of purple in
the pink garden. Even if the peonies are predominantly pink, there is a slight bit of purple at the edges of the flowers. Moreover,
the peonies are only semi-double petaled peonies and not the full double-petal peonies that Robyn requested. However, this
slight deviation was noticeable only to Robyn upon close inspection. No one else could detect these subtle differences. Still, this
was Robyn’s dream garden and she should be able to get what she bargained for. She bargained for a particular type of peony and
has not received it. And because peonies can live for up to 100 years, she will see them in her garden as long as she lives in the
house and most likely as long as she lives.
Fourth, the court considers the extent the breaching party will suffer forfeiture. In this case, Len will lose $1000. This is
not a huge amount. Since the entire fee for the peonies was $1500, Len stands to lose 2/3 of the amount which he is owed which
is sizeable but not a total forfeiture. Because Robyn paid him $500 at the time the contract was signed for the peonies, it is
possible that this covered his out-of-pocket expenses. Moreover, Len would have been paid separately for all the other flowers
and landscaping required for the garden so his loss would be limited to this amount.
Fifth, the court considers the extent to which the nonbreaching party can be compensated for the defective performance.
It would be impossible to measure the difference in value between a garden of only pink flowers and one with touches of purple.
77
It would be equally impossible to measure the difference in value between a garden with semi-petaled peonies and one with
double-petaled peonies. One could look to the difference in cost but the price of the peonies was substantially the same or Len
would not have selected them. While only Robyn can see the differences in the peonies, a homeowner is allowed to be
idiosyncratic when it comes to her own home.
In considering all of these factors, it is likely that a court would consider the type of peony to be an express condition of
the contract and that Len failed to meet the condition. Consequently, he will not recover the $1000. [Depending on the analysis,
one could come to the opposite conclusion.]
Part 2 separate
Whether Hannah is entitled to payment depends on whether Heidi’s duty to provide “fully satisfactory” paintings was
conditioned on an objective or subjective standard of satisfaction and, if so, whether the condition was met. A condition is an
event that must occur before performance of a contractual duty becomes due. A party whose duty is conditioned on an event is
not required to perform unless the event has occurred. Parties can make their promised performances conditional on their
personal satisfaction. Here, Heidi made her duty to pay Hannah subject to a satisfaction clause.
The question is whether the standard of satisfaction to be applied is one of subjective or objective satisfaction. Subjective
satisfaction is applicable in contracts for personal services because individual taste or judgment is involved. An objective standard
of reasonableness is applicable in commercial contracts because objective criteria is available to evaluate the performance. The
general preference is for an objective standard of reasonableness to avoid forfeiture.
Here, paintings were the subject matter of the contract. Because paintings are works of art and art is something that is
personal to the individual, the standard is one of personal satisfaction. The paintings were to be placed in Heidi’s restaurant and
would be highly visible where Heidi would see them all the time. If so, then it is likely that a subjective standard would be applied
to determine Heidi’s satisfaction.
However, these paintings might not be considered works of art because they were not really paintings but copies of
postcards. All Hannah had to do was replicate the postcards. There was nothing artistic or original about copying scenes from the
postcards onto the walls of the restaurant. Furthermore, the postcards provided an objective standard by which to measure
Hannah’s performance. Consequently, an objective standard of satisfaction would be applicable. In this case, Hannah’s work met
the criteria because everyone who saw the paintings said that they were an exact match to the postcards. Even Heidi did not say
that the paintings were not like the postcards but that she wanted something more exciting with buffalo. However, she did not
ask for buffalo but only to have the postcards copied on her restaurant’s walls. This is exactly the performance she received.
Hannah should be paid the $2000 she is owed because her performance satisfied the contract condition..
Warranties
The question is whether George can return the golf clubs when there was a disclaimer of warranty, and if so, what might
he be entitled to recover. It should be noted that Article 2 of the Uniform Commercial Code applies to this problem because it
concerns a transaction involving the sale of golf clubs which are goods (all things movable at the time of identification to the
contract.) Moreover, Sam is a merchant since he is one who deals in goods of the kind—Sam is a seller of golf equipment in a golf
shop.
The first question is whether Sam made an express warranty to George regarding the golf clubs. Under UCC 2–313, the
seller creates an express warranty by an affirmation of fact or promise about the goods which becomes part of the basis of the
bargain. Mere statements about the value of the goods or an opinion about them does not create an express warranty. Here,
Sam’s words that “I promise that you will love these clubs” is not a warranty but more likely his opinion or puffery. Even when he
said he knew “just what George needed,” Sam was just using typical sales talk and did not intend to create an express warranty.
However, since Sam specifically selected the golf clubs for George and told him they were exactly the type he needed, it is
possible this formed an express warranty that the clubs would be just the ones that George needed.
The next question is whether an implied warranty of fitness for a particular purpose arose when George told Sam he had
never golfed and Sam selected the clubs for him. According to UCC 2–315, an implied warranty of fitness for a particular purpose
arises when the seller has reason to know of the buyer’s particular purpose, the seller knows that the buyer relies on the seller’s
skill to furnish the appropriate goods, and the buyer in fact relies on the seller’s skill or judgment. Here, Sam knew George’s
purpose in buying the clubs because he told Sam he needed golf clubs to learn to play golf. Sam knew that George was relying on
Sam’s skill to provide the right kind of clubs because George told him that he had never played golf before. George relied on Sam’s
judgment because Sam told George that he “knew just the type of golf clubs he needed” and George purchased the clubs that
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Sam picked out for him. As a result, the implied warranty of fitness for a particular purpose arose when George purchased the golf
clubs.
It would seem that this warranty was breached because the golf clubs were far too long for George to use them as they
were intended to be used. The facts indicate that Sam took George’s measurements and George relied on Sam to select the
proper golf clubs. Since they were not suitable for a man of George’s size, the warranty was breached.
The next question is whether an implied warranty of merchantability arose when Sam sold the golf clubs to George.
According to UCC 2–314, a warranty that the goods shall be merchantable, which means fit for the ordinary purpose for which
they are sold, is implied if the seller is a merchant with respect to the goods sold. Here, Sam is a merchant with respect to the
goods because he sells golf clubs. The golf clubs are impliedly warranted that they could be used as golf clubs are normally used
which means that George could expect to have clubs that do not come apart as soon as he hit the ball. Golf clubs are intended to
hit golf balls and the handle should not come apart and cause such damage as they did here to a golf cart.
Whether the length of the clubs falls within the implied warranty of merchantability is another issue. Size is a relative
matter. However, George could claim that golf clubs are only fit for their ordinary purpose if they can be used by a person of
ordinary size, not the Jolly Green Giant.
Even if the implied warranties of merchantability and fitness for a particular purpose are applicable, Sam may have
disclaimed them. According to UCC 2–316, a seller may exclude or modify the implied warranty of merchantability by using
language which mentions the word “merchantability” and, if the disclaimer is in writing, it is conspicuous. Here, there was a tag
hanging from the golf bag which seems to be a disclaimer of warranty. It was written in bold print and was conspicuous since it
was hanging in plain view on the outside of the golf bag. But since it did not use the word “merchantability,” it is not a valid
disclaimer for the implied warranty of merchantability.
However, it appears to validly disclaim the warranty of fitness for a particular purpose because it states the precise
statutory language of exclusion: “there are no warranties which extend beyond the description on the face thereof.” It also limits
George’s remedy to repairs only with no option for a refund or replacement. In this case, George would be entitled only to repair
of the broken golf club and not a whole new set of clubs.
The question is whether this limited remedy “fails of its essential purpose” for George. When the exclusive remedy fails of
its essential purpose, the limitation is disregarded and ordinary Code remedies are available. The exclusive remedy fails when the
cumulative effect of all the non-conformities substantially impairs the value of the goods to the buyer.
Here, the exclusive remedy of “repairs only” means that George can have the one broken club repaired. This remedy fails
of its essential purpose because George has a set of golf clubs he cannot use. Unless repair is interpreted to mean fixing all the
clubs so that they fit him, then the clubs are of no use to him. Moreover, the only club he used fell apart and the handle went
flying. Fixing the one broken club will not get him what he bargained for when he purchased a set of clubs to play golf. In this case,
all the remedies under the Code are available to him which would include a new set of clubs or his money back.
Further, George may claim that the express warranty was not negated because it was inconsistent with the disclaimer.
Warranties are construed as consistent; if they conflict, the intent of the parties determines which warranty controls. Here, the
parties intended the sale and purchase of golf clubs to be used for golfing.
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Remedies 1
Jill committed a breach of contract by rendering a defective performance when she installed the incorrect flooring. Even
Jill admits that the wood floor that she installed was not the clear grade hardwood required by the contract. The question,
however, is whether Meredith is entitled to the difference in value between what was promised and what was received, or the
cost to repair the defective performance.
In this case, Jill can claim that she rendered substantial performance and that the breach was innocent and trivial. While
it is true that the difference in flooring was noticeable to Meredith and she has a right to receive what she contracted for, in this
case doing so would result in an unfair forfeiture for Jill. Jill completed the entire addition to the store and the remodeling in full
compliance with the contract’s specifications. Jill’s breach in installing the incorrect flooring was not material because it was
“purely innocent,” the grade she installed was substantially equivalent to the clear grade she should have installed, and the value
of the addition to Meredith’s store was “unchanged” by the error. Further, as soon as she realized that she had forgotten to
mount the wood moldings, she immediately did so.
If Jill were required to rip out and replace the flooring, it would be a tremendous forfeiture for her because it would cost
$150,000 to do so and there would be no difference in value to Meredith’s store. The entire cost of the job was only $200,000 so
to expend $150,000 to redo that which was already done would be a pure economic waste. Since the cost of redoing the
performance would be disproportionate to the actual loss suffered by the promisee (which was nominal at most) and would
impose an unfair forfeiture on the breaching party, it is unlikely that the court would require Jill to take this action. Instead, it is
more likely that the court would find that the proper measure of damages would be difference in value, if any, between the store
with the hardwood floor as promised and its value with the one that was installed.
Further, since it is unlikely that a court would compel Jill to specifically perform by replacing the wood flooring, Meredith
would not be entitled to receive the liquidated damages award of $1000 per day. Jill completed the addition and renovation by
Monday, November 23 when she installed the wood trim molding, which was two days before the contract’s required completion
date of November 25. Consequently, the store was ready for the public on “Black Friday,” which was Meredith’s goal in redoing
the store.
Assuming, however, that the court found that Meredith was entitled to receive the “benefit of her bargain”—which would
require the precise wood flooring that she contracted for—then it would not be possible to have it installed in time to meet the
contract deadline. While it is unlikely that a court would order Jill to render the performance because it would be difficult to
supervise or evaluate such a performance and now personal feelings are involved, another contractor could be hired and Jill
would be liable for the costs involved in replacing the floor. She would also be liable for the $1000 per day in damages pursuant to
paragraph 11 of the contract.
The parties included a liquidated damages provision in their contract to specify what the damages would be in the event
of a breach. Parties are entitled to set an amount for damages as long as that amount is reasonable in light of the anticipated loss
caused by the breach. However, if the agreed-to amount is significantly larger than necessary to compensate the injured party for
its loss, a court will consider the provision to be punitive in nature and not enforce it. In this case, it is possible that the $1000 per
day in damages is reasonable because the facts indicate that the store was successful and did a great deal of business. It is very
likely that daily sales receipts would be in excess of $1000 per day so that this amount would be deemed reasonable in light of the
anticipated loss. Finally, since this was an established business, it would be easy enough to verify whether this amount was a
typical day’s sales receipts. If so, then the court would surely enforce the provision.
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Remedies 2
As the injured party, Molly is entitled to recover damages based on her actual loss caused by the breach. Molly expected
to earn $75,000 for working for six months and will now earn only $25,000. Unfortunately, the only suitable job she could find still
results in a loss of $50,000 in expected earnings. If she brings a claim based on her expectation interest, Molly is entitled to
receive the benefit of her bargain less any expenses saved by the breach. Here, she would save $200 per month for six months by
not having to commute to her job with Jessica for a total of $1200. This amount would be deducted from her recovery. However,
she would be entitled to recover the $500 she spent in trying to find another job. This would be considered an incidental expense
incurred as a result of the breach. This claim would amount to $49,300.
Molly could consider a claim based on her reliance interest based on the internship offer in educational television for
$50,000 that she gave up in reliance on Jessica’s offer. Since this job was in the same location as the one she would have had with
Jessica, she would have incurred the same transportation expenses, thus requiring a deduction of $200 per month for six months
for a total of $48,800.
However, since Molly has a duty to mitigate her losses and she found another suitable job, it is required that she take it—
which she did. Therefore, it is likely that a court would award the $50,000 in lost income minus the $1200 saved in transportation
costs plus the $500 in incidental damages for a total of $49,300.
Remedies 3
Although Nathan is the breaching party, he may be entitled to recover in restitution if he conferred a benefit on Georgette
by virtue of his performance. Georgette expected to pay $50,000 to get her bathroom remodeled. She paid $10,000 to Nathan
and then $20,000 to someone else to complete the job for a total expenditure of $30,000. Georgette is required to pay Nathan
$20,000 because otherwise she would be unjustly enriched at his expense by this amount because then she would have paid only
$30,000 for a bathroom for which she expected to pay $50,000. Even if she had not be so lucky as to find a contractor to complete
the work for $20,000 and had to pay $30,000, she would not have been able to save this money—she would have had to pay
Nathan $10,000.
Remedies 4
Since this contract involves the sale of strawberries, which is a “good” according to the UCC definition where goods are all
things which are moveable at the time of identification to the contract and includes growing crops, Article 2 is the applicable law.
Mike repudiated the contract when he decided to keep the strawberries 330 for himself and not deliver them to Steve. Typically
upon breach by the seller, the buyer is most concerned with replacing the goods, as Steve was in this case since he had a factory
and employees ready to process the strawberries. He was entitled to seek cover under UCC 2–712 by going out into the market
and making a good faith substitute purchase. He did so by buying strawberries from Sam. Steve is entitled to recover from Mike as
damages the difference between the cost of cover and the contract price together with any incidental or consequential damages,
less expenses saved as a result of the seller’s breach. This means that Steve is entitled to recover the extra $25 per bushel he had
to pay to purchase 10,000 bushels from Sam for a total of $250,000. Steve is also entitled to recover as incidental damages the
$500 cost of shipping as costs incurred incidental to the breach.
The next question is whether Steve is entitled to recover the $50,000 he has to refund Aunt Jenny. These would be
considered consequential damages since they represent losses suffered by the non-breaching party beyond the mere loss in value
of the promised performance. If such losses were foreseeable at the time of contract to the breaching party as a consequence of
her breach, then such damages are recoverable. Here, Mike knew that Steve had a contract with Aunt Jenny for using Mike’s
strawberries since Steve told him at the time of contract that, “your strawberries are the essential ingredient in my strawberry
preserves and without them, I would not have been able to get the contract to sell to Aunt Jenny’s Jams and Jellies.”
Consequently, Mike would be liable for this loss. While Steve tried to prevent the loss by covering with strawberries from another
farmer, the type of loss which he sustained was not preventable by cover since the flavor of the berries was different based on the
different soil content. Mike cannot escape liability for Steve’s additional $50,000 loss in profit.
Arguably, Steve might have a claim based on a loss of future business with Aunt Jenny since she was so dissatisfied with
his performance on this contract and it was due to Mike’s breach. However, at this point, it might not be possible to calculate with
reasonable certainty the value of a lost opportunity to sell to Aunt Jenny. Steve had no prior business dealings with the company
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and 331 we have no facts to indicate his success with other companies of similar size and reputation. Without additional facts,
the loss would be too speculative on which to base a recovery.
Extra
Under UCC 2–710, an aggrieved seller is entitled to recover its incidental damages, i.e., those “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.”
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