Consideration
Isaac Kirksey v. Angelico Kirksey (1845)
Facts:
-P was the wife of D’s brother, but was now a widow with several children
-P lived on leased public land and would have attempted to secure the land if she continued to
reside there
-D lived 60-70 miles away from P
-After hearing of brother’s death, D wrote P and offered to provide her with land to live on if she
came to see him
-P left land they were renting to go live on D’s land
-For first two years, D provided P and her family a comfortable home and gave her land to
cultivate
-After two years, D removed P and put her in an uncomfortable house in the woods
-D then required P to leave the house in the woods
Holding:
-No consideration, D’s promise was gratuitous
Reasoning:
-If a promise is gratuitous, it cannot be enforced due to lack of consideration’
-P’s inconvenience is a valid consideration to enforce D’s promise
-Gratuitous nature outweighs inconvenience
*speculation that the court did not want to get involved in a family dispute
*today, this would likely be analyzed under promissory estoppel
Hamer v. Sidway (1891)
Facts:
-At the golden wedding of Samuel Story and wife
-P was promised $5,000 by his uncle if P refrained from drinking, using tobacco, swearing, and
playing cards or billiards for money until P was 21 years of age. P assented.
-After turning 21, P wrote to his uncle and informed him that he had performed his part of the
deal and had thereby become entitled to the $5,000
-Uncle wrote back and agreed that P had earned the money, but says he will not pay it until he
believes that P is capable of taking care of it. He also promises interest.
-P received the letter, and thereafter consented to the terms of the letter
-P’s uncle died without having paid over any part of the $5,000 and interest
Holding:
-It is sufficient that P restricted his lawful freedom of action within certain prescribed limits upon
the faith of his uncle’s agreement and now, having fully performed the conditions imposed, it is
of no moment whether such performance actually proved a benefit to the promisor, and the court
will not inquire into it
Reasoning:
-D argues that there is no consideration, P received benefit, the promisor received no benefit
*That rule is not tolerated and unfounded in law
“Consideration” defined by Exchequer 1875-A valuable consideration, in the sense of law, may
consist either in some right, interest, profit, or benefit accruing to the one party, or some
forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other. Courts
will not ask whether the thing which forms the consideration does in fact benefit the promisee or
a third party, or is any substantial value to any one. It is enough that something is promised, done
, forborne, or suffered by the party whom the promise is made as consideration for the promise
made to him
*Waiver of any legal right is a sufficient consideration for a promise
Langer v. Superior Steel (1932)
Facts:
-P sues D for breach of contract (action for assumpsit)
-D sent P a letter promising $100 per month as long as he lived and preserved his present attitude
of loyalty to the company and its officers and are not employed in any competitive occupation
-P adhered to the terms of the letter
-P received payments for approximately 4 years when P was notified by D that the company no
longer intended to continue the payments
Holding:
-Benefit to D by P not working for a competitor, thus there is consideration
Reasoning:
-Question is whether letter was a gratuitous promise or an enforceable contract
-Benefit to D by P adhering to not work for a competitor despite experience and knowledge of
the company
*different than Kirksey
*no other reason for that provision existing
-By receiving the monthly payments, P impliedly accepted the conditions imposed and was thus
restrained from doing that which he had a right to do
-Contract is also enforceable by promissory estoppel
Pennsy v. American Ash (2006)
Facts:
-P obtained Aggrite paving materials from D for no payment
-P used these materials in the construction project of driveways and parking lot in a school
district
-The Aggrite paving developed extensive cracking
-P remedied the defects at a cost of $251,940 and spent $133,777 to properly dispose of Aggrite
(classified as hazardous material)
-P sued D for breach of contract and breach of expressed and implied warranties
-P argued that D promoted use of Aggrite, a hazardous material, and benefitted from P’s use by
avoiding the substantial cost of disposal
-D argues that this was a conditional gift, there was also no inference that disposal costs were
part of bargaining or that D offered the Aggrite with intent to avoid disposal costs
Holding:
-If facts of complaint may be proven, the promise of free Aggrite was to avoid the detriment of
disposal costs and disposal costs induced the promise to provide free Aggrite, thus there is
consideration
Reasoning:
-Free Aggrite was promised to avoid the detriment of disposal costs
-It was not discussed that by P using the Aggrite that would allow D to avoid disposal costs
-If facts of complaint are proven, this would show promise induced the detriment and the
detriment induced the promise
Notes:
Case of the injured mechanic
-Gratuitous gift, no consideration for the promise?
*What does Palmer get?
Case of the Proud Grandfather
-Sacrificed legal right to name the child
*consideration
$1 payment?
-Paying Schultz does not affect consideration?
Problem: The Case of the Lessee’s Well
-Gratuitous gift, parties had already agreed to split cost
*no benefit or avoided detriment to D by promising to pay P
In Re Greene
Facts:
-For several years prior to April 28,1926, D, a married man, had been living in adultery with P
-D gave P substantial sums of money and paid $70,000 for a house on Long Island acquired by
her, which she still owns
-P knew that D was married, but alleged that D had promised to marry her as soon as his wife
should get a divorce
*D denied this
-Relations of intimacy was discontinued in April, 1926, P & D then executed a written
instrument under seal which P alleged to be a binding contract
-In Instrument, D undertook
(1)
To pay D $1,000 a month during their joint lives;
(2)
To assign to her a $100,000 life insurance policy on his life and to keep up the premiums
on it for life, D to pay $100,000 to P in case the policy should lapse for nonpayment of
premiums;
(3)
And to pay the rent for 4 years on an apartment which she had leased
-In the instrument, D declared that he had no interest in the Long Island house or in its contents,
and that he should not longer be liable for mortgage interest, taxes, and other charges on this
property
-P, for her part, released D from all claims she had against him
-Preamble to instrument recites consideration by payment of $1 from P to D and “other good and
valuable consideration”
-D kept up payments by instrument until August, 1928, but failed to make payments thereafter
Holding:
-No consideration
*nominal not enough
*gratuitous gift in paying for the LI house
Reasoning:
-Question is whether there was any consideration for D’s promises, apart from the past
cohabitation?
(1)
$1 consideration is nominal, recited but not shown to be paid, cannot support an
executory promise to pay hundreds of thousands of dollars
(2)
“Other good and valuable consideration[s]”, sound plausible, but cannot serve as
consideration when there is no evidence of anything good or valuable given at the time the
contract was made
(3)
Claim of marriage after divorce of then wife is an illegal promise, therefore not a claim
and cannot be lawful consideration
(4)
Payments on LI house never required by D, if D was paying them it was gratuitous or
contemporaneous price of the continuance of his illicit intercourse with P
-Absurd to suppose that D not paying on the gift given that he never had to pay on would make a
gift into a contract
(5)
Promise for a gift may be put in the most solemn and official document, but only in
exceptional cases will that promise be enforced
-In the past, a seal would mean a contract did not require consideration, but now, in NY, a seal is
only presumptive evidence of consideration on an executory instrument
Notes
(1)
Intent to contract no longer sufficient under re greene for a contract?
(2)
Sufficiency vs. adequacy of consideration
-A court will not inquire into whether the exchange was a fair one, i.e whether the the
consideration given was adequate
*peppercorn
Restatement 71: No consideration where there is only a mere pretense of bargain or nominal
consideration
Restatement 87: Firm offers
(3)
Court especially reluctant in re greene
-public policy considerations (promise to marry after divorce)
-bankruptcy proceeding?
(4)
In NY, after 1940 a seal no longer creates a presumption of consideration
Moral Obligation
First Hawaiian Bank v. Jack Zukerkorn (CoA, 1981)
Facts:
-Zukerkorn took two loans and made payments on neither
1. $6,394.21 demand note, Nov. 22, 1965
2. $2,500 two-year note dated Sept. 23, 1966
-Zukerkorn given loan from Bank to purchase an automobile, April 6 1973
*paid it off April 6, 1976
-Zukerkorn applies for a master charge credit card and was denied
-Bank informed Zukerkorn that he owed money on an “old account” and could receive the credit
card in exchange for paying $100 a month on the old account
-Zukerkorn denied that Bank ever informed him that the “old account” referred to the ‘65 and ‘66
loans
-Zukerkorn also denies paying $200 in cash at the time of the agreement
-Both parties agree that, after Dec. 1975, D made payments on his automobile loan and his
credit card, as well as several small payments to the disputed agreement over 3 months in 1976
-On March 3, 1978, Bank sued D on the ‘65 and ‘66 loans and on the balance due for his credit
card
Procedure
-trial court entered summary judgement on all 3 claims
Holding:
-SJ reversed on two stale debts, there are genuine issues of material fact with respect to D’s
obligation to pay the ‘65 and ‘66 notes
Reasoning:
-The SJ on the stale debts can only be sustained if, when the facts are viewed most favorable to
Zukerkorn, the facts show that within 6 years prior to March 3, 1978, Zukerkorn promised to pay
the two debts
*a new promise
-Express acknowledgement of debt or partial payment is only prima facie evidence of a new
promise which may be rebutted by other evidence and by the circumstances under which it was
made
-Zukerkorn could have promised
1) By express promise to pay the two stale debts, or
2) By express acknowledgement if the two stale debts, or
3) By part payment of the two stale debts
*Zukerkorn denies all 3, his evidence showing that he agreed to pay “a small amount on an old
account”
Daniel Mills v. Seth Wyman (Mass), 1825
Facts:
-D’s son got sick, was cared for by P, 5-20 Feb, 1821
-On Feb 24, 1821, D wrote a letter to P, promising that, if D’s son could not pay, to pay him the
expenses
*”satisfy him for it”
Holding:
-No consideration, services had already been performed before D made a promise
*If there was nothing paid or promised for a promise, law leaves the execution of it to the
conscience of him who makes it
*Only when the promisor gains something, or he to whom it is made loses something, that the
law gives the promise validity
Reasoning:
-Since D’s son is old enough to have “long ceased being a member of his father’s family,” D
does not have legal obligation of infancy
-Promise cannot be something for nothing (naked pact)
Joe Webb v. N. Floyd and Joseph F. McGowin (CoA Alabama, 1935)
Facts:
-Aug. 3, 1925, Webb, in his employment at a lumber mill, was following procedure to drop a pine
block to the ground below
-Webb saw that Joseph McGowin would be seriously injured by log, and so diverted its path,
crushing Webb
-Sept. 1, 1925, J. McGowin in consideration of Webb preventing him from injury or death,
agreed to pay Webb $15 every two weeks from the time Webb sustained his injuries to and
during the rest of Webb’s life
-J. McGowin followed through on payments until his death on Jan. 1, 1934
-After his death, payments were continued to and including Jan 27, 1934, and were then
discontinued
Holding:
-Material benefit of life and preservation constitutes consideration
*moral obligation makes past consideration here acceptable, as material benefit was received
Reasoning:
-If McGowin had been accidentally poisoned and a physician, without knowledge or request,
gave an antidote, thus saving his life, a subsequent promise by McGowin to pay the physician
would have been valid
Concurring, Judge Samford
-Justice Marshall, Hoffman v. Porter, law should not be separated from justice, where it is most
doubtful
Problem: Case of the Fine Penny
-Uncle Fred book for Pauline’s coin
-promise in writing, Dec. 1
-On Dec 25, Pauline gave penny, Fred did not give book
*sold to other buyer for $7,500
Peter Kossian v. American National Insurance Co. (CoA CA, 1967)
Facts:
-Feb 19, 1964, part of Bakersfield Inn burned down
-D was beneficiary of deed of trust for Inn with owner Reichert
-Reichart had 4 policies for fire insurance, which included cost of clearing and removing debris
-March 16, 1964, Reichert hired P to clear and remove debris for $18,900
*D had no knowledge of Reichert and P’s agreement
-P commenced work in middle of March 1964 and completed it in early April
-March 20, 1964, D caused a notice of Reichert’s default under the deed of trust
*record does not reflect that P had actual knowledge of notice of default until after P’s work was
complete
-After work was complete, Reichert declared bankruptcy
-Bankruptcy trustee abandoned the property as well interest in the insurance policies
-Reichert assigned policies to D
-D submitted claims for $160,000, including $18,00 for clearing and removing debris
-D was given $135,620, unclear how much was for clearing and removing debris
-P sues for unjust enrichment
Holding:
-Under the doctrine of unjust enrichment, Plaintiff is entitled to reimbursement for his work from
the insurance proceeds paid to Defendant for clean up and debris removal
Reasoning:
-When a party expends labor and materials and another party recovers the cost of such labor
and materials through insurance proceeds, the equitable doctrine of unjust enrichment provides
that the first party should be reimbursed
-Had circumstances been just D getting property worked by P, that shows benefit conferred, but
not unjust enrichment
*Here however, crux is insurance claim by D for value of work done by P
-Russell v. Williams, D’s right to insurance payment was a contract right embodied in the
policies of insurance
*However, claim was based in part on a claim of loss that did not exist because P had already
remedied the loss by his work, for which he was not paid
Mixed Motives and Adequacy of Consideration
Samuel Thomas v. Eleanor Thomas (Queen’s Bench, 1842)
Facts:
-P’s husband made oral request that P would have either the house in which he lived and all
that it contained or 100 pounds in front of two witnesses
*Husband owned row of seven dwellings
-Husband’s declaration was shortly thereafter told to Plaintiff’s brothers (Samuel and Benjamin
Thomas), who agreed to carry out the intentions
-Agreement was that wife would have a house for her life, or until she remarried
-Wife agreed to pay a pound annually for ground rent and handle upkeep
-After death of Benjamin, D brought an ejectment action
Holding:
Consideration exists for the contract
-Stipulation for annual rent was an express agreement
*independent of moral feeling which disposed executors to enter into the contract
Reasoning:
-This was not a mere gift due to moral reasons
-Had rent and repairs been paid for, gift by donors argument has legs
-Consideration not in usual part, but we may look at any part
*Not in fulfilling intentions of testator, but in express agreement to pay an annual sum and
agreement to repair
Notes
(1) Why did executors enter into an agreement? What was the motive in letting her remain
in the house? Why the rent?
(2) Restatement (2nd) 81(1)
Robert C. Browning v. O. Arthur Johnson (SC of Washington, 1967)
Facts:
-P agreed to sell D his osteopathic practice for and equipment in a contract of sale
-Before contract’s effective date, P changed his mind and asked to be released from the
contract
-D demurred, but later agreed to enter a new contract after P promised to pay D $40,000 in
exchange for giving up the old contract
-P later regretted the 2nd contract and filed for declaratory judgement and restitution
*Claimed that contract lacked consideration and was based on a mutual mistake
-Trial court held that the contract lacked mutuality and was unenforceable, but the cancellation
contract was supported by adequate consideration and was enforceable
Holding:
When a unilateral contract includes one party incurring a detriment in exchange for the other
party’s promise, the consideration is sufficient even when it may not be of comparable value to
the promise.
Reasoning:
-Difference between sufficient and adequate for contract analysis
*Adequate consideration, comparative value to promise given
*Sufficient consideration, enough to support a promise without necessarily being of equal value
-The contract is a unilateral contract, meaning that a promise was given in exchange for an act
or restraint
-Consideration is sufficient in a unilateral contract when the promisee incurs a detriment or the
promisor receives a benefit
-In this case, both parties had equal bargaining power and were represented by counsel. The
bargain was freely entered
-Defendant incurred a detriment, giving up the sale contract, at Plaintiff’s request. This was
sufficient consideration for Plaintiff’s promise to pay. The contract is enforceable.
Notes
(1) How does one give up a contract?
(2) If a performance, such as the “destruction of a legal relation,” is bargained for, there is
consideration
(3) Restatement section 74(1)
(4) Restatement (first) 76, honest and reasonable belief
Restatement (second) 74(1)(b), honest, but can be unreasonable belief
Which is the better rule?
Levine v. Blumenthal (SC of NJ, 1936)
Facts:
-D agreed to pay a certain amount of rent for two years, with a rent increase in year 2
-D was unable to pay the rent increase
-In district court it was found that there was a verbal agreement between P and D that D would
pay the original year’s amount of rent for the 2nd year
Holding:
-Affirmed district court, oral agreement to change rent was not supported by lawful consideration
*pre-existing duty rule, until new consideration
Reasoning:
-A promise to do what a promisor is already bound to do is an unreal consideration
-Creditor’s fear that debtor will fall into bankruptcy is not enough to form sufficient consideration
-Any consideration to perform the new undertaking is satisfactory consideration
The fact the agreement has been executed by the payment and acceptance of the reduced rent,
does not mean the substituted performance stands.
Alaska Packers v. Dominico (U.S CoA, 1902)
Facts:
-Sailors agreed with P to work in Alaska for a set sum ($50 for sum, $60 for others, 2 cents for
each red salmon you were a part of catching)
-Once they had arrived, sailors demanded higher wages for the same work from the company’s
representative ($100 for services in operating the vessel to and from pyramid harbor
-Rep claimed that he had no authority to alter the contract
-However, since the company had no way of getting other workers, he agreed to change the
compensation
-The company later refused to pay the higher wages
Holding:
-Sailors not entitled to higher wages, because of the involuntary nature of the modification to the
contract
Reasoning:
-New contract based solely on work previously contracted for
-Company gains nothing from entering the new contract when compensation was lower than
what he was now obligated to pay
*no bargained for exchange
-A party who refuses to perform and coerces a promise from the other party to pay increased
compensation takes an unjustifiable advantage of the necessities of the other party
Notes
(1) Consideration is normally something which is bargained for and given in exchange for a
promise. Why was the bargaining requirement not met in Levine? Different if clear that
lessor harassed lessees to stay on under the new arrangement
(2) Basis for distinguishing Levine and Alaska Packers?
(3) When will a court invoke strict preexisting duty rule, and when will it be more flexible?
(4) Net Present Value
-Incentives regarding fishing nets
-Duress argument for Packers
(5) In agreements between spouses, courts usually either refuse to enforce on the grounds
that agreement is without consideration since the spouse has a preexisting duty to
provide the bargained for services, or that is is unenforceable on the grounds of public
policy (enforcement would allow market to intrude into a marriage relationship)
Angel v. Murray (SC of Rhode Island, 1974)
Facts:
P-Angel
D-Murray (Director of Finance, Newport and Maher (refuse collector))
-P had a series of 5 year agreements with D for collecting and disposing of all waste materials
generated in the city of Newport
-Maher twice requested additional amounts of $10,000 per year from the city council for
unanticipated increases in waste
-This unanticipated increase was due to 400 new dwelling units instead of the projected 20-25
new units per year
-Trial court found for P and ordered D to repay $20,000 to the city
1. Payments unlawful, as they were not recommended in writing to the city council by the
city manager
2. All refuse from original contract included additional 400 units
Holding:
Reverse trial court, there is consideration, court does not apply preexisting duty rule, because P
was not under duress and had agreed to pay additional compensation
Reasoning:
-Restatement 89D(a)
*Allows enforcement of an agreement if the parties voluntarily agree and if (1) the promise
modifying the contract was made before the contract was fully performed; (2) the underlying
circumstances which prompted the modification were unanticipated by the parties and (3) the
modification is fair and equitable.
Problems-Dissatisfied Entertainer
-No consideration, made under duress
*threatened not to perform
-Does tearing up the old contract mean anything?
-Additional benefit of having a newly bigger hit performer?
Added Inducement
Rehm Zeiher v. Walker (CoA Kentucky, 1913)
Facts:
-D and P drafted a document where D agreed to supply P with a certain number of cases of
whiskey at yearly intervals
-P ordered less than the amounts to be supplied by D
-A clause in the contract stipulated that D would buy back any unused goods
-Price of whiskey went up, P demanded that D supply the full shipments of 1910 and 1911 that
were not already supplied
-D supplied the full amount for 1911, but not 1910
Holding:
-No consideration if contract gives no certainty and excuses a party from performing at its own
discretion
*not binding on either party and not enforceable
Reasoning:
-Since contract allows Rehm for any reason to not take the whiskey, the contract is
unenforceable
*unforeseen reason
-Whiskey bought under terms for two years does not have controlling weight in litigation
-Lack of mutuality of obligation, which is necessary to enforce a contract
-The ability for a party to avoid all obligations results in a lack of consideration
Wood v. Lucy, Lady Duff-Gordon (CoA NY, 1917)
Facts:
-D was a fashionable woman who could increase the price of goods with her endorsement
-D entered exclusive agreement with P, allowing D’s endorsement and use D’s designs
-D would retain half the profits and P would retain the other half
-Nothing in contract specifically stated what Wood promised
-P’s business was adapted for the placement of endorsements
Holding:
-The circumstances supported a promise by implication that Plaintiff would use reasonable
efforts to place the endorsements and market the designs
-Unless he gave his efforts neither party would gain anything from the contract
-Also the one-half profit arrangement was a promise to use all of his efforts in order that the
contract would have value to Plaintiff
Reasoning:
-Exclusive privilege given to Plaintiff and that acceptance thereof was an assumption of the
duties to place and market the designs
-With Plaintiff’s implied efforts to assume those duties, neither party could effectively make
money
Notes
1. You Picked A Fine TIme to Leave Me, Lucille
UCC 2-306(2)
2. Cardozo’s Concerns
3. Creator of Fashions
Omni Group v. Seattle First National Bank (CoA WA, 1982)
Facts:
-Dec. 1977, the Clarks executed an exclusive agency listing agreement with Royal Realty
Company for the sale of approximately 59 acres of property for $3,000 an acre
-In early May, Royal offered the Clark property to Omni
-May 17, Omni signed an earnest money agreement offering $2,000 an acre
-Two Royal brokers delivered agreement to the Clarks
-May 19, Clarks signed agreement, but directed brokers to obtain further consideration in the
nature of Omni’s agreement to make certain improvements on adjacent land not offered for sale
*Neither broker communicated these additional terms to Omni
Contract
Transaction subject to purchaser receiving an engineer’s and architect’s feasibility report
prepared by e and a of purchaser’s choice. Purchaser agrees to pay all costs of the
report. If the report is satisfactory to the purchaser, he shall notify the seller in writing
within 15 days of the seller's acceptance of this offer. If no such notice is sent, this
transaction shall be considered null and void.
*Omni’s purpose was to determine if property was suitable for development
-June 2, Omni delivered letter to the Clarks saying that Omni had decided to forego the report
-Omni later advised that property was only 50.3 acres
-Clarks agreed that if such were the case, they would accept Omni’s offer of $2,000 per acre but
with a minimum of 52 acres
*At meeting Clarks also discussed their other terms
-June 8, Omni sent a letter agreeing to the Clark’s additional terms, but Clarks refused to
proceed with the sale
Holding:
-Making a promise dependent upon a condition does not make it illusory
*the waiver of the report was not deemed to be an unrestricted way out for the buyer
*there was consideration for promise
-Reversed and remanded with instructions to enter decree for specific performance of the
earnest money agreement
Reasoning:
-A promise given for a promise is sufficient consideration and does not necessarily render the
contract illusory or affect its validity
-Omni can cancel by failing to give notice only if the feasibility report is not “satisfactory”
*Otherwise, Omni is bound to give notice and purchase the property
-If one party is free to perform or withdraw from the agreement at his own unrestricted desire,
then the contract will be illusory
Notes
1. The “Mutuality Requirement”
2. Subjective vs. Objective Satisfaction Tests
3. Obligation and UCC 2-204
4. Why did Omni forgo the feasibility standard?
Problem-Case of the Illusory Bonus
Ricketts v. Scothorn
Facts:
-P, D’s grandfather, gave her a note and said he had fixed it so she did not have to work
anymore
*$2,000 note with 6% annual interest
-P died two years later, only having paid one year interest and never paid the full balance of the
note
-P expressed regret regarding failure to pay the note upon his death
-There was no promise on the Plaintiff’s part to do or refrain to from doing anything, although
she did abandoned the job in reliance on the note
-One year after quitting, D secured another bookkeeping job
Holding:
-Equitable estoppel bars a party from asserting lack of consideration where reliance was
induced by the party asserting there was no requisite consideration
Reasoning:
-P intentionally influenced D into changing her position on belief note would be paid when due
-Inequitable to permit P to evade payment
-Recognition of reliance may help solve injustice in cases where an agreement is unsupported
by consideration
Comment: Evolution of Promissory Estoppel
Congregation Kadimah Toras-Moshe v. DeLeo
Facts:
-Decedent of D promised rabbi of P repeatedly, in the presence of witnesses, to leave $25,000
to P
-P planned to use the money to transform a synagogue storage room to a library named after
the decedent
-P claims that there is a valid contract, because the promise is supported by consideration and
bargain, or reliance
Holding:
-The courts will not enforce a promise in favor of charity where there is no showing of any
consideration or reliance
Reasoning:
-No indication that P’s promise to name a library after him induced the decedent to make or
renew his promise
-P’s inclusion of $25,000 in budget merely reduced its expectation to writing that it would receive
additional funds
Notes:
(1) Cardozo in Allegheny College
(2) Charitable Subscriptions
(3) Promissory Estoppel in New York
Comment: Promissory Estoppel in Particular Contexts
Problem: Case of the Disappointed Mortgagee: Is the bank's promise to notify
enforceable?
-Brad wanted to buy land from Harold and build a home
-Harold was willing to sell 3 acres for $6,000
-A company in another state was willing to sell Brad a prefabricated house for $40,000 to be
delivered and set up by Brad
*$3,000 down with installments
-Bank agreed to loan Brad $6,000 to pay Harold for the land and create a first mortgage on the
property
*made Brad take second mortgage due to value of land in default
-Company got written promise from Bank that the company would be promptly notified if Brad
defaulted
-Brad defaulted, but Bank did not notify, and sold Harold Brad’s note and the first mortgage for
$5,500
-Harold foreclosed the mortgage and then rebought the land at a foreclosure sale for $6,000
-Harold finished the house for $10,000 and sold the land w/ house to Frank for $30,000
Problem: Case of Friendly Ford’s Loaner Vehicle-Can Keller recover from Ford for
expenses?
-Keller bought new car from Ford
-Keller returned car to dealer and wanted a refund
-Keller then needed a car to drive his daughter to college
-Keller asked Ford for a loaner vehicle, which Ford assured he could have for the journey
-When Keller came to get the loaner, Ford refused to supply the car
-Keller had no other choice but to drive the lemon, which broke down
*Forced to rent a van to complete the trip
Problem: Case of the Independent Cab Driver-Advice to Marty?
-Jim offered Marty $20,000 to be paid back over 10 years
*Referred to Marty saving his life
-Marty refused, didn’t want charity
-1% interest so it’s not charity
-Marty quit his job
-A few days later, Jim told Marty he couldn’t give him the money right now
Statute of Frauds-Requirement that certain contracts be in writing
UCC 2:201
Restatement 110
Professional Bull Riders, Inc v. AutoZone, Inc.
Facts:
-D entered oral contract with P
*Two year deal, but D could void after 1 year
*To do so, D must provide a written motor of termination to PBR no later than Aug. 15, 2001
-D never signed the contract, but P argues that D behaved with the terms from the written
agreement
-D told P in 2002 that they were no longer sponsoring their events, but P kept using D’s name
and service mark
-P sued for breach of oral agreement
-D claimed contract was void under statute of frauds
Holding:
-An oral agreement that contemplates two alternative performances, one of which would be
completed within a year, falls outside of the statute of frauds
Reasoning:
-Statute’s purpose was to prevent perjury, since it has been shown to be ineffective, courts
rarely have voided oral agreements
-Courts only apply SOF when the agreement cannot be performed within one year
-Contract is an agreement for D to sponsor for either 1 or 2 years
-Since D could perform obligation by sponsoring for only one year, it falls below the requirement
to come within the statute of frauds
Notes
(1) How would outcome differ if agreement gave Autozone the ability to terminate at any
time within 30 days?
(2) Judicial Readings of the One-Year Provision
(3) Other Forms of Termination
(4) One Side Rule
(5) Cumulative Effect of Statute of Frauds Provisions
Problem: The Case of Jane Fonda’s Attorney
Crabtree v. Arden Sales Corp.
Facts:
-P sought a 3 year employment contract with D at $25k a year
-P was leaving their secure job for a different field and wanted a definite agreement
-Defendant instead offered Plaintiff a two year employment contract with an annual salary of
$20,000 for the first six months, $25,000 for the next six months, and $30,000 for the second
year
-Plaintiff called the offer “interesting.” Defendant had the offer written down on a telephone order
-A few days later, P accepted the offer and began working
-P received the first payment increase, but not the next
-D’s comptroller and GM each signed a payroll change card to remedy the issue, but it was
denied and P left employment and sued
Holding:
-More than one document may be linked together either expressly or impliedly by the subject
matter and occasion to supply a memo to satisfy the statute of frauds
Reasoning:
-Contract cannot be performed in under one year
-If a contract falls under the statute of frauds it must have a sufficient memo that is signed with
the intent to authenticate the terms and evidences the terms of the contract
-Memo can be collection of documents
-Memo written on the telephone order, the payroll change form initialed by Defendant’s general
manager, and the paper signed by Defendant’s comptroller all refer to the same transaction on
their face
Notes:
(1) Which writings constitute the requisite memo? To what extent was parol evidence
needed to show actual connection?
(2) Restatement 132
(3) Memo before alleged oral contract?
Comment: Satisfying the Statute
Sullivan v. Porter
Facts:
-Defendant owned a 52-acre farm with a barn, house, and stables on the premises, which
Plaintiff and Andrews managed
-Defendant offered to sell the farm to Plaintiff for $350,000 with a $20,000 down payment and
the remainder financed through Defendant at between five and seven percent interest for a
period of 20 to 30 years
-Plaintiff accepted the offer and Defendant told him he would contact his attorney and start the
paperwork
-Plaintiff told Defendant that he would refinance his house to get the money for the down
payment
-Defendant moved out of the farmhouse and gave Plaintiff the keys
-Plaintiff took possession of the property and began to improve the property in order to begin a
horse trail riding and lesson business on the property
-A couple of months later, Defendant told Plaintiff that there was interest from another buyer, but
that he intended to honor their agreement
-The next day, Plaintiff and Defendant met and Plaintiff offered Defendant $10,000 in cash
towards the down payment
-Defendant did not accept the money, saying that he did not want to take the money before the
paperwork was completed
*Defendant did eventually accept $3000 towards the down payment
-Plaintiff began renovations on the house and began his horse riding business
*Defendant visited the property and saw the work being done
-When Plaintiff asked about the paperwork, Defendant claimed to be too busy to contact his
attorney
-More than six months later, Plaintiff sent Defendant an appraisal on the property showing it to
be worth $250,000 and affirmed that he would still pay the agreed upon $350,000
-Defendant responded by offering to sell Plaintiff the property for $450,000 with $50,000 down
-Plaintiff sued, claiming the existence of the oral contract and requesting specific performance of
that contract
-A jury found for Plaintiff and the trial court ordered Defendant to perform under the original
terms of the oral contract. Defendant appealed.
Holding:
1.) An oral agreement for the sale of real property falls outside of the statute of frauds when
all of the elements of a contract exist, the party seeking to enforce the contract has
partially performed, and the partial performance was induced by the other parties’
misrepresentations
2.) A court can order specific performance of a contract to sell real property when the terms
of the contract are reasonably certain, the party seeking specific performance has made
significant improvements to the property, and the property is unique
Reasoning:
1.) Here, there is clear evidence that there was a meeting of the minds and that the
agreement contained all required elements, including the identification of the property
and the parties, the price and down payment amount, and the type of financing.
Secondly, Plaintiff partially performed by making improvements to the property and
offering a portion of the down payment. Finally, Defendant knew of the renovations and
accepted a portion of the down payment, inducing Plaintiff’s performance by his silence.
Defendant’s silence when informed that Plaintiff was refinancing his house to get the
down payment and action in claiming his attorney was drafting the paperwork is the
misrepresentation that induced Plaintiff to perform. Because the part performance
exception to the statute of frauds is satisfied, the contract falls outside of the statute and
may be enforced
2.) Ordering the sale of real property may be appropriate, since each parcel is unique. In
order for enforcement by specific performance, the terms of a contract must be
reasonably certain. Here, the terms were sufficiently certain and the property was
unique. Plaintiff had also invested time and money into the property and the business.
The trial court did not abuse its discretion in ordering that Defendant sell Plaintiff the
property under the terms of their oral contract
Notes
Problems: UCC 2-201
(1) a contract for the sale of goods for the price of $500 or more is not
enforceable by way of action or defense unless there is some writing
sufficient to indicate that a contract for sale has been made between the
parties and signed by the party against whom enforcement is sought or by
his authorized agent or broker. A writing is not insufficient because it omits
or incorrectly states a term agreed upon but the contract is not enforceable
under this paragraph beyond the quantity of goods shown in such writing.
(2) Between merchants if within a reasonable time a writing in confirmation of
the contract and sufficient against the sender is received and the party
receiving it has reason to know its contents, it satisfies the requirements of
subsection (1) against such party unless written notice of objection to its
contents is given within 10 days after it is received.
(3) A contract which does not satisfy the requirements of subsection (1) but
which is valid in other respects is enforceable
(a) if the goods are to be specially manufactured for the buyer and are not suitable for
sale to others in the ordinary course of the seller’s business and the seller, before notice
of repudiation is received and under circumstances which reasonably indicate that the
goods are for the buyer, has made either a substantial beginning of their manufacture or
commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in his pleading, testimony
or otherwise in court that a contract for sale was made, but the contract is not
enforceable under this provision beyond the quantity of goods admitted; or
(c)
with respect to goods for which payment has been made and accepted or which
have been received and accepted (Sec. 2–606).
Kayaks and Canoes
Df Activities Corp. v. Brown
Facts:
-In November, Plaintiff’s agent negotiated with Defendant to buy a Frank Lloyd Wright chair.
-During that conversation, Plaintiff alleges Defendant agreed to sell the chair to Plaintiff for $60K
in two equal installments
-In early December, Plaintiff sent Defendant a letter confirming the agreement. Shortly
thereafter, Plaintiff sent a check.
-Two weeks later Defendant returned the letter and the check, with the following note: “Since I
did not hear from you until December and I spoke with you in the middle of November I have
made other arrangements.”
*Defendant later sold the chair for $198K.
-Plaintiff sued for the difference. Defendant moved to dismiss under the Section:2-201 of the
Uniform Commercial Code (UCC).
-Attached to the motion to dismiss was an affidavit by Defendant that she had never agreed to
sell the chair to Plaintiff and that she did not recollect the conversation with Plaintiff
-In addition to the affidavit, there was a letter from Defendant to Plaintiff withdrawing the offer
to sell the chair in Sept. and a letter from Plaintiff to Defendant withdrawing the offer to buy in
October.
-Plaintiff appeals, alleging that the case is in the exception where “the party against whom
enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for
sale was made.” But this does not refer to the handwritten note.
-Plaintiff argues that if he could depose the Defendant he could force the truth from her: that she
had agreed to sell the chair in November.
Holding:
-No, Without the affidavit, then discovery would be permitted. However, the chance that the
Defendant will make an admission during a deposition is too small to allow further discovery
Reasoning:
-The statute of frauds prevents a party from conducting additional discovery once the defense is
raised
-Not the court’s discretion to determine limits of permissible discovery
-Court concerned with the possibility that intense deposition would cause the witness to commit
perjury and allow the opposing party to continue this course of action in order to force a change
in testimony
*Weakens statute of frauds
Dissent, Flaum
-Courts should have discretion to determine the limits of permissible discovery
Notes
(1) To demur not to demur?
(2) If defense is provided by statute, should there not be a convenient procedure by which to
raise the defense?
Comment: Statute of Frauds and Estoppel
Problem: Case of the Lake Wobegon Lot Purchase
-For years Paula sought to buy a lot on the lake owned by Vincent
-Last week, in Paula’s latest attempt, Vincent was agreeable
-While discussing at Vincent’s house, they agreed on terms
*cash price of $10,000
-They apparently shook on it
-Paula wrote a $1,000 check for a down payment
-Check was made out to Vincent and said “$1,000 down on Lake Wobegon, balance due
$9,000”
-The following week, Vincent changed his mind about selling and tendered the check back to
Paula
Legal recourse? What if Paula had taken out a loan?
Instead
-Paula wrote a check without the message, just to Vincent
-Vincent immediately cashes the check
-Paula is determined not to go through with the deal and wants her money back
-Vincent is willing to complete the deal whenever agreeable to Paula
Restatement 375
Capacity to Contract
Problem: Case of Drug-induced Seller
3. Mistake
Boise Junior College v. Mattefs Construction
Facts:
-Plaintiff sought bids for a project from various construction companies
-Defendant had the second-lowest bid and included in its bid was a bid bond, which offered to
pay reliance damages to the Plaintiff, if Defendant turned down the job for any reason.
-Defendant realized a clerical error had been made when formulating the bid and sought
rescission, rather than being held to the terms of the contract.
-The trial court found that a material mistake (i.e. a mistake that affected the essence of the
contract) had been made and allowed rescission. Plaintiff appealed.
Holding:
The Court did affirm that Defendant would be allowed to rescind, but it did so by considering the
conditions of the contract. The court found that Defendant, in preparing a bid for a public works
contract was allowed rescission, if he could prove (1) that his mistake was material; (2) that
enforcement of a contract pursuant to the terms of the bad bid would be considered
unconscionable; (3) that the mistake was made in good faith; (4) that the Plaintiff would not be
prejudiced by the loss of the deal and (5) prompt notice of the error was given.
Reasoning:
Elements outlined as follows: (1) Defendant’s mistake was material, in that it went to the
essence of the contract (evidenced by the fact that the discrepancy was almost a 14% error); (2)
because Defendant would suffer an economic loss, enforcing the bid was unconscionable
insofar as it created a burden; (3) clerical errors are always considered good faith mistakes,
unless proven otherwise; (4) the Plaintiff couldn’t prove any hardship, in that it had assumed it
would be paying $150,000 and the bid it ended up using was $149,000 and (5) Defendant gave
notice of his error as soon as he realized a mistake was made
*This is considered a mutual mistake case because the clerical error led both sides to believe
they were entering into a contract that was different than it really was
Notes:
(1) Gordley, when should a party be bound to a contract which is disadvantageous to
him?
-Purpose of contract is to advantage both parties
(2) Effect where there is knowledge of mistake
-Offeree’s knowledge of the mistake is often an important factor in judicial opinions granting
relief to the mistaken party
*typically, equity is in rescission
*Rescission accepts that there was a contract, but if offeree knew or should have known about
the mistake, it is arguable that he had no power to accept the offer at all
Rushlight v. Portland
-P’s bid was substantially lower than others because the cost of steel was mistakenly omitted
-Court allowed rescission
*Contract unenforceable if offeree should know the terms of the offer are unintended or
misunderstood
-It may may little difference whether there is no mutual assent or the contract is voidable
Wil-Fred v. Metro Sanitary District
-Rescission, equity granted to not allow D to take advantage of Wil-Fred’s sizeable discrepancy
in offer that likely conferred a material error
(3) Bidder Negligence
-Difficult to show reasonable bidder mistake
-Availability of equitable relief from a mistaken bid should focus on the consequences of the
mistake***
-Public construction contracts, question for equity is whether bidder made an honest or good
faith mistake
*Evidence of gross or extreme negligence only used to show lack of good faith
*Bidder cannot rescind for engaging in bad faith
*Ensures bidding proceeds on accurate cost estimates
*A contrary rule would encourage manipulative bidding practices
(4) Mistakes in bids and federal government contracting
-Contracting officers required to examine for mistakes and request verification of bid from bidder
to call attention to the suspected mistake
-Officer may correct any clerical error on the face of the bid before award
-Relief more difficult to obtain after awarding the contract
(5) Mistaken college admissions
-Princeton mistaken acceptances sent
*Restatement 153
Problem: Case of the four million labels
-Reed mistakenly order 4,000,000 (4MM) instead of 4,000 (4M) of type 5 price labels
-In previous transactions, Reed’s largest order to Monarch was 4,000 for any one item
-Monarch’s largest order ever (not Reed) was for 1MM
-Without checking further, Monarch filled the order
-First 4 types were in stock and were mailed to Reed
-Type 5 needed a special print
-Reed was not aware of the mistake until a truck arrived with 622 pounds of labels
-Reed refused the merchandise, Monarch sued for $2,680 purchasing price
Beachcomber Coins, Inc. v. Ron Boskett
Facts:
-D sold dime to P for $500 that purportedly was minted in 1916 in Denver
-Trial judge ruled for D, customary coin dealings include dealer conducting an investigation and
“assuming the risk” of his purchase if the investigation was faulty
*Judge concedes that the evidence satisfies ordinary requisites of rule of rescission for mutual
mistake
1. Both parties act under a mistake of fact
2. Fact is central to the making of the contract
*Proofs were that D had bought the dime and two minor value coins for $450 and D’s
representative had told P that he would not sell the dime for less than $500
*P spent 15-45 minutes inspecting the coin before buying
*P then received an offer for $700 from the American Numismatic Society subject to
certification, the coin was labeled a counterfeit
Holding:
Reversed, it is voidable by either party if enforcement would be materially more onerous to him
than it would had the fact been as the parties believed it to be
-Negligence by P in inspecting the coin does not bar his claim for rescission
Reasoning:
-Risk can only be used to bar rescission when the fact agreed by both parties is in doubt
*Different case if the seller was uncertain of the genuineness and had accepted the buyer’s
judgement
-Barring based on trade procedure does not align with the intent of the UCC 1-205(2)
*One witness testified there was a “normal policy” for return privilege
T.C. Sherwood v. Hiram Walker
Facts:
-D are importers and breeders of polled angus cattle
-P is a banker living in Wayne county
-P called D in Walkerville to buy some of their stock, but none there suited him
-One of D informed P that they had some more cattle at their Greenfield Farm
-P was asked to go out and look at them with the statement that they were probably barren, and
would not breed
-May 5, 1886, P went to Greenfield, a few days later he called one of D about purchasing a cow
known as “Rose 2d of Aberlone”
-It was agreed that D would call P at his home with a price
-The second morning after this talk, P was called and the terms for sale were agreed upon
*51/2 cents per pound, live weight, fifty pounds shrinkage
-P requested to confirm sale in writing
-May 21, 1886, P went to Greenfield farm, the presented his order to one of D’s workers, the
worker told P that he had been instructed not to deliver the cow
-Soon after, P gave Walker $80 and demanded the cow, Walker refused the money or to deliver
the cow
-D did not deliver because cow was with calf
*Difference between $80 barren and between $750-1,000 not barren
-Circuit court ruled that the contract should be performed at the agreed upon price
Holding:
Reversed and remanded with costs to defendants, mistake or misapprehension of the parties
went to the whole substance of the agreement
Reasoning:
-Mistake was not in quality of animal, but in the nature
-Barren cow substantially a difference creature than an unbarren one
*same as difference between ox and cow for milk
*$80 vs. $750
-Sale could have been enforceable if question was with calf or not
-Factor could not have been positively known by either party to exist
Dissenting, Sherwood
-P bought cow believing it could breed, not for beef
-If D owned a Hambletorian horse and believed it could only run a mile in 3 minutes and sold to
P, who believed it could go faster for $300, then the horse was able to run a mile in 2 minutes 16
seconds in more favorable conditions and is now worth $20,000, it is not equitable to allow the
seller to rescind the contract
-Both parties sold and bought based on what they believed the cow to be
OneBeacon America Insurance Co v. Travelers Indemnity Co. of Illinois
Facts:
-Plaintiff was the insurer for vehicles owned by LAI, a vehicle leasing agency. The insurance
policy defined an “insured” to include LAI and “Anyone else while using with your permission a
covered auto you own. . . .”
-Despite this language, LAI’s standard leases required lessees to provide their own insurance
for leased vehicles, either by applying to be added to the Plaintiff’s policy or through another
insurer.
-The lease also set minimum coverage limits and required that LAI be named as an additional
insured and the first loss payee, and that the insurer be approved by LAI. The lease left the
option of obtaining insurance through LAI to LAI.
-If this option was provided, the lessee would pay extra rent to cover the additional premium.
-A lease supplement regarding this coverage also stated that LAI would obtain insurance
coverage only for specifically identified vehicles and that the monthly rent due under the lease
could be increased by LAI to cover premium increases.
-One of LAI’s vehicles was insured, at the lessee’s option, by Defendant. The vehicle was
involved in an accident and Defendant paid $5 million on behalf of the lessee as part of a
settlement.
-Defendant became aware of the LAI policy with Plaintiff and sought reimbursement from
Plaintiff for the policy limit of $1 million.
-Plaintiff refused and brought suit for a declaration that its policy did not cover lessees, or in the
alternative, for reformation of the policy to reflect the parties’ intent that the policy not cover
lessees.
-At trial Plaintiff acknowledged that the language of the policy could be read to cover lessees,
but provided evidence that this was not the intent of the parties.
-The district court granted summary judgment to Defendant and Plaintiff appealed
Holding:
-When a contract’s written language does not reflect the intent of the parties and there is no
public policy reason to keep it as written, a court will reform the contract
Reasoning:
-A written contract may be reformed when its language does not reflect the intent of the parties.
In a reformation case, a party is asking the court to change the language of the contract to
reflect the parties’ actual intent.
-This party has the burden to prove fully, clearly, and decisively that the language in the contract
was a result of mutual mistake by the parties.
-Plaintiff, must show with a great deal of certainty that the language in the contract is not
reflective of the parties’ intent.
-The mutual mistake must be the language in the contract, not as to any factual understanding
that led to the contract.
-In some cases, even where mutual mistake is shown, a court may deny a request for
reformation on public policy grounds.
-Here, Plaintiff has shown sufficient evidence that the parties did not intend for the insurance
policy to cover lessees.
-LAI clearly intended for lessees to bear the responsibility of providing coverage during the term
of the lease and that Plaintiff would not insure those vehicles unless the lessee applied for it and
it was paid for by the lessee.
-LAI’s lease agreement and lease supplement are compelling evidence that LAI intended that
Plaintiff’s coverage of the vehicles ended when the vehicle was leased.
-Plaintiff has met its burden to show mutual mistake, and there are no public policy reasons,
such as detrimental reliance, to refuse reformation.
Notes
(1) The Case of Reformation
(2) More Recent Developments
Ayer v. Western Union Telegraph Co.
Facts:
-The Plaintiff, Ayer (Plaintiff), delivered a message to the Defendant, Western Union Telegraph
Co. (Defendant), which was to be transmitted to a third party.
-Plaintiff had entered into a contract with the third party for the sale of goods at $2.10, but
Defendant transmitted the offer at $2.00.
-When the third party accepted the offer, he accepted and enforced it at $2.00.
-Plaintiff brought suit against Defendant for the difference in profit, based on the mistake made
by Defendant.
-At trial of this matter, the Defendant offered no evidence, which created a presumption that the
mistake resulted from its faulty transmission.
-Plaintiff contended that it should receive the difference in the amount of the contract to which it
was forced to agree and the amount it offered via Defendant.
-Defendant contended that, in its mistake, it only owed Plaintiff the return of its telegraph fees.
Holding:
-The Court held the Plaintiff could recover the difference caused by the mistake of the
Defendant.
-While Western Union was not a party to the contract between Plaintiff and the third party
purchaser, its actions caused Plaintiff to be held to terms to which it did not agree.
-Because Plaintiff also had an agreement with Western Union to transmit its offer, it was not far
fetched for the court to hold it liable for the damages caused by its error in transmission.
Reasoning:
-Because Defendant, in the course of its dealings with Plaintiff, failed to perform as expected
(i.e. transmit the correct message), Plaintiff was injured and it holds equitable that Defendant
should pay for such mistake
Problem: Mistakes in Transmission and the Outer Fringes of the Objective Test
-Sam, a breeder of horses, owned Flasher and Dasher, who, as two year olds, showed great
promise
-Brenda, a sportsperson, was interested in buying one or both
-She visited Sam’s farm, and offered to buy Dasher for 5k and Flasher for 6k
-Sam replied that “under no circumstances” would he sell Flasher, who was promised to his
daughter on her next birthday
-Sam said he would sell Dasher for 7k
-Brenda said that the price for Dasher was “too high” but if Sam could lower it a bit, please
contact her at home some 500 miles away
(1) Next day, Sam decides to sell Dasher to Brenda for 6k
-Sam types out an offer to sell and places it in a properly addressed, stamped envelope
-On his way to the mailbox, Sam changes his mind
-Before he could return to his office, Sam was struck by a bicycle and knocked unconscious
-A stranger saw the envelope and mailed it
-Upon receipt, Brenda promptly telegraphed acceptance and resold Dasher to Thad for 8k
-Later, Sam telephoned to say that he did not intend to sell Dasher
Contract to sell Dasher?
(2) Suppose that Sam had indicated an offer to sell Dasher for 6k, but his secretary typed
Flasher instead, and Sam signed the letter without reading
-Upon receipt, Brenda promptly telegraphed “accept your offer to sell Flasher” and resold
Flasher to Thad for 8k
Contract to sell Flasher? How about Dasher? Rest. 2d sec. 20(2) with CISG Art. 8(1).
(3) Suppose that Sam went to a telegraph office on a standard form clearly wrote “Will sell
Dasher to you for 6k”
-Form contains a limitation of liability approved by the FCC declaring that the company would
not be liable for mistakes or delays in transmission beyond the sum of $500, unless message
was sent at repeated message rates or was specially valued
-Outer limit of liability for a repeated message was 5k
-Sam read the limitation and chose not to pay extra charge for repeated or specially valued
message
-Due to mistake of the telegraph company, Brenda received offer of Dasher for 5k
-Brenda promptly telegraphed acceptance and resold Dasher to Thad for 8k
Is there a contract to sell Dasher at 5k? Assuming negligence by the telegraph company, what is
its liability, if any, to Sam? To Brenda? To Thad?
Misrepresentation and Nondisclosure
Laidlaw v. Organ
Facts:
-The Plaintiff/vendee, Organ (Plaintiff) and the Defendant, Laidlaw/vendor (Defendant), entered
into an agreement whereby Plaintiff would buy tobacco from Defendant at an agreed upon price.
-Prior to completion of the sale, Plaintiff learned the War of 1812 was ending and that the value
of the product would substantially increase.
-Defendant, at close of the sale, asked Plaintiff if he knew of any information that would affect
the value of the product and Plaintiff answered in the negative, and took possession of the
tobacco.
-The next morning, Defendant recovered the tobacco, upon learning of the change in
circumstances, and Plaintiff brought suit to enforce the contract.
-At the trial of this matter, the Court found that Plaintiff was silent when asked directly whether
the value of the goods to be purchased would change.
-Silence, in this case, amounted to bad faith circumvention, which caused harm to the vendor,
Defendant.
-Plaintiff appealed.
Holding:
-Venire de novo awarded. (Remanded for a new trial.)
*This case begins to consider the duty of disclosure. When a promisee asks a direct question of
a promisor, it could amount to bad faith if the promisor withholds information that could change
the promisee’s position
Reasoning:
-Chief Justice Marshall (J. Marshall), on behalf of the Court noted there may be an affirmative
duty to disclose, but that it must be determined on a case-by-case basis and the question of
whether Plaintiff intentionally circumvented necessary information is one of fact, for a jury to
make a determination upon.
-Because Defendant directly asked Plaintiff whether it knew of any information that could affect
the price of its product, the Court found Plaintiff may have been under a duty to disclose that
information.
Notes
(1) What is holding of Laidlaw? Who won?
-One hand, Marshall state the rule that buyer “was not bound to communicate” the news that the
war has ended
-Other hand, Marshall also holds that “whether an imposition was practised by the vendee upon
the vendor ought to have been submitted by the jury” and remands the case on that basis.
If the buyer is under no duty to disclose, what other “imposition” might there have been?
(2) First holding of Laidlaw
-First holding in Laidlaw was accepted in US law until second half of 20th century
-Then , courts began recognizing a duty to disclose in arms-length transactions, often on the
heels of legislative disclosure requirements
-Today, courts are more willing to recognize a duty
Hill v. Jones
-Laidlaw unique, typically law requires disclosures from sellers, not buyers
-By placing some disclosure duties on buyers, it creates a marketplace where sellers must
beware
pp. 537-542, 548, 550-553
Vokes v. Murray, Inc.
Facts:
-The Plaintiff, Vokes (Plaintiff), a 51 year-old widow, desired to be an “accomplished dancer.”
-The Defendant, J.P. Davenport d/b/a Davenport’s school of dancing (a franchise of Arthur
Murray, Inc.) (Defendant), vowed to help make that dream come true.
-Over the course of a few years, Plaintiff signed several contracts with Defendant and paid out
cash in the amount of $31,090.45 for lessons and dance-related trips.
-After learning that she had no dancing ability, Plaintiff sought a rescission of the contracts and a
return of her money, based on allegations of fraud.
-Plaintiff’s Complaint was dismissed, with prejudice, for failure to state a cause of action. Plaintiff
appealed.
Holding:
-Reversed, In order to bring a cause of action to rescind based on fraud, the facts must justify
the allegations.
Reasoning:
-The court considers the notions of fraud and misrepresentation and makes the finding that, for
a misrepresentation to be actionable, it must be a question of fact.
-In this case, although the instructors opined as to Plaintiff’s dancing ability, they did not tell her
the whole truth.
-The large expenditures that Plaintiff made, in pursuit of her “progress”, were not justified by the
fact that she was not improving.
-Thus, the court found that there was a factual question, to be determined, regarding the
Defendants’ misrepresentation, and reversed, allowing Plaintiff a new trial.
-Generally, when a tradesman engages in puffing to promote its services, it is not considered
actionable as fraud.
-In this case, however, it was apparent to Defendant that the expenses Plaintiff was undergoing
were not justified by her abilities, and his puffing became fraudulent when he caused her to
make expenditures in reliance of non-existent abilities
Notes
(1) What exactly were the alleged misrepresentations?
(2) Fraud: Kaleidoscopic and Infinite
pp. 537-542, 548, 550-553
Hill v. Jones
Facts:
-Plaintiffs purchased Defendants home for $72,000. Plaintiffs had, on several occasions,
inspected the home and twice noticed potential termite damage to the home.
-Although Plaintiffs, who were both familiar with termite damage, noticed holes in the wood on
the patio and a ripple in the floor in the living room they never followed up to determine the
cause of such damages.
-On one such occasion, Plaintiffs asked Defendants about a ripple on the floor in the living,
Defendants responded that the ripple was caused by water damage.
-The house eventually passed termite inspection, and Plaintiffs closed relying on the inspection.
-Defendant sellers never disclosed to Plaintiff, or to the termite inspector, the fact that in the past
the house had been infested by termites and that the house received treatment for such
infestations.
-Upon moving into the house, the wood in the living room began to crumble, it was determined
that such damage was caused by termites.
Holding:
-The Court held that where the seller of a home knows of facts materially affecting the value of
the property which are not readily observable and are not known to the buyer, the seller is under
a duty to disclose them to the buyer.
-The Court held that the existence of termite damage is sufficiently material to warrant
disclosure.
-The Court held that the standard integration clause of the contract does not provide protection
against non-disclosure.
Reasoning:
-Where sellers to a home are aware of facts materially affecting the value of the property, the
sellers are under a duty to disclose such facts.
-The existence of termite damage and past termite infestation has been considered by other
courts to be sufficiently material to warrant disclosure.
-There is also a judicial policy promoting honesty and fair dealing in business relationships.
*This policy is expressed in the law of fraudulent and negligent misrepresentations.
-Where a misrepresentation is fraudulent or where a negligent misrepresentation is one of
material fact, the policy of finality rightly gives way to the policy of promoting honest dealings
between the parties.
Notes
(1) Duty of Disclosure in Contract Negotiations
-Traditional approach, Laidlaw
-More recent statement, Simpson Timber Co.
*In absence of duty to speak, silence as to a material fact does not of itself constitute fraud
*On the other hand, once duty to disclose has arisen, suppression of a material fact is
tantamount to an affirmative misrepresentation
*However, businessmen dealing at arm’s length are rarely under a duty to speak
Problems: Uncommunicative Parties And Duty to Disclose
Rest. 2d 161- A person’s non-disclosure of a fact known to him is equivalent to an assertion that
the fact does not exist in the following cases only:
(a) where he knows that disclosure of the fact is necessary to prevent some previous
assertion from being a misrepresentation or from being fraudulent or material.
(b) where he knows that disclosure of the fact would correct a mistake of the other
party as to a basic assumption on which that party is making the contract and if
non-disclosure of the fact amounts to a failure to act in good faith and in accordance with
reasonable standards of fair dealing.
(c)
where he knows that disclosure of the fact would correct a mistake of the other
party as to the contents or effect of a writing, evidencing or embodying an agreement in
whole or in part.
(d) where the other person is entitled to know the fact because of a relation of trust
and confidence between them.
(1) Mr. MC
-Mc is prospective purchaser of Ms. M’s house, and enters negotiations
-MC inquires of M’s agent as to whether the house has ever had termites
-Agent answers that house has been inspected for termites and is due for another inspection
shortly
-Agent does not disclose that the prior inspection indicated termite infestation
If parties enter into a contract for sale of the house, could the purchaser rescind? Yes?
(2) Jewish Congregation
-Congregation seeks to employ a rabbi
-Chaim applies for position
-Chaim does not disclose in his resume or during employment negotiations that he had
previously been convicted of mail fraud and disbarred as an attorney
-After Chaim is hired and enters upon his duties, these facts of his past life come to light
Does the congregation have a right to rescind the contract? No? Maybe yes
(3) Elderly person living alone
-D is an elderly person living alone
-D purchases a house from K
-Neither K nor his agent tells D that a woman and four grandchildren were murdered there ten
years earlier
-D learns of the gruesome episode from a neighbor after the sale
Can D rescind? No?
(4) Driller
-Driller learns through independent investigation that Owner’s land contains valuable oil
deposits
-Knowing owner is not aware, Driller persuades him to enter a contract to sell the land at a price
much less than Owner would have insisted upon had he been aware of the oil potential
Should the owner be entitled to rescind? No?
161 Ill. 11-Would the answer be different if Driller obtained the information from trespassing on
Owner’s land? Yes, could rescind
161 Ill. 10- Or, if Driller had received “inside” information from a relative at a state agency? Yes?
(5) Flea Market
-Adam finds a 1st edition Dickens for $5 at Barbara’s flea market
-Does Adam have a duty to disclose? No
(6) Employee interviews
-Employer planning to sell company
-Hires employee “at will”
-Company sold and new management fires employee
Did the employer have a duty to disclose information regarding the pending sale to the
employee? No.
What if, instead, employee intends to work only until he can enter law school, should he
disclose this information? No
(7) Summer employment
-Jake questioned about educational background and personal matters
-Jake knows that disclosure of suspension from the sophomore basketball team hurts his
chances for the job
Should he disclose? Yes
Should he disclose being guilty of plagiarism in college and placed on probation? Yes
Rubenstein v. Rubenstein
Facts:
-In 1953, a husband conveyed to a corporation wholly owned by his wife all of his interest in two
parcels of real property in Marlboro Township and the Borough of Farmingdale, respectively.
-In 1955, the couple obtained a final judgment of divorce. The divorce was filed by the husband
on grounds for extreme cruelty.
-Thus, the husband sought an action to compel his ex-wife to reconvey to him a one-half
interest in the real property in question or, in the alternative, to issue to him shares of capital
stock in the ex-wife's corporation equalling one half of the total outstanding stock therein.
-He further sought the establishment of a lien upon the proceeds of the sale of lands in his favor
to the extent of one-half and asks an adjudication that the ex-wife is seized of the real estate in
question as trustee for two infant children of the marriage.
-The husband contended that the conveyance was made under duress because during that
time, the couple was undergoing a separation and over a course of two years the ex-wife
allegedly threatened his life, made insistent and repeated demands for him to convey the
property, and had him arrested for non-support and desertion.
-She also told the husband that she would pursue legal action if he did not provide support or
make the conveyance.
-Leon, the party’s oldest child, was diagnosed with childhood schizophrenia, which led to a
sharp difference in opinion as to how the child should be cared for.
-Defendant pressured Plaintiff to allow her to care for the child and to give her his property so
that she might use the income to care for the boy. Plaintiff eventually acquiesced after several
threats were made.
-One of those threats was to poison him with arsenic.
-These threats caused Plaintiff to fear for his life, as Defendant’s father was imprisoned for
murders associated with an arsenic ring.
-The trial Judge noted that Plaintiff exhibited great fear, but also noted that he was also giving
up liabilities associated with the property and dismissed his complaint.
-Plaintiff appealed.
Holding:
-The court found that there was a prima facie case of duress, regardless of any liabilities the
Plaintiff would be giving up and as such, the Defendant should be allowed to present her case
so that a fair determination of the facts could be made.
Reasoning:
-A contract is voidable under duress when the party can show (1) fear of loss of life; (2) fear of
loss of limb; (3) fear of great danger; or (4) fear of imprisonment.
-When dealing with cases of duress, remember that not all pressure is wrongful. Only if it meets
the level of fear that is invoked by duress should it be actionable.
Austin Instrument, Inc. v. Loral Corp.
Facts:
-The Defendant, Loral Corp (Defendant), was awarded a Navy contract for the production of
radar sets.
-The Plaintiff, Austin Instrument, Inc. (Plaintiff), was a subcontractor who manufactured
precision gear components.
-When Defendant awarded Plaintiff a second subcontract, on the parts it had bid lowest, Plaintiff
raised its prices on all forward and back orders of the gear components, and threatened to stop
delivery if its prices were not paid.
-When Defendant could not find the same parts, ready to deliver, by another manufacturer, it
was forced to pay the price increase, in order to meet the terms of its contract.
-Plaintiff brought suit for charges still due on a second contract and Defendant countered for the
difference in prices.
-At the trial of this matter, Plaintiff was awarded the sum it sought in payment of the contract,
and Defendant’s complaint against plaintiff was dismissed. Defendant appealed.
Holding:
-Affirmed as to Plaintiff’s claim, and Modified to allow recovery for Defendant.
-The Court found that economic duress did exist, insofar as Defendant was forced to buy the
parts at Plaintiff’s gauged price, out of necessity to meet its own contractual obligation.
-As opined by the court: “It is manifest that Austin’s threat-to stop deliveries unless the prices
were increased-deprived Loral of its free will.”
Reasoning:
-Economic duress, as with other duress is seen as a contractual vice when it causes a party to
give up its own free will.
-In this case, Plaintiff’s knowledge of Defendant’s desire to meet its own contractual
commitment put Plaintiff in a position of coercion.
Dissent, Bergan
-Questions concerning acts constituting economic duress are factual and deference should be
given to the trial court, which found that the facts did not support duress.
Hauling v. Steel of West Virginia
Facts:
-The Plaintiff, Machinery Hauling, Inc. (Plaintiff), the buyer, contracted with the Defendant, Steel
of West Virginia (Defendant), the seller, to purchase and deliver steel to a third party.
-Defendant later learned that the steel was unmerchantable and directed Plaintiff to return it.
-Plaintiff contends that it was told that if it did not pay the price of the undelivered loads,
Defendant would cease doing business with Plaintiff.
-Plaintiff sued, based on extortion.
-The circuit court denied Plaintiff’s recovery and the appellate court affirmed, holding that a
threat not to do business in the future was not unlawful.
-Certified questions were sent to the Supreme Court of Appeals, dealing with the issue.
Holding:
-Questions Answered in agreement with Lower Courts; Action dismissed.
-In analyzing this case, the Court affirmed the judgments of the lower courts, holding that no
continuing contract had been formed between the parties and the demands of Defendant were
not coupled with a threat to terminate any such contract.
-Further, because Plaintiff did not pay the money to defendants, there was nothing for it to
recover.
-Plaintiff could not prevail in an extortion claim when it could not prove an on-going business
relationship that would be harmed by Defendant’s request that the unmerchantable product be
returned.
Reasoning:
-If there is no ongoing contractual relationship, a party cannot claim economic duress because
of a loss they may incur in the future.
-Economic duress is available as a remedy when a party has actually performed an act because
of a compulsion to do so, generally in desperate circumstances.
Notes
1. Duress: Wrongful Coercion
-Duress typically used as defense or basis for avoiding transaction, not maintaining an action for
damages
*Hauling exceptional in this respect
Rest. 174 vs. 175- Prevents formation vs. makes contract voidable
2. Austin Instruments
-What were alternatives in Austin?
3. When is a threat wrongful?
-threatening to do what a party has the legal right to do is not duress
*Quote in Hauling
-OK SC offer clarification, coercers action could be wrongful even though threatened action is
legal
4. Undue Influence
-Unfair persuasion that may fall short of constituting actual duress
UNCONSCIONABILITY
-Inquires into deal’s fairness
-Courts may deny contractual obligation by reference to the fairness of the underlying exchange
UCC 2-302
A. Consumer Transactions
Williams v. Walker-Thomas Furniture
Facts:
-Plaintiffs all entered into installment contracts with Defendant for the purchase of household
goods.
-Plaintiffs were relatively unsophisticated buyers who, at the time of purchase, had little monthly
income.
-The installment contracts contained boiler plate language which stated “all payments now and
hereafter made by [purchaser] shall be credited pro rata on all outstanding leases, bills, and
accounts due the Company by [purchaser] at the time each such payment is made.”
-The effect of this provision was to keep a balance on all items ever purchased under
installment by Plaintiffs, so that if Plaintiff defaulted on payment, Defendants would have the
ability to repossess each item, regardless of how much had actually been paid off, because
each item would have an outstanding balance due until all items were paid off.
-The lower Court dismissed the case on the grounds that there was no statutory authority to
provide protection to Plaintiffs in situations such as these.
Holding:
-The Court held that where there is an absence of meaningful choice on the part of one of the
parties together with contract terms which are unreasonably favorable to such party, such
contract may be set aside.
-Meaningful choice can be determined by the equality of bargaining power and a reasonable
understanding of contractual terms that each party has when entering into the contract. The
-Court remanded the case to determine whether, considering the lack of bargaining power held
by Plaintiffs, coupled with the commercially unreasonable terms in the contract, the installment
contract was so extreme as to appear unconscionable and render the contract unenforceable.
Reasoning:
-The case signifies that Courts may render a commercially unreasonable contract
unenforceable when entered into between two parties of unequal bargaining power, especially
where one party is commercially unsophisticated.
Dissent
-Would hold that it was the province of the legislature, not the Courts, to determine when such
contracts are unenforceable from a public policy perspective.
-Many low income clients purchase items on credit out of necessity, and it is not the Court’s role
to determine when such contracts should be annulled.
Notes
Comment: Renting-to-own as a Modern Method to “Profit on Poverty”
Jones v. Star Credit
Facts:
-On Aug. 31, 1965, Ps, who were welfare recipients, agreed to purchase a home freezer unit
from a salesman for $900
-Including time credit charges, credit life insurance, credit property insurance, and sales tax, the
purchase price totaled $1,234.80
-Thus far, Ps have paid $619.88 towards the purchase
-D claims that with various added credit charges paid for an extension of time there is a
remaining balance of $819.81 still due
-Proof shows that max retail value of the freezer unit was $300
Holding:
-The transaction is unconscionable under UCC 2-302
Reasoning:
-Public policy dictates that uneducated consumers should be protected from greedy merchants
and the dangers of unequal bargaining power.
-UCC Section:2-302 provides for a moral sense of community in commercial transactions and if
a clause of a contract is unconscionable at the time it was made, the court may refuse to
enforce the contract.
-The UCC applies to the price term of a contract.
-There is a public necessity and desirability for installments sales contracts.
-However, the pricing scheme on such contracts must afford some protection to the seller for the
risk of selling to those who may default on payment.
-The price terms set in the subject contract are in excess of any assurances and the result is an
unconscionable contract.
Fleet v. US Consumer Council
Facts:
-The Plaintiffs, Fleet and others (Plaintiffs), turned to the Defendants, the United States
Consumer Council, Inc. (Defendants), for help with their financial troubles.
-Defendants made claims that it could help people get out of debt, while it charged sometimes
$195.00 to $260.00, just to refer Plaintiffs to an attorney that they could have reached for free by
calling the bar association.
-Plaintiffs brought this action to have their agreement with the Defendant rendered
unconscionable.
Holding:
-The fees charged by the Defendant were unconscionable
*Applies to service contracts
-By charging them a fee for a referral that would otherwise be free, the Defendant was profiting
from their poor circumstances.
-An action that is, on its face, unconscionable.
Reasoning:
-The court focused on the Unfair and Deceptive Practices Act, noting that a fee for service is
unconscionable when the same service could be rendered elsewhere for a lower price.
-In this case, the Defendant provided attorney referrals for persons in need of financial help.
-While this service is free to anyone who calls the bar association, the Defendant was charging
fees between $195.00 and $260.00.
-Most of the people who called Defendant for assistance were people who were on public
assistance and/or persons on the verge of bankruptcy.
Problem: Life Care Contract
-MacKay did research, read agreement, but did not speak to attorney
-MacKay made down payment to entry fee
-no refund of entry fee upon a resident’s death
-There are parts of the agreement allowing refund for early termination of agreement
-representative of MacKay claims agreement was unconscionable adhesion contract
What result?
Not adhesion and not unconscionable, Mackay had bargaining power and chose that
agreement
Ferguson v. Countrywide
Facts:
-Plaintiff filed suit in District Court, alleging sexual harassment, retaliation and hostile work
environment, under Title VII of the Civil Rights Act of 1964.
-Defendant countered by filing a Petition to remove the action to Arbitration, based on an
arbitration that was signed upon Plaintiff’s employment with its firm.
-The District Court denied the Petition to Compel Arbitration, ruling that the agreement was
unconscionable. Defendant appealed.
Holding:
-Affirmed.
-The court focused on the concept of unconscionability and how the arbitration agreement
aligned with this concept.
1. The court found the agreement was procedurally unconscionable because, considering
the manner in which it was negotiated (as a prerequisite to Plaintiff’s employment) and
Plaintiff’s position (her need for employment), the agreement was procedurally
advantageous to the Defendant.
2. The Court considered the terms of the agreement, in accord with the concept of
substantive unconscionability. If contractual terms are so one-sided that they will “shock
the conscience”, then a contract is substantively unconscionable. In this case,
Defendant’s agreement was obviously one-sided.
(1) it called for some arbitration fees to be borne by Plaintiff (while she would not be subject
to such fees if she prevailed in a typical personal injury suit).
(2) the discovery provision of the agreement allowed for more depositions of employees
than of directors/supervisors.
(3) the agreement provided Defendant with undue advantages in that it was Plaintiff’s only
option.
-Defendant also argued that, if the above-mentioned terms of the agreement were considered
unconscionable, the agreement on its face might still stand.
-The Court was not persuaded by this argument and it maintained that the types of claims to be
arbitrated, along with the fee and discovery provisions permeated the agreement as a whole
and thus it was per se unconscionable.
Reasoning:
-All of the above-listed factors must be taken into consideration when making a determination of
unconscionability.
-If an agreement is only procedurally unconscionable, it can be modified. However, if the
unconscionability goes to the substance of the agreement, it will be stricken.
AT&T v. Concepcion
Facts:
-After seeing an advertisement that offered free cellphones, Vincent and Liza Concepcion
(Plaintiffs) bought cellphones and service from AT&T Mobility, LLC (Defendant).
-Plaintiffs were not charged for the cellphones, but they were charged $30.22 in sales tax.
-The service agreement contained an arbitration provision requiring all disputes between the
parties to be resolved in arbitration and prohibiting class action arbitration.
-Also, the service agreement gave Defendant the right to make unilateral amendments to the
agreement, and Defendant did make unilateral amendments.
-Plaintiffs sued Defendant in federal district court in the form of a putative class action, alleging
that Defendant engaged in false advertising and fraud.
-Defendant filed a motion to compel arbitration based on the arbitration provision in the service
agreement, which the federal district court denied.
-Based on a California Supreme Court case, the federal district court found that the arbitration
provision was unconscionable.
-The federal district court further found that Defendant did not show that bilateral arbitration
sufficiently replaced the deterrent effects of class actions.
-Defendant subsequently appealed to the Ninth Circuit Court of Appeals, which affirmed the
federal district court’s ruling.
-The U.S. Supreme Court granted certiorari.
Holding:
-Yes. Under the Federal Arbitration Act, arbitration is considered “valid, irrevocable, and
enforceable” to ensure “that private arbitration agreements are enforced according to their
terms.”
-The federal district court relied on a California Supreme Court case, which held a contract of
adhesion that included an arbitration provision requiring a waiver of class actions was
unenforceable due to unconscionability.
-If a state law prohibits arbitration, that state law is preempted.
-The California Supreme Court case conflicts with the Federal Arbitration Act because it gives
any party to a consumer adhesion contract the ability to demand class action arbitration.
-As such, the U.S. Supreme Court reversed the judgment of the lower courts.
Reasoning:
-Arbitration agreements can be deemed unenforceable if fraud, duress, or unconscionability
takes place.
-The purpose of the Federal Arbitration Act is to make sure private arbitration agreements are
enforced according to the terms in the agreements.
-When damages in such instances are usually small, slows the arbitration process, and makes
arbitration more costly, then the purpose of the Federal Arbitration Act becomes obstructed.
Sinnar v. LeRoy
Facts:
-Plaintiff owns and operates a grocery store. He made an application to the Washington state
liquor board for a license to sell beer and paid sixty dollars license fee, however the license was
denied and the license fee returned.
-Defendant, a friend of the Plaintiff’s, was a business machine operator at Boeing Airplane
Company.
-Defendant testified that he told Plaintiff that he knew someone, Mr. Lewis, who worked for the
city and could get him a beer license for four hundred and fifty dollars.
-Plaintiff gave Mr. Lewis four hundred and fifty dollars but did not receive a beer license.
-Defendant testified that he told Plaintiff to be careful to whom he gave his money.
-There was no indication in the record that the money was paid for professional services.
Holding:
-Yes. Judgment is reversed with instructions to dismiss the action.
-Illegality need not be pleaded.
-If it appears in the evidence the court on its own motion can deny relief to the Plaintiff the
Defendant cannot waive the defense of illegality.
-If the court suspects illegality it may examine witnesses and develop facts to establish illegality
that precludes recovery from the Plaintiff.
Reasoning:
-The only place a beer license was available was from the Washington state liquor board, not
from the city.
-In the present case, the action involves a beer license, which can only be secured from a state
agency.
-Since a party may not waive his right to plead the defense of illegality and if the evidence
establishes the illegality of the transaction the court may consider the illegality of the transaction
even though illegality was not pleaded as a defense.
-The court concluded that the parties contemplated the use of means that were not legal to
secure a beer license.
-The concept underlying the theory of illegality is that the contract is not enforceable on grounds
that it is against public policy.
-Considerations of public policy are paramount to private rights and when conflict between the two
exists private interests must yield to the public good.
-More specifically, public policy is the principle of law, which states that no subject can lawfully do
that which could harm the public or is against the public good.
Data Management v. Greene
Facts:
-P employed Greene and Van Camp
-Parties signed a contract containing a covenant not to compete with P in Alaska for 5 years after
termination
-Shortly after employees’ termination, P filed suit against them for breach of covenant not to
compete
-P sought preliminary injunction enjoining Greene and Van Camp from rendering computing
services to twenty-one named individuals
-Preliminary injunction granted
-Subsequently, the court granted summary judgement to Ds.
-Court found that the anti-competition covenant was not severable and was wholly unenforceable
-P appeals
Holding:
-Remanded to trial court to determine if P acted in good faith, and if so, whether the covenant not
to compete can be reasonably altered
Reasoning:
-Three approaches to deciding whether an overly broad covenant not to compete can be altered to
render it legal
(1) A covenant that is overbroad, and hence unconscionable, will not be enforced
Vroman
-3 year covenant not to compete was too long
-Court rejected employer’s request to alter the covenant from 3 years to 6 months
Not favored
-Parties’ contract is a bargain
-One element of bargain is covenant not to compete
-Court should respect the rights of parties to enter into contracts and should not interfere with
these relationships
-Too mechanical and may yield unduly harsh results
(2) If words in an overbroad covenant not to compete can be deleted in such a way to render
it enforceable then the court may do so
Licocci
-If covenant is clearly separated into parts, and some parts are reasonable and others are not,
the contract may be held divisible. The reasonable restrictions may then be enforced
Also not favored
-Too mechanical, values wording of contract over substance
-Distinction would be merely semantic and we reject it
*Covenant not to compete in England vs. In london or elsewhere in England
(3) If an overbroad covenant not to compete can be reasonably altered to render it
enforceable, then the court shall do so unless it determines the covenant was not drafted
in good faith
-Burden of proving good faith in the drafting of the covenant is on the employer
Restatement 2d sec. 184(2)
Raimonde
-Gives courts the power to determine reasonableness of the covenant
-Fashions contract reasonable between parties in accord with their intentions at the time of
contraction
Reasonableness factors (consistent with UCC 2-302)
(1) Absence or presence of limitations as to time and space
(2) Whether the employee represents the sole contact with the customer
(3) Whether the employee is possessed with confidential information or trade secrets
(4) Whether the covenant seeks to eliminate competition which would be unfair to the
employer or merely seeks to eliminate ordinary competition
(5) Whether the covenant seeks to stifle the inherent skill and experience of the employee
(6) Whether the benefit to the employer is disproportionate to the detriment to the employee
(7) Whether the covenant operates as a bar to the employee’s sole means of support
(8) Whether the employee’s talent which the employer seeks to suppress was actually
developed during the period of employment
(9) and , whether the forbidden employment is merely incidental to the main employment
Accepted in this case
-One criticism is that employers are encouraged to overreach
*If covenant is overbroad, the court redrafts it for them
-Court believes this can be avoided by stressing good faith element
Broadley v. Mashpee
Facts:
-Plaintiff docked his boat at the Defendant’s marina. He was permanently injured when his foot was
caught in a gap between the main dock and a floating dock.
-Plaintiff brought suit, alleging negligence, despite a clause in the seasonal mooring contract that
precluded boat owners from making any claims against Defendant “arising out of any damage,
loss, personal injury or death” the owners suffered.
-Defendant argued that the contract clause barred Plaintiff’s suit.
-Plaintiff claimed that because admiralty law governed the contract, that law only allowed parties to
limit liability for ordinary negligence, but not to eliminate it entirely.
-He also argued that the clause was overbroad and unenforceable because it would preclude a
finding of liability even for gross negligence, although he conceded that his injuries were not
caused by Defendant’s gross negligence.
-The trial court reformed the exculpatory clause to limit it to ordinary negligence.
-As a bar to claims of ordinary negligence, the clause then operated to preclude Plaintiff’s claim
and the court granted summary judgment in favor of Defendant. Plaintiff appealed.
Holding:
-Reverse the decision of the district court and remand for further proceedings
Reasoning:
1) Does admiralty law prevent the inclusion of an exculpatory clause for mere negligence
where the parties are of equal bargaining power?
-No. Under admiralty law, as with the common law, agreements to waive claims of mere negligence
are generally enforceable where the parties have equal bargaining power.
-Plaintiff relies on Bisso for his argument that admiralty law does not allow for complete immunity
from liability in ordinary negligence cases.
-However, that case does not create a flat rule forbidding exculpation for mere negligence in all
cases.
*It could be read to apply only to cases where the parties are not of equal bargaining power.
-This would be in accord with common law, where agreements to waive negligence claims are
generally found to be valid, unless special circumstances apply, such as unconscionability,
contracts of adhesion, unequal bargaining power, or inadequate disclosures.
-The federal courts’ of appeal are split on this issue, but this circuit has upheld exculpatory clauses
in ordinary negligence cases when they are expressed clearly and where, as here, the parties are
of equal bargaining power.
-The clause here, however, is overbroad and against public policy as it extends beyond mere
negligence, and appears to absolve gross negligence, recklessness, and even intentional
wrongdoing.
-The court must then determine whether the trial court correctly reformed the clause to limit it to
ordinary negligence, making it enforceable under the law in this circuit.
2) Is reformation or severance of the exculpatory clause appropriate where the clause is
overbroad, was not bargained for, and lacks an express reference to negligence?
-No. Neither reformation or severance of an exculpatory clause is appropriate where the language
of the clause is overbroad, the clause was not bargained for, and the clause lacks any express
reference to negligence.
-Reformation is appropriate in cases where the contract language does not adequately reflect the
parties’ mutual and actual intent and the court alters the language to coincide with what was
intended.
-That is not the case here. A more appropriate modification might be severance of part, or all, of
the clause under the contract’s severance clause.
-However, the clause here was not bargained for in good faith, because it is a boilerplate provision.
-The disclaimer itself never even mentions negligence, and so may not be an effective warning to a
boat owner of what liability is being disclaimed.
-Because of these issues, the severability clause cannot be used to save the exculpatory clause. It
would be unjust to uphold this clause as valid.
-Although Plaintiff did not make all of the arguments put forth here, this court has discretion to
avoid forfeiture of these claims in the interest of justice. Reversed and remanded.
Problem: Release of of Unknown Injuries
Facts:
-Morta suffered a collision that damaged his 1976 Mazda station wagon and caused him bodily
injury
-According to Morta, the car was “a total loss”
-Morta was knocked unconscious and taken to a hospital emergency room
-After treating Morta, he was told by the attending physician that he was fine and could go home
-Morta continued to have pain, and three days later a 2nd physician told him he was fine
-Morta seeks compensation for his losses from Korea Insurance who insured the driver who
caused the accident
-Santa Maria, a claims adjuster, met with Morta and helped him complete the claim form
-Morta was offered $900, but wanted $2,300
-Morta was advised by another lawyer that he could get more, but it would take longer
-Morta signed the standard release, which released the insurance company from all claims
even if injuries were permanent or indefinite
-A week after settlement, Morta found out he had a blood clot in his brain
-Morta filed suit to recover damages resulting from the blood clot, disavowing the release on the
grounds that Santa Maria fraudulently misrepresented the contents
Holding:
-Jury upheld release and superior court entered verdict to that effect
Morta appealed with the following arguments:
(1) There was a mutual mistake of fact
-Future is never certain, and Morta freely entered into this agreement which included claims of
unknown injury
(2) There was a mistake by Morta, who did not know the contents of the release and that it
purported to release Korea from unknown claims
-Morta’s failure to read the release does not justify rescission
(3) There was fraud by the agent
-Not supported by evidence, not a fair interpretation of Santa Maria’s statements
-Also, by visiting the other lawyer it was clear Morta did not interpret Santa Maria’s offer as the
“best he could get”
(4) Morta was unduly influenced by the agent
-No, evidence shows negotiation was at arm’s length
*no reliance
-No pressure to settle for $900
(5) The release was signed under duress, Morta needed the money
-Morta was working and there is no evidence of a pressing need for the money
(6) The release was either against public policy or unconscionable
-Unsure
Watts v. Watts
Facts:
-Sue Ann Evan Watts (Plaintiff) and James Watts (Defendant) began living together in a
marriage-like relationship.
-They held themselves out as husband and wife. Plaintiff assumed Defendant’s surname, and so
did the two children they had together.
-Plaintiff was on Defendant’s insurance policy.
-Plaintiff provided childcare and homemaking services.
-Eventually, she worked part time at his office.
-After twelve years together, she moved from their home and ended their relationship.
-Defendant barred her from returning to work.
-Plaintiff asserts that her contributions increased the business and personal wealth of the couple.
-She asserts that they had a contract to share equally the property accumulated during their
relationship and the Defendant breached it when he refused to share equally with her the wealth
accumulated through their joint efforts.
Holding:
-If P can prove elements of unjust enrichment to the satisfaction of the circuit court, she will be
entitled to demonstrate further that a constructive trust should be imposed as a remedy
Reasoning:
-Public policy does not prevent an unmarried co-habitant from asserting a contract claim against
the other party in the cohabitation as long as the claim exists independently of the sexual
relationship and is supported by separate consideration.
-Claims for breach of an express or implied contract do not arise out of an agreement entered into
by the parties.
-Recovery for unjust enrichment is grounded on the moral principle that one who has received a
benefit has a duty to make restitution where retaining such a benefit would be unjust. This is often
called a quasi contract.
-An action for unjust enrichment has three parts:
(1) a benefit conferred on the defendant by the plaintiff,
(2) appreciation or knowledge by the defendant of the benefit, and
(3) acceptance of the benefit by the defendant under circumstances making it inequitable for the
defendant to retain the benefit.
-Unmarried cohabitants may raise claims based upon unjust enrichment following the termination
of their relationships when one of the party’s attempts to retain an unreasonable amount of the
property acquired through the efforts of both.
-Here, plaintiff alleges her contributions increased the assets of the company and that she was
never compensated for her contributions.
*Defendant accepted her services knowing she expected to share the benefits. This is sufficient to
state a claim for recovery based upon just enrichment
Kass v. Kass
Facts:
-While Plaintiff and Defendant were married, they attempted to conceive children through in vitro
fertilization over the course of five years.
-The procedures failed and at the end of five years, the couple was left with five frozen
preembryos.
-Plaintiff and Defendant signed a consent agreement stating that if the two could not agree on the
disposition of the pre embryos, the pre embryos would be donated to the IVF program for research.
-Three weeks later, in anticipation of a divorce, Plaintiff and Defendant signed an additional
agreement stating that the pre embryos would be disposed of as described in the consent
agreement and that neither of them would seek custody of the pre embryos.
-Three weeks after this agreement was signed, Plaintiff notified the IVF program that she no longer
consented to the destruction or release of the frozen pre-embryos.
-A month after this notification Plaintiff filed for divorce, seeking custody of the pre-embryos for the
purpose of undergoing another implantation procedure.
-Defendant objected to implantation and sought specific performance of the consent agreement.
-The state intermediate appellate court ordered enforcement of the consent agreement and Plaintiff
appealed.
Holding:
-Affirmed order of appellate division
-The informed consents signed by the parties unequivocally manifest their mutual intention that in
the present circumstances the pre-zygotes be donated for research to the IVF program
Reasoning:
-The subject matter of the agreement at issue in this case was novel, but the court applied
common law contract principles in reaching its holding.
-One of the contract principles applied was the idea that in order to determine whether a contract is
ambiguous, the court looks only within the four corners of the document and not to other sources.
-The court examined the consent agreement and determined that it was not ambiguous and that
the parties’ intent was clear from the document.
-If the court had determined that the consent agreement was ambiguous, it could have then looked
to the agreement signed just three weeks later in order to resolve any ambiguity as to the parties’
intentions.
-An external source cannot be used in determining whether the document at question is itself
ambiguous, but can be used to resolve any ambiguities that are found in the document itself.
-In this case, the second agreement would have reaffirmed the intention of the two parties that
neither one could make a claim to the pre embryos.
A.Z v. B.Z
Facts:
-Husband A.Z. and wife B.Z. were married in 1977.
-The couple experienced fertility problems, and turned to in vitro fertilization (IVF)
-The wife conceived and gave birth to twin daughters in 1992.
-More pre embryos were formed than necessary, and two vials of pre embryos were frozen for
possible future implantation.
-Prior to the separation of the couple, the wife had one of the remaining vials of pre embryos
thawed and implanted.
-No pregnancy resulted.
-Ultimately they divorced, and one vial containing 4 frozen embryos remained in storage.
-During the procedure, the clinic required egg and sperm donors to sign consent forms for relevant
procedures.
-Each consent form explained the general nature of the procedure and outlined the freezing
process.
-The forms also require the donor to decide the disposition of the frozen pre embryos on certain
listed contingencies, including separation.
-On the initial form filled out by the wife, the decision was to return the embryos to the wife for
implant if the couple became separated.
-Thereafter the couple underwent 6 additional egg retrievals and signed 6 additional consent
forms.
-Each time the husband signed the form, the wife filled out the disposition and other information.
-Each provides for the embryos to be returned to her on separation.
-The probate judge concluded that while donors are generally free to agree as to the ultimate
disposition of the embryos, the agreement was unenforceable due to a change in circumstances in
the 4 years following the last signature, including the birth of the twins, the filing for divorce, and
the wife’s seeking to thaw the pre embryos for implantation.
-The judge found that the best solution was to balance the wife’s interest in procreation against the
husband’s interest in avoiding procreation, and determined that the husband’s interest outweighed
the wife’s and the permanent injunction should be granted in favor of the husband.
Holding:
-Court refuses to enforce the consent form the husband signed 4 years ago that would require him
to become a parent
-Prior agreements to enter into familial relationships should not be enforced against individuals
who subsequently reconsider their decisions.
Reasoning:
-In other jurisdictions, two State courts of last resort have concluded that such agreements should
ordinarily be enforced.
-This is the first reported case involving a consent form that provided that on the donors’
separation, the pre embryos were to be given to one of the donors for implantation.
-This Court is dubious at best that it represents the intent of husband and wife, and concludes that
the form should not be enforced in the circumstances of this case.
(1) The form’s primary purpose was to explain to the donors the benefits and risks of
freezing and to record their desires at the time the form is executed.
-It does not state that the consent form should act as a binding agreement should they later
disagree.
(2) The form does not contain a duration provision.
(3) It uses the term separated, without defining separated. Separation and divorce have
distinct legal meanings.
-The donors’ conduct also creates a doubt as to their true intent.
-A clinic representative told the wife that she could cross out any of the language and fill in her own
to fit her wishes.
-The consent form at issue here was signed in blank by the husband before the wife filled it in.
(4) The form is not a separation agreement that is binding on the couple in a divorce
proceeding, and does not cover custody, support, or maintenance in the event the wife
gives birth.
-Even if the couple had entered into an unambiguous agreement this Court would not enforce an
agreement that would compel one donor to become a parent against his or her will.
-As a matter of public policy, forced procreation is not an area amenable to judicial enforcement.
-The Legislature has already determined by statute that individuals should not be bound by certain
agreements binding them to enter or not enter into familial relationships.
Problem: The Promise to Remain Silent
Parol Evidence Rule; UCC 2:202; Restatement 2 § 209-216
A collateral contract: A contract where the parties to one contract enter into or promise
to enter into another contract.
Mitchill v. Lath
Facts:
-Defendants owned a farm, which they wished to sell.
-Across the road they had they had an icehouse, which they might remove. Plaintiffs looked over
the land to purchase and found the icehouse objectionable.
-The Defendants orally promised in consideration of the purchase of their farm by the Plaintiffs to
remove the said icehouse.
-Relying on that promise Plaintiffs made a written contract to buy the property and after receiving
the deed they entered into possession and spent considerable amounts of money improving the
property.
-Defendants have not fulfilled their promise as to the icehouse and did not intend to do so.
Holding:
-No. Judgment of the Appellate Division is reversed.
-The parol evidence rule defines the limits of the contract to be construed.
-It applies to attempts to modify a contract by parol.
-If one agreement is oral and the other is written a problem arises, as is here, whether the bond is
sufficiently close to prevent proof of the oral agreement.
-For an oral agreement to vary the written contract at least three conditions must be met:
(1) the agreement must in form be a collateral one
(2) it must not contradict express or implied provisions of the written contract, and
(3) it must be one that parties would not ordinarily be expected to embody in the writing.
-An oral agreement is not collateral to the written agreement if its subject is closely related to the
subject of the written agreement.
-Here, the agreement to remove the icehouse was such that it would have naturally been included
in the written contract for the sale of the farm.
-The oral agreement contradicts the written agreement.
-Therefore, the writing was concluded as being a complete integration and cannot be modified.
Reasoning:
-There are two conflicting views on parol evidence:
(1) Williston or Restatement view, also known as the four corner rule: States that if a term is
not found in the writing, then it cannot be offered into evidence by one of the parties if the
court concludes that it would have been natural of the parties to have included it in the
writing.
-Here, the majority adopts this approach.
(2) Corbin view, which looks at available evidence to determine the actual intention of the
parties. The dissent adopts this view
Dissent
-The removal of the icehouse could not be expected to be included in the writing, and therefore
the writing is not a complete integration.
-Therefore, the oral agreement is parol evidence and may be admitted to prove the contents of
the written agreement.
Masterson v. Sine
Facts:
-Plaintiffs owned a ranch as tenants in common which they conveyed to Defendants by a grant
deed reserving the right to purchase the property for the same consideration as being paid plus
depreciation value of any improvements grantee made.
-Plaintiffs went bankrupt and his trustee in bankruptcy and his wife brought this declaratory relief
action to establish their right to enforce the option.
-The case was tried without a jury.
-Over the Defendants’ objection the court admitted extrinsic evidence that by the same
consideration as being paid both the grantors and grantee meant the sum of $50,000.00 and by
depreciation value they meant the depreciation value of improvements to be computed by
deducting from the total amount of any capital expenditures made by Defendants the amount of
depreciation allowable under United States income tax regulations as the time of exercising the
option.
-The court also precluded that the parol evidence rule precluded admission of extrinsic evidence
offered by Defendants to show that the parties wanted the property kept in the Plaintiffs’ family and
that the options were personal to the grantors and could not be exercised by the trustee in
bankruptcy.
-The court entered judgment for the Plaintiffs declaring their right to exercise the option.
Holding:
-No. Judgment reversed.
-The parol testimony should have been admitted since the limitation term would not necessarily be
included.
-When the parties to a written contract have agreed to an integration, which is a complete and final
embodiment of the terms of an agreement, parol evidence cannot be used to add or vary the
terms.
-When only part of the agreement is integrated the same rule applies. Evidence of an oral
agreement should be excluded when the fact finder is likely to be misled.
-If additional terms are such that they would certainly have been included in the document in the
view of the court then evidence of their alleged making must be kept from the trier of fact.
-Here, the option clause in the deed does not explicitly provide that it is a complete agreement and
the deed is silent on assignability.
-Nothing in the record indicates that the parties did not have any warning of the disadvantages of
failing to put the whole agreement in the deed.
-Therefore, this case is one in which it can be said that a collateral agreement might naturally be
made as a separate agreement.
-This case is one that would not have included the collateral agreement in the deed.
-Defendants offered evidence that the parties agreed that the option was not assignable in order to
keep the property within the family.
Reasoning:
-The parol evidence rule applies only to documents, which are integrations, final expressions of the
agreement.
-A written document does not always represent a deal that the parties consider final.
-If the parties do intend a document to represent the final expression of their agreement, the
document is said to be an integration of their agreement.
-A partial integration occurs when the document is not intended by the parties to include all the
details of their agreement
Dissent
-The majority opinion undermined the parol evidence rule, rendered suspect instruments of
conveyance absolute on their face, materially lessened the reliance which might be placed upon
written instruments, and opened the door to new technique of defrauding creditors
Alaska v. Aleyska Northern Development
Facts:
-David Reed (Reed), a shareholder of Plaintiff, initiated discussions with Defendant regarding the
purchase of surplus parts.
-A letter of intent was prepared by Reed, in which Plaintiff proposed to purchase Defendant’s entire
inventory of Caterpillar parts.
-The place for purchase price was left blank.
-Defendant responded with its own letter, also leaving the purchase price blank, but added that the
sale was subject to the final approval of the owner committee.
-The price was subsequently decided upon.
-The owner’s committee rejected the agreement.
-Plaintiff contends that it was said that the owner’s committee’s approval was necessary for the
price term only, and not the entire contract.
-Plaintiff filed a complaint alleging that there was a contract between Plaintiff and Defendant, which
Defendant breached.
-Defendant moved for summary judgment and the superior court granted summary judgment in
favor of Defendant on the punitive damages count.
-The court initially denied Defendant’s Motion for Summary Judgment, however, the court reviewed
the case and announced that it would reverse its earlier holding and grant Defendant’s motion.
-The court applied the parol evidence rule to the letter and therefore no extrinsic evidence could be
presented to the jury.
Holding:
-Yes. Judgment affirmed.
-The letter was integrated with respect to the approval clause but the contract was merely partially
integrated based on the evidence presented.
-The excluded evidence does not contradict the integrated portion of the writing.
-Thus, parol evidence was properly excluded since it contradicted the integrated clause
Reasoning:
-This court adopts the Corbin view, which looks at all available evidence to determine the actual
intention of the parties
-Plaintiff contends that the superior court erred in granting summary judgment because the
evidence conflicted as to the meaning of the owner committee approval clause.
-However, the words in the letter are not reasonably susceptible to the interpretation offered by
Plaintiff. Thus, there is no merit in Plaintiff’s claim.
-The superior court also found that the owner committee’s approval power was limited to the
approval of the price to be inconsistent with and contradictory to the language used in the letter.
-Inconsistency is the absence of reasonable harmony in terms of the language and respective
obligations of the parties.
-Under this definition, the proffered parol evidence limiting the owner committee’s right of final
approval is inconsistent with the integrated term that conditionally gives the committee the right to
approval.
Problems: CISG and the Unexpected Spouse
Pacific Gas v. Thomas Drayage
Facts:
-1960, D entered contract with P to furnish the labor and equipment necessary to remove and
replace the upper metal cover of P’s steam turbine
-D agreed to perform the work “at its own risk and expense” and to “indemnify” P “against all loss,
damage, expense, and liability resulting from injury to property, arising out of or in any way
connected with the performance of this contract”
-D also agreed to procure not less than $50,000 insurance to cover liability for injury to property
-P was to be an additional named insured, but the policy was to contain a cross-liability clause
extending the coverage to P’s property
-During work, the cover fell and injured the exposed rotor of the turbine
-P brought an action to recover $25,144.51, the amount subsequently spent on repairs
Holding:
-Reversed. Extrinsic evidence is admissible to aid in the interpretation of a contract clause if the
clause is reasonably susceptible to the asserted interpretation
Reasoning:
-“The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not
whether it appears to the court to be plain and unambiguous on its face, but whether the offered
evidence is relevant to prove a meaning to which the language of the instrument is reasonably
susceptible.”
-Further, excluding parol evidence merely because the words do not appear ambiguous may lead
to an interpretation of a written contract that was never intended.
-Extrinsic evidence may not add to, detract from, or vary the terms of a written contract, but it may
be used to interpret the terms of the contract.
-In the present case, since the contract clause was reasonably susceptible of the meaning
Defendant attaches to it, the evidence offered by Defendant is admissible.
Notes
1. Context Evidence or “Plain Meaning” Rule?
2. Pacific Gas rule has critics
3. Kozinski over Pacific Gas rule
4. Holmes on the Interpretation Process
5. Interpretation under the UCC
6. Traynor opinion focused on same portion of clause as trial court
Comment: The Hierarchy of Contract Construction
Frigaliment v. B.N.S International Sales
Facts:
-Defendant contracted to sell chicken to Plaintiff. Both contracts indicated that Defendant was
selling specified amounts of 2 1/2 – 3 lb. chickens and 1 1/2 – 2 lb. chickens.
-When the first shipment was sent, Plaintiff found that the heavier chickens were not young
chickens suitable for broiling or frying, but older stewing chicken.
-The parties disagree as to what the term “chicken” in the contract means.
Holding:
-No. The term “chicken” in the contract did not mean only younger chicken.
-The Court holds that the because Defendant’s definition coincides with the objective meaning, one
of the dictionary definitions, the Department of Agriculture’s regulations referenced in the contract,
some trade usage, the realities of the market, and statements by Plaintiff’s spokesperson, Plaintiff
has not met its burden of showing that the narrower definition of the term applies
Reasoning:
-In determining what a term means the court will consider (in order of importance): (1) the
language of the contract, (2) the preliminary negotiations, (3) trade usage, (4) legal standard, (5)
course of performance, and (6) maxims.
-The smaller chickens had to be younger chickens, because older chickens do not come in that
size. Because the smaller chickens had to be younger chickens, Plaintiff argues that the larger
chickens also had to be young.
-Plaintiff also argues that trade usage of the term “chicken” is to indicate a young chicken.
However, there was conflicting evidence as to whether “chicken” only means a young chicken in
the trade.
-One maxim is that a reasonable construction is preferred over an unreasonable construction.
-Defendant alleges that to sell younger chicken to Plaintiff at the contract price would result in a
loss to the Defendant.
-Because under the Plaintiff’s construction the contract would result in Defendant selling chicken at
a loss, Defendant argues that Plaintiff’s definition of “chicken” is unreasonable.
In re Katrina Canal Breaches
Facts:
-Hurricane Katrina struck New Orleans and surrounding areas in 2005, causing widespread
devastation.
-During the storm, several canal levees surrounding New Orleans were breached and 80 percent
of New Orleans was underwater.
-Plaintiffs sought coverage for their losses under their homeowners, renters, and commercial
property all-risk insurance policies.
-Some of these policies excluded recovery for water damage arising from “flood, surface water,
waves, tidal water, overflow of a body of water, or spray from any of these.”
-State Farm policies stated that “We do not insure under any coverage for any loss which would
not have occurred in the absence of one or more of the following….”
-The list of exclusions included water damage and defined that term in the same manner that the
other policies had.
-This policy clearly stated that any water damage, regardless of the source, or combination of
sources, was excluded from coverage.
-The Plaintiffs argued that their losses were covered by their policies, despite the exclusionary
language, because the damage resulted from the negligent design, construction, and maintenance
of the failed levees and the policies did not exclude coverage for inundation of water induced by
negligence.
-Defendants declined coverage under this theory and Plaintiffs brought a series of separate state
actions, which were then consolidated and removed to federal district court.
-The trial court found that the non-State Farm policies’ flood exclusions were ambiguous because
they could be interpreted either to only exclude floods from natural causes, or could be interpreted
to exclude floods from natural causes or negligent or intentional acts.
-As a result, the court denied the Defendant’s motion for summary judgment on these polices and
held that these policies covered the Plaintiff’s losses to the extent the Plaintiffs could prove the
flooding was a result of the alleged levee negligence.
-As to the State Farm policies, the trial court determined that the introductory language to the
exclusions removed any ambiguity and clearly excluded a flood from any cause.
-The court dismissed the actions against State Farm. Plaintiffs and Defendants cross-appealed to
the appellate court.
Holding:
-Reversed. A contract term is not ambiguous when it aligns with its prevailing meaning and where
giving it another meaning would lead to illogical results.
Reasoning:
-The trial court here looked at the dictionary definition of “flood” to find that it contemplated a
natural event. The court then looked to case law regarding “water damage” in the context of broken
water mains and regarding “earth movement” exclusions and saw courts apply a distinction
between natural and non-naturally occurring events. Finally, the trial court rejected cases that
interpreted flood exclusions as extending to inundations of water caused by the rupture of a dam or
dike. Because the district court denied the Defendants’ motion to dismiss for failure to state a
claim, the court of appeals reviewed the case de novo and disagreed with the district court as to
each of its findings. The disparity in findings demonstrates how difficult contract interpretation can
be.
-A court must analyze an insurance policy using contract interpretation rules, as policies are
contracts.
-As a general contract rule, words of a contract are given their prevailing meaning, and if doing so
does not lead to absurd results, the words are considered unambiguous and the inquiry ends.
-Only where the words are ambiguous must the court look further into how the words fit into the
context of the entire policy or analyze the reasonable insured’s expectations.
-If ambiguity still remains after these steps are taken, and two or more reasonable interpretations
of the ambiguous term exists, the contract is construed against the drafter. In this case, the policies
were all-risk policies, meaning that everything not excluded was covered.
-The issue is whether the policies unambiguously excluded flood damage.
-The fact that the term “flood” is not defined does not make the term ambiguous on its own.
-Neither does the fact that the policy could have been written to expressly exclude flooding caused
by negligence.
-The existence of more specific flood exclusion clauses in other policies does not make the clauses
at issue here ambiguous.
-When the scope of a policy exclusion is not readily apparent, its terms must be given their
prevailing meaning.
-This meaning is found in dictionaries, treatises, and case law.
-Even when more than one meaning for the term is found in these sources, the term may not be
ambiguous so long as there is a prevailing meaning that can be applied.
-While the sources available indicate more than one meaning of the term “flood,” the prevailing
meaning found in them is an inundation of water. In light of this prevailing meaning, the flood
exclusions are not ambiguous and the damage at issue here aligns with the prevailing meaning of
the word “flood.”
-When a body of water overflows its natural boundary and inundates an area of normally dry land,
that is a flood. That is what happened to New Orleans following Hurricane Katrina.
-Water that moves through a breached levee is still floodwater and still results in a flood, no matter
the reason for the breach.
-Plaintiffs claim ambiguity by arguing that it is reasonable to interpret the term “flood” as only
resulting from natural causes.
-Given the natural component of this catastrophe and the excess water associated with it, it is hard
to imagine that the damage occurred only because of the non-natural cause.
-The non-natural aspect of this damage was only that the efforts to mitigate the effect of a natural
disaster failed.
-If man’s failure to address a natural disaster could transform that disaster into a non-natural event
that now escapes an insurance policy’s exclusion, insurers would never be able to exclude the
losses from natural causes since any natural event could be characterized in some way as
non-natural
-Even if the flood here could be characterized as non-natural, the term “flood” in the policies is not
limited to only natural events.
-Plaintiffs reliance on cases involving water main breaks to back up their argument that the term
“flood” is limited to natural events is misplaced because water mains are not bodies of water, the
amount of water involved is not comparable, and levees, unlike water mains, are meant to interact
with floodwaters.
-A treatise on insurance law adopts the body-of-water distinction as more useful than the
natural/non-natural one.
-More importantly, distinguishing between floods of natural and non-natural causes would create
an illogical result, because anytime floodwaters come up against a levee, a non-natural component
is introduced, but the waters are still floodwaters.
-The result of such a distinction would be the elimination of the flood exclusion in insurance
policies.
-The canons of contract construction lead to the same finding.
-The canon of noscitur a sociis leads courts to interpret a tem by considering the meaning of the
terms associated with it.
-The other terms associated with “flood” are not limited only to natural events.
-The canon of ejusdem generis tells courts that “where general words follow the enumeration of
particular classes of persons or things, the general words will be construed as applicable only to
persons or things of the same general nature or class as those enumerated.”
-This canon is inapplicable here because “flood” is a specific term in the list defining “water
damage” and is not a general term.
-Because the term “flood” is clear and unambiguous, there is no need to look to a reasonable
insured’s expectations.
-That is appropriate only when the term is ambiguous.
The Duty of Good Faith
(A) Scope and Content of the Good Faith Duty
UCC 1:304
Centronics v Genicom
Facts:
-The contract between the Plaintiff and Defendant provided for arbitration of any dispute about the
value of the property transferred, to which the purchase price was pegged and required an escrow
deposit of a portion of the price claimed by the seller pending final valuation.
-Plaintiff sued Defendant for breach of an implied covenant of good faith for refusing to release a
portion of the escrow fund claimed to be free from dispute.
-Defendant moved for summary judgment on the theory that the terms of the parties’ agreements
required payments out of escrow only upon completion of arbitration thus barring the implication of
any duty to authorized distribution before that event.
-The Superior Court granted summary judgment to the Defendant.
-The court held that the only way funds can be released is upon final determination of the purchase
price, which is in the hands of the arbitrator.
Holding:
-No. Judgment affirmed.
-The court cannot insert a provision for partial payments where it does not exist. Plaintiff should
have demanded a mechanism for partial payments for the escrow fund.
Reasoning:
-The express terms of the contract are inconsistent with the claim that an obligation of good faith
and fair dealing requires Defendant to an interim distribution.
-An obligation of good faith is imposed by statute in the performance and enforcement of every
contract. In New Hampshire, there are three distinct categories of an obligation of good faith:
(1) those dealing with standards of conduct in contract formation;
(2) with termination of at-will employment contracts; and
(3) with limits on discretion in contractual performance.
-The court is concerned with the third category.
-The third category states that under an agreement that appears by word or silence to invest one
party with a degree of discretion in performance sufficient to deprive another party of a substantial
proportion of the agreement’s value, the parties’ intend to be bound by an enforceable contract
raises an implied obligation of good faith to observe the reasonable limits in exercising that
discretion.
-Here, Defendant was not given the discretion to deprive Plaintiff of a portion of the agreed
consideration for the business assets previously transferred.
-The contract contains express provisions governing the timing of payment, thus Defendant has no
discretion to withhold approval for pay out beyond that time or to affect the timing of the arbitration.
-Therefore, Plaintiff is seeking a revision of the contact, not the enforcement of good faith in its
performance.
Patterson v Meterhofer
Facts:
-Plaintiff agreed to sell and Defendant agreed to buy four parcels of land including the houses on
the land for $23,000.00 to be paid partly in cash and partly by taking title subject to certain
mortgages on the property.
-At the time the contract was executed, the Defendant knew that the Plaintiff was not the owner of
the premises he agreed to sell.
-He expected to acquire title by purchasing it at a foreclosure sale. Before the foreclosure sale took
place, Defendant informed the Plaintiff that she would not perform under the contract and would
buy the premises herself.
-She bought the four parcels of land for $5,595.00 each.
-The Plaintiff also attended the foreclosure sale ready to purchase the parcels of land but was out
bid by the Defendant.
-Defendant acquired the four parcels of land for $620.00 less than she was obligated under the
contract.
-The foreclosure sale also included a fifth house, which was not mentioned in the contract. -The
Plaintiff’s complaint indicated that there was parole agreement, which provided that Plaintiff should
buy all five houses at the foreclosure sale and should convey four to the Defendant and keep one
for himself.
-Plaintiff brought this action for a judgment that Defendant convey the fifth house to the Plaintiff
and declare that Plaintiff had a lien upon the premises purchased by the Defendant at the
foreclosure sale, and that Defendant holds the parcels in trust for the Plaintiff subject to the
contract.
-Plaintiff also requests the sum of $620.00 in damages, the difference between the price, which the
Defendant paid and the price she would have paid the Plaintiff.
-The Special Term rendered judgment in favor of the Defendant, holding that the parties were free
to act for his own interests.
Holding:
-Yes. Judgment reversed and a new trial is granted.
-In every contract there is an undertaking by each party that they will not intentionally and
purposely do anything to prevent the other party from carrying out the contract.
-A party who causes the breach may not recover damages for non-performance on the contract.
Reasoning:
-By entering into a contract to purchase from the Plaintiff property, which she knew he would have
to buy at a foreclosure sale in order to convey it to her, the Defendant agreed that she would do
nothing to prevent Plaintiff from acquiring the property at such sale.
-There is no finding of a parole agreement between the parties with regard to the fifth house.
Defendant violated the agreement by bidding for and buying the premises for himself.
-Even though it was the intention of the contract that the Defendant receive the parcels of land, the
contract said that the Plaintiff should receive them first and then sell them to the Defendant.
-Therefore, Defendant breached the contract and Plaintiff is entitled to recover $620.00 in
damages, which represents the amount he would have received.
Problem: the uncooperative vendor
-In process of negotiating sale of land, Vendee indicated he hoped to secure a loan on the property
to be guaranteed by the VA
-Vender was opposed to dealing with the VA and preferred other financial arrangements
Issue resolved by following clauses of contract:
(18) Home to be financed by G.I. Bill of Rights subject to approval by VA for a purchase price not
to exceed $21,950. Said $18,000 First Deed of Trust herein mentioned has already been
committed by the First Federal Savings & Loan Assoc. Of Washington, D.C., and said loan must
be placed with this company, otherwise secondary financing will be arranged
(21) Purchaser agrees to accept the following financing in the event the house is not financed
under the aforementioned G.I. financing
-Shortly before agreed closing date, VA issued a “reasonable value” certificate that appraised the
property at $4,450 less than the contract price
-Since purchase price exceeded valuation, it appeared the VA guarantee would not be available
-Vendor informed Vendee that this means they should proceed with the agreed alternative
financing
-Vendee requested that Vendor furnish a schedule of his actual construction costs as a basis of
appealing to the VA for a higher appraisal
-Vendor refused and Vendee subsequently canceled the contract
-After the settlement date passed without closing, Vendor declared the 10% deposit forfeited and
retained it as liquidated damages. Vendee sues to recover the deposit. What result?
Market Street v Frey
Facts:
-In 1968, J.C. Penney Company (Penney) entered into a sale contract and leaseback arrangement
with General Electric Pension Trust (Defendant) in order to finance Penney’s growth.
-The arrangement provided that Penney was to sell properties to the Defendant, which the trust
then leased back to Penny for a term of 25 years.
-Paragraph 25 of the lease entitled the lessee to request that “lessor (pension trust) to finance the
costs and expenses of construction of additional improvements provided the amount of the costs
and expenses is at least $250,000.00.”
-Upon receiving the request the lessor agrees to give it reasonable consideration and provides that
they shall negotiate in good faith.
-Paragraph 34 also states that “if negotiations shall fail the lessee shall be entitled to repurchase
the property at a price roughly equal to the price at which Penney sold it to the Defendant plus 6%
a year for each year since the original purchase.”
-One of the leases was a shopping center, which in 1987, Penney assigned to Plaintiff.
-Plaintiff received an inquiry from a drugstore chain a year later to open a store in the shopping
center provided that Plaintiff build the store.
-The lessor of the shopping center sought financing from other sources than the Defendant.
-They were also unwilling to lend the necessary funds without a mortgage on the shopping center,
which Plaintiff could not obtain because it was not the owner of the shopping center.
-Therefore, Plaintiff tried to buy the property back from the Defendant.
-Plaintiff contacted the Defendant and finally received an offer to buy the property for $3 million,
however, Plaintiff considered this to be too high.
-Plaintiff then wrote a letter to the Defendant requesting funding for $2 million in improvements to
the shopping center. However it made no reference to paragraph 34 of the lease.
-The Defendant did not respond. Plaintiff sent a second letter with a general reference to the lease
and said that if the pension trust was unwilling to provide financing then they wanted to enter into
negotiation to amend the round lease.
-The following day, the pension trust sent a letter refusing the original request for funding. Plaintiff
sent a letter in response stating that they would seek financing elsewhere.
-Then Plaintiff sent another letter to the Defendant stating that they were exercising the option in
paragraph 34 to purchase the property in the event that negotiations over financing broke down.
-The Defendant refused to sell, and this suit was brought by the Plaintiff for specific performance.
-The district court granted summary judgment for the Defendant on the grounds that by failing to
correspond with Defendant to mention paragraph 34 of the lease Plaintiff prevented negotiations
over financing that are a condition precedent to the lessee’s exercise of the purchase option from
taking place; and on the ground that failure violated the duty of good faith. Plaintiff appeals.
Holding:
-A question of whether the Plaintiff violated the implied duty of good faith exists. Judgment
reversed and remanded.
Reasoning:
-There is a genuine issue of fact as to whether Plaintiff acted in bad faith in failing to point out to
the Defendant, a paragraph in the lease which gave lessee the right to purchase property under
terms specified in that paragraph in the event negotiations over financing improvements to property
broke down.
-The duty of good faith is not a duty of candor. You can make a contract to purchase something
that you know your seller undervalues.
-However, you may not take advantage of an oversight by your contract partner concerning his
rights under the contract.
-This is sharp dealing and may be actionable as fraud or deceit. However, this is a contact case
and not a tort case so the conduct may not rise to the level of fraud necessary to violate the duty of
good faith.
-Therefore, the duty of good faith is between a fiduciary duty and the duty to refrain from fraud.
-Good faith is an implied undertaking not to take advantage in a way that could not have been
contemplated at the time of drafting and which therefore was not resolved explicitly by the parties.
Emphasis is put on the post-contractual rather than the pre-contractual stage.
-Here, Plaintiff tried to trick the Defendant and succeeded in doing so.
-Plaintiff did not want financing from the Defendant and when it learned that it could not get the
financing without owning the property the Plaintiff wanted to purchase the property.
-Therefore, Plaintiff tried to trick the Defendant into forcing them to sell the Plaintiff the property
under paragraph 34 by not mentioning it in the various letters requesting financing.
-However, the facts must be construed in favor of the nonmoving party when a motion for summary
judgment is before the court.
-Thus, it could appear that the Plaintiff was not at fault.
-Therefore, there is a genuine issue of fact whether the Plaintiff acted in good faith and the Motion
for Summary Judgment should be dismissed.
Exercise of Reserved Discretion
Billman v. Hensel
Facts:
-Hensel entered into contract with Billman to sell their home to P for $54,000 cash
-Condition of the contract was the ability of the buyers to secure a conventional mortgage on the
property for not less than $35,000 within 30 days
-Buyer could not secure loan, as he could not obtain the difference between the purchase price
and the loan to receive the loan
-Buyers did not complete the purchase, so sellers commenced suit to secure $1,000 earnest
money/liquidated damage deposit required by the contract
-Lower court entered judgment for sellers
-Buyers appeal
Holding:
-Affirmed. Subject to financing clauses impose upon the buyers an implied obligation to make a
reasonable and good faith effort to satisfy the condition
-Sellers carried burden of proof by establishing that buyers did not make a reasonable and good
faith effort to secure the necessary financing
-Therefore could not rely upon the condition to relieve their duty to perform
Reasoning:
-Billman only contacted one financial institution concerning a mortgage loan
-Billman made no formal loan application
*limited discussion to 35k loan, although they subsequently claimed to require more
-Billman had assured Hensels that he had all the money to complete the deal
-Then, when Hensel offered to lower the price, Billman said he required 1.5k more
Austrian Airlines v. UT Finance Corporation
Facts:
-During the 1990's, United Technologies Corporation (“UTC”) was anxious to have plaintiff
Austrian Airlines specify jet engines made by one of UTC's affiliates for use on new aircraft
being ordered by Austrian.
-It entered into a complex deal pursuant to which Austrian agreed to do so, and a UTC affiliate,
defendant UT Finance Corporation ("UTF"), agreed to buy a particular used aircraft from
Austrian some years in the future for a price in excess of $30 million.
-The aircraft purchase agreement ("APA") made UTF's obligation to consummate the purchase
contingent on satisfaction of a myriad of conditions.
-After the 2001 terrorist attacks on the World Trade Center and the Pentagon, however, UTF
became anxious to avoid buying an aircraft for far in excess of its market value and insisted on
strict compliance with the contractual requirements.
-Austrian failed in major respects to satisfy the conditions precedent to UTF's obligation to
purchase, and UTF rejected delivery.
-Plaintiff seller Austrian brought this action for breach of contract, claiming primarily that UTF's
alleged desire to avoid what had become a disadvantageous deal led it to reject the aircraft in
bad faith.
-Defendant buyer UTF moved for judgment of dismissal.
Holding:
-Austrian’s argument is without merit.
-Section 2.2A of APA, UTF had no obligation to accept a non-conforming tender, therefore Austrian
contracted away any right it would have otherwise had to cure its failure to perform by March 31st
*UTF prepared to discuss an extension of delivery date in exchange for financial consideration,
which Austrian rejected, is immaterial
*Austrian never made a conforming tender
-Where the parties contract in terms that give the buyer the right to walk away from the deal in the
event of a non-conforming tender, there is no reason not to give the buyer the benefit of its bargain
Reasoning:
UCC 1-203 obligation of good faith, 1-201(19) definition of good faith, 2-103(1)(b) good faith
requirement incorporated into all contracts governed by article II of UCC
-Industry custom does not apply where the express terms of a contract mandate something
different. UCC 2-208(2)
1. Section 2.2A of Aircraft Purchase Agreement
*UTF may accept the aircraft in the event of noncompliance
*UTF has no obligation to purchase the aircraft if all delivery conditions are not met
2. Austrian’s argument, reliance on custom, rests on misconceptions
-Custom stated as an obligation to accept aircrafts with minor nonconformities
*Evidence shows that Aircraft would not have passed FAA certificate of airworthiness until 2
ACTs were approved; deviations not minor
-Evidence that UTF rejected aircraft due to disadvantageous bargain is too far, simply wanted all
delivery conditions met to receive full amount of offer
*Entirely reasonable based on need for FAA certificate, not just market value decrease in price
Joc Oil
UCC 2-508(2)
(1) Buyer had reasonable grounds to believe that a substitute tender would be acceptable
(2) Seller gave timely and reasonable notice of intention to cure
-In Joc Oil, buyer found in breach of contract
-Court’s focus was more on price than the sulphur content
*No dispute if market price had risen in that time
Warranties
UCC 2:313-16
2:313- Express Warranties by Affirmation, Promise, Description, Sample.
2:314- Implied Warranty of Merchantability
*Applies only to merchants
2:315- Implied Warranty of Fitness
*Buyer relying on seller’s knowledge
2:316- Exclusion or Modification of Warranties
Problems p. 781
The Case of the Disappointed Skier
-Francine went shopping for ski boots, after research, went to get Bordica Alpine ski boots
-Salesperson Bob told her the BA 200 “is the best boot on the market--you can go anywhere in
it--it is toasty on frigid days--support on the ankle is superb.”
-Francine bought them for $350
-On ski trip, Francine got severe frostbite on her right foot, the left ski boot bindings broke, and
her ankle broke
Arguments
2:313(b)
-Bob’s description creates express warranty that goods should adhere to description
2:314
*depends on online description
2:315
-Francine relied on Bob’s skill or judgment to select or furnish suitable goods
(2)
2:715(2) (b)
-injury to person or property proximately resulting from any breach of warranty.
2:719
-Consequential damages may be limited or excluded unless the limitation or exclusion is
unconscionable. Limitation of consequential damages for injury to the person in the case of
consumer goods is prima facie unconscionable but limitation of damages where the loss is
commercial is not
Drafting Exercise
-Purchasing Jerry Seinfeld’s 1963 Corvair
-Draft a list of the seller representations and warranties you would like included in the purchase
agreement of the vehicle
Dove v. Rose Acre Farms
Facts:
-Dove employed by Rose acre, operated by David Rust, in the summers and other times from
1972-79
-Rose acre made eggs
-Rose acre instituted and maintained bonus programs
-Any slight violation would forfeit the bonus, even a minute’s tardiness
-June 1979, Rust called in Dove and others and offered a bonus $6,000 each if certain detailed
construction work was completed in 12 weeks
-Bonus card indicated that in addition to completing the work, he would be required to work at
least 5 full days a week for 12 weeks to qualify for the bonus
*Same day, this was amended by mutual consent to ten weeks with a bonus of $5,000 to enable
him to return to law school by sept. 1
-In the 10th week, Dove got strep
-Dove showed up with a temperature of 104, and said he can’t work
-Rust told him he could stay there and lay on the couch, or make up his lost days on saturday
and/or sunday, but if he went home he’d forfeit the bonus
*Rust told him he could sleep and still qualify
-Dive left to seek medical treatment and missed two days
-Trial court denied recovery, Dove had not shown that all conditions of the bonus contract have
been met
-Dove argues that bonus agreement was implemented to
(1) Insure his presence at the construction site
-Worked more hours than the amount required 750>500
(2) Cut the cost of construction through maximizing production by workers
-Project was completed
-Also, Dove should be relieved of strict performance because his illness rendered performance
impossible
Holding:
-Affirmed, Dove failed to perform all the conditions of the contract and is not entitled to recover
any portion of the bonus
Reasoning:
-Rules of tardiness and absenteeism are the central theme, not the completion of the task
-Examples like white car and silver feather programs showed effort by Rust to establish among
employees an identity with Rose acre
*direct tangible benefits to Rose acre are unmeasurable
*burden upon employees are unmeasurable
-Yet, Rust was willing to pay substantial bonuses and employees, including Dove, were willing to
take the money
-No fraud or bad faith, nor any public policy reasons for why bonus contract should not be
enforced as agreed by the parties
-Generally, impossibility is a defense to an action for damages, but Dove has not demonstrated
it is applicable here
-What if Dove had, because of illness, not been able to work at all, could he sue for wages?
In re Carter’s Claim
Facts:
-Plaintiff and its six subsidiaries were available for purchase. Defendant began negotiations for
the purchase of the company.
-The parties entered into a written agreement in which Defendant purchased all the issued and
outstanding capital stock of Plaintiff and its subsidiaries.
-The total purchase price was $2,100,00.00 of which $187,863.60 was set aside as escrow in
Provident Trust Company of Philadelphia to indemnify the buyer against “the liabilities of sellers
by reason of any and all provisions of this agreement.”
-Defendant presented a claim against the escrow fund for $69,998.42 as a “liability” of the seller
under the agreement.
-The arbitration was submitted to a judge by the sellers.
-The arbitrator awarded the buyer $3,182.88 and the buyer's motion to correct the arbitrator’s
award was dismissed.
-Defendant appeals, contending that the financial condition on the date of purchase was less
favorable than that reflected in the company’s financial statement and therefore he is entitled to
reimbursement out of the escrow fund for the amount of the deficiency.
-Plaintiff denies the reduction in the financial condition and even if there were the Defendant has
no right to reimbursement under the agreement unless the reduction resulted from occurrences
outside the ordinary course of business, which caused a materially adverse change in the
company’s financial condition.
-The Defendant contends the provision constituted a warranty on the seller’s part that the
financial company was not less favorable than demonstrated by the financial statement, and
that the Plaintiff breached this warrant.
-Plaintiff contends that the provision was a condition and the buyer had the right to refuse a
consummation of the sale if the condition was not fulfilled, when the Defendant elected to
consummate the sale it waived the condition.
-Arbitrator, to construe 9(a) as warranty would be inconsistent with 5(g)
5(g)- represented and warranted that there had been no changes in financial condition of
company and subsidiaries other than changes in ordinary business, none materially adverse
and were changes required or permitted by agreement
9(a)- Changes in financial condition of company and subsidiaries in ordinary course of business
which were materially adverse and not permitted by the agreement
Holding:
-The provision was a condition and not a warranty. Arbitration award affirmed.
Reasoning:
-The agreement was carefully and meticulously prepared by counsel after they went through
careful negotiations.
-To be included among the conditions was the financial condition of the company and that the
fulfillment of the conditions was to take place not subsequent but prior to or at the closing and
the buyers obligations were made subject to the fulfillment of the condition.
-To construe the provisions as creative of a promise for the breach of which the buyer could
recover damages would be inconsistent with the other provisions of the agreement.
-The buyer was under no obligation to complete the purchase. (9(a))
-In order to determine if the provision is a condition or a warranty depends on the interpretation
of the language of the agreement.
-Here is it clear that the parties intended it to be a condition and not a warranty and once the
Defendant elected to accept this agreement the provisions ceased to be operative and the
Defendant had no right to recover any damages.
Clark v. West
Facts:
-Plaintiff and Defendant entered into a contract for the Plaintiff to write a series of law books.
-After the Plaintiff wrote “Clark & Marshall on Corporations” the parties had a disagreement.
-The contract had a clause that the Plaintiff agrees to abstain from the use of intoxicating liquors
during the continuance of the contract and payment is dependent on the faithful performance of
this condition and others to the contract.
-The Plaintiff was to be paid $6.00 a page if he did not drink and $2.00 if he did not comply with
the condition.
-While Plaintiff was writing, the Defendant assures him that strict compliance to this condition is
not necessary.
-Plaintiff started drinking and Defendant refused to pay him. Plaintiff’s complaint alleges that he
is due $2.00 per page for the work completed but Defendant refused to pay him.
-Plaintiff’s breach of contract claim alleged that Defendant took out a copyright on Plaintiff’s
work on corporations in the name of a publishing company, which had no relation to the contract
and the relief asked for that the copyright be transferred to the Plaintiff or that he discovered its
value.
-Plaintiff claimed that Defendant broke the contract by causing the book to be copyrighted in the
name of the corporation, which was not a party to the contract and brought this action to recover
what he claims to be due to him.
-Defendant brought a Motion to Dismiss on the ground that it did not state facts sufficient to
constitute a cause of action.
-The Special Term overruled the Motion to Dismiss, but the Appellate Division reversed the
decision and the motion was sustained.
Holding:
-The provision was an express condition. Judgment is reversed
Reasoning:
-The provision to abstain for alcohol was an express condition because Defendant was
bargaining for Plaintiff’s writing of books and not for Plaintiff’s abstention.
-Even though it was an express condition, it was waived when the Defendant stated that strict
compliance was not necessary.
-It is not a contract to write books in order that the Plaintiff shall keep sober but a contract
containing a stipulation that he shall keep sober so that he may write satisfactory books. Here,
the waiver is not of the consideration or subject matter but of an incident to the method of
performance.
-If the Plaintiff waived the incidental condition, he has created a situation to which the doctrine of
waiver applies.
-Therefore, the Motion to Dismiss is overruled and Defendant should be permitted to answer the
complaint.
Ferguson v. Phoenix
Facts:
-Plaintiff was insured under a Storekeepers Burglary and Robbery Policy issued by the
Defendant.
-Plaintiff operated a drug store, which was broken into, drugs were taken from a storage drawer,
and $433.76 was taken from within the safe. The insurance company paid everything except for
the money taken from the safe.
-There were two doors on the safe, an exterior door and an inner door, there were no marks on
the exterior door to show the use of force but there were marks on the inner door that show
marks of force and violence upon its exterior.
-The insurance policy limited liability for safe burglary to $50.00. The policy also had an
exclusion clause that the policy does not apply to any fraudulent or dishonest acts by the
insured, but this exclusion does not apply to safe burglary or robbery by other than the insured.
-The exclusion was amended to include conditions, which required there to be visible marks on
the exterior of the doors of the vault for the insured to recover for safe burglary.
-The trial court held that the clause was an escape clause and allowed for full recovery under
the policy.
-Defendant appealed.
Holding:
-Judgment affirmed.
-Appellant lacked exclusion in policy
Reasoning:
-Insurance policies are to be construed in favor of the insured and against the insurance
company.
-This theory is only applicable when the contract contains provisions or language of doubtful
meaning.
-Therefore, when an insurance contract is not ambiguous the court must enforce the contract as
made.
-Provisions restricting insurance companies’ liability are common because they protect the
insurance companies from inside jobs and frauds that would occur but for such protection.
-The visible marks clause imposes a rule of evidence on the insured to establish that entry was
made into the safe by actual force.
-An insurance carrier assesses the risks and decides which to insure.
-However, whether a provision intended to determine the character of evidence necessary to
show liability is not necessarily within an insurance carrier’s responsibilities.
-It has been held that when parties to an insurance contract agree on a provision that is not
against public policy and contains no ambiguity, the court must enforce the provision and may
not relieve one of the parties from the disadvantageous terms.
-When a rule of evidence is imposed by a provision in an insurance policy and is enforced by
the insurance carrier to prevent fraudulent claims against it by proof of a substantive condition
the rule is against public policy.
-Here, the assertion of an evidentiary requirement by the Defendant is designed to defeat
recovery on a just claim.
-The court held that the Defendant should have put the visible marks clause in the exclusion
section of the policy.
Dissenting, Price
-Safe burglary clause is plain, clear, and unambiguous
-Restrictions normal in other types of policies
-Court has no business making another contract for the parties
Jacobs & Young v. Kent
-Reading Pipe
-Installation of particular brand of pipe was not a condition precedent to the duty of the owner to
pay the balance due under the construction contract
856-57
Problem: Reading Pipe and the Waiver of Conditions
(1) What if the owner did indeed want the installation of a brand of pipe to be a condition?
Could it be done? How?
(2) Installation of reading pipe is a condition precedent, but cannot be procured by the
owner. Contractor approaches the owner and offers a substitute. Owner is agreeable to
substitution, but after installation, stands by the original contract provision making
installation of Reading pipe a condition of recovery. Will the owner prevail?
(3) Owner says that the contractor can omit the reading pipe, also that no pipe at all needs
to be installed or even construct the building. The owner will pay anyway. Can a
contractor hold the owner to this commitment?
(4) Contractor installed the Cohoe pipe without consulting the owner. Is the latter obligated
to pay? Is there a difference if the owner, after becoming aware of the substitution,
indicated he would still pay? Even if obliged to pay, could the owner still recover
damages if the Cohoes pipe was inferior to the Reading pipe?
(5) Contractor did not install any pipe at all, but the owner said that he would still pay. Would
the owner be bound by this commitment?
Impossibility and Frustration of Purpose
Taylor v. Caldwell
Facts:
-Plaintiff and Defendant entered into a contract, in which Defendant agreed to let the Plaintiff
use The Surrey Gardens and Music Hall on four certain days.
-After the signing of the contract, but before the first contract, the Music hall was destroyed by
fire.
-The destruction was without fault of either party and was so extensive that the concerts could
not be given
Holding:
-No. Loss suffered by plaintiffs is not recoverable from defendants
-Music hall ceased to exist, without fault of either party, both parties are excused, the plaintiffs
from taking the gardens and paying the money, the defendants from performing their promise to
give use of the Hall and Gardens and things.
-Implied stipulation that destruction of Hall shall excuse performance
(1) What is basic assumption
(2) What is effect of occurrence?
Reasoning:
-The Defendant was discharged from performing, and his failure to perform was not a breach of
the contract.
-When the contract is absolute, the contractor must perform it or pay damages for
nonperformance although in consequence of unforeseen events the performance of the contract
has become impossible.
-However, that occurs only where the contract is absolute.
-The contract here is subject to an implied condition that the parties shall be excused if
performance becomes impossible from the perishing of the thing without fault of the contractor.
-The parties regarded the continuing existence of the hall as the foundation of the contract, and
the contract contained an implied condition that both parties would be excused if the hall did not
exist.
-Therefore, the destruction of the hall without fault of either party excuses both parties, the
Plaintiff from taking the gardens and paying the money and the Defendant from performing their
promise to give the use of the hall
Canadian Industrial v. Dunbar Molasses
Facts:
-Plaintiff contracted with the Defendant to purchase approximately 1,500,000 wine gallons of
molasses.
-Defendant’s supplier decided not to produce a sufficient amount of molasses and did not
deliver to the Plaintiff the full amount of molasses, which were provided for in the contract.
-Plaintiff brought this action to recover damages.
-Defendant contends that the duty to deliver was conditioned upon the production by the
National Sugar Refinery of molasses sufficient in quantity to fulfill Plaintiff’s order.
Holding:
-No. Affirmed. Continuance of special circumstances does not appear from the terms of the
contract to have been an assumption in the minds of the contracting parties conditioning their
belief in a continued obligation
Reasoning:
-When a court believes that the risk was foreseeable and under the control of one of the parties,
then the court will not relieve performance of that party due to impossibility.
-The Plaintiff was not made aware of the agreement between the Defendant and the Sugar
Refinery.
-If they had been made aware it is likely that they would have contracted with the Sugar
Refinery on its own.
-Further, the Defendant did not have time to nor did he procure a contract with the Sugar
Refinery to supply sufficient for its needs.
-Therefore, the Defendant will not be relieved of performance and cannot use the defense of
impossibility.
-This case demonstrates impossibility due to failure of third persons.
-When a middleman contracts to supply goods that he will be getting from a third party and the
third party cannot supply the goods, the middleman may not use the impossibility defense if the
seller is unwilling rather than unable to contract to sell the items to the buyer
-Middleman must make efforts to avoid “impossibility”
Frustration of Purpose
Restatement 2d § 261, 265
Paradine v Jane
Facts:
-Plaintiff sued Defendant under a lease for years for unpaid rent.
-Defendant pleaded that as a result of the invasion of an enemy of the King Defendant was
forced out of possession of the property and was unable to take the profits.
-Defendant refused to pay Plaintiff rent for the time he was forced out of possession by the
army.
-Plaintiff demurred and the plea was held to be insufficient.
Holding:
-Affirmed. No, Defendant was not excused from performance because his purpose for entering
into the contract was frustrated.
Reasoning:
-Defendant must pay the required rent to the Plaintiff.
-The law creates a duty, however, the law will excuse him of performance if the party was
disabled to perform without any default in him and he has no other available remedy.
-When a party by his own contract creates a duty upon himself, he is bound to make it good
notwithstanding accident because he could have provided against it in the contract.
-Here, the rent is a duty created by the parties, and the Defendant must make it good,
notwithstanding interruption by enemies, for the law would not protect him beyond his
agreement.
-The Defendant lessee must run the burden of casual losses and cannot place the burden on
the Plaintiff lessor.
-Therefore, the Defendant here remains liable for the unpaid rent.
-Here, the court held that the Defendant remained liable for the unpaid rent even though he was
unable to retain possession of the property because Defendant bound himself to this agreement
and should have provided against such incidents in the contract.
-Defendant also should have sought a remedy against the enemies who occupied his property
Krell v Henry
Facts:
-Plaintiff and Defendant entered into a contract for the Defendant to rent a flat to watch the
coronation of the King. Defendant was induced to contract by an announcement in the window
of Plaintiff’s flat renting windows to view the coronation. The contract, however, did not have any
express reference to the coronation. The coronation never took place since the King became ill,
therefore, Defendant refused payment. Plaintiff sued for the remaining money due under the
contract. Defendant denied liability and counterclaimed for the 25 pounds previously paid on the
theory that the coronation did not take place, and, thus there was a total failure of consideration
for the contract entered into. The lower court found that there was an implied condition in the
contract that the coronation should take place and found for the Defendant on liability and the
counterclaim. Plaintiff appealed.
Holding:
Affirmed. Yes, the defendant was excused from performance because his purpose for entering
into the contract was frustrated.
Reasoning:
Doctrine of frustration of purpose- When a party’s purpose is frustrated by intervening
events the duties of the parties will be discharged. A party’s purpose is frustrated when
events occur which destroy this purpose, even though performance of the contract is not
impossible
-Defendant’s purpose of entering into the contract was to view the coronation of the King.
-This purpose was understood by both of the parties and regarded as the foundation of the
contract.
-Further, the rooms were taken by their reason to suitability for viewing the coronation
processions and thus the purpose of the contract.
-Performance of the contract was not rendered impossible, since Defendant could remain in the
flat even though the coronation procession did not take place.
-However, Defendant would not receive any benefit from staying in the flat, therefore he must be
excused from performing.
-Parol evidence is admissible to show that the subject of the contract, which was flats to view
the coronation and was known by both of the parties, in order to determine whether the object of
the contract was frustrated by the non occurrence of the coronation.
-Therefore, the court held that Defendant was excused from performing under the contract and
Plaintiff’s claim is dismissed.
Washington Hop Producers v Goschie
Facts:
-From 1965 until 1985, the United States Department of Agriculture (USDA) required hop
growers to obtain Federal allotments in order to market their hops; this was called a hop base.
-Hop base became a scarce, expensive commodity and a secondary market developed for
trading.
-Plaintiff was organized in 1979 to acquire, lease and sell federal hop base. Since the system
restricted entry, the USDA considered making various efforts to change it, but by June 1985
substantial changes in the marketing order were not expected.
-On May 31, 1985, Plaintiff mailed invitations to bid on two pools of hop base for sale.
-On June 21, 1985, Plaintiff mailed notices of award to bids in the $0.5 to $0.76 range, including
Defendant and other respondents.
-On June 27, 1985, the USDA terminated the marketing order effective December 31, 1985.
Defendant refused to perform on the contract.
-Plaintiff was able to sell 50% of one of the pools for a price of $0.7 per pound compared with
earlier successful bids of $0.6 per pound.
-Plaintiff brought an action to enforce the contracts.
-The trial court granted summary judgment to the Defendant.
-The Court of Appeals affirmed and Plaintiff appealed.
Holding:
-Affirmed. Exclusive control of the contract language was in the hands of the Trust and the Trust
did not include disclaimers in its contracts until after the termination order.
*One of rare american cases where relief was granted under doctrine of “frustration of purpose”
Reasoning:
-The Restatement Second of Contracts states that “the doctrine of discharge by supervening
frustration occurs where a party’s principle purpose is substantially frustrated without his fault by
the occurrence of an event the non-occurrence of which was a basic assumption on which the
contract was made, and thus his remaining duty to render performance is discharged unless the
language or the circumstances indicate the contrary.”
-The State of Washington has not previously adopted the Restatement Second’s doctrine of
supervening frustration.
-Under the formula, the purpose that is frustrated must be the principle purpose for making the
contract.
-Here, the principle purpose of this contract was to purchase a hop allotment base provided and
created pursuant to a hop marketing agreement.
-Since Defendant sought to purchase hop base, the inference is that future market access was
the principle purpose for entering into the contract.
-It is clear that this purpose was frustrated due to the decline in value of hop allotments.
However, the irrelevance of control of hop base after 1985 that supplies the real frustration of
purpose.
-Further, Plaintiff here did not allocate the risk to Defendant growers and Defendant did not
include any allocating language in its acceptance.
-The termination here was unforeseeable.
-The Restatement Second states that foreseeability is merely a relevant factor in determining
whether nonoccurrence of the frustrating event was a basic assumption of the frustrated party in
entering the transaction.
-However, if the basic assumption is found, as it is here, the issue of foreseeability becomes
irrelevant.
-The fact that it was not foreseeable does not argue the contrary conclusion.
-The language that suggests that unforeseeability is a prerequisite of supervening frustration
does not apply in this case.
-Foreseeability of a possible frustrating event is meaningful only where the party seeking relief
could have controlled could have controlled the language of the contract to allocate the risk.
-Here, exclusive control of the contract was in the hands of Plaintiff, and Plaintiff did not do
allocate such risk