OUTLINE
BASIS FOR CONTRACTS
I.
REQUIREMENTS
A. To have a contract, there must be (1) manifestation of mutual assent to the exchange
and (2) consideration
1. No coercion, must be voluntary exchange that parties voluntarily enter into
2. Normal promises, without exchange, not legally binding → no legal duty to
perform
3. Contractual promises, with exchange, legally binding → legal duty to perform
II.
MUTUAL ASSENT
A. Definition - two parties mutually agreeing to exchange promises
1. Has two components: Offer and Acceptance
a) Offer (RSS 24) - manifestation of willingness to enter into a bargain
(1) Requires the offeree to understand that her assent is invited
(2) Must allow offeree to agree by signing, nodding, saying yes
(3) If more is required, may be negotiation or solicitation
b) Counteroffer (RSS 39) - made by offeree to offeror relating to same
matter as original offer and proposing substitute bargain
(1) Once counteroffer made, original offer is gone and can’t come
back to it
(2) Offeree becomes offeror and power of acceptance is gone
(now original offeror becomes offeree with power of acceptance)
(3) Any form of “yes but” is a counteroffer, NOT acceptance
c) Revocation (RSS 42) - manifestation of intent of offeror not to enter into
proposed contract
(1) Revocation terminates power of acceptance and can be done at
any time prior to acceptance (unless otherwise specified in offer)
d) Acceptance (RSS 50) - manifestation of assent to terms of offer in
manner invited/required by offeror
(1) Can be made through words, action, or inaction
(2) May be made by performance - at least partial and operate as
return promise
B. Intent to Be Bound
1. Objective (Classical) Test
a) Look to what the parties say in the contract and their actions when
creating the contract to determine intent
b) Adv: Derives bright-line rules (e.g. when you sign, you’re bound) →
offers consistency and reliability in contracts
c) Disadv: Can limit autonomy by binding parties to contracts they don’t
fully understand. Also tends to favor wealthy
2. Subjective (Modernist) Test
a) Look to the parties’ state of mind to determine intent (must have
“meeting of the minds”)
b) Adv: Tends to be more lenient on parties to escape contracts they never
intended to enter into
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c) Disadv: Relies on witnesses and information that is not concrete, can be
unreliable and allow unjust avoidance. Does not create bright-lined rules
that would be easy to follow
3. Ray v. Eurice Bros. (Objective Theory Rule) - parties are bound to signed
contracts even if they are ignorant of the terms of the writing or their
interpretation
a) Rays hired the Eurice Bros. to make improvements on their land
(construct a home) pursuant to specifications but, after signing
agreement, Eurice Bros. refused to build per specifications, citing costs
b) App. Ct. rejected lower ct.’s subjective standard → there did not have to
be a “meeting of the minds,” instead looks to actions
c) Relies on signature above all else - this was the objective
manifestation of assent (and that’s all you need)
C. Offer and Acceptance in Bilateral Contract
1. Bilateral Contract - exchange of promise for a promise (commitments on both
sides)
2. Final Offer Rule (RSS 26) - If the person accepting the offer knows or has
reason to know that the offeror is making a preliminary gesture to engage in
future discussion, an offer has not been made
a) Longeran - Lonergan (seller) sent Scolnick (buyer) “form letter”
containing information regarding property Lonergan advertised to be
sold. Lonergan told Scolnick to “act fast” before property was sold to
someone else. Scolnick delayed putting money into escrow → Lonergan
sold to someone else during that time
(1) App. Ct. said that there was no offer Scolnick could accept
because the form letter was not an offer (Scolnick could not
accept by saying “yes”)
(2) Form Letters - mass produced letters meant to distribute to
large numbers of people → not offers
(a) Even if form letters have price, quantity, date (which are
essential to contracts), they can still be considered form
letters (not offers) if they have all the characteristics of
form letters
3. Timing of Acceptance (“Mailbox Rule”) (RSS 63) - Unless offer provides
otherwise (look out!), offer is accepted when acceptance is out of the control of
the offeree (eg “in the mailbox”) in the manner and by the medium invited by the
offeror
a) Unless offer is for an options contract, offeror never has to receive
acceptance
4. Termination of Bilateral Offer (RSS36) - Termination of power of acceptance
through
a) Rejection of counteroffer by offeree
b) Lapse of time
c) Revocation by offeror
d) Death or incapacity of offeror or offeree
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e) Non-occurrence of any condition of acceptance under terms of offer
5. Indirect Revocation (RSS 43) - Offeree’s power of acceptance can be
terminated if the offeror takes definite action inconsistent with an intention to
enter into proposed contract and offeree acquires reliable information to that
effect
a) Normile - Miller lists property for sale and Normile makes offer. Miller
makes counteroffer (original offer gone). Normile waits too long to
accept counteroffer → Miller sells property to another buyer and informs
Normile “you snooze you lose.”
(1) Ct rules that Miller’s sale to other party constituted a revocation
of the counteroffer because it went against intent of selling
property to Normile and Miller informed Normile of the sale
(a) Had he not been informed, it would not be revocation
(2) Normile thought he had an option for the sale, but he didn’t →
no legal significance
D. Offer and Acceptance in Unilateral Contract
1. Unilateral Contract - exchange of promise for performance where offeree does
not make a promise but instead completes an act
2. Master of the Offer Rule (RSS 32) - if it is unclear on whether the offer is
unilateral or bilateral, the offeree gets to decide
3. Partial Performance Rule for Unilateral Contracts (RSS 45) - option contract
(limiting offeror’s power to revoke) created
a) (1) Where the offeree has accepted a unilateral offer by beginning the
invited performance or tenders the beginning of it
b) (2) Offeror’s duty of performance under option contract is conditional on
completion or tender of the invited performance in accordance with the
terms of the offer
c) Cook - Coldwell Banker (“CB”) made unilateral offer in form of a tiered
bonus program to its agents. Cook left CB prior to CB giving out the
bonuses but her bonus was worth $17K under the tiered bonus program.
CB refused to pay, arguing that it revoked the offer prior to Cook’s
acceptance (ie completion)
(1) Ct ruled that CB could not revoke the offer because Cook had
accepted the offer through substantial performance of the
invited task
(2) Consideration given when the offeree completes a “substantial
part” of performance
4. Joking Offer Rule - If the offeree knows that the offer is made as a joke, can’t
accept
a) Pepsico - Pepsi’s advertisement suggested that a jet could be
purchased with 7 million of its reward points (roughly $700K). Leonard
garnered enough points and demanded that Pepsi provide the jet. Pepsi
refused
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(1) Ct ruled that no reasonable person could have believed that the
company seriously intended to convey a $23 million jet for $700K
→ there was no offer to be accepted through performance
5. Advertisement Rule - Advertisements/promotions are not considered offers for
unilateral contracts but rather as invitations for offers/negotiations
a) Common law rule that protects advertisers from over acceptance otherwise, stores may get sued every time they advertise a product they
no longer have in stock
b) RJR Tobacco (Camel Cash) - rewards/points programs that are
advertised to promote sales and offer products in exchange for points
could be exception to advertisement rule
(1) RJR had “Camel Cash” program in which customers could
redeem “Camel Cash” for Camel merchandise (no return
promise made by customers → unilateral contract). RJR sent a
notice stating that the program would end and that holders of
“Camel Cash” can redeem points between Oct. 2006 and Mar.
2007. RJR ran out of merchandise after Oct 2006 → refused to
redeem points → sued in class action
(2) Ct ruled that RJR made an offer for unilateral contract and was
bound when “Camel Cash” holders accepted through redeeming
their points
(a) Ct highlighted repeated use of word “offer” in Camel
Cash, formal enrollment process that RJR monitored
and on which people relied to participate in program, and
RJR’s valuation of “Camel Cash” (showed sufficient
definiteness because RJR could determine how much it
was liable for)
(b) Also noted that RJR waived its right to terminate the
program at any time when it said customers could
redeem them between Oct. 2006 and Mar. 2007
E. Postponed Bargaining: Agreement to Agree
1. Classical Rule: if contract is not complete it is not a contract
a) Supplemented and modified by new rules to become more modern →
more situations where incomplete contracts are enforceable
2. Walker (Classical Rule) - Option provision of a rental agreement offered no
definite rental price and offered no unambiguous and agreed-upon method of
arriving at the new rental price → option is not enforceable
a) App. Ct. held that Walker and Keith in essence “agreed to agree” on a
future rental price in the renewal provision and therefore the provision
was unenforceable
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(1) Rental price is essential to rental agreement → must be
definitively stated or must be unambiguous/agreed upon method
of calculating it (otherwise, there could be no meeting of the
minds)
(2) Ambiguous - two or more possible, reasonable interpretations
(3) Cts should not be “filling gaps” of contracts
3. Open Price Terms Rule (UCC 2-305) - in contracts for sale of goods (ie UCC),
unsettled price term will not preclude the enforcement of a contract if the parties
intend to be bound by the contract
a) Exact opposite of the Walker view
b) If parties later fail to agree on a price, Cts can enforce reasonable price;
though there are several exceptions
4. Letters of Intent Rule - letters of intent awarding contracts to parties may
constitute enforceable contracts even if the contracts themselves are not final if
parties intended for the letter of intent to be binding
a) Quake Construction - American Airlines hires Jones to manage
contracts/subcontractors on terminal construction. Jones sends letter of
intent to Quake, which said that: (1) Quake “has been awarded the
contract” and that a final contract will be prepared “shortly;” (2)Jones has
the right to cancel the letter of intent if parties can’t agree on final
contract; (3) “authorize{d}” Quake to begin work (explicitly and by
reasonable interpretation); (4) indicated that negotiations over
modifications of doors and materials for floor still needed. Seven days
later, Jones told Quake it was “terminated” as subcontractor
(1) Ct ruled that the letter was ambiguous but that there was
sufficient evidence that parties intended to be bound by letter
such that parties should be allowed to present evidence of intent
(ie no summary judgment)
(a) Language of letter suggested that there were no conflicts
unresolved and Jones expects Quake to sign
(b) The relatively minor details still unsettled were not
enough to change intent of the letter (qualification was
narrow and didn’t change any material term)
(c) Lack of a material dispute to justify Jones’ actions (ie
this was not an agreement to agree on terms to be
determined at later date, but rather an agreement to be
bound by agreement already made) contrast with
Walker where there was a genuine dispute over price
that was unsettled → can’t identify dispute here
III.
CONSIDERATION
A. Definitions
1. Consideration is anything of value promised to another when making a contract
2. NOT ALL PROMISES ARE ENFORCEABLE
a) RSS 2 - Promise is a manifestation of intention to act or refrain from
acting in a specific way, so made as to justify a promise in understanding
that a commitment has been made
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b) Promises supported by consideration are enforceable, suggest existence
of a bargain
c) Gratuitous promises can’t be enforced (all promises must be “paid for”
by consideration). See Willston’s “Tramp” hypothetical.
d) Consideration can be promise (bilateral) or performance (unilateral)
e) Promising to do something (or not do something) that is a legal
obligation or is illegal is NOT consideration
(1) E.g. Promises not to do illegal drugs or to always pay taxes are
not consideration
B. Benefit-Detriment Test (Classical) (RSS 79)
1. For there to be sufficient consideration, there must be a benefit for the
promisor or a detriment to the promisee
a) This is an OR test, no need to show that promisor benefited if you can
show that promisee suffered detriment
2. NOT benefit to the promisee or detriment to the promisor
3. DO NOT get distracted by equivalence of consideration → law is about
existence of consideration
a) Even if consideration is lopsided, if it is genuine, it is OK (note exception
to rule below)
C. Bargaining for Exchange Test (Modern) (RSS 71)
1. To constitute consideration, performance or return performance must be
bargained for
2. Performance/return performance is bargained for if it is sought by the promisor in
exchange for his promise and is given by the promisee in exchange for that
promise
3. Performance may consist of
a) Act other than a promise, or
b) A forebearance, or
c) Creation, modification, or destruction of a legal relation
D. Legal Right Rule - Abandoning a legal right in the present or limiting legal freedoms in
the future as an inducement for the promise can be sufficient consideration to make
promise enforceable
1. Hamer - wealthy uncle made a unilateral contract with his nephew under which
nephew would receive $5K in a trust when he turned 21 if he didn’t didn’t smoke,
drink, gamble, etc. (all legal) until his 21st birthday. Uncle died, executor argues
that the contract is not enforceable because it is not supported by consideration
a) Ct said that there was sufficient consideration under benefit/detriment
test - nephew restricted his actions from what he was legally entitled to
do (detriment to the promisee)
b) Important that all the things nephew agreed to do were legal, if they
were illegal, he would not be legally entitled to do them → no detriment →
no consideration
E. Unspoken Consideration Rule - the benefit to the promisor or detriment to the
promisee does not have to be communicated between the parties for there to be
sufficient consideration
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1. American Ash (AggRite) - American Ash sold AggRite for free to Pennsy to
repave a parking lot/driveway for the school district. AggRite was defective →
Pennsy had to re-do the paving at its own expense and dispose of the defective
AggRite (hazardous waste that was very expensive to dispose of) → Pennsy
sued American Ash to cover the costs of disposing of defective AggRite
a) Trial Ct said that since disposal of hazardous waste was not part of initial
bargain, American Ash never expressed intent to cover hazardous waste
costs for defective AggRite → no contract
b) App Ct. said that even though parties didn’t actually communicate, they
engaged in bargain - Pennsy would get the AggRite for free in exchange
for Pennsy relieving American Ash of the duty (costs) of disposing
AggRite
c) Applied reciprocal conventional inducement of detriment - promise
induced the detriment and detriment induced the promise
(1) American Ash actively promoted use of their AggRite as base for
building material → inducing a detriment to those who use it
because they will have to cover disposal costs
F. Functions Performed by Legal Formalities
1. Evidentiary - evidence of the existence and purport of a contract in case of
controversy
2. Cautionary - acting as a check against inconsiderate action (suggests a level of
seriousness)
3. Channeling - mark or signalize the enforceable contract; furnishes a simple and
external test of enforceability
G. Promissory Notes Rule - promissory notes accepted without conditions doesn’t
constitute consideration and would be treated as an unenforceable donative promise
1. Dougherty - Grandmother wrote promissory note to nephew because nephew
was a “good boy” and signs it. Ct rejected argument that signed, written
instrument was evidence of consideration. Ct noted that “value received”
denoted value of past acts, which cannot serve as consideration
a) There was also no benefit to the grandmother and no detriment to the
nephew (there was no condition that nephew continue to be a good boy
or owtherwise limit legal freedoms - distinguished from Hamer)
H. Past Performance Rule - past acts/performance are not sufficient consideration.
Consideration must be made at time contract exists.
1. Plowman - VP of refining company laid off workers but promised to pay them
half their salaries for rest of their lives if they came in to pick up their checks.
When company stopped paying for economic reasons, laid off employees sued
a) Ct said that plaintiffs’ service for company (past performance) is not
consideration → must be something that is done after the promise or with
reference to promise
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I.
b) Ct said going to pick up checks is not consideration, plaintiffs’ only doing
so for their benefit
c) Also at issue was whether the VP had the authorization to make such
an agreement
Gross Inadequacy of Consideration Rule (RSS 79 Comment e) - sham consideration
cannot be consideration and where there is such gross inadequacy of consideration it
“shocks the court,” the Ct may deem the contract unenforceable for lack of consideration
(and may invoke other rules such as fraud, duress, etc.)
1. Dohrmann - Rogers, deceased woman with large estate, transferred large
portion of estate (more than $5 million) to Dohrmann, her neighbor, “in exchange
for” past and future services and “other good and valuable” considerations such
as “carrying on her name” by changing his son’s middle name to Rogers. Rogers
also not allowed to show contract to lawyer
a) Executor said contract lacks consideration due to gross inadequacy of
Dohrmann’s detriment
b) Dohrmann argued that it was not up to the court to juge the adequacy of
the consideration, just the existence thereof
c) Ct agreed but said that where, as in this case, the consideration is so
inadequate it “shocks” the Ct, it can intervene and rule that the contract
is unenforceable (also suggests, but doe not accuse, other crimes may
have been committed such as fraud or coercion)
UNIFORM COMMERCIAL CODE (UCC)
I.
DEFINITIONS
A. UCC 1-102: Scope
B. Merchant (UCC 2-104):
1. (1) person who deals in goods of the kind or otherwise by occupation holds
himself as having knowledge or skill regarding the good in transaction
a) “Expert in the field” or employee in a store selling goods
2. (3) “between merchants” means any transaction with respect to which both
parties hare chargeable with knowledge or skill of merchants
a) Law is different when dealing with “between merchants” → must be at
least two
C. Good (UCC 2-105)
1. All things that are moveable (if it moves, it’s a good - just because you can’t
move it doesn’t mean it’s not a good)
2. Money is not a good
D. Knowing if UCC Applies
1. Determine what the outcome is → determine whether outcome will be different (is
there a conflict between UCC and common law?) → determine if UCC applies
II.
2. DO NOT need to determine whether UCC will apply if the outcome would be the
same under UCC or common law
CONTRACT FORMATION
A. Formation in General (UCC 2-204)
1. Contract for sale of good may be made in any manner sufficient to show
agreement, including conduct by both parties which recognizes the existence of
such a contract
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2. Agreement sufficient to constitute a contract of sale may be found even though
moment of its making is undetermined
3. Even though one or more terms left open contract for sale does not fail for
indefiniteness if parties intended to make a contract and there is reasonably
certain basis for giving an appropriate remedy
a) Jannusch - Jannusch entered oral agreement to sell Festival Foods
business to Naffziger, including truck, trailer, fridges, and other goods for
$150,000 but after business earned less money than Naffziger thought,
wanted to get out of paying full amount.
(1) Ct ruled that even though there were many terms left open, there
was a contract under UCC 2-204 because parties’ conduct
recognized existence of contract
(a) Defendant operated business for rest of year, reported
income on business in taxes, asked attorney to prepare
contract, Plaintiff canceled storage contract where he
would have kept items sold to defendant
(b) Even though defendant didn’t know when the oral
agreement was made, under UCC 2-204, that doesn’t
matter
B. Quantity Limitations Rule - where quantity, as opposed to price, is left undetermined,
there will generally be no contract but instead ongoing negotiations
1. Styberg Engineering - Plaintiff manufactured custom brake assembly parts for
defendant for two years after which they negotiated for larger purchase.
Defendant agreed to 13,000 parts but Plaintiff wanted larger order to cover
capital expenditures → no purchase order was ever issued by defendant for
13,000 parts
a) Ct said that there was no contract because parties were negotiating
essential terms of contract, which were never agreed upon
b) Essential term was quantity → Ct ruled that UCC can’t “fill the gap” for
quantity like it can do for price (ie market price)
c) Ct also looked at normal course of dealing - parties had prior
transactions with each other, all of which involved a purchase order but
none provided here → conduct did not demonstrate contract
III.
UCC AND QUALIFIED ACCEPTANCE
A. Battle of the Forms
1. Question: when an offer is made on one party’s “form” (ie standardized
document like a purchase order) and accepted on the other party’s “form,” is
there a contract and whose form governs?
a) Different terms: when both forms speak to the same topic and the
words don’t match
b) Additional terms: when one form speaks to a topic and the other is
silent on the topic
c) Answer depends whether the contract is governed by common law or the
UCC
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2. Common Law Rules
a) Mirror Image Rule (RSS 59) - reply to offer which purports to accept but
is conditional on offeror’s assent to additional or different terms is a
counteroffer
(1) There is no contract until the other party accepts the counteroffer
b) Last Shot Rule - since different forms are counteroffers, the last form to
which both parties assent controls (i.e. if the last counteroffer is
accepted, it controls)
3. UCC Rules
a) Additional Terms in Acceptance of Confirmation (UCC 2-207)
(1) Definite and seasonable expression of acceptance or written
confirmation which is sent within reasonable time operates as
acceptance even though it states terms additional to or different
from those offered or agreed upon, unless acceptance is
expressly made conditional on assent to additional or different
(a) {rejects common law rule}
(2) Additional terms are to be construed as proposals for addition to
the contract. {if NOT between two merchants, stop here}.
Between two merchants, such terms become part of the
contract unless:
(a) Offer expressly limits acceptance of the terms of the
offer
(b) They materially alter it; or
(c) Notification of objection to them has already been given
with reasonable time after notice of them is received
(3) Conduct by both parties that recognizes the existence of a
contract is sufficient to establish a contract for sale although the
writings of parties do not otherwise establish a contract. In such
cases, terms of the particular contact consist of those terms on
which writings of the parties agree, together with any
supplementary terms incorporated under other provisions
(a) {if both parties’ language say that only their
contracts’ terms apply, only terms on which they
agree and rest will be filled in by UCC)
b) In general, applies where a contract/terms have been agreed to but
have not been reduced to writing
B. Primary Purpose Rule (Coakley Rule) - when determining whether a contract is for sale
of a good or service, look to the primary purpose of the contract by examining (1) the
language of the contract, (2) the nature of the business of supplier, and (3) the
intrinsic worth of the materials
1. Princess Cruises - dispute between Princess Cruises and GE after GE’s repairs
on Princess Cruises’ ship caused it to need additional repairs and resulted in a
canceled cruise (lost revenu). During negotiations for repairs, Princess Cruises
and GE exchanged forms (see battle of the forms) and question was which
companies’ “form” controlled → answer limited GE’s liability
a) Trial Ct applied UCC to award Princess Cruise $4.5 million
b) App. Ct. reversed, saying that primary purpose of the contract was for
the sale of services by using Coakley test
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(1) Language of contract discussed “engineering services” that GE
was to provide
(2) Price quote came from GE’s Installation and Service Engineering
Department → GE’s business was services
(3) Nothing separated values by goods or services but clear
services dominated
c) Thus, under common law, GE’s final price quote (final “form”) was NOT
acceptance but a counter-offer because it had additional and different
terms than offered by Princess Cruises (RSS 59)
d) Princess Cruises acted in a way that suggested its assent to GE’s “last
form” (dropped off the boat, paid full price in quote, didn’t raise
objections) → GE’s form controls
C. Express Limitations and Affirmative Assent Rule (UCC 2-207(2)(a)) - Under UCC,
where the original offer includes express limitations on acceptance to its terms, additional
or different terms included in the acceptance do not become part of the contract unless
affirmatively agreed to by offeror
1. Hercules - Hercules purchased trim press from Brown Machines and the
purchase order (constitutes offer) expressly limited the offer to terms contained
therein. Brown sent back order acknowledgement (constitutes acceptance) with
additional terms, including one that would require Hercules to indemnify
(reimburse) Brown for any suit against it resulting from operation of trim press.
After purchase, Hercules employee gets hurt, sues, but Hercules refuses to
indemnify Brown
a) Ct said that since Hercules’ offer expressly limited the terms of
acceptance to what was included in the purchase order, the additional
terms in Brown’s order acknowledgement were not part of the contract →
Hercules did not have to indemnify Brown
b) Ct said that even though Hercules responded to Brown’s order
acknowledgement, it did not affirmatively assent to the additional
conditions and positive assent cannot be given by silence or failure to
acknowledge → additional terms not part of contract
IV.
ELECTRONIC (LAYERED) CONTRACTING
A. Definitions
1. Shrinkwrap - products come in shrinkwrap with terms inside and terms outside of
shrinkwrap state that if the product is not returned within specified period,
consumer agrees to terms
2. Browsewrap - websites that offer links to terms and conditions but do not require
active assent
3. Clickwrap - products, services, etc. that require clicking box/button to agree to
terms and conditions
4. Issue is determining whether the consumer manifested assent to terms and
conditions
B. Reasonably Conspicuous Notice Rule - Website operators must provide reasonably
conspicuous notice of the terms and conditions such that a reasonably prudent user
would be able to (1) notice the terms and conditions (or hyperlink thereto), and (2)
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understand that the terms and conditions were connected to the action the user performs
(e.g. creating an account, purchasing products, etc.)
1. Meyer - Meyer was put on “inquiry notice” of the terms and conditions when he
registered his Uber account because a hyperlink to the terms and conditions was
(1) clear in blue “hyperlink” font, (2) unclutterd on the page, (3) right underneath
the registration button → Meyer bound by arbitration provision of agreement
a) Ct sates principle that for these cases, party will not be bound by an
inconspicuous provision of the terms but here the hyperlink to the terms
and conditions was conspicuous enough that a reasonably prudent
person would be on inquiry notice → bound by the terms
b) Whether the user actually reads the terms is not considered → classical
(objective) approach
C. Timely Return Rule - shrinkwrap terms and conditions must clearly state that non-return
of the product by a specified date (eg 14 days after receipt) constitutes the consumer’s
assent to the shrinkwrapped terms and conditions
1. Defontes - Defontes purchased Dell computer on the phone, received email
receipt, and then shrinkwrap terms and conditions with the product itself, which
contained arbitration clause.
a) Ct ruled that terms and conditions of shrinkwrap terms and conditions
were not binding because the terms and conditions did not clearly define
how the consumer could assent (or decline) by failing to specify within
how many days consumer had to return the product to decline
(1) Go through steps of court:
(a) Outcome would be different whether it was under
Common Law (last form rule) and UCC → yes
(b) Covered by UCC → yes, undisputed sale of good
(c) Formation (UCC 2-204(2)) - moment of formation is
undetermined but Ct treats the purchaser as the offeror
→ submits offer over the phone and Dell accepts by
shipping the computer
(d) Qualified Acceptance (UCC 2-207(2)) - additional terms
in shrinkwrap are proposals that consumer must accept
(e) Did consumers accept? Ct says it’s unclear whether the
customers had (or knew that they had) the right to reject
by return → can’t say if the customers accepted → terms
and conditions not part of contract
PROMISSORY ESTOPPEL
I.
DEFINITION/ELEMENTS
A. Definition - legal doctrine that stops a person from reneging on a promise even if a legal
contract does not exist
B. Elements (RSS 90(1))
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1. There is a promise (express or implied)
2. That a promisor should reasonably expect to produce action or forbearance on
the part of the promisee
3. Reliance in fact exists
4. Reliance is detrimental to the promisee and injustice can be only avoided by
enforcing the promise
a) Injustice must be large → small injustices won’t suffice for promissory
estoppel
II.
C. Basic Question - was there a reasonable basis to rely on a promise or would a
reasonable person rely on the promise?
APPLICATION/RULES
A. Implied Promise Rule - even when no express promise is made, a court can still apply
promissory estoppel if the other elements can be shown and the parties can show the
existence of an implied promise
1. Harvey - Plaintiff sued her parents claiming they promised to convey land to her
and she relied on this promise when building a house on it (making
improvements to the land). Trial Ct found that parents made “general, nonspecific plan to transfer land to the children at some undetermined time” → no
specific promise made → no promissory estoppel. App Ct reversed
a) App Ct went through elements of promissory estoppel (RSS 90(1))
(1) There was no express promise but RSS 2 defines “promise” as
“manifestation of intent to act” → parents helped get building
permit, build house, etc. was evidence of intent to convey land
int future → implied promise
(2) Daughter had a reasonable basis to rely on promise and parents
had a reasonable basis to expect reliance - daughter sought their
help to build/acquire permit for house
(3) Evidence of reliance by $200,000 improvements to property
(building home) - daughter would not have made improvements
without promise
(4) Injustice to daughter through loss of $200,000 and improvement
to another’s property (at a minimum)
B. Charitable Subscription Rule (RSS 90(2)) - charitable subscription is binding without
proof that a promise induced action or forbearance
1. Warning: this is minority rule not generally followed or accepted
2. King - Boston University was allowed to keep letters by Dr. King because it was
able to show that King promised to give letters to BU upon his death with a
donative intent and demonstrated reliance on that promise by indexing them,
making them available for research, taking care of them etc.
C. Detrimental Reliance Rule - In order to satisfy the reliance element of promissory
estoppel, plaintiff must show that he acted to his detriment because of a promise (ie he
would not have acted that way otherwise)
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1. Katz - Katz had retired because Danny Dare promised to pay Katz every month
pursuant to a negotiated pension plan. After a few years, Danny Dare began to
demand that Katz work to receive his payments → Katz sued
a) Ct said Danny Dare was bound under promissory estoppel because dare
made a promise on which Katz acted to his detriment (as opposed to
giving something up to which he was entitled)
(1) Ct did not seem to agree that there was sufficient consideration
by the parties to form a contract, but ruled that Dare was bound
by the promise regardless
b) Ct applied three elements: (1) promise; (2) detrimental reliance on such
a promise, (3) injustice can be avoided by enforcement of promise
(1) Ct still thinks element that promisor should have expected
reliance at time promise made is important, just not needed in
this jurisdiction
c) Distinguished from Plowman where everyone was laid off and the
promise for pension was gratuitous → no remedy. Here, Dare didn’t want
to fire Katz → Katz losing job came after and as a consequence of,
pension plan
2. Aceves - Aceves relied on US Bank’s promise that it would “work with her” on
her home payments so that she could keep her home → convinced her not to file
Chapter 13 bankruptcy. US Bank offered a higher loan amount with higher
monthly payments (phony offer that Aceves could obviously not afford) → Aceves
sued
a) Ct held that Aceves acted on US Bank’s promise to negotiate and that
action was to her detriment.
b) Bank argued that it followed through on its promise but Ct ruled that
Bank made new offer or unilateral offer → US Bank did not do what it
promised to do
c) Ct used slightly different elements:
(1) A promise clear and unambiguous in its terms
(2) Reliance by party to whom promise was made
(3) Reliance must be both reasonable and foreseeable
(4) Party asserting the estoppel must be injured by reliance
LIABILITY IN ABSENCE OF A CONTRACT
I.
OPTIONS CONTRACTS
A. Defitions
1. Firm Offers (UCC 2-205)
a) Merchant makes an offer to buy or sell goods
b) In signed writing
c) Which by its terms give assurance that it will be held open and not
revocable for lack of consideration
d) During the time stated or if not time stated than a reasonable time but
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e) In no event may such a period of irrevocability exceed three months and
(1) {if time stated is 2 weeks → irrevocable for 2 weeks; if time stated
is 6 months → irrevocable for 3 months}
f) Any signed writing supplied by offeree must be signed by offeror
g) Comment 3: three month irrevocable period only for options that lack
consideration - options with consideration are irrevocable for as long as
the parties state
2. Options Contracts (RSS 87)
a) Offer is binding as an options contract if it
(1) Is in writing and signed by the offeror, recites a purported
consideration for the making of the offer, and proposed an
exchange of fair terms within a reasonable time; or
(2) Is made irrevocable by statute
b) Offer which the offeror should reasonably expect to induce
action/forbearance of a substantial character by the offeree before
acceptance and which does induce such action/forbearance is binding to
the extent necessary to avoid injustice
B. Consideration Requirement Rule (RSS 87(1)) - Options contracts not under the UCC,
consideration between the offeror and offeree for the option is required
1. Berryman - Berryman and Kmoch entered into an options contract under which
Berryman would not sell land for 120 days to another buyer. Kmoch was
supposed to pay $10 for the option but money was never paid. Berryman sold
the property after Kmoch indicated that he wanted out of the option but then
changed his mind → Kmoch sued Berryman
a) Ct ruled that Berryman was not bound to the option because there was
no consideration for it
(1) Kmoch tried to argue that time and money spent trying to get
investors for the property was consideration → Ct rejected bargain for exchange was not to get investors to buy the land,
the bargain was to keep the offer to sell the land open → no
consideration
(a) Also works under benefit/detriment - benefit/detriment
must be between the parties
(2) Ct also ruled that there was insufficient reliance for promissory
estoppel
C. Pre-Acceptance Reliance Rule (RSS 87(2)) - Where offeror should expect that the offer
would induce and does induce an action detrimental to the offeree, the offer is binding as
an options contract to extent necessary to avoid injustice
1. Distinguish from promissory estoppel - to be used when there is an offer but NOT
necessarily a clear promise
2. Pop’s Cones - Pop’s Cones is negotiating with Resorts regarding moving its
yogurt store to one of Resorts’ properties Pop’s Cones asks Resorts if it should
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renew its lease in its current location or give it up because it will get the location
in Resorts’ property. Resorts says deal is all but done → Pop’s gives up location,
purchases storage to put its equipment, gives up revenue. Resorts denies Pop’s
Cone location and awards it to someone else → Pop’s Cone sues
a) Ct rules that since Resorts told Pop’s Cone not to renew lease based on
its offer and knew that Pop’s Cone incurred expenses/lost revenue by
relying on Resorts’ offer → offer acted as a binding option such that
Pop’s Cone could recover reliance damages
b) Pop’s Cone had a great case for promissory estoppel but not so clear
what the promise was
(1) Clearly relied on what Resorts said to its detriment (gave up
location, put stuff in storage, gave up revenue/income for
employees)
(2) Clearly it was reasonable for Resorts to expect reliance
(3) Not so clear what Resorts promise was - was it a promise to
award Pop’s the lease, negotiate further, both?
c) RSS 87(2) allows Pop’s to recover reliance damages without promissory
estoppel
LIABILITY FOR BENEFITS RECEIVED
I.
RESTITUTION
A. Definitions
1. Unjust enrichment - equitable principle mandating that one shall not be permitted
to unjustly enrich oneself at expense of another or to receive property or benefits
without compensation
2. Contract Implied in Fact - agreement meets all of the terms of contract except the
contract was implied rather than express → these ARE contracts
a) Offer and assent is implied from the facts (ex Jannusch)
b) Remedies include expectation damages
3. Contract Implied in Law - legal fiction that is used to grant restitution remedy,
implies conclusion that someone has been enriched unjustly and therefore the
other party deserves restitution → NOT contracts
a) Also referred to as quasi-contracts
b) Remedies include restitution only
c) Elements
(1) Plaintiff conferred benefit on defendant
(2) Defendant knows about the benefit
(3) Defendant has accepted or retained the benefit conferred
(4) Circumstances are such that it would be inequitable for
defendant to retain the benefit without paying fair value for it
B. Restatement of Restitution Sec 116 - someone who supplied things/services to another
is entitled to restitution from the one who received them if
1. The one who supplied the thing/service acted unofficiously and with intent to
charge and
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a) Ie acts of goodwill do not apply
2. Things or services were necessary to prevent the other from suffering serious
bodily harm or pain, and
3. The person supplying them had no reason to know that the other would not
consent to receiving them, if mentally competent; and
4. It was impossible for the other to give consent or, because of extreme youth or
mental impairment, the other’s consent would have been immaterial
a) Pelo - Pelo was mentally disturbed individual who was under magistrate
order hospitalizing him for 48 hours. Pelo signed contract saying that he
was liable for expenses while he was at hospital but later refused to pay
and said that he was under duress when signing
(1) Ct ruled that Pelo must pay under the contract and even if he
signed under he contract, he was bound to pay under the quasi
contract - Ct applied the Sec 116 of the Restatement on
Restitution
(2) Ct said that it didn’t matter that Pelo did not consent to the
services provided because he was under magistrate order (could
not consent)
C. Law and Economics and Restitution (Posner) - When transaction costs are high,
there should be restitution.
1. In Pelo, the transaction cost of not having a contract is that Pelo did not get
services/could be dead → transaction cost very high
2. When transaction costs are low, parties have opportunity to negotiate and if they
don’t enter into contract, they didn’t intend to → no restitution
D. Benefits Received Rule - focus of restitution is on a party has received benefits for
which it did not provide compensation, NOT on the part that was harmed
1. Equity - Equity, subcontractor, sues Commerce, owner of the building, for work it
did on Commerce’s building but was never paid. Equity was subcontracted by
World Properties, the contractor, which was bankrupt at the time of suit
a) Ct ruled that Commerce was NOT unjustly enriched because it paid
World Properties for the benefits it received from Equity’s work →
question was whether Commerce paid someone for the benefits it
received from Equity’s work, not whether Equity was paid
(1) Commerce paid World Properties but World Properties did not
pay Equity → Equity could sue World Properties but it was
bankrupt → out of luck
II.
PROMISSORY RESTITUTION
A. Definition - benefit received by someone who makes a promise to pay for the benefit at
some point in the future
B. Pre-Existing (Moral) Obligation Rule - a “pre-existing duty” or “moral obligation” will be
sufficient consideration for an express promise for past services to be binding when (1)
debt expires due to changes in law, (2) promises to pay bankruptcy after it’s discharged ,
and (3) contracts made by minors once they reach age of majority
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1. Wyman - Father was not bound by promise to pay Mills for taking care of his ill
son because son was not a minor, services Mills provided were not requested by
father, and there was no sufficient consideration given at any time for promise or
acts → Wyman had no moral or pre-existing duty
C. Material Benefit Rule (RSS 86) - If a person received a non-gratuitous material benefit
(significant/important) from another, a subsequent promise to compensate the person for
rendering such a benefit is enforceable
1. Webb - Webb was clearing blocks from the second story by throwing them down
to the first when he saw McGown, his boss, below. To save McGown from
getting hit, Webb used his body to divert one of the blocks, injuring him for life.
McGown promised to pay Webb $15 every two weeks for life. Payments stopped
when McGown died → Webb sued
a) Ct ruled that McGown’s estate had to pay - past consideration is
sufficient to make an enforceable contract, when the promisor received a
material benefit, even if there was no original duty or liability resting on
the promisor - based on the idea of promissory restitution
STATUTE OF FRAUDS
I.
DEFINITIONS/RULES
A. Definition - statutes that require that certain types of contracts be in writing
B. Types of Contracts Covered
1. RSS 110
a) Executor-administrator contracts
b) Suretyship contracts
c) Marriage contracts
d) Land contracts
e) Contracts that cannot be performed within one year
f) NOTE: this is not a statute, RSS 110 summarizes what most statutes
contain
(1) **Statutes of fraud are specific to each state → must look at the
statute for each state**
2. UCC 2-201
a) Sales of goods over $500
b) Contracts that cannot be performed within one year
c) Anything involving real estate
d) Suretyship contracts
e) Exceptions: custom goods
C. Writing Requirements (RSS 131 - 136)
1. Must identify subject matter
2. Indicate a contract has been made/there has been an agreement
3. Has to state essential terms (price, quantity, time)
4. Need not necessarily be words on paper
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a) UCC 1-201(43): Writing includes printing, typewriting, or any other
intentional reduction to tangible form
5. May be a series of forms (multiple documents)
6. Does not have to be made at the time contract is made
7. Signature generally required from the person against whom contract is being
enforced
a) Exception for sale of goods between merchants (UCC 2-201(2)) - if
document is sent and not signed, but the receiver has not objected or
notified that he will not sign, it is as good as if it were signed
8. If writing requirements are not met, must use non-contract remedy sources
(promissory estoppel, restitution)
D. Steps for Legal Analysis
1. Is the contract covered by a statute? Yes → continue to Q2
2. Is there sufficient memorandum? No → continue to Q3
3. Is there an exception?
E. Clear Relation Rule - The writing requirement for statute of frauds can be satisfied by
multiple pieces of writing, with one or more signed, as long as they clearly relate to each
other
1. Crabtree - Crabtree entered into an employee contract with a rising payscale
that covered 2 years. There was no written contract that stated the rising
payscale but there was an employment agreement and payroll cards that
contained the increased amounts and benchmarks that Crabtree was entitled to.
When Crabtree’s employer refused to pay, Crabtree sued
a) Ct ruled that although there was no single, signed document, the writing
requirement was met because the agreement and payroll cards, which
stated the rising payscale, clearly related to each other and thus together
satisfied the requirement
F. Partial Performance Exception Rule (UCC 2-201(3)(c) and Comment 2) - Partial
performance can substitute the written requirement rule where the goods have been
accepted or for which payment has been made and accepted. The overt actions of the
parties can evidence acceptance.
1. Buffaloe - Oral agreement to buy tobacco barns over five years is enforceable
despite not meeting writing requirement. Farmer agreed to buy tobacco barns
from defendants, sent defendants the check, took possession of the barns, and
advertised them to prospective buyers. Defendants returned check, ripped up
and although farmer was able to put it back together, Ct ruled that it did not
satisfy writing requirements
a) Ct ruled that the oral agreement was enforceable because the farmer
paid for and received the barns and the defendants accepted the
payment. Cited conduct of the parties as evidence of acceptance
PRINCIPLES OF INTERPRETATION
I.
THEORIES
A. Subjective
1. What each party thought at the time they entered into the contract (“meeting of
the minds”)
2. No meeting of the minds, no contract
3. Problems: too often contracts are not enforced, doesn’t take into account
common usage
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II.
B. Objective
1. What a reasonable* person would conclude based on the words of the contract
and the parties’ behavior
2. Problems: could end up enforcing a contract neither party wanted (inconsistent
with theory of autonomy)
3. *Reasonability is what you would expect a person on the street to think,
ambiguity only applies if there are to reasonable interpretations
a) If you come up with an alternate interpretation that’s unreasonable, there
may not be ambiguity
C. Modified Objective (RSS 201)
1. If two parties subjectively agree on meaning of terms, that’s what contract means
2. Assuming parties don’t subjectively agree, the meaning of the contract is that of
the party that
a) Did not know of the different meaning attached by the other and the
other party knew the meaning attached by the first party, or
b) Had no reason to know the meaning attached by the other party and the
other party had reason to know the meaning attached by the first party
3. If 1 and 2 don’t apply, there is no enforceable agreement
PRINCIPLES
A. No single principle is controlling and not listed in any hierarchy - use most appropriate
rule, not all rules will apply
B. Noscitur a sociis
1. The meaning of the word in a series is affected others in the same series or may
be affected by its immediate context
C. Ejusdem generis
1. General term joined with a specific one will be deemed to include only things that
are like the specific one
D. Expressio unius exclusio alterius
1. If one or more specific items are listed without any more general or inclusive
terms, other items although similar in kind are excluded
E. Ut magis valeat quam pereat
1. Interpretation that makes the contract valid are preferred to one that makes it
invalid
F. Omnia praesumuntur contra proferentem (RSS 206)
1. If a written contract contains a word or phrase that is capable of two reasonable
meanings, one of which favors one party and the other favors the other, that
interpretation will be preferred which is less favorable to the one by whom the
contract was drafted
G. Interpret the contract as a whole
1. Writing or writings that form part of the same transaction should be interpreted as
a whole (each part should be interpreted together instead of separately)
H. Purpose of the parties
1. Principal apparent purpose of the parties is given great weight in determining the
meaning to be given manifestations of intention or to any part thereof
I. Specific provision is exception to a general rule
1. If two provisions of a contract are inconsistent with each other and if one is
general enough to include the specific situation, the specific provision will qualify
the general one (ie state an exception to it)
J. Handwritten or typed provisions control printed provisions
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III.
1. Where written contract contains both printed provisions and handwritten or typed
provisions, and the two are inconsistent, the handwritten provisions are preferred
K. Public interest preferred
1. If public interest is affected by a contract, that interpretation or construction is
preferred which favors the public interest
RULES/EXAMPLES
A. Modified Objective Approach - where there is objective evidence of what each party
understood at the time of contract, but those understandings differ, courts should look at
what each party knew/should have known about the other’s understanding
1. Joyner - Joyner contracted with Brown (later substituted by Adams) to develop
office park and contract required that each plot be “developed” or lease would
increase. Parties disagreed about what “developed” meant and showed
objective evidence of what each party meant.
a) Trial Ct used subjective approach to determine there was no meeting
of the minds (the parties understood “developed” meant different things)
→ no contract
b) App Ct remanded, each party agreed that there was a contract but
disagreed as to what “developed” meant → have to look at evidence of
what each party knew about what the other party understood
c) Ct rejected contra proferentem interpretation - not clear which party
drafted the contract (demonstrates courts’ caution with using this
principle)
B. Evidence of Interpretation - Basic arguments for one interpretation over another can
cite:
1. Plain language - Cts should simply enforce what is in the contract since the
contract is what the parties agreed to
a) Plain meaning is often not what the parties want
b) Can’t have ambiguities → limited helpfulness
2. Preliminary Negotiations - is there evidence of what the parties intended from
the negotiations leading to the contract
a) Beware parol evidence rule
3. Trade Usage (RSS 222) - Term having such common usage that it would be
expected to have an understood meaning in the trade
a) Those in the trade know, or should know, what the term means
4. Price - does the understanding of the term align with the price negotiated
5. Legal Standards - if authorities are cited in the contract, use the interpretation
the authorities attach to the terms
a) Look out for “cites” that are really “references”
6. RSS 203(a) - Prefer interpretation that makes agreement reasonable, lawful, and
effective
7. Parties Course of Action - how the parties interpreted the language of the
contract(s) prior to current dispute
a) Frigaliment (Chickens) - ambiguity between buyer in Switzerland and
US seller over what the word “chicken” meant in the contract. Buyer
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meant young, broiler chickens. Seller meant any genus of chickens
meeting contract specifications. Seller shipped fowl, which was not
suitable for buyer’s needs → buyer sued.
(1) Ct went through the above arguments to determine what
“chicken” meant in the contract → used modified objective
approach (RSS 201(2)(b)) to determine that
(a) No objective evidence that seller had reason to know
buyer meant young, boiler chickens
(b) Given statements, government regs, and price, buyer
had reason to know seller meant any kind of chicken
(including larger fowls)
(c) Note parol evidence rule wouldn’t apply in this case
because parties didn’t intend writing to be final
expression of agreement
IV.
ADHESION CONTRACTS
A. Definition - contracts that include
1. Standardized form (e.g. insurance form)
2. Imbalance of bargaining power
3. Absence of choice (take it or leave it)
B. Doctrine of Reasonable Interpretation (RSS 211) - Terms that parties didn’t negotiate
should be interpreted in favor of the reasonable expectations of the party that did not
draft the contract even if close reading of contract shows the language is inconsistent
with the expectations of the party
1. Applies when the party drafting the contract believes the other party would not
agree to the standard term because it is
a) Bizarre or oppressive
b) Eviscerates the purpose of the non-standard terms, and
c) Eliminates the dominant purpose of the transaction
(1) Note 1: Doctrine does NOT apply to “dickerd terms” - nonstandard terms specifically negotiated between the parties for
the contract at issue
(2) Note 2: most jurisdictions will only apply doctrine if language is
ambiguous and the standard terms are hidden
2. C&J Fertilizer - Fertilizer plant burglarized and insurance company refused to
provide coverage because policy required markings on the exterior of the plant
(there were markings on the exterior of the burglarized room within the plan) →
owner sues arguing adhesion contract
a) App Ct rules that insurance policy was an adhesion contract
(1) (1) Term was a standard term not negotiated, (2) there was a
disparity in bargaining power (insurance company v. 37 year old
man with high school education), (3) the farmer and insurance
company didn’t negotiate the contract/term (take it or leave it) →
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V.
b) Therefore, the contract was subject to reasonable expectations test
(1) (1) term eliminated the dominant purpose of the transaction
(didn’t cover burglary; (2) the term was bizarre/oppressive (odd
that insurance policy for burglary depended on skill of burglar),
(3) didn’t eviscerate the terms explicitly agreed to (that’s ok
because meets 1 and 2)
PAROL EVIDENCE RULE
A. Definition - a set of rules of law that prevents the use of certain extrinsic (matters not
contained in the written instrument) evidence to contradict and perhaps even to
supplement a written agreement
1. Exclusionary rule (excludes evidence rather than includes)
a) When does it apply?
b) What is excluded?
2. Applies to integrated (=final) agreement
3. Only applies when contracts are in writing
4. Used to decide whether evidence regarding contract interpretation should be
allowed into evidence
B. Purpose
1. Provides certainty for parties
a) Lets parties know that other evidence won’t be brought against them in a
contract dispute
2. Prevents introduction of unreliable evidence
3. Deters attempts to rewrite agreements with hindsight
4. If the parties did not intend to make the agreement a final or (perhaps) a partial
agreement, the rule doesn’t apply
C. Integrated Agreements (RSS 209(1)) - A writing or writings constituting a final
expression of one or more terms of an agreement
1. Complete Integration (RSS 210(1)) - an integrated agreement adopted by the
parties is a complete and exclusive statement of the terms of the agreement
a) Rule: If agreement is completely integrated, then evidence of prior or
contemporaneous communications cannot be offered to add to or
contradict the written agreement
2. Partial Integration (RSS 210(2)) - an integrated agreement other than a
completely integrated agreement
a) Rule: If agreement is partially integrated, then evidence of prior or
contemporaneous communications cannot be offered to contradict the
written agreement but may be offered to supplement the agreement
3. Determining whether contract is integrated
a) Williston (traditional) approach - four corners approach
(1) Must appear integrated on its face
b) Corbin (modern) approach - consider all circumstances
(1) RSS 210 comment b - integration “may be proved by any
relevant evidence…[W]riting cannot of itself prove its own
completeness”
4. To make sure that an agreement is subject to the parol evidence rule, parties
should include a merger clause
a) Ex: Entire Agreement. This document constitutes the entire agreement
of the parties and there are no representations, warranties, or
agreements other than those contained in this document
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5. Thompson - Libby buys logs from Thompson but Libb doesn’t want to pay
because Libby claims there was a warranty/assurance and promise was
breached and sought to introduce warranty that was separate from final contract.
Thompson argued parol evidence rule but Libby argued that final contract was
not representation of full contract and parol evidence rule does not exclude
evidence showing the final contract is not final/complete
a) Ct uses Williston (traditional) approach - the agreement itself is the
only evidence that can be used to determine whether the agreement is
fully or partially integrated
(1) Note: Most courts allow for this type of evidence (see RSS 214
and exceptions below)
D. Exceptions to Parol Evidence Rule
1. Exceptions where rule doesn’t apply in first place - evidence won’t be excluded to
show that there was no agreement or that the agreement is invalid by
a) Incapacity
b) Fraud
c) Duress
d) Undue influence
e) Mistake
f) Lack of consideration
g) Mutual assent
2. Exceptions where the rule applies (“true” exceptions) - evidence showing
a) Collateral contracts (RSS 216(2)) - separate agreement between
parties (oral or written)
(1) There must be separate consideration or
(2) Term in would ordinarily be omitted from writing
b) Oral conditions - oral evidence is permissible to show that the
agreement would not take effect unless some specified event occurred
c) Entitlement to an equitable remedy (eg reformation of the contract rather
than enforcement of the contract)
d) Evidence of agreements made after the contract was made
e) Evidence to explain ambiguity in the contract
(1) Evidence supporting a claim that a term is ambiguous
3. Taylor (Bobby Sid) - the language of a release clause in Taylor’s insurance
contract with State Farm was reasonably susceptible to multiple reasonable
interpretations and was therefore ambiguous → Ct allowed parol evidence to
establish ambiguity and party’s interpretation
a) Ct adopted Corbin (Modern) Approach
(1) Examine all evidence to determine integration and intent of
parties
(2) Use parol evidence rule to exclude evidence that would vary or
contradict the meaning of the written word
b) Parol evidence to support Taylor’s interpretation:
(1) State Farm apparently didn’t insist that release contain broad
language � suggests knew Taylor wouldn’t sign if it did
(2) State Farm knew large size of bad faith claim, Taylor would seek
something more than $15,000 to release claim
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(3) Parties used limiting language in release, confining it to
“contractual” and “subsequent” matters
c) Substantial evidence supports State Farm’s interpretation as well
d) Difference between Thompson and Taylor
(1) Thompson - plaintiff tried to supplement agreement with parol
evidence
(2) Taylor - plaintiff tried to interpret agreement
E. Course of Performance, Course of Dealings, and Usage of Trade (UCC 1-303) - the
following may be used as evidence to supplement the agreement
1. (a) - course of performance
a) Sequence of conduct between parties to particular transaction (ie on this
contract) that exists if
(1) (1) agreement of parties with respect to transaction involves
repeated occasions for performance by a party and
(2) (2) the other party with knowledge of the nature of performance
and opportunity for objection to it accepts the performance or
acquiesces in it without objection
2. (b) - course of dealings
a) Sequence of conduct concerning previous transactions between parties
to a particular transaction that is fairly to be regarded as establishing a
common basis of understanding for interpreting their expressions and
other conduct
3. (c) - usage of trade
a) Any practice or method of dealing having such regularity of observance
in a place, vocation, or trade as to justify the expectation that it will be
observed with respect to the transaction in question
4. (e) - express terms prevail
a) Express terms of agreement and any applicable course of performance,
course of dealing, or usage of trade must be construed consistently and
if such construction is unreasonable:
(1) express terms > course of performance, course of dealing, and
usage of trade
(2) course of performance > course of dealing and usage of trade
(3) course of dealing > course of trade
5. Nanakuli - Nanakuli bid on project based on pricing of asphalt it receives from
Shell at the time of the bid. Shell nearly doubles price of asphalt after Nankuli
placed bids and refuses to price protect → Nanakuli sues, arguing that price
protection was understood to be included in its contract with Shell (even though
there was no actual language on price protection in contract)
a) Ct analyzes the factors in UCC 1-303 to determine whether price
protection was included in the agreement (supplement agreement)
(1) Trade Usage- Ct upholds broad definition of usage of trade to
include other players (not just sellers of asphault) because UCC
1-303 states “place, vocation, or trade” and suggests that each
of these factors is equally important → it doesn’t necessarily
matter if parties of trade (sellers of asphalt) participate in a
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practice if the practice is so common in the locality (Hawaii) that
the parties should have been aware of it
(2) Course of performance - there were two instances under the
1969 contract in which Shell provided price protection
(a) Disregards Shell’s argument that more than 2 instances
needed
(3) Prior Dealings - evidence excluded but doesn’t matter because
of issues with course of performance
b) Ct ultimately allows the contract to be supplemented by trade usage and
course of performance → was this right?
(1) Depends if you think that the supplement contradicts the express
language of the contract
(2) UCC 1-201(3) - The bargain of the parties in fact as found in
their language or by implication from other circumstances
including course of dealing or usage of trade or course of
performance
(3) Thus, UCC allows the consideration of course of performance
and trade usage in interpreting the contract
IMPLIED TERMS
I.
DEFINITIONS
A. Implied terms are distinguished from express terms - what’s written in the contract
1. Implied terms are assumed in the contracts
2. Tailored default clause - implied terms that are negotiated over but not expressly
written in the contract
3. Off the rack terms - untailored default rules that are applied to all contracts and
reflects what the majority of parties would want
4. Penalty defaults - implied terms that are built along public policy
B. UCC will not imply a quantity term
II.
RULES
A. Absence of Specific Time Rule (UCC 2-309)
1. 1) Time for shipments or delivery or any other action under contract not provided
in this Article or agreed upon shall be a reasonable time
2. (2) Where contract provides successive performances but is indefinite in duration
it is valid for a reasonable time but unless otherwise agreed may be terminated at
any time by either party
3. (3) Termination of a contract by one party except on the happening of an agreed
event requires that reasonable notification be received by the other party and
an agreement dispensing with notification is invalid if its operation would be
unconscionable
a) Even if the contract had a term that said that the contract can be
terminated with notification, that notification would need to be reasonable
and cannot be unconscionable
b) If Raynor had an agreement with Leibel that said that if Leibel’s sales
decreased for 2 years it could terminate the agreement immediately, that
would be a “happening of an agreed event” and thus Raynor could
immediately terminate the agreement
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4. Comment 8 - section 3 recognizes the application of the principles of good faith
and a reasonable notification allows the other party to seek a substitute
arrangement or some other deal or recoup investment or sell off all of the
inventory
5. Leibel - Raynor supplies garage doors and has an exclusive distribution
agreement with a local dealer, Leibel. After a year, Raynor terminates the
agreement and Leibel sues. Raynor says that under the contract it had the right
to terminate the agreement at will after one year/ Leibel does not dispute this but
says that it is due a reasonable amount of notice before the contract is
terminated.
a) Ct says that this is a contract to further the sale of goods, thus it is not an
agreement for service but a dealership is instead a contract for the sale
of goods → UCC applies
(1) Ct looked at the “overall purpose” of the contract to determine
that it is an agreement for sale of goods
b) Ct applies UCC 2-309 to determine that a reasonable notification was not
given to Leibel → awarded damages
B. “Best Effort” Rule (Wood) - Famous designer promised to give Wood the exclusive
right to her name (her label) and sell/market her designs and in exchange the designer
will get half of all profits. Wood sues famous designer because he says she used her
name on merchandise she sold without going through him.
1. Ct deems that there must have been an implied promise that Woods use
reasonable or best efforts to market and sell the designer goods
2. Cardozo reasons that without an implied promise to use best efforts to sell her
designs, the contract makes no sense (and therefore wouldn’t make sense to
anyone) → this term must have been implied
III.
OBLIGATION OF GOOD FAITH AND FAIR DEALING
A. UCC 1-304 - imples good faith and fair dealing in every contract subject to the UCC
1. Comment 1: This section does not support an independent cause of action for
failure to perform or enforce in good faith. Rather this section means that a
failure of to perform or enforce or in good faith, a specific duty or obligation under
contract constitutes a breach of that contract
B. UCC 1-201(20) - good faith means honesty in fact and the observance of reasonable
commercial standards of fair dealing
C. UCC 2-103(1)(b) - Good faith in the case of a merchant means honest in fact and the
observance of reasonable commercial standards of fair dealing in the trade
1. Good faith is generally a subjective standard and courts tend to tie the good faith
standard to the actual terms of the contract → Need to articulate how the act that
was in bad was so
D. Intent Requirement Rule - a party must show that the other party intended to act in bad
faith in order to allege breach of implied bad faith term
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1. Seidenberg - Plaintiffs sold their business to a bank and the bank is now trying
to terminate them → sued Bank alleging Bank violated good faith term of contract
(implied)
a) Ct looks at various types of situations in which the covenant of good faith
has been successfully invoked...when:
(1) Implication of a term is necessary to protect the parties
expectation of the contract
(2) Termination or other action by one party appears to be in bad
faith or pretextual
(3) The contact specifically permits some amount of exercise of
discretion but should be limited by principles of good faith and
fair dealing
b) Here the contract guaranteed the plaintiffs employment → fits in option 2
and could argue that the bank’s operation of the company exceeded its
discretion (option 3)
c) The plaintiffs have to prove that the defendant intended to act in bad faith
d) Ct cites Sons of Thunder v. Bordenl, which states that “neither party
shall do anything which will have the effect of destroying or injuring the
right of the other party to receive the fruits of the contract”
E. Satisfaction of Party Rule - When dissatisfaction with performance is raised as a
reason for nonperformance and the performing party alleges bad faith, Cts can analyze
through objective or subjective standards
1. Objective standard of satisfaction is preferred when the contract relates to
commercial quality, operative fitness, or mechanical utility, in such cases it is
generally practicable to determine whether a reasonable person would be
satisfied
2. Subjective standard of satisfaction is preferred when the contract relates to
personal aesthetics or fancy. In such cases it is NOT practicable to determine
whether a reasonable person would be satisfied
3. Caveats
a) Subjective dissatisfaction must be in good faith ie honest dissatisfaction
b) If the contract provides for a subjective standard, a subjective standard
will be applied
4. Look at what the contract is about and whether it would fit in the subjective or
objective standard
5. Baystone Construction - Morin is subcontractor on aluminum walls on GM
factory. Morin put all walls that were not exactly uniform and GM was not
satisfied and so the contractor refused to pay Morin. Standard was one of
whether the owner (GM) was satisfied and whether that satisfaction was
reasonable
a) Ct ruled that the aluminum with which the walls were being built could
not have been uniform and the walls were for a warehouse (aesthetic not
highly valued) → dissatisfaction was unreasonable
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IV.
6. Locke - Locke and Warner Bros enter an agreement in which Locke would give
Warner Bros first look at any of her upcoming projects in return for Locke’s first
consideration when Warner Bros had upcoming projects and gets paid a
$250,000 regardless of whether any of her projects are adopted
a) Locke says that Warner Bros acted in bad faith because it never
intended to consider her projects and indeed never accepted any of
Locke’s proposals
(1) Warner Bros could deny any all of her proposals, but as long as
it could prove that it did so based on standard practice and
according to standard procedure (ie it was biased against her
and genuinely considered her proposals in bad faith) there would
be no breach
b) Interpretation of satisfaction clauses
(1) Where the contract involves matter of fancy, taste, or judgment,
the promisor is the sole judge of his satisfaction. If he asserts in
good faith and he is not satisfied, there can be no inquiry into the
reasonableness of his attitude
F. Output v. Requirements Contracts
1. Requirement contracts - buyer agrees to buy all of its needs from a seller and the
seller agrees to supply all of the buyer’s needs
a) The seller can supply other buyers
2. Output contract - buyer agrees to buy all of the seller’s output and the seller
agrees to only sell to buyer
a) Buyer can buy from others
3. Good faith requires that the parties are honest about their needs and their
WARRANTIES
A. UCC Warranties
1. Express warranties (UCC 2-313
a) Any affirmation of fact or promise made by the seller creates an
express warranty that the goods shall conform to the affirmation or
promise
b) Any description of the goods creates an express warranty
c) Any sample or model creates an express warranty
d) Not necessary to use the words “warranty” or variations thereof
2. Implied warranty of merchantability (UCC 2-314) (most basic level of warranty)
a) Warranty that the goods shall be “merchantable” is implied if the seller is
a merchant the respect to the goods of that kind
b) Merchantable means, inter alia, that the goods are “fit for the ordinary
purpose for which such goods are used”
c) Warranty can be disclaimed under certain circumstances (Sec 2316(2))
3. Implied warranty of fitness of particular purpose (UCC 2-315)
a) Where the seller has reason to know any particular purpose for which
the goods are required and that the buyer is relying on the seller’s skill
or judgment to select or furnish suitable goods, there is an implied
warranty that the goods shall be fit for such purpose
b) Applies to any seller of goods (not just merchants)
c) Warranty can be disclaimed under certain circumstances (UCC 2316(2))
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B. Bayliner - Involves the sale of a sportfishing boat to crow from Bayliner and Crow sues
for breach of express warranty and implied warranty of merchantability
1. Court rules against Crow in express warranty claim
a) The models advertised by Baliner were different from the one that Crow
purchased → not express warranty
b) Brochure was expressing the merchant’s opinions, not statements of
facts → Apples to oranges comparison
2. Crow’s implied warranty claim
a) Crow was disappointed with the speed of the boat because it could not
get him to the fishing places he wanted
b) Ct said Crow has no facts that show it’s not suited for fishing (the thing
that it was built for) → shows that this is a low standard
3. Crow’s implied warranty of fitness for a particular purpose
a) Crow says that his particular purpose was to use boat as a commuter
fishing boat and travel at speeds of over 30 mph
b) But Crow never communicated that purpose to the seller → seller did
not know of the particular purpose
AVOIDING ENFORCEMENT
I.
MINORITY
A. Traditional Rule (RSS 14) - Unless a statute provides otherwise, a natural person has
the capacity to incur only voidable contractual duties until the beginning of the day before
the person’s 18th birthday
1. Contracts made by minors are voidable
B. Limits on General Rule
1. Benefits and Use Rule
a) Limits the minor’s recovery form the voided contract (see Dodson)
b) Benefits rule reduces the payment from the other party to the minor by
the benefit (value) minor received
c) Use Rule - requires the minor to make full payment less the
consideration and depreciation
2. Contracts for necessaries
a) Minor liable for reasonable value of food, clothing, and shelter (ie
“necessaries”)
3. Minor must disaffirm
a) Contract within reasonable time once reaching the age of majority (18)
(or contract is deemed affirmed)
4. Misrepresentation
a) If minor misrepresents age PLUS other tortious conduct, this may
eliminate minor’s ability to void
5. State Statutes
a) May provide that certain contracts by minors are non-voidable
C. Dodson - 16 year old kid buys a used car. Seller testifies that he thought the kid was 18
or 19. After discovering there is a problem with the engine and that he would need to pay
to have it fixed, Dodson drives the car into the ground (until the engine explodes) and
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II.
then wants to “rescind” his contract for the sale. Dodson’s parents sue to get the Seller
to get money back
1. Dodson’s theory is that because he was 16 at the time he bought the car, the
contract is voidable and he can rescind it at any time
a) Void contract = no contract that neither party can enforce
b) Voidable contract = minor can get out of the contract or perform, adult is
bound by the contract
MENTAL INCAPACITY
A. General Rule (RSS 15(1)) - A person incurs only voidable contractual duties by entering
into a transaction if by reason of mental illness or defect*
1. (a) he is unable to understand in a reasonable manner the nature and
consequences of the transaction (cognitive incapacity, traditional) OR
2. (b) he is unable to act in a reasonable manner in relation to the transaction and
the other party has a reason to know of his condition (volitional incapcity,
modern extension of traditional rule, see Ortelere)
3. *Medical evidence is necessary to establish that a person lacked the capacity to
contract due to existence of mental condition - Sparrow)
B. Limitation on Right to Avoid (RSS 15(2)) - Where contract is made on fair terms and
the other party is without knowledge of the mental illness or defect, power of avoidance
under RSS 15(1) terminates to the extent that the contract has been so performed in
whole or in part or the circumstances have so changed that avoidance would be unjust.
In such a case a court may grant relief as justice requires
1. More tenuous requirements than Minor Avoidance
C. Volition Test - person is unable to act reasonably, regardless of what person
understood, and the other party knows that the person lacks mental capacity
1. Sparrow - Interfamily dispute regarding ownership of a home. Home was in the
name of Susan but was in dispute by her sister. Settled at mediation, home was
to be sold and Susan was to get $100,000 from the sale. Susan refuses to honor
settlement agreement because she suffered a mental breakdown and was
inpacitated at the time of the contract → contract is voidable
III.
a) Ct says that in order to demonstrate incapacity, person claiming it must
show that
(1) At time of contract, person was too weak of mind to understand
the contract at the time entering into it and therefore could not
perform the task contracted
b) Ct already said that she understood what the transaction was and said it
was the basis for her distraught state (she couldn’t believe how things
were turning out)
(1) However, under volitional test, court cited Ortelere, Susan
would only need to prove that she cannot act reasonably to
perform the task and that the other party knew of her mental
state
(2) Still, Ct said that without medical evidence attesting to her
mental state, Ct could not conclude that she lacked the mental
capacity to contract
BARGAINING MISCONDUCT: DURESS
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A. Definition (RSS 175) - A contract may be voided by the victim when
1. The victim’s manifestation of assent is induced
2. by an improper threat*
3. that leaves the victim with no reasonable alternative
4. * A threat is “improper” if, inter alia, the threat is a breach of the duty of good faith
and fair dealing under a contract with the recipient (RSS 176)
5. Note that some courts use adjectives like “wrongful” or “coercive” in the place of
“improper”
B. Economic Duress (Totem) - Alyeska is a large construction firm that needs supplies
moved while Totem is a new business. Totem is responsible for transporting tubes for
Alyeska from Texas to Alaska and Totem has a lot of difficulties transporting the cargo,
some of which are Alyesk’s fault. Before Totem completes the contract, Alyeska
terminates it, and puts in invoices for $300,000 and Alyeska says that it would take 6-9
months to pay. Totem is facing financial difficulties and really needs the money → sends
negotiator who reveals difficulties to Alyeska and they settle for $97,000
1. Ct defines economic duress
a) Involuntary acceptance terms of another
b) Absence of alternative
c) Results of coercive acts/terms of the oppressive party
(1) Usually the focus is on the actions of the oppressing party
2. The coercive act was pressuring Totem with the option that either Alyesk would
not pay Totem at all or that it would pay Totem so slowly that Totem would be
bankrupt → threat is improper because Alyeska admitted that it owed Totem
IV.
money but it threatened to withhold it until Totem collapsed
3. Totem had no alternative but to accept a lower amount of money
BARGAINING MISCONDUCT: UNDUE INFLUENCE
A. Definition (RSS 177(1), (2)) - Contract is voidable by victim if
1. Victim’s manifestation of assent is induced by
2. Unfair persuasion (excessive pressure)
a) See Odorizzi seven factors
3. By a dominant person (or someone in a confidential relationship (aka undue
susceptibility)
B. Factors for Determining Undue Influence (Odorizzi Factors)
1. discussion of transaction at an unusual or inappropriate time
2. consummation of the transaction in an unusual place
3. insistent demand that the business be finished at once
4. extreme emphasis on untoward consequences of delay
5. use of multiple persuaders by dominant side against single servient party
6. absence of third-party advisers to the servient party
7. statements that there is no time to consult financial advisers or attorneys
8. Odorizzi - Teacher that was arrested and charged criminally for homosexual
behavior (case is from 1966). After arrest, Odorizzi signed and submitted letter
of resignation (letter of resignation is the agreement at issue)
a) Odorizzi claims that agreement is invalid
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V.
(1) He signed immediately after arrest, detention, interrogation and
on little sleep
(2) School officials pressured him into signing, saying that they
would fire him and publicize the proceedings if Odorizzi didn’t
sign (meaning he could never get another teaching job again)
(3) School officials told him he did not have time to consult with a
lawyer
b) Ct says that excessive pressure and undue susceptibility replaces will of
dominant instead of subservient
(1) Easier to establish when there is a trust-based relationship
wherein the subservient party is expected to trust the dominant
party
(2) An employer-employee relationship is not one of these
relationships, it’s an arm’s-length relationship
c) Ct applies seven factors but Ct did not find that there was undue
influence in this case because the threat was not improper
(1) The school had the right to fire and/or suspend Odorizzi and it
was not improper for it to threaten to do so
MISREPRESENTATION
A. Definitions
1. RSS 159 - A misrepresentation is an assertion that is not in accord with the facts
2. RSS 164(1) - If a party’s manifestation of assent is induced by either a fraudulent
or a material misrepresentation by the other party upon which the recipient is
justified in relying, the contract is voidable by the recipient
3. RSS 162(1), (2) - When a misrepresentation is fraudulent or material
a) (1) a misrepresentation is fraudulent if the maker intends his assertion to
induce a party to manifest his assent and the maker
(1) (a) knows or believes that the assertion is not in accord with the
facts, or
(2) (b) does not have the confidence that he states or implies the
truth of the assertion, or
(3) (c) knows that he does not have the basis that he states or
implies for the assertion
b) (2) a misrepresentation is material if it would be likely to induce a
reasonable person to manifest his assent or if the maker knows it would
be likely to induce the recipient to do so
B. Opinion Exception (RSS 168(1), (2)) - Reliance on assertions of opinion
1. Opinion is quality of judgment as to the authenticity of the assertion
2. (Opinions are implied representations that the person giving the opinion does not
know facts that would make the opinion false and knows enough facts to give
credibility to the opinion
a) Syester - Widow who purchases 4,000 hours of dancing lessons.
Standard for rescinding the release from contract if it can be showed that
the way the contract was decided is based in some kind of fraud (don’t
necessarily need fraud for misrepresentation and is actually much more
than you would need).
(1) Misrepresentations in this class was:
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(a) Defendant told Syester that she could be a professional
dancer, could not consult a lawyer, and that he had a
romantic interest in her
(b) He knew these statements were false and made them
solely with the intent to get her to sign
(2) Defendant argued that these were not misrepresentations but
simply opinions (puffery) → misrepresentation has to be based in
fact and opinions do not
(a) Here, defendant knows his opinion is false → can’t just
say this is opinion as defense
(3) More complicated issue was whether Syester was justified in
relying on the defendant
(a) She had already filed a lawsuit against defendant
(b) Defendant specifically says to Syester that he and the
other dancers were her only friends → could argue this is
manipulation that could justify reliance
(4) Ct determines that release is procured under fraudulent
misrepresentation
C. Non-Disclosure of Fact (“Buyer Beware”) Rule (RSS 161(b)) - A person’s nondisclosure of fact known to him is equivalent to an assertion that the fact does not exist in
the following cases only:
1. (b) where he knows that disclosure of the fact would correct a mistake of the
other party as a basic assumption on which that party is making the contract and
if non-disclosure of the fact amounts to a failure to act in good faith and in
accordance with reasonable standard of fair dealing
2. Hill - Jones selling house to Hills. Hills visit house and ask if there is termite
damage to which Jones say no, only water damage. Hills have termite inspector
come in to test and test is clean. After Hills buy home, they discover there was
termite damage and have to pay a lot of money to replace floors. Then find out
that Jones made multiple attempts to get rid of the termites (knew they were
there) and didn’t tell the Hills → Hills sue to rescind contract for sale of home
a) Jones say the contract is fully integrated and the parol evidence rule
prevents introduction of evidence about prior communications - problem
is that in most jurisdictions, you can introduce parol evidence to show
fraud
b) Modern courts are not so tolerant of the “buyer beware” rule and follow
RSS 161(b)
(1) If the Jones hadn’t known of the termite problem, but should’ve
known about the termite problem, the outcome might have been
the same because willful ignorance is not an excuse
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c) Ct finds that when selling house, there is a duty to disclose “material
facts” that may affect the value of the property being purchased →
Whether prior history of termite infestation is a “material fact” is up to the
jury to decide
VI.
UNCONSCIONABILITY
A. Definitions
1. RSS 208 - If contract or term thereof is unconscionable at the time the contract is
made a court may refuse to enforce contract, or may enforce the remainder of
the contract without the unconscionable terms as to avoid any unconscionable
result
2. UCC 2-302
a) (1) if the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made the court
may refuse to enforce the contract, it may enforce the remainder of the
contract without the unconscionable clause or it may so limit the
application of any unconscionable clause as to avoid any
unconscionable result
b) (2) when it is claimed or appears to the court that the contract or any
clause thereof may be unconscionable the parties shall be afforded a
reasonable opportunity to present evidence as to its commercial
setting, purpose, and effect to aid the court in making the
determination
3. Note: This is not a normal remedy, literally has to be shocking or aweing to be
used
B. Requirements (Procedural and Substantive Unconscionability) - unconscionability
has generally included:
1. (1) absence of meaningful choice (procedural unconscionability) and
a) Look at bargaining power
b) Manner in which bargain entered into
c) Did parties know what they were getting into?
d) Was critical term hidden?
2. (2) contract terms which are unreasonably favorable to the other party
(substantive unconscionability)
a) Terms of contract in light of circumstances at the time the contract was
made (circumstances of trade or need)
3. Williams - Walker-Thomas owns a furniture store and the plaintiffs are furniture
buyers and Williams purchased $500 stereo. Plaintiffs agreed to make monthly
payments on the items they bought. Ct explains that Cross-Collateral Clause
was provided in order to ensure that debt on each purchased product would
remain until debt on all products was liquidated → if payments for any product
stopped, the store had the right to reclaim all products
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a) Unconscionability is ultimately the decision of the judge because it is a
question of law (drafters of UCC were concerned about juries being
biased about this)
b) Cts tend to use a sliding scale between procedural and substantive
unconscionability (where there is a lot of procedural, need less
substantive but still need both)
(1) Procedural - there were not a lot of alternatives for the buyers
and the seller had greater bargaining power
(2) Substantive - Cross-Collateral Clause itself, Ct looks to whether
this was common in the industry or if it was reasonable to include
it
(a) Furniture store argues that because the value of
furniture decreases so much once it’s out the store,
furniture sellers need more collateral
(b) On the other hand, if the value of the repossessed
furniture is not helpful to the seller, the clause seems
more like a punishment → seems unreasonable
JUSTIFICATIONS FOR NON-PERFORMANCE
I.
MISTAKE
A. Definitions
1. RSS 151 - A mistake is a belief that is not in accord with the facts
a) The mistake (the fact) must be present at the time of the contract
2. RSS 152(1) - Mutual Mistake occurs where a
a) (1) mistake (of fact)
b) (2) of both parties
c) (3) at the time a contract was made
d) (4) as to a basic assumption on which contract was made
e) (5) has a material effect on agreed exchange, the contract is voidable by
the adversely affected party
f) (6) unless he bears the risk of the mistake under the rule stated in RSS
154 and
3. RSS 153 - Unilateral mistake Where a
a) (1) mistake of one party at time contract was made as to
b) (2) a basic assumption on which he made the contract
c) (3) has a material effect on the agreed exchange of performance that is
adverse to him, the contract is voidable by him
d) (4) if he does not bear the risk of the mistake under the rule stated in
RSS 154 and
e) (5) (a) the effect of the mistake is such that enforcement of the contract
would be unconscionable or (b) the other party has a reason to know of
the mistake or his fault caused the mistake
4. RSS 154 - A party bears the risk of a mistake when
a) (a) the risk is allocated to him by agreement of the parties, or
b) (b) he is aware at the time contract is made that he has only limited
knowledge with respect to facts to which mistake relates but treats his
limited knowledge as sufficient
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c) (c) the risk is allocated to him by court on ground that it is reasonable in
the circumstances to do so
5. Risk allocation - types of terms allocate risk differently
a) Express - parties allocate risk through express terms/contingencies
written in contract
b) Implied - legislature allocates risk based on policy preferences that apply
across contracts
c) Mistake/excuse - constructive risk allocation that common law develops
when certain unanticipated contingencies occur
B. Essence of Transaction Rule - the focus of the mistake analysis should be on whether
the mistake (mutual or unilateral) had a material effect to the essence of the transaction
on which the exchange was agreed
1. Lenawee County - Pickles are buyers and Messerlees are sellers. Owner prior
to Messerlees installed illegal septic system but Messerlees did not know about it
→ Messerlees did not inform Pickles that there was a problem with the land.
Pickles purchase the land and immediately discover the illegal septic system (it
started leaking). County conducts an inspection and determines that it is
uninhabitable → enjoins Pickles or Messerlees from stepping on the land. Pickles
sue alleging fraud and misrepresentation, but Messerlees did not know about the
septic system → no fraud or misrepresentation
a) Here the court looks at whether the mistake had a material effect on the
essence of the transaction on which the exchange was agreed
(1) Ct says that there was
(a) (1) a mistake
(b) (2) made by both parties
(c) (3) at the time the contract was made
(d) (4) as to a basic assumption on which the contract was
made (viability of land/ability to generate rental revenue
on land)
(e) (5) that had a material effect on the agreed exchange
(land was now useless to Pickles)
(2) But Ct says the Pickles
(a) (6) bore the risk of the mistake. Cites the term that the
Pickles will take the land “as is” → the Pickles agreed to
bear the risk of the land being uninhabitable
II.
(3) Thus, the Pickles cannot void the contract
CHANGED CIRCUMSTANCES
A. Definitions
1. Changed circumstances address cases in which circumstances change between
when the contract is entered into and when performance becomes due (ie after
parties enter into contract)
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2. Impossibility - the original thing that parties bargain for is no longer possible
(Eg. contracting to rent concert hall and then the hall burns down prior to the
concert)
3. Impracticability - performance is not impossible but no longer makes economic
sense (for reasons that were not in existence at the time of the contract and are
not the fault of the party) to force performance
a) The event that makes performance impracticable cannot be the fault of
the party
b) RSS 261 (see also UCC 2-615(a)) - Where
(1) after a contract is made
(2) a party’s performance is made impracticable
(3) without his fault
(4) by the occurrence of an event the nonoccurrence of which was a
basic assumption on which the contract was made
(5) his duty to render performance is discharged
(6) unless language or circumstances dictate contrary
4. Frustration of Purpose - performance is feasible (and not impracticable) but the
reason the party(ies) entered into the contract is frustrated or no longer exists
a) Krell (1903) (see RSS 265) - A duty to perform is discharged when
(1) after the contract is made
(2) a party’s principal purpose
(3) is substantially frustrated
(4) without his fault
(5) by the occurrence of an event the nonoccurrence of which was a
basic assumption on which the contract was made
(6) unless the language or circumstances indicate the contrary
b) RSS 261 and 265 are virtually identical but the difference is that under
265 performance can still be done and under 261 performance cannot be
done practicably
B. “Substantial Frustration” Rule - in order to claim frustration of purpose, the party must
show that the principle purpose of the contract is substantially frustrated
1. Di-Chem - Di-Chem leases some space from Mel Frank. Di-Chem told they can
no longer store hazardous material in the space they are renting due to a new
city ordinance → tell Mel Frank they are moving out. Mel Frank sues Di-Chem for
rent it did not pay and Di-Chem pleads frustration of purpose
a) Ct breaks frustration into three factors: (1) Principle purpose, (2)
substantial frustration, (3) basic assumption
b) Ct says that there was no “substantial frustration” because it could use
the leased space to store some of its products/materials there → it could
use the space for the “storage” purpose of the contract to some extent →
no substantial frustration
c) Di-Chem also points to a clause of the contract that says it will be
discharged if Di-Chem can no longer conduct its business on th premises
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→ Ct rejects argument because it reads contingency clause as relating to
physical damage to property that prohibits Di-Chem from conducting
business
(1) Example of Force Majeure clause - allows parties to escape
contracts for events that are outside of their control including but
not limited to, severe weather, acts of God, embargoes, acts of
government, crimes, etc.
(a) Good idea to include these (especially during these
times)
C. Posner and Rosenfeld on Impracticability and Frustration - Discuss when the
contract is silent on who the risk bearer → look at the party who is in the best position to
bear the risk (“superior risk bearer”)
III.
MODIFICATION
A. Definitions
1. Situations where parties agree to modify existing agreements
a) Generally modifications are easy to enforce if both parties agree to the
modification
b) However, where modifications occur but then one party does not want to
perform the modification, to what extent is the modification enforceable?
(1) Generally ask what consideration is of modification consideration that supports original contract cannot also support
modification → must be new consideration
2. RSS 73 - Performance of legal duty owed to promisor is neither doubtful nor
the subject of honest dispute is not consideration (doing what you’ve already
agreed to do is not consideration for a modification); but a similar performance is
consideration if it differs from what was required by the duty in a way which
reflects more than a pretense of a bargain
3. RSS 89 - Promise modifying a duty under a contract not fully performed on
either side is binding
a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made or
b) to the extent provided by statute or
c) to extent justice requires enforcement in view of material change of
position in reliance on the promise
4. UCC 2-209(1) (legislative act) - An agreement modifying contract within this
article needs no consideration to be binding (ie modifications to contracts under
UCC do not need additional consideration)
a) BUT Comment 2: modifications made thereunder must meet the test of
good faith imposed by this act (modification must be made in good faith)
B. Consideration Requirement for Modification and Pre-Existing Duty Rule - A preexisting duty to perform the work already agreed to do cannot be used as sufficient
consideration for modification and cannot use this as leverage to try and modify the
contract
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1. Alaska Packers - Domenico et al agree to work in Alaska during fishing season
for company and company would bring them up and bring them back. When
Domenico et al get to Alaska, they refuse to work and demand more money →
modify contract to get paid more and Ass’n agrees. When the season is over
and Domenico et al get back, Ass’n refuses to pay the higher modified amount
and pays them the amount originally agreed
a) Trial ct rules in favor of Domenico et al, saying that they breached their
original contract but by agreeing to a modified contract (instead of suing)
the Ass’n waived any claims of breach under the old contract and is
bound by the new one
b) Appellate Ct said that there was not sufficient consideration to establish
a new contract because what Domenico et al were paid more to do was
what they originally were contracted to do
(1) Domenico et al had a pre-existing duty to perform the work that
they agreed to do and cannot use this as leverage to try and
modify the contract
(a) The season had started and Ass’n likely couldn’t replace
Domenico et al → gave them leverage to coerce Ass’n
into agreeing to modifications → Ct wants to avoid this
kind of outcome
c) If there were unforeseen events that change the conditions under which
Domenico et al did the work, completing the work under the new
conditions (ex the work becomes much more dangerous, the work is
made much harder due to tech/tool/supply difficulties, etc.) could be
sufficient additional considerations to make increased pay enforceable
(1) Must modify the changed circumstances and cannot be foreseen
C. Modification Under Duress and Protest Rule - Modifications agreed to under duress
can still be basis for enforceable claims if sufficient protest is given and reservations of
right to sue in the future made
1. Kelsey-Hayes - During contract, Galtaco notifies its customers that it is going
under and that it will breach its contract and not supply parts. Kelsey-Hayes
seeks declaratory j against Galtaco so that they do not have to pay product at
increased price that they had agreed to pay. Galtaco claims larger amount. No
price protection provision and no market price
a) Ct analyzes whether Kelsey-Hayes agreed to the price increase under
duress
(1) Rules that whether Galtaco’s threat to breach contract due to
bankruptcy was improper should be left to the jury
(2) Rules that jury should also determine whether Kelsey-Hayes had
a reasonable alternative
b) Kelsey-Hayes agreed to the price increase “under protest” but it did not
reserve its rights to sue in the future (modified agreements did not state
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that Kelsey-Hayes reserves the right) → is this sufficient protest? For jury
to decide
CONSEQUENCES OF NON-PERFORMANCE
I.
DEFINITIONS
A. RSS 235 - (1) Full performance of a duty under contract discharges the duty (2) When
performance of a duty under contract is due any non-performance is a breach
1. Binary rule, perform or breach
B. Focus - When one party breaches, focus on
1. (1) Can a party withhold their performance of the contract without breaching
the contract?
2. (2) Can a party sue the other party for damages?
3. General rule, any breach allows the other party to sue/seek damages but only
material breaches allows the other party to refuse performance
4. Partial breach, party has to perform but can sue for damages
II.
EXPRESS CONDITIONS A. Definition - Duty of one or more parties depends upon the happening of one or more
specified events. Might be under one, both, or neither parties control. Obligor and
obligee are the actors of focus.
B. Rule - Analysis of whether to excuse breach of express conditions focuses on whether
1. obligee will suffer forfeiture
2. failure of condition is an excusable, honest mistake
3. obligor is not prejudiced
4. JNA Realty - NA is lessor and Crossbay Chelsea is leasee. JNA assigned lease
to party with an option to renew. Original lease was 10 years but tenant had right
to renew for additional 10 years if they gave written notice 6 months prior to the
deadline. Original tenant sold restaurant to Chelsea, which re-negotiated the the
lease to extend an additional 24 years, and all of the other terms were the same.
While Chelsea knew that the lease could be extended an additional 24 years, it
did not know that it had to give 6 month notice. Chelsea gave notice two months
before the end of the lease, which was 4 months too late. JNA said no, Chelsea
had to give 6 months notice → moves to evict. All parties agree that to extend,
the tenant had to give 6 months notice but Chelsea is saying that it didn’t know
about the 6 month notice term and to evict it would cause it to suffer forfeiture
of all of its other rights under the contract
a) Ct rules what’s required to excuse failure to comply with a condition:
(1) obligee will suffer forfeiture - Ct feels that it’s important that
tenant spent 55K on the property and the landlord knew that the
tenant spent this money on the property → tenant spent this
money expecting to stay there → enough to show the tenant
would suffer forfeiture
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III.
(2) failure of condition is an excusable, honest mistake- Ct didn’t
think this was bad faith or strategic, it was just an innocent
mistake
(3) obligor is not prejudiced - Ct remands on this issue, but the
obligor could have been prejudiced if it spent time/money on
finding new tenant, had another tenant lined up, etc.
b) Dissent argues that the rule articulated by the Ct could open future
parties to try and game contracts and undermine confidence in contracts
MATERIAL BREACH
A. Terms
1. Construction condition - Dependent promises. In construction, buyer must still
pay for improvements/developments on property even if there is breach (the
seller can’t “take it back”) - contrast with perfect tender
2. Substantial completion/performance
3. Perfect tender - UCC recognizes that in sale of goods, buyer is entitled to a
“perfect” version of the good as agreed to
a) Perfect Tender Rule (UCC 2-508)
(1) If the buyer notifies the seller of nonconformance, the seller is
entitled to cure within the original time period
(2) If seller makes nonconforming tender but has reason to believe
that it should have been acceptable, entitled to make the
conforming tender
(3) Can contract around this rule
4. Cure - correcting the breach
B. Rule and Cardozo Analysis - When there is omission that that is trivial and innocent,
small and made in good faith, you can atone for it by allowance of resulting damages but
it will not always be a breach of condition followed by forfeiture
1. In analysis of whether there was a material breach, Ct must weigh:
a) Purpose to be served
b) Desire to be gratified
c) Excuse for deviation from letter
d) Cruelty of enforcement of adherence
2. Deviation will not be tolerated if it is dominant or pervasive such that the entire
purpose of the contract is frustrated
3. Jacobs & Young - Plaintiff general contractor to build residence for Kent. Issue
is plumbing, contract called for standard pipe of Redding Manufacturing. When
contractor was making house, 1st 1,000 feet was Redding but some of the pipe
was not Redding but very similar quality. Kent discovers that some of the pipe
was not Redding and Kent’s architect won’t issue cert of completion on the
residence → Kent wants all of the piping replaced but Plaintiff refuses (would
require rebuilding entire building). Plaintiff sues for the remainder of the
purchase price to show that as a matter of fact, the pipe that was installed was of
very similar quality to contracted pipe
a) Issue is whether use of wrong pipe was a constructive condition that
created a duty of the buyer to pay the remainder of purchase price?
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b) Cardozo concludes that there was substantial performance and that
the other pipe was just as good as the redding pipe → no material breach
(1) Purpose to be served - have high quality pipe in residence
(2) Desire to be gratified - pipe shouldn’t burst, should last a long
time
(3) Excuse for deviation from letter - may not have been looking
but wasn’t trying to gain advantage (no malintent)
(4) Cruelty of enforcement of adherence - would take a lot of
time/money to redo the building
c) Doesn’t mean that Kent is not entitled to sue, just entitled to sue for the
difference between the residence with the non-Redding pipe and one
where all the pipe was Redding (which could be zero).
C. Restatement Analysis (RSS 241) - In determining whether a breach is material,
following circumstances are significant:
1. (a) extent to which the injured party will be deprived of the benefit which he
reasonably expected
2. (b) extent to which the injured party can be adequate compensated for part of
that benefit of which he will be deprived
3. (c) extent to which party failing to perform will suffer forfeiture
4. (d) likelihood that party failing to perform will cure his failure, taking into
account all of the circumstances including any reasonable assurances
5. (e) extent to which behavior of the party failing to perform comports with
standards of good faith and fair dealing
6. Spindler - Sackett agrees to buy newspaper from Spindler for $85K in
installments. Makes 1st installment and most of 2nd but still owes $59,200. Tries
to give check for the rest but it bounces. Sackett eventually pays additional
$4,000 and there are further negotiations. Spindler eventually sells remainder of
stock to third party form $22K → Sackett sues Spindler for breach of contract and
Spindler counterclaims
a) Ct defines breach per the Restatement - “any unjustified or unexcused
failure to perform all or part of the promises contract”
(1) Here buyer didn’t make the payments (breach) and seller didn’t
make the sale (breach) → question for Appellate Ct is seller’s
breach justified (was it really a breach)?
b) Ct rules that seller’s breach was justified because buyer’s breach was a
total breach
(1) Evaluates six factors in determining whether breach is total
breach (similar to factors used today except with ommission of
good faith factor)
c) In this case the Ct concludes the buyers breach was material because it
as unlikely the buyer would pay
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IV.
d) Material and total breach are used interchangeably but the most
important similarity is that it discharges the nonbreaching party’s duty to
perform
ANTICIPATORY REPUDIATION
A. Definitions
1. Anticipatory repudiation deals with situations where it looks like one party will
breach, at what point can the other party not return performance without
breaching
2. RSS 250 - Statement or action by the obligor to the obligee that is overt, definite,
and unequivocal that the obligor will breach or voluntary act that makes obligor
unable to perform
a) Very high bar, no grey area, must be a clear and definite statement or
action
3. RSS 253; UCC 2-610 - (1) Repudiation acts as a total breach (ie repudiation =
total breach) (2) Non-breaching party is discharged from return performance
a) Repudiation is a significant moment
B. Doctrines
1. RSS 251; UCC 2-609 (1) When reasonable grounds for insecurity arise with
respect to performance, can demand adequate assurance (2) Failure to give
adequate assurance is also a repudiation
2. RSS 256; UCC 2-611 - Party can retract his/her repudiation unless other party
relies or indicates that the repudiation is being treated as final
a) 2-611(2): Retraction may be made by any method which clearly
indicates to aggrieved party that the repudiating party intends to perform
but must include any assurance justifiably demanded under UCC 2-609.
3. Hornell - 1993: Hornell nad Spry enter into oral, exclusive, distribution
agreement. Spry orders A LOT of tea but doesn’t pay past due invoices
(somewhere around $100K). March/April 1994: Hornell tells Spry to pay up May
2 and says that it will not ship more until it Spry pays off its balance and says that
it will only sell up to $300K worth of tea on credit. Hornell also learns Spry’s
business is a shell. May 9, 1994: Spry pays balance due to Hornell. May 9,
1994: Spry orders $390 - $450K worth of tea → more than the $300K limit
Hornell set. May 10, 1994: Hornell says - show us letter of credit but Spry never
responds to Hornell’s demand (even though it has financing source). Hornell
seeks declaratory judgment that it is no longer in a contract with Spry
a) Hornell says that Spry has repudiated the contract and thus Hornell
should be discharged from its duties under the contract
(1) Says that it was entitled to demand assurances and did so twice
(when it demanded that the balances be paid on May 2 and
when it asked for letter of credit on May 10), says that the
repudiation was when it asked to see letter of credit and Spry
never responded
(2) Spry focuses on the first assurance, demand to pay balance, and
says that it provided assurance by paying balance
b) Ct says Hornell had additional reasons for believing that Spry won’t
perform other than outstanding invoices when it learned that Spry was a
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shell and didn’t have adequate infrastructure to distribute the amount of
tea it was buying → justified in requesting additional assurances that Spry
never provided
(1) Hornell actually wants the tea distributed to the Canadian market
so that people keep buying more of it (it doesn’t want Spry to just
store the tea even if it made all of its payments on time)
c) If Spry made all of its payments on time, Hornell would have needed
additional information to be entitled to assurance (can’t base need for
assurance on rumors regarding the other party)
d) Cts tend to be wary of parties’ attempts to rewrite contracts through
demands of adequate assurances
(1) In this case, Hornell could have demanded that Spry pay $300K
up front or put it in escrow as assurance of performance, but this
would have rewritten contract and could seem unreasonable - if
there was a more reasonable way to get assurance, Ct could say
that request for assurance was unreasonable and Spry’s failure
to provide was not repudiation
(2) Reasonableness of request is a fact-specific analysis
DAMAGES
I.
THREE TYPES
A. Restitution (non-contract, unjust enrichment)
1. Recognize that the defendant may be unjustly enriched → damages = value of
what the defendant gained
II.
2. Focus is on the defendant’s position, not the plaintiff’s
B. Reliance (in contact, in non-contract/promissory estoppel cases)
1. Puts the injured party back into the position it would have been in had the
promise never been made
2. Focus is on injured party
C. Expectation (common contract remedy)
1. Puts the non-breaching party in the position it would have been in had the
promise been performed
2. Generally larger than reliance or restitution
D. Most important part is to show your work - explain why the client is entitled to that
much in damages
EXPECTATION DAMAGES
A. Definitions
1. Loss in value of other party’s performance - Damages non-breaching party
should receive are those that can be fairly and reasonably considered to arise
naturally (according to the usual course of things) or those that can reasonably
be supposed to be contemplated by the parties at the time of contract
a) “Arising naturally” - any damages that come directly as a result from
breaching the contract
2. Incidental damages - damages caused by trying to avoid further loss due to
breach
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3. Consequential damages - any damages arising out of special circumstances, as
long as both parties know of special circumstances
a) Today, most courts focus only on what the breaching party knew
regarding special circumstances at the time the parties entered into the
contract
b) “Special circumstances” - depends on the circumstances under which
the breach occurred → knowledge of the breaching parties is key
4. Cost avoided or other loss avoided - plaintiff may save certain costs due to
breach → these have to be subtracted from the other costs to avoid double
counting
III.
5. Mitigation - The non-breaching party has a legal duty to mitigate the damages to
the breaching party
B. Basic Damages Formula (RSS 347)
1. Loss in value of other party’s performance
2. + Other loss (incidental or consequential damages)
3. - cost avoided
4. - other loss avoided
5. = Damages
C. Another formula for construction projects
1. Expected net profit (revenue - costs)
2. + unreimbursed costs at time of breach (costs - payment)
3. = Damages
D. Proxy Sale Rule - for breaches of real estate transactions, seller’s measure of damages
for the buyer’s breach of contract for the sale of land with a structure on it is the
difference between the purchase (contract) price and the fair market value of the property
on the date of the breach (generally same as on the date the sale should have been
completed)
1. Crabby’s - Contract for sale of restaurant and property. Buyer backs out of
buying property and buys a different property. Trial Ct used the price that the
property was eventually sold for to a different buyer 11 months later as a proxy
for expectation damages calculation (loss in value of other party’s performance).
Crabby argued that this was a “distress” sale and that market conditions had
changed in the 11 months such that the Ct should not use the resale price 11
months later as a proxy for market value
a) App. Ct affirmed, explaining that damages being sought were difference
in purchase price and relevant taxes and interest, using the formula in
the proxy sale rule
b) Also said that resale within a “reasonable period” after breach date is
acceptable to establish the market price on the breach date and that
there is nothing in the law that says 11 months is too long to use as a
market price and resale prices are usually the best proxies for market
price
LIMITATIONS ON EXPECTATION DAMAGES
A. Foreseeability Requirement of Consequential Damages - Consequential damages
must be foreseeable at the time of the contract in order to be recoverable.
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1.
RSS 351(1) - Damages are not recoverable for loss that the party in breach did
not have reason to foresee at a probable result of the breach when the contract
was made
2. RSS 352 - Damages are not recoverable for loss beyond an amount that the
evidence permits to be established with reasonable certainty
3. Hadley - Hadley owns mill that is shut down because crank shaft of steam
engine is broken. Hadley gives crank to carrier which is suppose to take it to
manufacturer to get fixed so that the mill can run again. Carrier gets delayed →
takes more days to get mill open. Hadley sues the carrier for the profits it lost
during the extra days that the mill was not operational
a) Ct says that the carrier should not be liable for damages it could not have
foreseen
(1) If carrier knew that the mill couldn’t run without this part and that
it would be held liable for any lost profits occurring from the delay
in getting the mill running, it may have acted differently
(2) May have not agreed to do delivery, may have charged more,
may have required indemnification
b) Cts will generally look at what the parties knew at the time of the contract
to determine whether damage was foreseeable
(1) This lets parties negotiate contracts taking into account special
circumstances
(2) Contractually, party can’t act any differently after the contract is
made → doesn’t matter if they learn of special circumstances
after contract is made but before breach
4. Florafax - Florafax contracted with GTE to provide telecommunication services
so that Florafax can enter into third-party contracts with companies . GTE goes
into the contract knowing that it will probably lose money on it. GTE failed to
provide sufficient telecom services and telemarketing service reps. Because GTE
failed to provide sufficient services/reps on Mother’s Day, Florafax’s contract with
another company, Bellarose, gets canceled. Florafax sues GTE for lost profits
on sales on Mother’s Day and for lost profits on the contract with Bellarose
a) Florafax spent $820,000 setting up alternative call center (incidental
damages) and Florafax alleges the lost profits on its contract with
Bellarose at $750,000 (consequential damages)
b) Ct has no problem awarding Florafax the consequential damages
because profits on the Bellarose contract (ie on third party contracts)
were contemplated in the contracted between Florafax and GTE →
damages were foreseeable
c) Contract even said that GTE agreed to pay consequential damages in
the event GTE fails to provide sufficient services
d) GTE concedes that it was liable for consequential damages BUT
contends that it should only be liable for lost profits that occurred in 60
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IV.
V.
days because the Bellarose contract had a clause that stipulated that the
contract could be terminated within 60 days
e) Ct rejects this argument because the 60 days applied to GTE and there
is no evidence that Bellarose would have terminated (facts show that
Bellarose was in it for a long period)
B. Mitigation Damages Rule - Non-breaching party cannot collect damages that could
have been avoided (can’t drive up damages) and has a duty to mitigate the amount of the
damages. The breaching party also has the “burden” to demonstrate non-breaching
party failed to mitigate
1. Rockingham County - Lewton Bridge enters into contract with Rockingham
County to build bridge. Rockingham County notifies Lewton Bridge that it is
cancelling the contract, but Lewton Bridge continues to build bridge and finishes
it. Lewton sues county for breach of contract
a) Trial ct said that county was in total breach of contract when it decided to
end contract
b) Ct said that once Lewton knew that the County ended the contract (ie
was in total breach) they were not permitted to continue performance,
once not permitted to continue performance, not entitled to collect
damages based on continued performance
(1) Where there is no benefit to the non-breaching party to continue
the work, the non-breaching party may not continue just to
increase the amount of damages owed by the breaching party
C. Other Limits
1. Nonrecoverable types of damages
a) Cap: Generally can’t be better off than you would be if both parties
performed
b) Attorney’s fees
(1) American rule: both parties bear their own attorney’s fees
(2) British rule: loser pays both parties’ fees
(3) Can contract around the American rule
c) Non-economic damages (mental distress, etc.)
d) Punitive Damages
UCC DAMAGES
A. Buyers and sellers remedies are addressed separately
1. Buyers
a) Cover (UCC 2-712) - Allows buyers to cover their loss and to go out and
get the same product from another seller
b) Damages for accepted goods (decreased price/value)
(1) Decreased price (UCC 2-714)
(2) Buyer’s incidental and consequential damages (UCC 2-715)
compare with - Seller’s incidental and consequential
damages (UCC 2-710)
c) “Replevin” (non-money!) (UCC 2-716) - seizure, possession
2. Sellers
a) Market (UCC 2-708(1)) - seller can recover market value of good
b) Lost Profits (UCC 2-708(2)) - seller can recover lost profits only when
market price is not available
c) Price (UCC 2-709)
OTHER DAMAGES ISSUES
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A. Reliance Damages (RSS 349) - Original contract price will usually be a cap on reliance
damages
B. Restitution (RSS 370 & 371) - Looks at the value of the party that was unjustly enriched
C. Specific Performance (RSS 359, 360, 361) (unusual) - Forces the breaching party to
perform as originally agreed
1. Services (common sense rule) - If you can get needs met through another
service or another provider, you won’t get specific performance
THIRD PARTIES
I.
DEFINITION/TERMINOLOGY
A. Generally applies to parties that were not party to the contract
1. Think about relationships of parties to each other
B. RSS 302 - (1) unless otherwise agreed between promisor and promisee, a beneficiary
of a promise is an intended beneficiary* if recognition of a right to performance in the
beneficiary is appropriate effectuate the intention of the parties and either
1. (a) the performance of the promise will satisfy an obligation of the promisee to
pay money to the beneficiary {creditor/beneficiary cases}, or
2. (b) the circumstances indicate that the promisee intends to give the beneficiary
the benefit of the promised performance {donee/beneficiary cases}
a) *RSS 302(2) - incidental beneficiaries do not have enforceable rights
under the contract of the promisor and promisee
3. Lawrence - {creditor/beneficiary case} Parties loan money to each other and
promise to pay accordingly:
a) Lawrence loans to Holly who loans to Fox
b) Fox promises to pay Holly by paying Fox
c) Lawrence = beneficiary, Holly = promisee, Fox = promisor
d) Fox doesn’t pay → Lawrence sues Fox (on Fox promise to Holly but he
did not promise Lawrence anything → issue)
e) Ct rules that Lawrence can sue Fox as a third party beneficiary
(1) More efficient for Lawrence to sue Fox instead of suing Holly and
then Holly suing Fox
(2) Also has downsides of creating litigation between parties who
have no promise/agreement between them
4. Vogan - MidAmerican agreed to loan money to Builder for Vogan to build home,
which will be held as collateral for a mortgage loan. MidAmerican hires (pays)
Hayes to appraise the progress of the home construction. Builder eventually
stopes building home (breaches contract) and Vogan refuses to repay
MidAmerican because MidAmerican allegedly lent more money to Builder than
was collateralized. MidAmerica sues Vogan and they settle. Vogan sues Hayes
even though they had no contractual relationship.
a) Ct rules that third party, who is not a promisee and gave no
consideration, has an enforceable right by a contract made by two
others, if the promised performance of the contract would be of
pecuniary benefit to the third party and the contract is so express as to
give the promisor a reason to know that such a benefit was contemplated
by the promisee as a motivating factor for entering into the contract
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b) Ct concludes that Hayes knew that Vogans had pecuniary benefit and
knew that benefit was contemplated by MidAmerican when entering into
a contract with Hayes
c) BUT SEE RSS 311(1)-(2) - unless otherwise provided, the promisor and
promisee can discharge/modify the duty to the beneficiary
(1) If MidAmerican and Hayes changed the agreement so that
Hayes worked on another appraisal before finishing Vogan’s,
Vogan could not sue for breach
d) UNLESS RSS 311(3) - the beneficiary materially changes his position in
justifiable reliance on the promise prior to receiving notice of
modification/discharge
(1) If Vogan didn’t hire his own appraiser because he was relying on
Hayes’s appraisal → could bring suit for breach
II.
C. Approaches to Intended Beneficiaries
1. Dual intent standard - both the promisor and promisee must intend to benefit the
beneficiary
2. Promisee intent standard - only promisee must intend to benefit the beneficiary
3. Promisor knowledge standard - promisor must know/have reason to know of the
promisee’s intent to benefit the beneficiary
ASSIGNMENT AND DELEGATION
A. Definitions
1. Assignment of rights (RSS 317)
a) When delegating rights, rights are gone from delegating party
b) (1) Assignment of a right is a manifestation of the assignor’s intention to
transfer it by virtue of which the assignor’s right to performance by the
obligor is extinguished in whole or in part and the assignee acquires a
right to such performance
c) (2) a contractual right can be assigned unless
(1) (a) if assignment would have material adverse effects on the
other party
(2) (b) if there is a policy/statute prohibiting assignment
(3) (c) assignment is validly precluded by contract
d) Elements of effective assignment:
(1) Owner of a right has to manifest a present intention to make a
present transfer
(2) Owner has to manifest the intention to the assignee
2. Delegation of duties (RSS 318) - eg subcontracting
a) When delegating duties, delegating party is still bound
b) (1) an obligor can properly delegate the performance of his duty to
another unless the delegation is contrary to public policy or terms of his
promise
c) (2) Unless otherwise agreed, a promise requires performance by a
particular person to the extent that the obligee has a substantial interest
in having that person perform or control the acts promised
d) Personal services contracts cannot be delegated
(1) Generally means that the choice of person of performance is of
sufficient significance that it should be non-delegable
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3. General assignments (assignments of rights and delegation of duties) (RSS 328)
- eg selling a business
B. Herzog - Herzog is doctor that treated Jones for injuries that arose from Jones’s
assignment of his rights to Herzog. Herzog notifies the attorneys that Jones assigned
rights to him. Attorneys get money for Jones from accident and give money to Jones, not
Herzog → Herzog sues attorneys
1. Ct rules that for an assignment to be valid and enforceable the...obligor…, the
assignor must make clear his intent to relinquish the right to the assignee and
must not retain any control over the right assigned or any power of revocation.
The assignment takes effect through the actions of the assignor and assignee
and the obligor need not accept the assignment to render it valid
C. Assignment of Future Rights (RSS 321) - assignment of future right based on contract
not in existence operates only as a promise to assign the right when it arises and as a
power to enforce it
1. Unless otherwise provided by statute or unless assignment of right to payment
expected to arise out of existing employment or business relationship
D. Hypothetical Bargain Approach - test to determine whether delegation should be
permitted. Contemplates what would happen if during the original negotiations one party
stated its intent to delegate its duties
1. If the other party would have been OK with it, delegation probably OK
2. If other party would not have been OK with it, delegation probably not OK
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