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OUTLINE DETAILS:
Author:
Anonymous
School:
University of Michigan Law School
Course:
Contracts
Year:
Fall, 2003
Professor:
James J. White
Text:
James J. White Coursepack (Fall 2003)
Text Authors: James J. White
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CONTRACTS OUTLINE
I. A Roadmap for Contract Law........................................................................................................... 7
II. The Bargain Theory of Contract ..................................................................................................... 12
A. Consideration .............................................................................................................................. 12
B. Reliance ...................................................................................................................................... 15
C. The Restitution Interest............................................................................................................... 17
III. Negotiation and the Contract .......................................................................................................... 18
A. The Role of the Courts ................................................................................................................ 18
B. Offer and Acceptance ................................................................................................................. 18
C. Negotiation and Closure ............................................................................................................. 22
D. Good Faith in Contract Formation .............................................................................................. 23
E.
Problems with Standard Form Contracts .................................................................................... 24
F.
The Statute of Frauds .................................................................................................................. 28
IV. The Content of a Contract............................................................................................................... 31
A. The Parol Evidence Rule and Reformation ................................................................................ 31
B. Interpreting the Terms of the Contract ....................................................................................... 34
C. Implied Terms and the Implied Covenant of Good Faith ........................................................... 37
D. Express and Implied Warranties ................................................................................................. 40
E.
Modifications .............................................................................................................................. 42
V. Legal Regulation of Contracts ........................................................................................................ 44
A. Mistake of Fact ........................................................................................................................... 44
B. Public Policy and Illegality ......................................................................................................... 45
C. Unconscionability ....................................................................................................................... 46
VI. Remedies......................................................................................................................................... 49
A. Expectation Damages ................................................................................................................. 49
B. Mitigation ................................................................................................................................... 52
C. Reliance Damages ...................................................................................................................... 52
D. Restitution Damages ................................................................................................................... 53
E.
Specific Performance .................................................................................................................. 53
F.
Liquidated Damages and Agreed Remedies ............................................................................... 54
VII. Conditions ....................................................................................................................................... 58
A. Express Conditions ..................................................................................................................... 58
B. Implied or Constructive Conditions............................................................................................ 59
C. Impossibility, Impracticability, and Frustration ......................................................................... 61
VIII. Third Party Rights and Responsibilities ......................................................................................... 63
A. The Assignment of Rights and Delegation of Responsibilities .................................................. 64
B. Suretyship and Guaranty Contracts ............................................................................................ 65
2
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CASES
A.Z. v. B.Z., 431 Mass. 150 ................................................................................................................... 46
Alabama Football v. Wright, 452 F.Supp 182 ........................................................................................ 62
Angel v. Murray, 322 A.2d 630 .............................................................................................................. 42
Ardente v. Horan, 117 R.I. 254 .............................................................................................................. 20
Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584........................................................... 22
Bailey v. West, 105 R.I. 61 ..................................................................................................................... 17
Baker v. Bailey, 240 Mont. 139 .............................................................................................................. 32
Bank One v. Coates, 125 F.Supp.2d 819 ................................................................................................ 48
Board of Control of Eastern Michigan University v. Burgess, 45 Mich. App. 183 ............................... 14
Brookside Farms v. Mama Rizzo’s, Inc, 873 F.Supp 1029 .................................................................... 43
C & J Fertilizer, Inc. v. Allied Mutual Insurance Co., 227 N.W.2d 169 ................................................ 27
C.R. Klewin, Inc. v Flagshp Properties, Inc., 220 Conn. 569 ................................................................ 29
Carnival Cruise Lines v. Shute, 499 U.S. 585 ........................................................................................ 26
Carpenter v. Chrysler Corp., 853 S.W.2d 346 ........................................................................................ 40
Centronics Corp. v. Genitron Corp., 132 N.H. 133 ................................................................................ 38
City of Kenai v. Ferguson, 732 P.2d 184 ............................................................................................... 23
City Stores Co. v. Ammerman, 266 F.Supp. 766 ................................................................................... 54
Clouse v. Myers, 753 S.W.2d 316 .......................................................................................................... 45
Cohen v. Cowles Media Company, 479 N.W.2d 387 ............................................................................ 16
ConAgra, Inc. v. Nierenberg, 301 Mont. 55 ........................................................................................... 29
Contemporary Mission v. Famous Music Corp., 557 F.2d 918 ............................................................. 64
Davis v. Satrom, 383 N.W.2d 831 .......................................................................................................... 19
Delchi Carrier SpA. v. Rotorex Corp., 71 F.3d 1024 ............................................................................... 7
Donahue v. Federal Express Corp., 753 A.2d 238 ................................................................................. 39
Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 ................................................................ 39
ePlus Group, Inc. v. Panoramic Comm., 50 UCC 2d 213 (2003) .......................................................... 56
Fertico Belgium v. Phosphate Chemicals Export Ass’n, 501 N.Y.S.2d 867 .......................................... 51
Fiege v. Boehm, 210 Md. 352 ................................................................................................................ 13
Fisher v. Jackson, 142 Conn. 734 ........................................................................................................... 14
Ford Motor Credit Co. v. Russell, 519 N.W.2d 460 ............................................................................... 18
Freund v. Washington Square Press, 34 N.Y.2d 379 ............................................................................. 49
Gardner Zemke Co. v. Dunham Bush, Inc., 115 N.M. 260 .................................................................... 25
Hadley v. Baxendale, 9 Exch 341 (1845) ............................................................................................... 51
Haines v. City of New York, 41 N.Y.2d 769 ......................................................................................... 37
Hamer v. Sidway, 124 N.Y. 538 ............................................................................................................. 13
Hamilton Bancshares, Inc. v. Leroy, 131 Ill. App. 3d 907 ..................................................................... 21
Harrington v. Taylor, 225 N.C. 690........................................................................................................ 15
Hill v. Gateway 2000, 105 F.3d 1147 ..................................................................................................... 27
Hopper v. All Pet Animal Clinic, 861 P.2d 531 ..................................................................................... 46
Howard v. Federal Crop Insurance Corp., 520 F.2d 695 ........................................................................ 58
Hunt Foods & Industries, Inc. v. Doliner, 26 A.D.2d 41........................................................................ 33
In re El Paso Refinery, 196 B.R. 58 ....................................................................................................... 50
In re Nedwick Steel Co., 289 B.R. 95 .................................................................................................... 65
Insurance ......................................................................................................................... 16, 27, 35, 45, 58
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3
K & G Construction Co. v. Harris & Brooks, 223 Md. 305 ................................................................... 59
KGM Harvesting Co. v. Fresh Network, 42 Cal. Rptr. 2d 286 .............................................................. 51
Koch Materials Co. v. Shore Slurry Seal, Inc., 205 F.Supp.2d 324 ....................................................... 61
Lanci v. Metropolitan Ins. Co., 388 Pa. Super. 1 ................................................................................... 45
Langemeier v. National Oats Co., Inc, 775 F.2d 975 ............................................................................. 47
Lenawee Ct. Bd. Of Health v. Messerly, 331 N.W.2d 203 .................................................................... 45
Lige Dickson Co. v. Union Oil Co. of California, 96 Wash.2d 291....................................................... 30
Lucy v. Zehmer, 196 Va. 493 ................................................................................................................... 7
Martinez v. Socoma Companies, 11 Cal.3d 394 .................................................................................... 63
Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57 .................................................................................... 41
Masterson v. Sine, 68 Cal. 2d 222 .......................................................................................................... 32
Maxwell v. Fidelity Fin. Servs., Inc., 184 Ariz. 82 ................................................................................ 47
MCC_Marble Ceramic Ctr, Inc. v. Cermaic Nuova D’Agostino, 144 F.3d 1384 .................................. 36
Midwest Energy, Inc. v. Orion Food Systems, Inc., 14 S.W.3d 154...................................................... 17
Migerobe, Inc. v. Certina USA, Inc., 924 F.2d 1330.............................................................................. 29
Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772 ........................................................ 36
National Surety Corp. v. United States, 118 F.3d 1542 ......................................................................... 65
New England Insulation Co. v. General Dynamics Corp., 26 Mass. App. Ct. 28 .................................. 24
Oswald v. Allen, 417 F.2d 43 ................................................................................................................. 20
Pacific Gas & Elec. v. G.W. Thomas Drayage & Rigging, 69 Cal. 2d 33 ............................................. 35
Pavel Enterprises, Inc. v. A.S. Johnson Co., Inc., 342 Md. 143 ............................................................ 21
Peevyhouse v. Garland Coal Mining Co., 382 P.2d 109 ........................................................................ 50
Petroleum Refractionating Corp. v. Kendrick Oil Co., 65 F.2d 997 ...................................................... 13
Racine & Laramie, Ltd., Inc. v. Dep. Of Parks & Recreation, 11 Cal. App. 4th 1026 (1992) ............... 23
Ricketts v. Scothorn, 57 Neb. 51 ............................................................................................................ 16
Sally Beauty, 801 F.2d 1001................................................................................................................... 65
Sherwood v. Walker, 66 Mich. 578 (1887) ............................................................................................ 45
Siemens Energy & Automation v. Coleman Elec. Supply Co, 46 F.Supp.2d 217 (1999) ..................... 52
Singer Co. v. E.I. Du Pont De Nemours & Co., 579 F.2d 433 ............................................................... 41
Situation Management Systems, Inc. v. Malouf, Inc., 430 Mass. 875 ................................................... 22
Step-Saver Data Systems v. Wyse Technology, 939 F.2d 91 ................................................................ 26
Sun Printing & Publishing Co. v. Remington Pulp & Paper Co., 235 N.Y. 338 ................................... 18
Taylor v. Johnston,15 Cal. 3d 130 .......................................................................................................... 60
Thompson v. Estate of Coffield, 894 P.2d 1065..................................................................................... 33
Vlases v. Montgomery Ward & Co., 377 F.2d 846 ................................................................................ 41
W.W.W. Associates, Inc. v Giancontieri, 77 N.Y.2d 157 ...................................................................... 35
Williams v. Walker-Thomas Furniture Co., 121 U.S. App. D.C. 315.................................................... 47
Z.R.L. Corp. v. Great Cent. Ins. Co., 156 Ill. App. 3d 856 .................................................................... 35
4
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STATUTES
Magnussen-Moss .................................................................................................................................... 63
Restatement §145.................................................................................................................................... 63
Restatement §261.................................................................................................................................... 59
Restatement §346 (1)(a)(ii)..................................................................................................................... 50
Restatement §346(1)(a)(i) ....................................................................................................................... 50
Restatement §71(a) ................................................................................................................................. 20
Restatement §76...................................................................................................................................... 12
Restatement §76(b) ................................................................................................................................. 13
Restatement §79...................................................................................................................................... 12
Restatement 2d §1................................................................................................................................... 12
Restatement 2d §110............................................................................................................................... 28
Restatement 2d §131............................................................................................................................... 29
Restatement 2d §139............................................................................................................................... 30
Restatement 2d §151............................................................................................................................... 44
Restatement 2d §152............................................................................................................................... 44
Restatement 2d §153............................................................................................................................... 44
Restatement 2d §154............................................................................................................................... 44
Restatement 2d §175............................................................................................................................... 13
Restatement 2d §20................................................................................................................................. 20
Restatement 2d §202............................................................................................................................... 34
Restatement 2d §204............................................................................................................................... 32
Restatement 2d §205......................................................................................................................... 23, 38
Restatement 2d §211(3) .......................................................................................................................... 27
Restatement 2d §217............................................................................................................................... 32
Restatement 2d §227(1) .......................................................................................................................... 59
Restatement 2d §230............................................................................................................................... 37
Restatement 2d §237............................................................................................................................... 60
Restatement 2d §24................................................................................................................................. 18
Restatement 2d §26 comment (c) ........................................................................................................... 19
Restatement 2d §30(1) ............................................................................................................................ 20
Restatement 2d §356............................................................................................................................... 55
Restatement 2d §36................................................................................................................................. 19
Restatement 2d §360............................................................................................................................... 53
Restatement 2d §42................................................................................................................................. 21
Restatement 2d §45................................................................................................................................. 21
Restatement 2d §45(1) ............................................................................................................................ 21
Restatement 2d §45(2) ............................................................................................................................ 21
Restatement 2d §59................................................................................................................................. 19
Restatement 2d §61................................................................................................................................. 19
Restatement 2d §63(a) ............................................................................................................................ 20
Restatement 2d §71(1) ............................................................................................................................ 12
Restatement 2d §77 Comment (a) .......................................................................................................... 12
Restatement 2d §79................................................................................................................................. 12
Restatement 2d §90................................................................................................................................. 15
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5
Restatement 2d 175................................................................................................................................. 13
UCC §1-201(19) ..................................................................................................................................... 37
UCC §1-203 ............................................................................................................................................ 23
UCC §2-103(1)(b) .................................................................................................................................. 37
UCC §2-201 ...................................................................................................................................... 28, 65
UCC §2-202 ............................................................................................................................................ 31
UCC §2-204(3) ....................................................................................................................................... 23
UCC §2-205 ...................................................................................................................................... 14, 21
UCC §2-206(1)(a) ................................................................................................................................... 21
UCC §2-206(1)(b) .................................................................................................................................. 21
UCC §2-206(2) ....................................................................................................................................... 21
UCC §2-207 ...................................................................................................................................... 24, 25
UCC §2-209 ............................................................................................................................................ 42
UCC §2-210 ............................................................................................................................................ 64
UCC §2-302 ............................................................................................................................................ 47
UCC §2-305 ................................................................................................................................ 23, 37, 39
UCC §2-306 ............................................................................................................................................ 13
UCC §2-313 ............................................................................................................................................ 40
UCC §2-314 ............................................................................................................................................ 40
UCC §2-315 ...................................................................................................................................... 40, 41
UCC §2-316 ............................................................................................................................................ 41
UCC §2-318 ............................................................................................................................................ 63
UCC §2-606 ............................................................................................................................................ 28
UCC §2-609 ............................................................................................................................................ 60
UCC §2-614 ............................................................................................................................................ 61
UCC §2-615 ............................................................................................................................................ 62
UCC §2-709 ............................................................................................................................................ 52
UCC §2-710 ...................................................................................................................................... 52, 53
UCC §2-712 ............................................................................................................................................ 49
UCC §2-713 ............................................................................................................................................ 49
UCC §2-714 ............................................................................................................................................ 49
UCC §2-715 ................................................................................................................................ 49, 52, 53
UCC §2-716 ............................................................................................................................................ 54
UCC §2-717 ............................................................................................................................................ 49
UCC §2-718 ............................................................................................................................................ 55
UCC §2A-504 ................................................................................................................................... 55, 56
UCC §2A-528 ......................................................................................................................................... 56
UCC §3-305 ............................................................................................................................................ 64
UCC §9-404 ............................................................................................................................................ 64
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I. A ROADMAP FOR CONTRACT LAW
1. Lucy v. Zehmer, 196 Va. 493 (1954)
a) Facts: Π allegedly enters a contract with Δ for the sale of land. Π says they were
serious, but Δ says he was clearly only joking around. Π wants specific
performance.
b) Issue: Was there a contract, and is it enforceable?
c) Held: The contract was in good faith and specific performance was awarded. The
private intentions of Δ are irrelevant, only the manifested acts.
2. Delchi Carrier SpA. v. Rotorex Corp., 71 F.3d 1024 (1995)
a) Facts: Π, an Italian company contracted for goods from Δ w/ a letter of credit. The
goods upon arrival were not to spec and Π wasn’t able to use the goods. Π covered
with extra expense.
b) Issue: Under the CISG is Π able to recover damages for nonconforming goods?
c) Result: Π was entitled to lost profits, foreseeable consequential damages. Π was not
entitled to damages for modifications necessary for cover.
Table 1 Topics, Rules, and Keywords
Issue
Case
Bargain
Hamer v. Sidway
Unconscionability Williams v. WalkerThomas
Mutuality
Wood v Lucy
Laclede Gas v
Amoco
Rule
Expectation
Damages
Goods: Freund v.
Washington Sq.
Press
Services:
Peevyhouse
Buyer: 2-712- 2-716
Seller: §703; §704;
§706; §708; §709
Buyer:
Cost to complete
Diminution in value
Seller: ukp-cost
avoided
Specific
Performance
Lucy v. Zehmer
City Stores v.
Ammerman
2-302
2-306
Restitution
Offer
Acceptance
Parol Evidence
8
Lucy v Zehmer
Frigaliment
Ardente v Horan
Pavel Enterprises
Baker v. Bailey
Masterson v. Sine
Illusory
No free way out
Output K
Requirement K
Implied good faith effort
At will employment
Mitigation
Foreseeability (Hadley v.
Baxendale)
Injunction (money insufficient)
Unique good- can’t be priced
LDC §356; 2-718
Penalty
Reasonable time period
Put in position before K
Break even rationale
Reliance
K Interpretation
Key Terms
Forbearance from a legal right
§20
§201
§219,220,221,222,232
§24
§41, 39, 59, 37,
30
2-207
§209, 210, 213, 215,
216
2-202
2-209
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Express terms
Course of Performance
Course of Dealing
Trade Usage
Mail box rule
Auctions
Bid chopping/shopping
Counteroffer
Notice
Silence
Past dealings
Benefit conferred
Integration
Merger Clause
Issue
Mistake
Unilateral
Mistake
Substantial
Performance
Express
Conditions
Breach and
Response
Anticipatory
Breach
Case
Sherwood v Walker
(barren cow)
Lenawee v Messerly
(septic tank)
Lanci v. Met Ins.
Co.
Jacob &Young v.
Kent (wrong pipes)
Rule
§152, 154,
2-313, 2-314, 2-315
Key Terms
Warranty
Mutual Mistake
Allocation of Risk
§153
2-601 (perfect tender);
2-508 (cure); 2-608
(revocation of
acceptance); 2-612
(installment K)
Howard v. Fed. Crop §227 (condition v.
Ins. (tobacco crop)
promise);
Implied promise to meet
condition- good faith
Subjective and objective standard
K & G Construction
co. v. Harris
(workmanlike
manner);
Taylor v. Johnston
§241; §242
Material breach
Substantial performance
§253; §236; 2-610; 2611
Mitigation, cover
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Implied promise to meet
condition
9
Y
N
Is there a valid
Acceptance?
Y
N
N
Probably no K,
check for
quasi-K
Is this the type
of promise that
might be
binding w/o
consideration?
Y
Is the party trying
to introduce
evidence to vary
the terms?
Y
Y
There is a K!
Y
N
Not a K
Apply Parol Evidence Rule
Check for Warranties
N
Y
K unenforceable unless written
N
Mistake, illegality,
duress, fraud or
unconscionability?
Y
Are damages available by
quasi-K?
Y
Go to
Remedies
N
Done
N
No duty b/c
impossibility,
impracticability or
frustration?
Y
K unenforceable
N
K is enforceable, subject to
preconditions being met.
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Changing the Contract?
N
Does Statute of
Frauds apply?
10
Is there a contract?
Is there a valid
Offer?
Total/Material
Breach?
Y
Non breaching party may repudiate and
recover damages
Y
Non-breaching party may not cancel the
K, but may recover damages
N
Partial Breach?
Damages
Can expectation damages be
determined?
Y
Does Π have a
duty to mitigate?
N
Y
Is Π entitled to any reliance
interests
Y
N
Are restitution damages
appropriate
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II.
THE BARGAIN THEORY OF CONTRACT
A. Consideration
1. Definitions
a) A Contract is “a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty.”
Restatement 2d §1.
b) Consideration is the inducement of a contract, something of value given in return
for a performance or a promise of performance by another, for the purpose of
forming a contract. This is a required element in the formation of a contract.
c) Illusory Promise is a promise so indefinite that it cannot be enforced or which, by
virtue of provisions or conditions contained in the promise itself, is one whose
fulfillment is optional on the part of the promisor. Not adequate for consideration.
2. Restatement
a) Restatement 2d §71(1) – to find consideration there must be a performance or return
promise which has been bargained for by the parties.
b) Restatement §76 - Any consideration that is not a promise is sufficient to satisfy the
requirement of §19 (c), except the following:
(1) (a) An act or forbearance required by a legal duty that is neither doubtful nor
the subject of honest and reasonable dispute if the duty is owed either to the
promisor or to the public, or, if imposed by the law of torts or crimes, is
owed to any person;
(2) (b) The surrender of, or forbearance to assert an invalid claim or defense by
one who has not an honest and reasonable belief in its possible validity;
(3) (c) The transfer of money or fungible goods as consideration for a promise
to transfer at the same time and place a larger amount of money or goods of
the same kind and quality.
c) Restatement §79 – A promise or apparent promise which reserves by its terms to the
promisor the privilege of alternative courses of conduct is insufficient consideration
if any of these courses of conduct would be insufficient consideration if it alone
were bargained for.
(1) See Petroleum Refractionating Corp. v. Kendrick Oil Co., infra.
d) Restatement 2d §77 Comment (a) – Words of promise which by their terms make
performance entirely optional with the promisor do not constitute a promise.
e) Restatement 2d §79 - If the requirement of consideration is met, there is no
additional requirement of
(1) (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or
detriment to the promisee; or
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(2) (b) equivalence in the values exchanged; or
(3) (c) "mutuality of obligation."
f) Restatement 2d §175 – a contract is voidable by the victim if that party’s
“manifestation of assent is induced by improper threat by the other party that leaves
the victim no reasonable alternative.”
g) UCC §2-306 – Output, Requirements, and Exclusive Dealings
(1) A term that measures the quantity by output or requirements means actual
output or requirements as may occur in good faith, cannot be
disproportionate to a stated or implied estimate.
3. Refraining from a right is adequate consideration.
a) Hamer v. Sidway, 124 N.Y. 538 (1891)
(1) Facts: Uncle tells Nephew that if he refrains from certain vices until he is
21, he will give him $5000. Π is the executor of Uncle’s estate; Δ is the
assignee of Nephew.
(2) Held: Nephew’s refraining from certain vices is a forbearance that amounts
to consideration necessary for contract enforceability. The court “will not
ask whether the thing which forms the consideration does in fact benefit the
promisee or a third party.”
b) Fiege v. Boehm, 210 Md. 352 (1956)
(1) Facts: Π and Δ entered an agreement for which Δ will pay support for her
illegitimate child in return for Π not trying him for bastardy. Δ later proves
the child is not his and stops paying.
(2) Held: Π’s promise not to sue for bastardy even though impossible was
adequate consideration for his promise to pay support. There was no
evidence of fraud. Giving up the right to take legal action is adequate
consideration.
(3) Uses Restatement §76(b). A current defense could have used Restatement 2d
175.
c) Petroleum Refractionating Corp. v. Kendrick Oil Co., 65 F.2d 997 (1933)
(1) Facts: Δ contracted to buy 1.5M G of oil from Π unless Π should stop
making that grade of oil. Δ states that the grade of oil is not correct and will
not accept further deliveries. (This is during the depression when the price of
oil is falling fast.) Π then sells the remaining contract for much less than
originally contracted and is suing for the difference.
(2) Issue: Δ argues there was no consideration.
(3) Held: A benefit to the promisor (Δ) or a detriment to the promisee (Π) is a
sufficient consideration for a contract. Under Restatement 79, both need to
be sufficient when promisor has alternative courses of conduct. Δ got oil,
and Π gave up the right to discontinue producing that grade of oil. Giving up
a right is adequate consideration.
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13
4. Options Contracts
a) Firm Offers under UCC §2-205
(1) An offer by a merchant which by its terms gives assurance that it will be
held open is not revocable, for lack of consideration, during the stated time
(or reasonable time if not stated, no more than 3 months). Must be signed.
b) Restatement 2d §87(a)
(1) An offer is binding as an option contract if it
(a) is in writing and signed by the offeror, recites a purported consideration for
the making of the offer, and proposes an exchange on fair terms within a
reasonable time; or
(b) is made irrevocable by statute.
(2) An offer which the offeror should reasonably expect to induce action or
forbearance of a substantial character on the part of the offeree before
acceptance and which does induce such action or forbearance is binding as
an option contract to the extent necessary to avoid injustice.
c) Board of Control of Eastern Michigan University v. Burgess, 45 Mich. App. 183
(1973)
(1) Facts: Π entered a contract with Δ for a nominal fee for the option to
purchase Δ’s land. Π never actually tendered Δ the money. When Π tried to
execute the option, Δ refused.
(2) Issue: Is there consideration for the option?
(3) Held: a dollar is valid consideration for options for the purchase of land.
However, no consideration was received, so there was no option, but simply
an offer by Δ to sell, which is revocable.
5. Employment at Will
a) Permanent Employment is terminable at the will of either party without liability to
the other.
b) Fisher v. Jackson, 142 Conn. 734 (1955)
(1) Facts: Δ told Π to give up his job and work for Δ (for less money) under an
oral contract for life or until he was physically unable to work. Π complied
and then was discharged. Π acts to recover damages. Δ says the employment
was not “for life”, but a permanent position as was advertised.
(2) Result: giving up a job is not adequate consideration, but an incident
necessary to accept the offer.
(3) JJ suggests that the plaintiff’s lawyer could have made more of the fact that
he was giving up some salary. That could be consideration.
6. Moral Consideration and Past Consideration
a) Although not bargained for, there are two circumstances where a promise might
seem worthy of enforcement
(1) Promisor acts from a strong sense of duty (moral consideration)
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(2) Promisor is seeking to recompense the promisee for a previously conferred
benefit (past consideration)
b) Harrington v. Taylor, 225 N.C. 690 (1945)
(1) Facts: Δ assaults his wife who hid in Π’s house. The wife then tried to kill
Δ, and Π saved him, injuring herself in the process. Δ promises to pay
damages, but fails to.
(2) Held: A voluntary humanitarian act is not consideration; implies that Δ
should pay up anyways.
B. Reliance
1. Definitions
a) Equitable Estoppel is strictly, an estoppel which arises out of a person’s statement
of fact, or out of his silence, acts, or omissions, rather than from a deed or record or
written contract. Equitable estoppel is available when one party knowingly
misrepresents material facts that are then predictably relied upon by the other. The
misrepresenting party is “estopped” from asserting facts that contradict its
misrepresentations.
b) Promissory Estoppel – an equitable doctrine declaring that “a promise which the
promisor should reasonably expect [will] induce action or forbearance on the part of
the promisee or a third person and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise.
Restatement 2d §90.
2. Holmes on Reliance
a) “It would cut up the doctrine of consideration by the roots, if a promisee could make
a gratuitous promise binding by subsequently acting in reliance on it.”
b) Some have argued that this prophecy has come true.
3. Equitable Estoppel and the emergence of Promissory Estoppel
a) Promissory Estoppel requires all of:
(1) A Promise
(2) Foreseeable reliance
(3) Actual reliance
(4) Injustice absent enforcement
b) Possible Applications
(1) Promise to make a gift: The P.E. doctrine is most often applied to enforce
promises to make gifts, where the promisee relies on the gift to his
detriment.
(a) Intra-family promises: The doctrine may be applied where the promise is
made by one member of a family to another. (Example: Mother promises to
pay for Son's college education, and Son quits his job. Probably the court
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will award just the damages Son suffers from losing the job, not the full
cost of a college education.)
(2) Charitable subscriptions: A written promise to make a charitable
contribution will generally be binding without consideration, under the P.E.
doctrine. Here, the doctrine is watered down: usually the charity does not
need to show detrimental reliance. (But oral promises to make charitable
contributions usually will not be enforceable unless the charity relies on the
promise to its detriment.)
(3) Gratuitous bailments and agencies: If a person promises to take care of
another's property (a "gratuitous bailment") or promises to carry out an act as
another person's agent (gratuitous agency), the promisor may be held liable
under P.E. if he does not perform at all. (However, courts are hesitant to
apply P.E. to promises to procure insurance for another.)
c) Quasi-contract - One party has something they were not entitled to in the first
place, and in good conscience he should either return it or pay its value (doctor
charging for reviving a person who passes out on the floor). The law implies a
contract where no contract existed previously and dispenses relief according to that
implied contract. The contract implied-in-law is a legal fiction imposed by the court
to remedy injustice.
d) Ricketts v. Scothorn, 57 Neb. 51 (1898)
(1) Facts: Δ is the executor. Testator promised to pay Π $2000 on demand so
she wouldn’t have to work.
(2) Issue: There was no consideration, but Π relied on the money and quit her
job.
(3) Result: Because it would be grossly inequitable to permit Δ to resist
payment, Π should receive the payment.
(4) JJ notes that while the court tries to fit this case to Equitable Estoppel, they
actually created Promissory Estoppel because Δ had misrepresented no facts.
(5) Restatement §90 was borne in part from this case.
e) Cohen v. Cowles Media Company, 479 N.W.2d 387 (1992)
(1) Facts: Π gave facts pertinent to a story to Δ when assured that Δ would not
share Π’s identity. Δ then printed Π’s name in the paper, and Π was fired
from his office.
(2) Held: Although there was no contract, promissory estoppel barred Δ from
using Π’s name, so damages are due.
4. Promissory Estoppel in Franchise Negotiations
a) A party to unsuccessful negotiations may recover for losses reasonably and
foreseeably sustained by him as a result of the other party’s negligence or lack of
good faith during the bargaining process.
b) Alternate: recovery may be based on the duty to bargain in good faith.
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c) Typical context is an unsuccessful contract negotiation involving franchises or
government contracts. Both have a great inequality in bargaining power.
d) Midwest Energy, Inc. v. Orion Food Systems, Inc., 14 S.W.3d 154 (2000)
(1) Facts: Π was building a gas station/convenience store with hopes to provide
Δ’s product. Δ required that certain mods be done to the design before they
could provide their product. Π redesigned and constructed as Δ required. Δ
then never agreed to the deal. Trial court granted summary judgment for Δ.
(2) Result: While the contract was not enforceable, there was a promise,
foreseeable reliance, reliance in fact, and injustice absent enforcement, so
the judgment was overturned.
C. The Restitution Interest
1. Definition
a) Restitution Interest – The interest in getting back to the point the parties would
have been at had there been no contract created. If a person A gave $5 to another B
in creation of the contract, the restitution interest is the $5 that would have to be
returned from B to A.
2. Bailey v. West, 105 R.I. 61 (1969)
a) Facts: Δ purchased a horse then discovered it was lame. Δ took the horse to Π’s
farm. Π fed and housed the horse and sent Δ a bill which was not paid. Π is suing
for restitution.
b) Issue: Was there a contract, and what is the damage for breach?
c) Held: no contract, and since there was no request for payment prior to caring for the
horse, no restitution can be paid. (Π volunteered for the job.)
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III. NEGOTIATION AND THE CONTRACT
A. The Role of the Courts
1. Cardozo and Crane duke it out in Sun Printing.
a) Should the courts hold strict the content of the contract? (Cardozo)
b) Should the courts hold strict that parties should be bound by their contracts when
parts are missing? (Crane)
2. Sun Printing & Publishing Co. v. Remington Pulp & Paper Co., 235 N.Y. 338 (1923)
a) Facts: Π agreed to buy paper from Δ for a period of months with the price for some
months and the term of that price to be determined in the future. The price would
not be higher than the current price listed by a particular third party.
b) Held: Δ was not bound because the fallback on the price term in the absence of
agreement did not make up for the absence of a time limit. The contract was too
indefinite. (Cardozo)
c) Dissent (Strongly worded): The price was indeed definable. If on the deadline to
determine a new price, Π could offer the 3rd party price, and Δ is bound. The term
issue could be resolved month-to-month and be within the contract’s specs. (Crane)
B. Offer and Acceptance
1. Definitions
a) An Offer is a “manifestation of willingness to enter into a bargain, so as to justify
another person in understanding that his assent to that bargain is invited an will
conclude it,” Restatement 2d §24.
b) An Acceptance is consent to the terms of an offer, creating a contract.
c) A Promise is a declaration of one’s intention to do or to refrain from doing
something. It can bind the person making the declaration to the thing declared.
2. Offers
a) An offer creates, in the offeree, a legal power of acceptance.
b) Advertisements
(1) An advertisement constitutes an offer when it is clear, definite, explicit, and
leaves nothing open for negotiation.
(2) Ford Motor Credit Co. v. Russell, 519 N.W.2d 460 (1994)
(a) Facts: Π sold Δ a car with a higher APR than was advertised. Δ defaulted
on the payments and sued for breach when Π gave them the higher APR.
This is Π’s countersuit.
(b) Issue: Is an advertisement an offer?
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(c) Held: An advertisement is not an offer. Because not everyone qualifies for
financing, and Π did not have an unlimited number of the car in question to
sell, it was unreasonable for Δ to believe that the advertisement was an
offer binding the advertiser.
c) Quotes
(1) Restatement 2d §26 comment (c): A “quotation” of a price is usually a
statement of price per unit of quantity; it may omit the quantity to be sold,
time and place of delivery, and other terms… The word quote is commonly
understood as inviting an offer rather than making one, even when
directed to a particular customer… In determining whether an offer is made,
relevant factors include the terms of previous inquiries, completeness of the
terms of the suggested bargain, and the number of people to whom the
communication is addressed.
3. Counteroffers and Mirror Image Rule
a) A counteroffer destroys the original offer and replaces it for the original offeror to
accept if he chooses.
b) Restatement 2d §36 lists five possibilities under which an offer is terminated
(1) The offeree rejects the offer or makes a counteroffer
(2) At the time specified in the contract, or, failing that, at the end of a
reasonable time
(3) If the offeror revokes the offer
(4) If the offeror dies or becomes incapacitated
(5) If the terms of the offer include a condition for acceptance that has not yet
occurred.
c) Mirror Image Rules
(1) Restatement 2d §59 states: “A reply to an offer which purports to accept it
but is conditional on the offeror’s assent to terms additional to or different
fromthose offered is not an acceptance but is a counteroffer.”
(2) Restatement 2d §61 states an “acceptance request[ing] a change or addition
to the terms of the offer” is not invalid “unless the acceptance is made to
depend on an assent” to the new terms.
(3) Both the UCC and the CISG are more liberal.
d) Davis v. Satrom, 383 N.W.2d 831 (1986)
(1) Facts: Π and Δ were negotiating the sale of a mobile home park. Π sent an
offer to Δ who made mods and returned it to Π. Π and Δ went back and forth
again, and Δ’s final letter included a clause accepting the offer conditioned
on his attorney’s recommendation. Π sends a check to begin performance,
but Δ returns the check. Π wants specific performance.
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(2) Result: Δ’s mods resulted in a counteroffer, not an acceptance. Π’s final
response to Δ’s final response constituted the only acceptance, and those
became the terms of the contract, including the attorney provision which was
enforceable. Specific performance denied.
4. Meeting of the Minds
a) When any of the terms used to express an agreement is ambivalent, and the parties
understand it in different ways, there cannot be a contract unless one of them should
have been aware of the other’s understanding. Restatement §71(a)
b) Restatement 2d §20 states
(1) there is no manifestation of mutual assent to an exchange if the parties attach
materially different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the
other
(b) each party knows or each party has reason to know the meaning attached by
the other
c) Oswald v. Allen, 417 F.2d 43 (1969)
(1) Facts: Π tried to buy some of Δ’s coins. Π thought he was buying all the
Swiss coins in her collection. Δ thought she was selling the collection she
calls Swiss Coin Collection, but not the Swiss coins that are parts of other
collections. Π and Δ entered a contract, but Δ reneged when it was
discovered that Π tried to collect more coins than she was selling. Π wants
specific performance.
(2) Held: There was no meeting of the minds, and thus no contract.
5. Contracts Concluded by Exchange of letters
a) The Offeror is the Master of the Offer.
b) An offer may invite or require acceptance to be made by affirmative answer in
words, or by performing or refraining from performing a specified act, or may
empower the offeree to make a selection of terms in his acceptance. Restatement 2d
§30(1).
c) Revisit counteroffers and the mirror image rule, supra.
d) Mailbox rule: the offer is effective upon proper dispatch.
(1) An acceptance made in a manner and by a medium invited by an offer is
operative and completes the manifestation of mutual assent as soon as put
out of the offeree’s possession, without regard to wheter it ever reaches the
offeror… Restatement 2d §63(a).
e) Ardente v. Horan, 117 R.I. 254 (1976)
(1) Facts: Π bid on Δ’s house for sale. After Δ stated the offer was acceptable,
Π prepared a sale agreement and sent it to Δ along with a check. Π also sent
a letter asking if certain furnishings were included. Δ then refused to sell,
returning the check. Π wants specific performance
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(2) Issue: was the letter a counteroffer, or an acceptance?
(3) Held: Π’s “letter of acceptance” was conditional, and therefore a
counteroffer rejecting Δ’s offer. No contractual obligation was created.
6. Revocability of Offers
a) Restatement 2d §42 says an offeree’s power of acceptance is terminated when the
offeree receives form the offeror a manifestation of an intention not to enter into the
proposed contract.
b) Look out for Firm Offer issues in UCC §2-205 however.
c) Hamilton Bancshares, Inc. v. Leroy, 131 Ill. App. 3d 907 (1985)
(1) Facts: Π and Δ entered into two option contracts for stock for $1. While the
$1 was never received, Π paid “earnest money” as a deposit towards
purchasing the shares. Δ claimed to withdraw the options, but Π moved to
exercise them. Π wants specific performance for two stock options.
(2) Issue: since $1 wasn’t received, was this an offer (revocable) or a contract?
(3) Held: The earnest money put as a deposit was consideration supporting the
contract because it was detrimental to Π to do so. Π gave up the right to use
that money elsewhere.
7. Contracts Accepted by the Offeree’s Performance
a) Restatement 2d §45 and Restatement 2d §62 handle this situation.
(1) Where an offer invites an offeree to accept by rendering a performance and
does not invite a promissory acceptance, an option contract is created when
the offeree tenders or begins the invited performance or tenders a beginning
of it. Restatement 2d §45(1).
(2) The offeror’s duty of performance under any option contract so created is
conditional on completion or tender of the invited performance in
accordance with the terms of the offer. Restatement 2d §45(2).
(3) The consequence of this is that the offeror is bound to the offer while the
offeree is not.
b) Offers Ambiguous as to Manner of Acceptance
(1) An offer to make a contract shall be construed to invite acceptance in any
reasonable manner. UCC §2-206(1)(a).
(2) An offer to buy goods if ambiguous can be accepted “either by a prompt
promise to ship or by the prompt or current shipment of goods. UCC §2206(1)(b).
(3) Where the beginning of a requested performance is a reasonable mode of
acceptance, an offeror who is not notified of acceptance within a reasonable
time may treat the offer as having lapsed before acceptance. UCC §2-206(2).
(4) When an offer is ambiguous as to whether a promise or a performance
constitutes acceptance, not only does the beginning or tender of performance
c) Pavel Enterprises, Inc. v. A.S. Johnson Co., Inc., 342 Md. 143 (1996)
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(1) Facts: C solicited subcontractor bids to enter its own bid for a contract. S
gave them a bid which C relied on in the creation of its bid. C initially lost
the bid, but was awarded it when the winner couldn’t perform. S then
notified C that its bid was erroneous and too low and did not feel compelled
to correct the error because C had not won the contract when the error was
discovered. C sued to cover damages between the contract price and the
price of a substitute subcontractor.
(2) Issue: Is S’s bid revocable?
(3) Result: Neither traditional K theory nor detrimental reliance theory upheld
C’s request for damages.
(4) Many states adopted Traynor’s view that a sub’s bid is irrevocable under
R2d §90 (Promissory Estoppel) although the rule was criticized for its lack
of symmetry, allowing the general contractor to bid shop.
(5) CISG Art. 16(2)(b) holds an offer irrevocable if “it was reasonable for the
offeree to rely on the offer as being irrevocable and the offeree has acted in
reliance on the offer.” (No time limit!)
C. Negotiation and Closure
1. Situation Management Systems, Inc. v. Malouf, Inc., 430 Mass. 875 (2000)
a) Facts: Π and Δ had longstanding business agreements for Δ to purchase services
from Π. Π’s business became less profitable and Π agreed with Δ that Δ should
purchase a Π’s competitor for sale. In order for Δ to make the purchase, they
requested a longer term for the renewal on Π and Δ’s longstanding contract. Π
assured Δ of the commitment and Δ bought the competitor. Π then added terms to
the renewal contract that had not been present in previous dealings. When Δ did not
abide by the new terms, Π sued for breach.
b) Held: Δ and Π’s minds had met because of the longstanding contract. The contract
was enforceable when Π offered assurances (without the new terms).
2. Agreements to Agree
a) Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584 (1976)
(1) Facts: Π solicited Δ to merge. Π and Δ negotiated and drafted a
memorandum to be distributed by the press stating in part that counsel for Π
and Δ will proceed to make a definitive agreement containing details, and
conditions obligation on completing such a definitive agreement. Δ then
declined to go forward with the deal. Π complains of breach of contract.
(2) Issue: Is it a breach when there is simply an “agreement to agree?”
(3) Result: The agreement to agree is upheld, obligating the two parties to make
the detailed agreement. (Remanded for trial to see if the intentions were to
be bound.)
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3. Open Terms
a) Even though one or more terms are left open a contract for sale does not fail for
indefiniteness if the parties have intended to make a contract and there is a
reasonably certain basis for giving an appropriate remedy. UCC §2-204(3)
b) A contract can be valid even though the price term is left open, or is sbject to
determination by one party or by a third party. UCC §2-305.
c) City of Kenai v. Ferguson, 732 P.2d 184 (1987)
(1) Facts: Δ leased a plot of land from the city, Π for a term of 55 years where
the rent was set by an escalation clause. The clause allowed for renegotiation
every 5 years. For 10 years, the rent remained constant, and then the city
demanded a 500+% increase (the highest use value) without negotiation.
When Δ didn’t pay, Π sued for breach.
(2) Held: Good faith is implied in every contract with open terms, and Π did not
act in good faith. Π had the duty to negotiate, and the highest use value was
inappropriate.
D. Good Faith in Contract Formation
1. Definition
a) Good Faith is a total absence of any intention to seek an unfair advantage or to
defraud another party; an honest and sincere intention to fulfill one’s obligations.
b) Good faith in the case of a merchant means honesty in fact and the observance of
reasonable commercial standards of fair dealing in the trade. (UCC §2-103(b))
c) Also called BFP: Bona Fide Purchaser
d) Every contract or duty within this Act imposes an obligation of good faith in its
performance or enforcement. UCC §1-203, Restatement 2d §205.
2. Negotiating a new contract
a) There is no requirement in America that parties negotiating must come to a contract.
As seen below in Racine & Laramie, this is true too of contract
extensions/expansions.
b) The implied covenant of good faith and fair dealing rests upon the existence of some
specific contractual obligation.
c) Some Civil Law jurisdictions take a different approach in that damages may be
awarded to an injured party from negotiations in bad faith. This is the doctrine of
culpa in contrahendo.
d) Racine & Laramie, Ltd., Inc. v. Dep. Of Parks & Recreation, 11 Cal. App. 4th 1026
(1992)
(1) Facts: Π entered a long term K with Δ for leasing an area of a park for
concessions. Midway through the lease, Π wanted to negotiate an addition to
the contract to allow them to expand the operation.
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(2) Held: There can be no breach of the covenant of good faith by a refusal to
enter into a new contract.
3. New England Insulation Co. v. General Dynamics Corp., 26 Mass. App. Ct. 28
(1988)
a) Facts: Π was invited by Δ to bid on a contract. Π designed a solution to fit the needs
that included confidential engineering ideas. Δ then made Π’s bid available to a 3rd
company that Δ got kickbacks from.
b) Result: remanded for trial reversing the dismissal. The court held that the implied
contract to perform in good faith meant that Δ did not have the right to give the
contents of the bid to third parties, and that they had the obligation to judge the bids
fairly.
E. Problems with Standard Form Contracts
1. UCC §2-207 – Battle of the Forms
a) §2-207 takes a much different position than the common law precedents do. In
common law, any response that didn’t look exactly like the offer was not an
acceptance, but a counter offer. This doesn’t work well with the nature of current
businesses using standardized forms. §2-207 comes in to help this.
b) This section’s goal is to deal with written confirmations of either oral or informal
correspondence or the exchange of a purchase order and
acceptance/acknowledgement form where the second form may offer slight
differences.
c) Additional Terms in Acceptance or Confirmation
(1) A definite and seasonable expression of acceptance or a written confirmation
which is sent within a reasonable time operates as an acceptance even
though it states terms additional to or different from those offered or agreed
upon, unless acceptance is expressly made conditional on assent to the
additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the
contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a
reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale although the writings of the parties
do not otherwise establish a contract. In such case the terms of the particular
contract consist of those terms on which the writings of the parties agree,
together with any supplementary terms incorporated under any other
provisions of this Act.
d) There seems to be general agreement that §2-207 has not been a success.
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e) Important pieces:
(1) Definite acceptance, or written confirmation
(2) Does not expressly limit acceptance to the terms proposed (no conditional
acceptance)
(3) Does not materially alter the offer
(4) Objection not received in a reasonable time
(5) Conduct by both parties suggests a contract was intended
(6) No unwillingness to proceed absent the terms
f) Prototypical case: Gardner Zemke Co. v. Dunham Bush, Inc., 115 N.M. 260 (1993)
(1) Facts: Π entered a K with Δ to provide chillers for Π’s DOEnergy contract.
Π provided an offer on standard form, and Δ responded with another
standard form. Δ’s chillers were not to spec, Π sues for damages, but Δ
claims that their version of the K is controlling.
(2) Issue: in using two different forms, was Δ’s acknowledgement of the K a
counteroffer or an acceptance?
(3) Result: Remanded to address questions that
(a) Π could reasonably believe that a K had been formed
(b) When the offeree’s acceptance lists a term in conflict with the offer, neither
is part of the contract, and general rules of fairness prevail.
2. Seven scenarios for UCC §2-207
a) The Acceptance is expressly made conditional on the offeror’s assent to the terms
additional or different
(1) Any expression of acceptance or written confirmation acts as an acceptance.
(General Rule)
(2) The acceptance does not form a contract if it is “expressly made conditional
on assent to the additional or different terms.”
(3) Courts will general only accept the exception if it is shown that the Acceptor
is unwilling to proceed absent the changes.
b) Acceptance discusses an issue on which the offer is silent (additional term)
(1) The additional term does not prevent the offeree’s response from giving rise
to a contract.
(2) If both parties are merchants, the change automatically becomes part of the
K unless the offeror rejects in a reasonable time.
(3) If one party is not a merchant, the offeror has to explicitly assent to the
change for the term to be part of the K.
c) Offer discusses an issue on which the acceptance is silent
d) Acceptance and Offer deal with a particular issue in conflicting (different) ways
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(1) Majority view: KNOCKOUT RULE – conflicting clauses knock each other
out. Neither gets into the K. A UCC gap-filler is used in its place if
available. Criticism: the knockout theory strips the offeror of writing the
terms to which he will do business.
(2) Minority view – second form’s term fails to have any effect.
e) Acceptance recites terms that diverge so much from those contained in the offer
(1) No contract is formed
(2) In the usual purchase order-acknowledgement context the forms do not fail
to give rise to a contract if they do not diverge as to price, quality, quantity,
or delivery terms, but only as to the usually unbargained terms on the reverse
side concerning remedies, arbitration and the like.
f) Oral agreement, then one or both sends a confirmation which adds to or conflicts
with the oral agreement
(1) Additional terms in confirmation are treated just the same as if the offer was
written.
(2) Different terms – the court will almost certainly say that the different term in
the confirmation does not enter the contract. The Knockout rule will not be
applied.
g) The parties don’t use forms, but exchange custom-drafted documents that differ.
(1) No contract is formed
3. Confirmation of Oral Contracts via Forms
a) Step-Saver Data Systems v. Wyse Technology, 939 F.2d 91 (1991)
(1) Facts: Π entered a K with Δ by calling Δ on the phone to order goods. Δ
would then ship them the goods with a warrantee disclaimer applied on the
packaging, containing an integration clause. When Δ’s product failed, Π
sued for breach.
(2) Issue: Do the additional terms on the received goods override the terms of
the oral agreement on the phone? Do they materially alter the parties’
contract?
(3) Result: Because K was sufficiently definite without the Δ added terms, and
Π never assented to the terms, and there was no conditional acceptance
because the terms did not specify Δ’s unwillingness to proceed, K without
the added terms is controlling. Warranty terms materially altered the
contract, so were not controlling.
4. Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991)
a) Facts: Δ bought a ticket on Π’s cruise line. When the ticket arrived, it contained
many terms and conditions on the reverse side, including the forum clause. Δ was
injured on board, and is trying to sue in the court near their residence. Π wants to
enforce its forum selection clause to get the case to be tried in Π’s home district.
b) Issue: Is the forum clause controlling?
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c) Result: Because Δ had notice of the clause, and because Π had no bad faith motive
for including the clause, and because the court felt the clause did not limit Δ in any
way (JJW disagrees), the clause is controlling.
d) I think JJW put this case in the book to show a bad decision. He quotes the lower
court ruling that even if Δ had notice of the clause, Δ clearly had not bargained for
the term.
5. Rolling Contracts
a) A Rolling Contract is one where a consumer orders and pays for goods before
seeing most of the terms, which are contained on or in the packaging of goods.
b) Hill v. Gateway 2000, 105 F.3d 1147 (1997)
(1) Facts: Π orders and purchases a computer from Δ by phone. Upon its
arrival, the computer has a list of terms limiting liability that the customer
must assent to or return the computer. When the computer doesn’t work, Π
complains of breach of warranty, and Δ notes the arbitration clause. (Π does
not want to arbitrate.)
(2) Issue: Since the terms were not read prior to purchase, are the terms
controlling?
(3) Result: By keeping the computer for more than 30 days, Π accepted the
additional terms, and must go through arbitration.
(4) This is a policy ruling and is very flawed. It uses ProCD as precedent
(written by the same judge) and will not distinguish its facts from the instant
case. Murray observes: “The [7th Circuit] has provided particularly valuable
insights in the interpretation of various provisions of UCC Article 2, many
of which are cited elsewhere in this volume. The most charitable statement
that can be made concerning the ProCD/Hill analysis, however, is that, even
Homer nods.” (Ouch.)
6. Reasonable Expectations
a) Largely confined to insurance cases.
b) Where the other party has reason to believe that the party manifesting such assent
would not do so if he knew that the writing contained a particular term, the term is
not part of the agreement. Restatement 2d §211(3).
c) C & J Fertilizer, Inc. v. Allied Mutual Insurance Co., 227 N.W.2d 169 (1975)
(1) Facts: Π’s business was burglarized and Π tries to recover their loss from Δ,
their insurer. Π and Δ intended to exclude liability for inside jobs. The door
was found to not be locked after the burglary. In small type, burglary was
defined such that this loss was not covered.
(2) Held: That Π had reasonable expectation to believe this was covered when
he purchased the policy. Also, it was unconscionable that the fine print
would overrule the reasonable meaning of the dickered terms.
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(3) Dissent: Π didn’t read the contract, and thus Δ shouldn’t be liable for Π’s
lack of understanding.
F. The Statute of Frauds
1. Definition:
a) This statute requires that certain contracts must be in writing to be enforceable.
Restatement 2d §110. These include in common law:
(1) Contracts to answer to a creditor for the debt of another
(2) Contracts made in consideration of marriage
(3) Contracts for the sale of land or affecting any interest in land (except short
term leases)
(4) Contracts not to be performed within one year from their making
b) The UCC handles the Statute slightly differently.
c) The CISG has no statute of frauds. Article 11: A contract of sale need not be
concluded in or evidenced by writing and is not subject to any other requirement as
to form. It may be proved by any means, including witnesses.
2. UCC §2-201
a) Codifies the common law Statute, but adds that a contract for the sale of goods for
the price of over $500 is not enforceable unless in writing and signed by the party
against whom the enforcement is sought. (The new version set the limit at $5000.)
b) §2-201(1) adds that a writing is not insufficient because it omits or incorrectly states
a term agreed upon but the quantity of goods transferred cannot be enforced beyond
what is actually written in the contract.
c) §2-201(2) adds that between merchants, a confirmation in writing received in a
reasonable amount of time when the party receiving it has reason to know its
contents will satisfy the statute unless notice of objection is remitted within 10 days.
(1) Illustration: Two parties, S and B, agree over the telephone the purchase of
goods. S sends B a memo confirming the order. That memo is good against
S for breach. That memo is also good against B if he is a merchant. The
reason is that it would be unfair to S that he be bound to his word, but not B.
B would be able to play the market otherwise with impunity.
d) §2-201(3) adds exceptions where the contract is enforceable even if it violates §2201(1)
(1) if the goods are specially manufactured for the buyer that aren’t suitable for
another buyer
(2) if the party against whom enforcement is sought admits that a contract for
sale was made (limited to the actual quantity in the writing)
(3) if the payment has been made and accepted or received and accepted. (UCC
§2-606)
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3. The One Year Limit Rule
a) The Restatement and UCC both declare that a contract must be in writing if it is not
to be performed within one year from its making. The case below adds that the
performance must be COMPLETED in a year, and that if there’s any chance that it
won’t be completed in a year, it is bound by the Statute.
b) C.R. Klewin, Inc. v Flagship Properties, Inc., 220 Conn. 569 (1991)
(1) Facts: Π subcontracted for Δ to build at a site. The agreement was over
dinner and unwritten. The agreement was publicized and videotaped. Also,
Π and Δ ceremoniously signed a standard form without filling in any blanks.
Construction began a year later. Δ became dissatisfied with Π’s work and
replaced Π, breaking the contract.
(2) Held: that “an oral contract that does not say, in express terms that
performance is to have a specific duration beyond one year is, as a matter of
law, the functional equivalent of a contract of indefinite duration for the
purposes of the statute of frauds.”
4. Multiple Writings to Comply with the Statute
a) A writing must be sufficient to indicate that a contract for sale has been made
between the parties.
b) The writing must be signed by the party against whom enforcement is sought
c) The writing must specify a quantity.
d) The writing must “state with reasonable certainty the essential terms of the
unperformed promises in the contract.” Restatement 2d §131.
e) Migerobe, Inc. v. Certina USA, Inc., 924 F.2d 1330 (1991)
(1) Facts: Π contracted to buy watches from Δ for an after-Thanksgiving sale. Δ
later backed out, and Π sued for breach of the oral contract and won. On
appeal, Δ argues that the Statute was violated.
(2) Result: Court found that the integration of three documents, including two
signed by Δ were adequate to prove a contract had been formed and the
Statute was not violated.
5. Exceptions to the Written Requirement
a) If a party admits that an oral contract for sale was made by way of his pleadings,
testimony, or otherwise in court, then he can no longer assert a Statute of Frauds
defense.
b) If both parties are “merchants,” one party may send written confirmation of an oral
contract to the other which, if received within a “reasonable time,” provides that the
receiving party has 10 days to object in writing. Should the receiving party
subsequently fail to object as required, he too can no longer assert a Statute of
Frauds defense.
c) ConAgra, Inc. v. Nierenberg, 301 Mont. 55 (2000)
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(1) Facts: Δ agreed by phone to sell Π grain at a certain price to be delivered at
a certain time. Π drafted a K to which Δ promised to sign, but Δ never
signed the contract. Oral K’s make up the vast majority of Π’s K’s. When Δ
sold the grain to another buyer (at a much higher price), Π had to cover, and
sued for damages.
(2) Result: Because Π’s confirmation was received in a reasonable time, and Δ
did not object, the Statute defense is not available.
6. Promissory Estoppel does not Trump the Statute of Frauds.
a) A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce the
action or forbearance is enforceable notwithstanding the Statute of Frauds if
injustice can be avoided only by enforcement of the promise. The remedy granted
for breach is to be limited as justice requires. Restatement 2d §139. This means that
the Statute of Frauds is a higher authority than Promissory Estoppel. Courts are
generally reluctant to add ways to circumvent the Statute of Frauds.
b) Lige Dickson Co. v. Union Oil Co. of California, 96 Wash.2d 291 (1981)
(1) Facts: Π had a longstanding relationship with Δ to provide oil based
products. Δ encouraged and assisted Π’s entering the asphalt business and Π
purchased all its asphalt from Δ. When prices for asphalt went up during the
oil crisis, Δ promised that they would only raise prices on new K’s with Π. Δ
then raised prices anyway for existing K’s.
(2) Result: Since the promise was not in writing, and the court will not allow
promissory estoppel to trump the Statute, the court ruled for Δ.
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IV. THE CONTENT OF A CONTRACT
A. The Parol Evidence Rule and Reformation
1. Definitions
a) The Parol Evidence Rule renders any evidence of a prior or contemporaneous
understanding of the parties inadmissible if offered to contradict or modif the terms
of a written agreement. It is best understood as a rule of substantive law concerning
the legal effect of the expression of an agreement in a final, fully integrated
contract; it declares that when the terms of a contract have been embodied in a
writing [called the integration of the agreement] to which both parties have assented
as the final expression of their agreement, parol evidence of contemporaneous or
prior oral agreement is not admissible for the purpose of varying or contradicting
the written contract.
b) Reformation is an equitable remedy consisting of a “rewriting” of a contract or
other document in cases where the written terms of the contract do not express what
was actually agreed upon.
c) Integration is the process by which the parties to an agreement adopt a writing or
writings as the full and final expression of their agreement. Also called merger.
2. UCC §2-202
a) Final Written Expression: Parol or Extrinsic Evidence
(1) Terms with respect to which the confirmatory memoranda of the parties
agree or which are otherwise set forth in a writing intended by the parties as
a final expression of their agreement with respect to such terms as are
included therein may not be contradicted by evidence of any prior agreement
or of a contemporaneous oral agreement but may be explained or
supplemented
(a) By course of dealing or usage of trade or by course of performance (see
UCC §2-208) and
(b) By evidence of consistent additional terms unless the court finds the writing
to have been intended also as a complete and exclusive statement of the
terms of the agreement.
b) Don’t be fooled! The Parol Evidence Rule does not keep out terms that are added
after the agreement is written.
3. Integration
a) Restatement 2d §210 says
(1) A Completely Integrated Agreement is adopted by the parties as a complete
and exclusive statement of the terms of the agreement.
(2) A Partially Integrated Agreement is an integrated agreement other than a
completely integrated agreement
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(3) Whether an agreement is completely or partially integrated is to be
determined by the court as a question preliminary to determination of
question of interpretation or to application of the parol evidence rule.
b) Williston’s view
(1) Merger clause – will conclusively establish that the document is a total
integration, unless the doc is obviously incomplete.
(2) Rest of Writing – without a merger clause, if the doc is obviously
incomplete, it is a partial integration, allowing consistent terms to be
submitted from oral evidence.
(3) Four Corners – reasonable person standard looking just at the document.
Would a reasonable person have put the terms of the alleged oral agreement
in the document?
c) Corbin’s view
(1) The actual intention of the parties should be looked to in answering if it is a
partial or total integration.
(2) Corbin places less importance on the actual writing and more on the intent.
The Corbin view comes close to eviscerating the parol evidence rule.
4. Prototypical case: Baker v. Bailey, 240 Mont. 139 (1989)
a) Facts: The value of Π’s land plummeted when Δ enforced a rule in their contract
stating that if Π sold their land, Δ had the right to disallow the subsequent buyer the
use of Δ’s well. Π argues that the original purpose of the clause was to keep
undesirables from using the well, not to prevent Π’s buyer from using the well.
b) Result: Parol evidence rule prevents extrinsic evidence of the Π’s reason for
including the clause allowing them to deny the well usage to subsequent
landowners. Ruled for Δ.
5. Parol Evidence is allowed in interpreting terms that are not clear
a) The fact that an essential term is omitted may indicate that the agreement is not
integrated or that there is partial rather than complete integration. Restatement 2d
§204.
b) Where the parties to a written agreement agree orally that performance of the
agreement is subject to the occurrence of a stated condition, the agreement is not
integrated with respect to the oral condition. Restatement 2d §217.
c) The term must not be contradictory to a term in the written document. A test in the
§2-201 official comment is “if the additional terms are such that, if agreed upon,
they would certainly have been included in the document tin the view of the court,
then evidence of their alleged making must be kept from the trier of fact.”
d) Masterson v. Sine, 68 Cal. 2d 222 (1968)
(1) Facts: Π sells his interest in a TIC to a relative with the option to repurchase
it later for the same price as given. Π then goes into bankruptcy. Π’s trustee
sues his relative to enforce the option.
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(2) Result: Parol evidence was allowed to determine what was meant by the
unclear terms in the written contract.
(3) IN CALIFORNIA, the parol evidence rule was greatly limited by this
ruling.
e) Hunt Foods & Industries, Inc. v. Doliner, 26 A.D.2d 41 (1966)
(1) Facts: Π entered negotiations to purchase Δ and agreed on all but a few
points. When negotiations were recessed, Π and Δ agreed to grant Π the
option to purchase all of Δ’s stock to prevent Δ from shopping for a higher
bid. While not part of the contract, Π assured Δ that the option was only to
be used in the event Δ solicited another bid, but then Π executed the option
anyways.
(2) Held: Additional terms, while oral, were not contradictory, but explanatory.
Therefore, the parol evidence was allowed and Π’s summary judgment
denied.
6. Reformation
a) In an action for reformation of a contract, “parol evidence is admissible to show the
parties’ intent and a mutual mistake.” … The parol evidence rule is not applicable
in suits for rescission or reformation of contracts. (Williston)
b) “Reformation of a written instrument will be decreed when the words that it
contains do not correctly express the meaning that the parties agreed upon, as the
court finds to be convincingly proved.” (Corbin)
c) Thompson v. Estate of Coffield, 894 P.2d 1065 (1995)
(1) Facts: Δ sold his land to Π retaining royalties for coal found under current
“valid, recorded leases.” However, none of the current leases had been
recorded. Δ urges that reformation of the deed is required because the deed
did not conform to the negotiations, intent, and knowledge of the parties.
(2) Result: the case was remanded to determine what the true intent of the
parties was. Parol evidence will be allowed.
d) See also Mistake, on page 44
7. In sum
Is there an integrated agreement?
NO Then Jury can hear the evidence
YES
Does the oral term directly contradict the written agreement?
YES Then Jury can NOT hear the evidence
NO
Would the oral term naturally be omitted from (or is it in reasonable
harmony with) the written agreement?
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YES Then Jury can hear the evidence
NO Then Jury can NOT hear the evidence
B. Interpreting the Terms of the Contract
1. Definitions
a) Four Corners – the doctrine that requires that the meaning of a document be
derived from its entire contents as they relate to one another, and not from its
individual parts.
2. Restatements
a) The restatements offer a lot of insight in interpretation.
b) Restatement 2d §202 – Rules in Aid of Interpretation
(1) Words and other conduct are interpreted in the light of all the circumstances,
and if the principal purpose of the parties is ascertainable it is given great
weight.
(2) A writing is interpreted as a whole, and all writings that are part of the same
transaction are interpreted together.
(3) Unless a different intention is manifested,
(a) Where language has a generally prevailing meaning, it is interpreted in
accordance with that meaning
(b) Technical terms and words of art are given their technical meaning when
used in a transaction within their technical field
(4) Where an agreement involves repeated occasions for performance by either
party with knowledge of the nature of the performance and opportunity for
objection to it by the other, any course of performance accepted to
acquiesced in without objection is given great weight in the interpretation of
the agreement.
(5) Wherever reasonable, the manifestations of intention of the parties to a
promise or agreement are interpreted as consistent with each other and
with any relevant course of performance, course of dealing, or usage of
trade.
c) Restatement 2d §203(a) – an interpretation which gives a reasonable, lawful, and
effective meaning to all the terms is preferred to an interpretation which leaves a
part unreasonable, unlawful, or of no effect.
3. Principles of Construction – 5 principles
a) The entire contract should be read as a whole and every part is a piece of the whole
b) The contract itself must be read in light of the circumstances under which it was
made.
c) Where a public interest is affected, an interpretation that favors the public is
preferred
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d) Specific provisions ordinarily will be regarded as qualifying the meaning of broad
general words in relation to a particular subject
e) Unless contrary to the plain meaning of the contract, an interpretation given by the
parties themselves will be favored.
f) W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157 (1990)
(1) Facts: Π entered a contract to purchase land from Δ. K called for $25k up
front, $225k upon closing, and $500k to be mortgaged. K contained a clause
allowing either party to cancel if the litigation on Δ was not settled by a
certain date. Standard merger clause present. Δ dallied on the litigation
waiting for the cancellation date. Π sues for specific performance.
(2) Issue: Π wants the court to interpret the cancellation clause as one way, in
that it was intended to protect him from the buyer’s continued litigation.
(3) Result: Π had exclusive rights in certain clauses immediately surrounding
the offending clause, implying that the two parties knew what they were
doing. They had done it before, so their omission here suggests they
intended this clause to be different. No specific performance. Restatement 2d
§§202(5), 203(d), 203(a)
4. Parol Evidence
a) Parol Evidence is admissible to ascertain the true intent of the contractual parties
even where the writing seems clear and unambiguous.
b) Pacific Gas & Elec. v. G.W. Thomas Drayage & Rigging, 69 Cal. 2d 33 (1968)
(1) Facts: Δ promised to purchase insurance “to indemnify [Π] 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.” Δ
damages the equipment, and Π sues for the insured damages. TC ruled for Π.
(2) Issue: How should the court interpret the indemnity clause? Specific to 3rd
parties’ damages, or inclusive of Π’s?
(3) Held: Traynor: The exclusion of Π’s equipment could be justified only if it
were feasible to determine the meaning the parties gave to the words from
the instrument alone. Looking only at the plain meaning of contractual
language ignored the possibility that the parties had contrary intentions.
(4) Criticism: Kozinski of the 9th C complained that even when the transaction
is sizeable and the parties are sophisticated, and the result is unambiguous,
costly litigation cannot be avoided if one party has a strong enough motive
to challenge the K.
5. Insurance Policies
a) Insurance companies will be held to higher standards in this case as well. Any
ambiguity in the policy will be construed to favor the insured. Contra Proferentem
b) Z.R.L. Corp. v. Great Cent. Ins. Co., 156 Ill. App. 3d 856 (1987)
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(1) Facts: Π operates a club that is insured by Δ. A racial discrimination suit is
brought against Π by a 3rd party for “wrongful eviction” and Π seeks to force
Δ to pay for the suit.
(2) Held: Where language in an insurance policy is subject to different
interpretations, such ambiguity is to be construed to favor the insured (Π)
not the insurance company, which drafted the policy.
6. Customs and Practices
a) Hierarchy of practices
(1) Express terms of the agreement
(2) Course of Performance – how a company had performed the contract so far
can imply the meaning of how the contract was meant to be performed.
(3) Course of dealing – how a party has performed on similar contracts in the
past can imply the meaning of how the contract was meant to be performed.
(4) Trade practice – local customs can imply terms in a contract.
b) The risks of waiving your performance on express terms of the contract are great. If
you do it systematically, it becomes your course of dealing.
c) Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772 (1981)
(1) Facts: Π had a longstanding K with Δ for the sale of asphalt supplies. (19631974). Δ twice raised prices, but gave Π a warning and held the price
constant for a few months.
(2) Issue: Can local customs imply terms in a contract?
(3) Held: Yes. There was overwhelming evidence that it was customary to
practice price protection in the asphalt industry in Hawaii (Trade Practices).
In past dealings, Δ had price protected and given warning when the price
was to go up. (Course of Performance). Ruled for Π. UCC §2-202
(4) Note: now the question becomes how prevalent must a practice be before it
becomes a trade practice?
7. CISG cases CAN include parol evidence
a) MCC_Marble Ceramic Ctr, Inc. v. Cermaic Nuova D’Agostino, 144 F.3d 1384
(1998)
(1) Facts: Π entered oral negotiations and agreed with Δ on price, quality,
quantity, delivery, and payment in 10/90. K memorialized by Δ’s standard
form. When Δ did not satisfy orders in 4/, 5/, and 8/91, Π sued for breach. Δ
responded that it was under no obligation to satisfy the order because Π
hadn’t paid for some previous shipments. Π responded that the shipments
they had received were of lower quality than requested, and the CISG allows
them to pay less for them. Δ responds that terms for dealing with lower
quality receipts are on the back of the form, in Italian. Π responds that they
had never intended those terms, just the oral terms.
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(2) Result: CISG Article 8(1): courts must interpret the “statements … and
other conduct of a party … according to his intent” as long as the other party
“knew or could not have been unaware” of that intent. Thus, CISG cases can
include parol evidence.
C. Implied Terms and the Implied Covenant of Good Faith
1. Definitions
a) Good Faith is a total absence of any intention to seek an unfair advantage or to
defraud another party; an honest and sincere intention to fulfill one’s obligations
(1) In the case of a merchant, good faith refers to honesty in fact and the
observance of reasonable commercial standards of fair dealing in the trade.
UCC §2-103(1)(b).
(2) More generally, the term means “honesty in fact in the conduct or
transaction concerned.” UCC §1-201(19).
2. Missing Terms
a) When a term is missing, a reasonable term may be inserted by the court, i.e.
reasonable time is implied when a temporal term is missing.
b) It is generally agreed that where a duration may be fairly and reasonably supplied by
implication, a contract is not terminable at will. Restatement 2d §230.
c) A contract is not voided by conditions that arise outside the contemplation of the
parties after execution.
d) Haines v. City of New York, 41 N.Y.2d 769 (1977)
(1) Facts: Π was a developer that wanted to add a sewer system outside NYC in
a town that had contracted with NYC in 1923 that “all costs of construction
and subsequent operation maintenance and repair” shall be at the expense of
NYC. The K also stated that it required NYC to extend the sewer lines when
necessitated by future growth and building up of the communities. The
sewer system is now at capacity, and further additions would be impossible
without building a new plant.
(2) Issue: K did not say for how long the K would be in effect, or what to do
when it becomes impossible to add sewer lines. NYC argues it can terminate
the K at will.
(3) Held: The contract’s missing time term should be added to be the reasonable
time required to perform the contract. NYC is obligated to maintain the
existing plant, but not to expand it.
3. Open Price Term UCC §2-305
a) Parties can write a contract without the price term settled.
b) At the time of delivery the price is a reasonable price if
(1) nothing is said of price,
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(2) the price is left to be determined but the parties fail to agree
(3) the price term is to be fixed to some 3rd party price index or market standard.
c) Good faith rules apply.
d) If the parties agree not to be bound without a price, there is no contract. Buyer must
return all goods received or pay the reasonable value if unreasonable to return them.
Seller must return prepaid money.
4. Good Faith
a) Summers: the obligation of good faith performance is better understood simply as
excluding behavior inconsistent with common standards of decency, fairness,
and reasonableness, and with the parties’ agreed-upon common purposes and
justified expectations.
b) Burton: Bad faith is the exercise of discretion for the purpose of recapturing
opportunities forgone or bargained away at the time of contracting, with the
identification of such forgone opportunities depending on objective analysis of the
parties’ expectations as they may be inferred from the express contract terms in light
of the ordinary course of business.
c) Centronics Corp. v. Genitron Corp., 132 N.H. 133 (1989)
(1) Facts: Π agreed to sell biz assets to Δ. The purchase price was pegged at a
value that arbitration was to determine. An escrow account held money from
DD pending the results of the arbitration.
(2) Issue: Π charged that Δ was breaching the implied covenant of good faith
when Δ would not allow any money to be removed from the escrow before
arbitration ended even though that money was going to be Π’s after
arbitration and that Δ was belaboring the arbitration.
(3) Held: Π had not asked for any clause in the K to allow them to pull any
money out in the event of a long arbitration. Δ had good faith reasons to
want to keep the money in escrow until the end of arbitration.
d) Four question test
(1) Does the agreement ostensibly allow to or confer upon Δ a degree of
discretion in performance tantamount to a power to deprive the plaintiff of a
substantial proportion of the agreement’s value?
(2) If the ostensible discretion is of that requisite scope, does competent
evidence indicate that the parties intended by their agreement to make a
legally enforceable contract?
(3) Assuming an intent to be bound, has Δ’s exercise of discretion exceeded the
limits of reasonableness?
(4) Is the cause of the damage complained of Δ’s abuse of discretion, or does it
result from events beyond the control of either party, against which Δ has no
obligation to protect Π?
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e) CISG contains no clause requiring good faith in the international sale of goods by
merchants but most European codes have clauses closely following Restatement 2d
§205 which implies the duty of good faith and fair dealing in every contract.
5. Output, Requirements, and Exclusive Dealings UCC §2-305
a) A term that measures the quantity by the output of the seller or the requirements of
the buyer is still bound by a quantity of good faith, and no quantity unreasonably
disproportionate to any stated estimate or comparable prior output may be tendered
or demanded.
b) A lawful agreement for exclusive dealings imposes an obligation on the seller to use
best efforts to supply and on the buyer to use best efforts to promote the sale.
c) A shutdown by a requirements buyer for lack of orders might be permissible where
a shutdown merely to curtail losses would not. Comment 2.
d) Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 (1988) Requirements K
(1) Facts: Δ entered K with Π to convert 3000 trucks from gas powered to
propane “as required by [Δ]” and then buy all the propane from Π for 8
years. Δ, giving no reason decided not to convert its fleet. Π sues Δ for lost
profits on 2,242 conversions.
(2) Issue: What is unnecessarily disproportionate under UCC §2-305(1)?
(3) Held: With proper jury instruction, no reasonable jury would have found for
Δ. If no reason at all need be given to reduce a buyer’s requirements to zero,
then a requirements contract is reduced to an option contract. There must be
a good reason to change the requirements to zero, and Δ did not supply one.
6. Employment and Good Faith
a) An at-will employee can still be terminated at any time without a good faith duty for
the employer to give a reason.
b) Most jurisdictions recognize a narrow “public policy” exception that must involve a
public duty.
c) Donahue v. Federal Express Corp., 753 A.2d 238 (2000)
(1) Facts: Π, a permanent employee, was a “whistleblower” at company Δ
which then terminated him. Π appealed his termination with the Guaranteed
Fair Treatment Procedure provided for in his K, which upheld the
termination.
(2) Issue: Π argues that Δ did not act in good faith in Π’s termination and that P
supplied sufficient additional consideration to be classed differently than an
at-will employee.
(3) Held: As a matter of law, an employee cannot maintain action for breach of
implied duty of good faith and fair dealing insofar as underlying claim is for
termination of an at-will employment. Superior performance is not good
enough to be classed differently than an at-will employee because that is
what is expected.
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D. Express and Implied Warranties
1. Definitions
a) Warranty – an assurance by one party to a contract of the existence of a fact upon
which the other party may rely, intended precisely to relieve the promisee of any
duty to ascertain the fact for himself, and which amounts to a promise to indemnify
the promisee for any loss if the fact warranted proves untrue.
2. UCC §2-313 on the Creation of Express Warranties
a) Any affirmation of fact or promise made by S to B that becomes part of the basis of
the bargain creates a warranty that the goods will conform to the affirmation or
promise
b) Any description of the goods which is made part of the basis of the bargain creates a
warranty that the goods will conform to the description.
c) Any sample or model which is made part of the basis of the bargain creates a
warranty that the goods will conform to the sample.
d) The use of the words “warrant” or “guarantee” are not necessary.
e) Opinions do not make a warranty, expressions of fact do.
f) Express warranties must be part of the basis of the bargain to take effect.
g) Carpenter v. Chrysler Corp., 853 S.W.2d 346 (1993)
(1) Facts: Π purchased two cars from Δ dealer. Π requests a “reliable car” and
dealer tells Π that the LeBaron is what he wants. The car then has a series of
failures and defects. Π stops making payments on the car when Δ cannot
repair the car’s defects. Δ then repossessed the car.
(2) Held: Under UCC §2-313, a warranty was created because the dealer gave a
(mis)representation of fact. When the car did not live up to the
representations, the warranty was breached.
(3) Note: look out for statute of frauds or parol evidence problems. This case
had no SoF problems because it was a written contract with an oral
supplement. No Parol Evidence problem because the written instrument was
not a full integration.
(4) The dealer could have protected himself from salesmen’s slips by putting an
integration clause into the contract.
3. Implied warranties
a) UCC §2-314 on Implied Warranty of Merchantability and Usage of Trade
(1) Unless excluded or modified, a warranty that the goods shall be
merchantable is implied in a contract for their sale if the seller is a merchant
with respect to goods of that kind. See the statute for a description of what
makes goods merchantable.
b) UCC §2-315 on Implied warranty on Fitness for purpose
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(1) Where the seller at the time of contracting has reason to know any particular
purpose for which the buyer is purchasing the goods and that the buyer is
relying on the seller’s judgment, there is, unless modified, an implied
warranty that the goods will fit that purpose.
c) Vlases v. Montgomery Ward & Co., 377 F.2d 846 (1967)
(1) Facts: Π purchased 2000 chicks from Δ. The chicks were then found to
carry a disease that left them unsuitable for use.
(2) Held: UCC §314 and UCC §315 hold. It doesn’t matter that Δ could not
have known that the chicks were sick nor that Δ took care in ensuring that
the goods were quality. All that is important is that the goods were not. Δ is
in breach.
4. UCC §2-316 Exclusion or Modification of Warranties
a) Words or conduct relevant to the creation of an express warranty and words or
conduct tending to negate or limit the warranty shall be construed as consistent
whenever reasonable. §2-316(1)
b) To exclude or modify the implied warranty of merchantability or fitness must
mention merchantability or fitness and be conspicuous. §2-316(2)
c) See exclusions in text.
d) Singer Co. v. E.I. Du Pont De Nemours & Co., 579 F.2d 433 (1978)
(1) Facts: Π approached Δ about purchasing their electrodepositing system. Π
then contracted Δ to build the system. Π then experienced problems with the
system that Δ was unable to fix, including altering the original consumables.
Π then removed Δ’s consumables and replaced them with another
company’s. Π then sues Δ.
(2) Result: Π is awarded $$. Reliance interest was formed when Δ accepted the
offer to provide Π a system. §2-316(2) applies as the implied warranty of
fitness was cumulative to and not excluded by the express warranty. Π relied
on Δ’s expertise in the area. §2-315. The question of the parties’ intent was a
proper issue to reach the jury.
e) Massey-Ferguson, Inc. v. Utley, 439 S.W.2d 57 (1969)
(1) Facts: Π’s dealer sold Δ a combine. Δ put $675 down, and financed the rest
for $534.52 a year for the next 3 years. Δ defaulted on the first payment and
Π brings suit to recover the deferred payments. Δ defends on breach of
implied warranties of fitness in UCC §2-316.
(2) Result: Affirmed the ruling for Δ because the language that limited the
implied warranties was not conspicuous enough.
(3) Note: why is the manufacturer/financier losing? The court states that its
conduct put it in the status of a seller and that its status as a seller
outweighed its status as an assignee, and therefore did not entitle them to the
protection of an assignee against defenses that derived from its actions as a
seller.
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E. Modifications
1. Generally
a) Usually, modifications of contracts are contracts themselves requiring consideration.
(1) Preexisting duty rule: an agreement modifying a contract is not supported by
consideration if one of the parties to the agreement does or promises to do
something that he is legally obligated to do.
(2) Courts are hesitant to apply this rule when unanticipated difficulties arise
and the other party, not influenced by coercion or duress, voluntarily agrees
to the amendments.
b) UCC §2-209(1).
(1) An agreement modifying a contract [for the sale of goods] needs no
consideration to be binding.
(2) A signed agreement which excludes modification or rescission except by a
signed writing cannot otherwise be modified or rescinded, but except as
between merchants, such a requirement on a form supplied by the merchant
must be separately signed by the other party.
(3) The requirements of the statute of frauds must be satisfied if the contract as
modified is within its provisions
(4) Although an attempt at modification or rescission does not satisfy the
requirements of (2) or (3) it can operate as a waiver.
(5) A party who has made a waiver affecting an an executory portion of the
contract may retract the waiver by reasonable notification received by the
other party that strict performance will be required of any term waived,
unless the retraction would be unjust in view of a material change of position
in reliance on the waiver.
c) Angel v. Murray, 322 A.2d 630 (1974)
(1) Facts: Δ entered a K with the city to collect garbage for a fee. Δ later asked
the city to increase the fee paid to him to cover an unexpected increase in
garbage to be collected. The city obliged. Π, a citizen of the city, sues Δ, a
garbage collector company for repayment of fees paid to the latter by the
city claiming a lack of consideration.
(2) Issue: is consideration necessary for modification?
(3) Result: The volume of garbage had risen unexpectedly and substantially.
The modification to the contract was made during a time when the contract
had not been fully performed. Therefore, the decision to pay the additional
fees was fair and equitable.
2. Oral Modifications
a) Oral modifications of contracts within the Statute of Frauds are not enforceable.
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b) Oral modifications that do not materially alter the underlying obligations may not be
barred. Where one party relies on the other to reduce an oral agreement to writing,
failure to do so will not prevent the relying party from taking the modification out of
the statute of frauds.
c) An oral modification may be valid on estoppel or statutory grounds.
d) Brookside Farms v. Mama Rizzo’s, Inc, 873 F.Supp. 1029 (1995)
(1) Facts: Π entered K with Δ to sell basil as Δ required. Δ agreed to buy a
minimum over a year. Π and Δ agreed to a series of modifications over the
months as Δ’s needs and financial situation changed. Δ then bounced a
payment check. Π brings suit because Δ did not purchase the minimum
amount over the year. Δ counters that Π raised the prices in violation of the
K’s express language that no modifications would be made unless in written
form.
(2) Held: While the K’s no waiver clause prevents oral modification, other legal
theories (noted in (b) and (c)) allow for the modifications. Δ breached, so Π
is awarded damages.
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V.
LEGAL REGULATION OF CONTRACTS
A. Mistake of Fact
1. Generally
a) A mistake is a belief that is not in accord with the facts. Restatement 2d §151.
b) Mutual Mistake – Where a mistake of both parties at the time a contract was made
as to a basic assumption on which the contract was made has a material effect on
the agreed exchange of performances, the contract is voidable by the adversely
affected party unless he bears the risk of the mistake under the rule stated in §154.
Restatement 2d §152.
(1) Look out for limited information! If the parties recognize their limited
information and proceed anyway, K will be enforced.
c) Unilateral Mistake – Where a mistake of one party at the time a contract was made
as to a basic assumption on which he made the contract has a material effect on
the agreed exchange of performances that is adverse to him, the contract is voidable
by him if he does not bear the risk of the mistake under the rule stated in §154 and
(1) The effect of the mistake is such that enforcement of the K would be
unconscionable, or
(2) The other party had reason to know of the mistake or his fault caused the
mistake.
Restatement 2d §153.
d) A party bears the risk of a mistake when
(1) The risk is allocated to him by agreement of the parties, or
(2) He is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats
his limited knowledge as sufficient, or
(3) The risk is allocated to him by the court on the ground that it is reasonable in
the circumstances to do so.
Restatement 2d §154.
2. Reformation –
a) A court may reform the contract if parties orally agree to a deal and then mistakenly
draft a document that incorrectly reflects the terms of the deal.
b) A party’s negligence does not prevent him from obtaining relief, even if he didn’t
read the contract.
c) Parol Evidence may be allowed.
d) For more, refer back to the remedy of Reformation, on page 33
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3. Lenawee Ct. Bd. Of Health v. Messerly, 331 N.W.2d 203 (1982)
a) Facts: Δ sold land to Π on which a 3 unit apartment stood. After the sale, the county
condemned the property as it had a defective sewer system. Δ sued to rescind the
sale on the basis of mutual mistake. Both parties were blameless as neither new of
the sewer defect. The sales K contained an “as is” provision allocating risk to the
buyer.
b) Held: The parties had a mutual mistake of fact, but this case does not warrant
rescission. Rescission is not available to relieve a party who has assumed the risk of
loss in connection with the mistake.
c) In the cited Barren Cow case, Sherwood v. Walker, 66 Mich. 568 (1887), the parties
agreed to the sale and purchase of a cow which was thought to be barren, but which
was, in reality, with calf, showing it to have a much greater value. The court
permitted the rescission as the state of the cow was the substance of the agreement.
“The thing sold and bought had in fact no existence.” Sherwood is distinguished
from Messerly because the very thing being sold was different in Sherwood, as
opposed to the value of the thing being sold being different in Messerly.
4. Lanci v. Metropolitan Ins. Co., 388 Pa. Super. 1 (1989)
a) Facts: Π agreed to settle an accident claim with Δ, his insurer, for $15k. After
which, he finds that his policy allowed him $250k. Π argued that he had settled
under a mistaken belief that $15k was all he was entitled.
b) Held: This was a unilateral mistake under §153. The performance was adverse to
him, the mistake was such that enforcement would be unconscionable, and Δ had
reason to know of the mistake.
B. Public Policy and Illegality
1. Illegality
a) Neither law nor equity can be invoked to redress a wrong that has resulted from the
injured party’s own wrongful and illegal conduct.
b) Clouse v. Myers, 753 S.W.2d 316 (1988)
(1) Facts: Π and Δ entered an agreement to jointly run a tavern. Π paid money
to Δ as an investment in the venture, with more to pay at a later date.
However, it was not legal for Π to operate a tavern in the manner propsed,
and the authorities halted the operation. Π then sued Δ for return of the
payment made.
(2) Held: Because Π and Δ were violating the law when they entered the K, the
action is denied. (see (a) above.)
2. Covenant Enforceability
a) A noncompetition covenant is okay if the enforcing agent can prove it is necessary
for business interests.
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b) A covenant cannot deprive a community of a unique skill.
c) A covenant cannot impose undue hardship on the terminating worker
d) Geography constraints are upheld when the business serves a limited geographical
area
e) Time constraints should be reasonable related to the legitimate interest which the
employer is seeking to protect.
f) Hopper v. All Pet Animal Clinic, 861 P.2d 531 (1993)
(1) Facts: Π worked for Δ for a time under a K that disallowed her working as a
small animal veterinarian within the 5 miles surrounding the city for 3 years.
Π left and then worked at another animal hospital and depleted some of Δ’s
business.
(2) Issue: Are covenants such as these enforceable?
(3) Result: The Court held that the 3 year duration was unreasonable, and
reduced it to 1 year. The Court affirmed the remaining terms of the
covenant.
3. A.Z. v. B.Z., 431 Mass. 150 (2000)
a) Facts: Π and Δ divorced after going through artificial insemination and storing preembryos. Δ wants to have the pre-embryos implanted; Π does not.
b) Issue: Can an individual be compelled to procreate? Does a consent form constitute
a contract between the couple?
c) Held: A person cannot be compelled by court to procreate. Also, the purpose of the
consent form was not to bind the couple to an agreement, but was only meant to
direct the clinic.
d) Note: public policy will also not force an abortion of the child, even if a couple
agrees that the woman would go on birth control and does not.
C. Unconscionability
1. Definition
a) Something is unconscionable if it is so unreasonably detrimental to the interest of a
contracting party as to render the contract unenforceable.
b) Procedural Unconscionability is concerned with “unfair surprise,” fine print
clauses, mistakes, or ignorance of important facts or other things that mean
bargaining did not proceed as it should.
c) Substantive Unconscionability is an unjust or “one-sided” contract.
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d) An Adhesion Contract is one so heavily restrictive of one party, while so nonrestrictive of another, that doubts arise as to its representation as a voluntary and
uncoerced agreement. Often a standard form printed contract prepared by one party
and submitted to the other on a “take it or leave it” basis.
2. UCC
a) UCC §2-302 official comment – The basic test is whether, in the light of the general
commercial background and the commercial needs of the particular trade or case,
the clauses are so involved are so one-sided as to be unconscionable under the
circumstances existing at the time of the making of the contract.
b) Unconscionability is generally recognized to include an absence of meaningful
choice on the part of one of the parties together with contract terms which are
unreasonably favorable to the other party.
c) Williams v. Walker-Thomas Furniture Co., 121 U.S. App. D.C. 315 (1965)
(1) Facts: Π entered a contract with Δ stating that payments on rent-to-own
merchandise are to be applied equally to the outstanding balance of all debts
owed pro rata. Π defaulted on a payment, and Δ used this clause to repossess
all the belongings with any outstanding debt, some having owed less than a
dollar remaining.
(2) Held: This is classic unconscionability.
d) Many courts hold that there must be both procedural and substantive
unconscionability present to establish a claim.
e) Maxwell v. Fidelity Fin. Servs., Inc., 184 Ariz. 82 (1995)
(1) Facts: Δ financed Π’s purchase of a water heater for their $40k home. The
heater cost $6500, and with 19% financing for 10 years, cost $15k. The
heater didn’t work. When financing was renewed, the balance was down to
$5733. The K called for securing the payments with the home. Π argues
unconscionability. Δ argues novation and passing the statute of limitations.
(2) Held: No one should be able to repossess a $40k house for nonpayment on a
$6500 heater. This is substantively unconscionable. This court does not
require both procedural and substantive unconscionability though.
3. Bargaining power
a) Courts are reluctant to accept pleas of unconscionability between merchants.
(similar bargaining power)
b) When gross inequality of bargaining power and a misunderstanding or unawareness
of a provision is present, a court may invoke unconscionability.
c) Langemeier v. National Oats Co., Inc, 775 F.2d 975 (1985)
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(1) Facts: Π entered a K to grow popcorn for Δ. The K provided that Δ could
reject popcorn with defects including damage due to freezing weather. Π got
Δ’s permission to proceed and plant. After a freeze damaged the corn, Δ
refused it, and Π sold it to another firm. Δ had not told Π that the crop
required an extra 20 days in the field, exposing it to the frost damage.
(2) Held: the clause stating Δ could reject the popcorn was unconscionable.
(3) JJ: isn’t this odd? Shouldn’t you avoid using this case on the final?  Hint
Hint…
4. Bank One v. Coates, 125 F.Supp.2d 819 (2001)
a) Facts: Δ entered a K with Π for credit. Π then sends an addendum to Δ including a
forced arbitration clause. Not responding within 30 days is regarded as acceptance
of the addendum. After the 30 day period, Δ finds he does not want the arbitration
clause.
b) Held: This case is not unconscionable. Arbitration is not inherently unfair, and Δ
had the right to deny but didn’t. He was given options, and failed to take them.
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VI. REMEDIES
A. Expectation Damages
1. Definitions:
a) This is a measure of the money damages available to plaintiff in an action for breach
of contract based on the value of the benefit he would have received from the
contract if Δ had not breached, but had completed the performance as agreed.
b) The amount is generally the monetary value of full performance minus the costs
plaintiff avoided by not performing his own part of the contract.
D = VFullPerformance – Cavoided
c) When the buyer breaches, the seller’s expectation damages will ordinarily be the
contract price less the cost saved.
D = K - Cavoided
d) When the seller breaches, the buyer’s expectation damages will be measured by the
fair market value of the performance at the time and place of promised performance.
D = VFairMarket
2. UCC Provisions
a) UCC §2-712 – “cover” damages, damages for replacement goods
b) UCC §2-713 – damages for goods not delivered
c) UCC §2-714 – damages for goods delivered not to spec
d) UCC §2-715 – damages incidental to main
e) UCC §2-715(2) – damages consequential to main (as a result of bad goods, extra
damages occurred) (Hadley v. Baxendale rule)
f) UCC §2-717 - the buyer on notifying the seller of his intention to do so may deduct
all or any part of the damages resulting from any breach of the contract from any
part of the price still due under the same contract.
3. General rules
a) No speculative damages. Π has to prove his damages with reasonable certainty.
b) The injured party should not recover more from the breach than he would have
gained had the contract been fully performed.
c) ‼ Common law alert: the common law did not recognize cover as a remedy.
d) Specific performance is only awarded when damages are not adequate.
e) Freund v. Washington Square Press, 34 N.Y.2d 379 (1974)
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(1) Facts: Π contracted with Δ to publish his manuscript with a $2k advance
upon receipt of the work and royalties on the copies. Δ then decides not to
produce his book. Π finds a different publisher and pays then to publish. Π
sues Δ for specific performance (denied at TC) and damages.
(2) Issue: Π argues his promotion was delayed, he lost royalties, and he make
other arrangements.
(3) Result: Nominal damages only. Π was promoted anyways, royalties were
speculative at best, and on the cost of publication, the injured party should
not recover more from the breach than he would have gained had the
contract been fully performed.
4. Efficient Breach and Economic Waste
a) If the seller finds a better buyer, he should breach and present the original buyer
with damages.
b) The cost of performance is the proper measure of damages ‘if this is possible and
does not involve unreasonable economic waste’. Restatement §346(1)(a)(i)
c) The diminution in value caused by the breach is the proper measure ‘if construction
and completion in accordance with the contract would involve unreasonable
economic waste’. Restatement §346 (1)(a)(ii)
d) Peevyhouse v. Garland Coal Mining Co., 382 P.2d 109 (1962)
(1) Facts: Π entered a K with Δ to allow Δ to strip mine coal on Π’s land for a
period of years if they return the land to the way it was at the end of the
lease. Δ refuses to fill in the holes they left saying it would cost them $29k,
while only adding $300 in value. Π sues for $25k.
(2) Held: The measure of damages in Restatement §346(1)(a)(ii) is used
because unreasonable economic waste would occur if the K was completed
as written.
e) Doran: there is a risk that a seller with the prospect of zero damages will breach
when someone else will have to bear the cost. It’s not that we don’t want parties
breaching, but we want breaching parties to do so efficiently. An inefficient breach
would be that society as a whole would have to pay more than required while
society would gain less than it could.
5. Lost Volume Sellers
a) To be a lost volume seller, these criteria must be met
(1) Capacity to make an additional sale
(2) Profitable to make an additional sale
(3) Probably would have made an additional sale absent the buyer’s breach
b) Lost Volume sellers do not have to mitigate their loss on a license sale because the
new sale would have been one they could have made absent the breach.
c) In re El Paso Refinery, 196 B.R. 58 (1996)
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(1) Facts: Refinery (R) went bankrupt and RHC took over their processes and
assets. UOP alerts RHC that they are operating without a license, and RHC
and UOP negotiated a new license.
(2) Issue: did UOP mitigate R’s damages in the sale of licenses to RHC? UOP
argues that R’s damages were not mitigated because RHC was a new
potential customer, and UOP is a lost volume seller.
(3) Held: UOP is not a lost volume seller, because absent R’s breach, UOP
would not have been able to sell to RHC which used the same refinery.
Thus, R’s damages were mitigated.
6. Cost Plus
a) KGM Harvesting Co. v. Fresh Network, 42 Cal. Rptr. 2d 286 (1995)
(1) Facts: S contracted to sell lettuce to B which would pass the lettuce to
another buyer at cost plus. During a period of skyrocketing lettuce prices, S
refuses to supply B with lettuce, forcing B to find another, more expensive
supplier.
(2) Issue: Why should B recover damages when they suffer no consequences of
the breach?
(3) Held: B should get the benefit of the bargain in all situations.
(4) See Doran’s note above.
7. Incidental Damages
a) Fertico Belgium v. Phosphate Chemicals Export Ass’n, 501 N.Y.S.2d 867
(1) Facts: B contracts with S to deliver fertilizer to Belgium which will then go
to Iraq in two shipments paid by letter of credit. The first shipment will
arrive late, so the second shipment is canceled. The first shipment is covered
for $700k more. B then sells the first shipment when it arrives for $450k
profit.
(2) Result: B has to subtract the profit on the resale because he never would
have had that profit were it not for the breach.
8. Consequential Damages
a) A plaintiff can only recover consequential damages when
(1) They arise naturally from the breach itself
(2) They arise from the special circumstances under which the contract was
actually made if the special circumstances were communicated by Π to Δ.
Hadley v. Baxendale, infra.
b) Hadley v. Baxendale, 9 Exch 341 (1845)
(1) Facts: Π operated a mill that suffered a broken shaft. Manufacturer asked Π
to send them the shaft. Δ delayed in sending the shaft and as a result the mill
was inoperable for longer than it had to be.
(2) Issue: is Δ liable for the lost profits Π suffered from their delay in shipment?
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(3) Result: Δ owed no damages by the famous rule noted above that is now
represented in UCC §2-715(2)
B. Mitigation
1. Definition
a) Mitigation of Damages is a requirement that one injured by reason of another’s
breach of an agreement exercise reasonable diligence and ordinary care to avoid
aggravating the injury or increasing the damages.
2. When Applicable
a) In general, the party that did not breach has the duty to mitigate in lessening the
damages incurred by the other party, and not increasing their damages.
b) UCC §2-709(1) Action for the Price – when the buyer fails to pay, the seller may
recover the price of goods accepted or of conforming goods lost or damaged within
a reasonable time after risk of loss has passed to the buyer or goods identified to the
contract if the seller can’t reasonably resell them.
c) A seller only has the duty to mitigate when loss could be avoided with reasonable
effort and without undue risk, expense, or humiliation.
3. Siemens Energy & Automation v. Coleman Elec. Supply Co, 46 F.Supp.2d 217
(1999)
a) Facts: Δ was a distributor of Π’s products. Δ was late on its payments to Π. Δ tried
to return some goods to Π, but Π refused them in favor of money. Π sues for such
money. Δ argues that their duty to mitigate suggests they should have to recover the
goods.
b) Issue: does Π have the duty to mitigate?
c) Result: No. UCC §2-709(1) holds.
C. Reliance Damages
1. Definitions
a) Incidental damages include losses reasonably incident to a claim for actual damages.
These would include things like “expenses incurred in inspection, receipt,
transportation, and care and custody of goods rightfully rejected…(UCC §2-715 buyers) or “any commercially reasonable charges, expenses, or commissions
incurred in stopping delivery, in the transportation, care and custody of goods after
the buyers breach in connection with return or resale of the goods…” (UCC §2-710
– sellers)
b) Consequential damages are those which are caused by an injury but which are not a
necessary result of the injury. Because they do not necessarily flow from the injury,
they must be specially pleaded and proven.
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2. Availability
a) Reliance Damages may be limited to the expectation of complete performance.
3. UCC
a) UCC §2-715 – Buyer’s Incidental and Consequential Damages.
(1) Incidental damages resulting from Seller’s breach include expenses
reasonably incurred in inspection, receipt, transportation and care and
custody of goods rightfully rejected.
(2) Consequential damages resulting from the seller’s breach include
(a) Any loss resulting from general or particular requirements and needs that
the seller was told or would have reason to know
(b) Injury to person or property proximately resulting from any breach of
warranty.
b) UCC §2-710 - Seller’s Incidental Damages
(1) Incidental damages to an aggrieved seller may include any commercially
reasonable charges, expenses or commissions incurred in stopping delivery,
in the transportation, care, and custody of goods after the buyer’s breach, in
connection with return or resale of gods or otherwise resulting from the
breach.
D. Restitution Damages
1.
E. Specific Performance
1. Definition
a) This is an equitable remedy available to an aggrieved party when the party’s remedy
at law is inadequate forcing the party in breach to undertake to perform or complete
performance as prescribed by the contract.
2. Availability
a) Specific Performance is only available in common law jurisdictions when other
remedies are inadequate or where damages are impractical. In civil law
jurisdictions however, it is usually available before other remedies are used.
b) Contract has to describe a performance so specific that other remedies would be
inadequate. Having indefinite terms however does not bar a court’s use of specific
performance. (See City Stores, infra.)
c) Common law usually decrees specific performance for land contracts because each
plot of land is considered unique unless the difficulties of supervision outweigh the
importance of specific performance to the P. (Especially true for construction on D
controlled land because P cannot employ another contractor at D’s expense.)
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3. Restatement
a) Restatement 2d §360 says: In determining whether the remedy in damages would be
adequate, the following circumstances are significant:
(1) the difficulty of proving damages with reasonable certainty,
(2) the difficulty of procuring a suitable substitute performance by means of
money awarded as damages, and
(3) the likelihood that an award of damages could not be collected.
4. UCC
a) UCC §2-716 says that (1) Specific Performance may be decreed when goods are
unique. Additionally, (3) the buyer has the right of replevin “goods identified to the
contract” if cover is attainable with reasonable effort, or if circumstances reasonably
indicate that such effort will be of no avail.
5. City Stores Co. v. Ammerman, 266 F.Supp. 766
a) Facts: P entered an agreement with D such that if P helped D gain zoning approval
to build their mall, D would give P the opportunity to be a tenant at a favorable rate.
The terms of the lease to P would be similar to what was offered to other tenants
when they were acquired. D did secure zoning privileges and then entered leases
with Woodward & Lothrop and Hecht’s, but not with P.
b) Issue: Is the K definite enough to warrant specific performance?
c) Result: The precise measure of damages was too difficult to ascertain. Even if it
was ascertainable, money would not be adequate compensation for the right to
participate in the shopping center. Specific Performance awarded.
F. Liquidated Damages and Agreed Remedies
1. Definition
a) An amount stipulated in a contract which the parties agree to as a reasonable
estimation of damages owing to one in the event of breach by the other.
2. Enforceability
a) In order for such a provision to be enforceable, the liquidated damages must be
reasonable in light of
(1) A forecast of the damages likely to actually result from the breach
(2) Difficulties in proof of loss
(3) Inconvenience or infeasibility of otherwise obtaining an adequate remedy
b) If these conditions are met, liquidated damages clauses establish a maximal liability.
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c) If these conditions are not met or if it otherwise appears that the clause was included
to deter a breach rather than by a good faith effort to estimate probable damages, the
provision will be considered punitive and unenforceable. (This does not exclude
normal damage calculations.)
3. Restatement
a) Restatement 2d §356
(1) Damages for breach by either party may be liquidated in the agreement but
only at an amount that is reasonable in the light of the anticipated or actual
loss caused by the breach and the difficulties of proof of loss. A term fixing
unreasonably large liquidated damages is unenforceable on grounds of
public policy as a penalty.
(2) A term in a bond providing for an amount of money as a penalty for nonoccurrence of the condition of the bond is unenforceable on grounds of
public policy to the extent that the amount exceeds the loss caused by such
non-occurrence.
b)
4. UCC
a) UCC §2-718
(1) Damages for breach by either party may be liquidated in the agreement but
only at an amount which is reasonable in the light of the anticipated or actual
harm, the difficulties in proof of loss, and the inconvenience or
nonfeasibility of otherwise obtaining an adequate remedy. Unreasonably
large liquidated damages are void as a penalty.
b) UCC §2A-504 – Liquidation of Damages (leases)
(1) Damages payable by either party for default, or any other act or omission,
including indemnity for loss or diminution of anticipated tax benefits or loss
or damage to lessor's residual interest, may be liquidated in the lease
agreement but only at an amount or by a formula that is reasonable in light
of the then anticipated harm caused by the default or other act or omission.
(2) If the lease agreement provides for liquidation of damages, and such
provision does not comply with subsection (1), or such provision is an
exclusive or limited remedy that circumstances cause to fail of its essential
purpose, remedy may be had as provided in this Article.
(3) If the lessor justifiably withholds or stops delivery of goods because of the
lessee's default or insolvency (Section 2A-525 or 2A-526), the lessee is
entitled to restitution of any amount by which the sum of his [or her]
payments exceeds:
(a) the amount to which the lessor is entitled by virtue of terms liquidating the
lessor's damages in accordance with subsection (1); or
(b) in the absence of those terms, 20 percent of the then present value of the
total rent the lessee was obligated to pay for the balance of the lease term,
or, in the case of a consumer lease, the lesser of such amount or $500.
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(4) A lessee's right to restitution under subsection (3) is subject to offset to the
extent the lessor establishes:
(a) a right to recover damages under the provisions of this Article other than
subsection (1); and
(b) the amount or value of any benefits received by the lessee directly or
indirectly by reason of the lease contract.
c) UCC §2A-528 - Lessor's Damages for Non-acceptance, Failure to Pay, Repudiation,
or Other Default.
(1) Except as otherwise provided with respect to damages liquidated in the lease
agreement (§2A-504) or otherwise determined pursuant to agreement of the
parties (§§1-102(3) and 2A-503), if a lessor elects to retain the goods or a
lessor elects to dispose of the goods and the disposition is by lease
agreement that for any reason does not qualify for treatment under §2A527(2), or is by sale or otherwise, the lessor may recover from the lessee as
damages for a default of the type described in Section 2A-523(1) or 2A523(3)(a), or, if agreed, for other default of the lessee, (i) accrued and unpaid
rent as of the date of default if the lessee has never taken possession of the
goods, or, if the lessee has taken possession of the goods, as of the date the
lessor repossesses the goods or an earlier date on which the lessee makes a
tender of the goods to the lessor, (ii) the present value as of the date
determined under clause (i) of the total rent for the then remaining lease term
of the original lease agreement minus the present value as of the same date
of the market rent at the place where the goods are located computed for the
same lease term, and (iii) any incidental damages allowed under Section 2A530, less expenses saved in consequence of the lessee's default.
(2) If the measure of damages provided in subsection (1) is inadequate to put a
lessor in as good a position as performance would have, the measure of
damages is the present value of the profit, including reasonable overhead,
the lessor would have made from full performance by the lessee, together
with any incidental damages allowed under Section 2A-530, due allowance
for costs reasonably incurred and due credit for payments or proceeds of
disposition.
d) Liquidated damages should not put the lessor in a better position than it would have
been in had the lease been fully performed. UCC §2A-504
e) A contract aloowing the lessor to collect the present value of all future rent and the
present value of the equipment’s fair market value at the end of the lease while
permitting the lessor to sell the repossessed equipment immediately without
providing the lessee with any credit for the proceeds of the sale violates UCC 2A504.
f) ePlus Group, Inc. v. Panoramic Comm., 50 UCC 2d 213 (2003)
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(1) Facts: Π entered a master lease agreement with Δ with a K that included a
liquidated damages clause. The lease was then modified to include a colessee. Δ eventually breached. Π sues for $1.1M, reduced from $1.2M by a
credit for the releases and sale of returned equipment.
(2) Issue: the liquidated damages clause stated that Π will credit the Net
Proceeds to damages owed by Δ. Damages were the amount of money left
on the lease, while net proceeds were the value or re-leasing or selling the
equipment. The value left on the lease was much greater than the value in releasing or selling the equipment.
(3) Result: The court ruled that the liquidated damages clause may be
unreasonable (so refused to grant summary judgment on its enforceability).
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VII. CONDITIONS
A. Express Conditions
1. Definitions
a) A condition is something attached to an agreement, the occurrence of which will
trigger the performance of a legal obligation. A condition is not a promise. Failure
to meet a condition is not a breach.
b) A condition precedent is a fact which must exist or occur before a duty of
immediate performance of a promise arises. The party to whom a duty is owed
must prove the occurrence in order to compel the other party to perform.
c) A condition subsequent is a fact which will extinguish a duty to make
compensation for a breach of contract after the breach has occurred.
d) A concurrent condition is a condition precedent which exists only when parties to
a contact are found to render performance at the same time. The party owing the
duty must prove the condition has occurred to discharge the duty.
2. Condition vs. Promise
Condition
Upon not meeting the condition,
the duty is discharged
Promise
Upon not performing the promise, then
 total breach: the duty is discharged.
 material breach: the duty is performed, but
there are damages recoverable.
3. Restatement view
a) See Howard v. Federal Crop Insurance Corp., 520 F.2d 695, on p.99
(1) Facts: Due to heavy rains, Π’s tobacco crop was damaged and unusable. Π
plowed and disked the land so he could plant a cover crop. When Π tried to
get an insurance claim, Δ, his insurer denied the claim because they had not
inspected the damage. The K said in one paragraph “it shall be a condition
precedent to the payment of any loss [that the insured provide info regarding
the loss]” and in the next “[the crops] shall not be destroyed until the
Corporation makes an inspection.”
(2) Issue: Is the latter paragraph a promise or a condition? If it is a condition, its
violation results in Π’s forfeiture of coverage. If it is a promise, Δ may
recover damages from Π for the elimination of the crop but does not cause a
forfeiture of the policy.
(3) Held: If the policy was intended for the latter paragraph to be a condition, it
would have been labeled as such like the other paragraphs were. Therefore,
this paragraph is a promise, and Π has not forfeited the policy.
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b) Restatement §261: Promises and Conditions: Where it is doubtful whether words
create a promise or an express condition, they are interpreted as creating a
promise; but the same words may sometimes mean that one party promises a
performance and that the other party's promise is conditional on that performance.
Illustration: An insurance company A issues B a policy containing the clause “In
the event of disagreement as to the amount of loss it shall be ascertained by two
appraisers and an umpire. The loss shall not be payable until 60 days after the award
of the appraisers when such an appraisal is required.” This provision is a promise to
arbitrate AND makes the award conditioned on A’s duty to pay upon disagreement.
4. Strict compliance is the rule
a) Courts frequently avoid applying the strict compliance rule when a forfeiture would
result. A forfeiture occurs when one party has relied on the bargain (either by
preparing to perform or by actually making part performance), and insistence on
strict compliance with the condition would cause him to fail to receive the expected
benefits from the deal. See Restatement 2d §227(1)
B. Implied or Constructive Conditions
1. Definitions
a) An implied condition is one that can be implied from the parties’ conduct.
b) A constructive condition is one that is not agreed on by the parties, but which is
supplied by the court for fairness.
2. Substantial Compliance is the rule
3. Restatement view
a) When parties have structured a contract to require periodic payments or alternating
performances, a party’s duty to perform a portion of the contract is constructively
conditioned upon the other party’s having substantially performed any
corresponding duties. Look at who is first to fail to substantially perform.
b) See K & G Construction Co. v. Harris & Brooks, 223 Md. 305, p.104
(1) Issue: Did the contractor have the right to refuse progress payments when a
condition of the contract was not met? Did the subcontractor have the right
to refuse to perform when the contractor stopped paying them?
(2) Held: Mutually dependent promises. Contractor’s refusal to pay did not
relieve Sub’s duty because it was the Sub that breached in the first place.
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c) Restatement 2d §237: Except as stated in §240, it is a condition of each party’s
remaining duties to render performances to be exchanged under an exchange of
promises that there be no uncured material failure by the other party to render any
such performance due at an earlier time.
Illustration: A contracts to build a house for B for some amount, with progress
payments while A is building. For no reason, B fails to remit a progress payment,
and A opts to suspend building. B’s failure is an uncured material failure. A is not
in breach, and B has no claim against A. A has a claim against B if it is damaged by
the delay. However, if B makes a delayed payment and it is not too late to cure the
material breach, A’s duties are not discharged.
4. Taylor v. Johnston,15 Cal. 3d 130 (1975)
a) Facts: Π had two mares to be bred with Δ’s horse. Δ sold his horse out of state
before Π bred the horse making it very difficult for Π. Π attempted to find a way to
breed the horses, but Δ’s horse was not available because it was often breeding with
other horses owned by its shareholders. Π gave up and bred the horses with a
different horse.
b) Issue: When was Π in breach? When they sold the horse, or when the contract
period ended? The court noted that no condition appeared that Π was required to
take a subordinate position to the shareholders.
c) Held: Π could have still bred his horses with Δ during the contracted term but for
his own actions (like bringing a pregnant horse to the stud, and finding another
stud). The condition constructed by the actions of Δ at most amounted to a partial
breach, insufficiently material to terminate the contracts.
5. Anticipatory Breach and the Right to Adequate Assurance of Performance
a) Anticipatory Repudiation is a breach committed before the arrival of the actual time
of required performance. It occurs when one party by declaration repudiates his
contractual obligation before it is due. See Taylor v. Johnston,15 Cal. 3d 130
(1975), supra.
b) This is covered under UCC §2-609: (1) a contract for sale imposes an obligation on
each party that the other’s expectation of receiving due performance will not be
impaired. So, when a party has reason to believe that the contract’s performance is
in jeopardy, he may demand in writing assurance, and may if commercially
reasonable, suspend performance for which he has not already received the
agreed return. Merchants must use commercial standards as grounds for
reasonableness. §2-609(2). Acceptance of improper delivery or payment does not
preclude the use of this in the future. (No waiver.) §2-609(3). A party receiving such
a demand has repudiated the contract if he does not respond with assurances in a
reasonable time not exceeding 30 days. §2-609(4).
This clause was an attempt to battle problems with anticipatory repudiation. A lawyer
may erroneously signal to his client that the other party has breached, and instruct him
to cover his losses. At that point, his client may have breached if the other party actually
hadn’t.
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(1) Pros: instead of immediately putting the client in a situation where he may
cause a breach, a lawyer can force the other party to give assurances that he
will continue to perform as contracted, and then wait the month.
(2) Cons: introduces problematic concepts that may extend the weaseling a
couple more moves.
(a) What are “reasonable grounds for insecurity?”
(b) When has a party given an “adequate assurance” of due performance?
(c) When is it commercially reasonable to suspend performance while awaiting
assurance? (Remember the repudiatee is only authorized the suspension of
performance “for which he has not already received the agreed return.”
c) See Koch Materials Co. v. Shore Slurry Seal, Inc., 205 F.Supp.2d 324.
(1) Facts: D, a construction company has entered a contract with P to provide
asphalt as required. Then, D writes P saying that he is selling the company to
a third party. P demands assurances that D will continue the contract, and D
does not respond with assurances.
(2) Result: P had good reason to ask for assurances under §2-609, and D
violated it when he did not respond. Summary judgment is granted.
C. Impossibility, Impracticability, and Frustration
1. Impossibility occurs where
a) An unexpected contingency occurs
b) The risk of which was not allocated either by agreement or custom and
c) The occurrence of the contingency has made performance impossible.
2. UCC §2-614
a) Substituted Performance – when the agreed performance is unavailable due to
unforeseeable contingency, but another alternative is available, the substitute must
be tendered and accepted.
(1) Where without fault of either party the agreed berthing, loading, or
unloading facilities fail or an agreed type of carrier becomes unavailable or
the agreed manner of delivery otherwise becomes commercially
impracticable but a commercially reasonable substitute is available, such
substitute performance must be tendered and accepted.
(2) If the agreed means or manner of payment fails because of domestic or
foreign governmental regulation, the seller may withhold or stop delivery
unless the buyer provides a means or manner of payment which is
commercially a substantial equivalent. If delivery has already been taken,
payment by the means or in the manner provided by the regulation
discharges the buyer's obligation unless the regulation is discriminatory,
oppressive or predatory.
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b) But, take note that the buyer of services can say that fixed fees inherently are
allocation of risks and as such, the buyer should not have to pay more for the
services substituted for the services.
3. UCC §2-615
a) Delay in delivery or non-delivery in whole or in part by a seller who complies with
paragraphs (b) and (c) is not a breach of his duty under a contract for sale if
performance as agreed has been made impracticable by the occurrence of a
contingency the non-occurrence of which was a basic assumption on which the
contract was made or by compliance in good faith with any applicable foreign or
domestic governmental regulation or order whether or not it later proves to be
invalid.
b) Where the causes mentioned in paragraph (a) affect only a part of the seller's
capacity to perform, he must allocate production and deliveries among his
customers but may at his option include regular customers not then under contract
as well as his own requirements for further manufacture. He may so allocate in any
manner which is fair and reasonable.
c) The seller must notify the buyer seasonably that there will be delay or non-delivery
and, when allocation is required under paragraph (b), of the estimated quota thus
made available for the buyer.
d) What is “impracticable?”
(1)
e) But, again, take note that the buyer of services can say that fixed fees inherently are
allocation of risks and as such, the buyer should not have to pay more for the
services substituted for the services.
4. Long term contracts are the ones that will cause this affect the most.
5. Alabama Football v. Wright, 452 F.Supp. 182 (1975)
a) Facts: Π hired Δ to play football for them, and gave a $75k signing bonus. When Π
and the league folded, Π requested Δ remit the $75k. Δ countersued that Π failed to
provide him with a forum to perform the contract.
b) Result: Δ was allowed to keep the $75k as it was consideration for a performance Δ
actually did: sign the contract. Π was not granted any damages in the countersuit
because it was impossible.
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VIII. THIRD PARTY RIGHTS AND RESPONSIBILITIES
In general, third parties can only sue for damages if they are intended beneficiaries, not
incidental beneficiaries.
The law is receptive to payees who wish to assign their rights to payment.
The law is generally unreceptive when the suit is over the delegation to perform a duty.
 For instance, if you contract a brain surgeon to operate on you, and he has his less
qualified friend do it, your cause of action is against the surgeon.
 C, A member of the public cannot recover for injury from B’s failure to perform a
contract with the United States to carry mail over a certain route. Restatement §145
(illus 1)
Magnussen-Moss
Fill in Later
UCC §2-318
A natural person is a human. A person as compared to a natural person may include a
corporation.
Three options to the states in implementation: A seller’s warranty (express or implied)
extends…
 Alternative A: to the immediate family or household or guest of the buyer if it
is reasonable that such person would be injured by breach. (Seller cannot
exclude.)
 Alternative B: to any natural person who would reasonably be expected to use
the goods and could be injured by breach. (Seller cannot exclude.)
 Alternative C: to anyone who would reasonably be expected to use the goods
and could be injured by breach. (A seller may not exclude or limit the operation
of this section with respect to injury to the person of an individual to whom the
warranty extends.)
Martinez v. Socoma Companies, 11 Cal.3d 394 (1974)
1. Facts: Δ contracted with the government to build and provide jobs for Π. When
Δ failed to do so, Π sued.
2. Issue: can Π sue for damages when the contract was between Δ and the
government?
3. No: Although Π would certainly benefit from the performance of the K as
intended, Π was not a direct party to the contract. Π’s beneficiary status was
only incidental.
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A. The Assignment of Rights and Delegation of Responsibilities
1. Definitions
a) Assignment is the transfer of an interest in a right or property from one party to
another.
b) Delegation is the transfer of authority by one person to another which may infer a
general power to act for another’s benefit or which may assign a debt to another.
c) Subrogation is one’s payment or assumption of an obligation for which another is
primarily liable.
2. Assignment of payment
a) Usually no one will mind if the rights to payment are assigned. (This is the usual
case.)
b) An exception may be an assignment of payments from a manufacturer to a bank.
(1) If the recipient of goods has a problem with the goods, they may lose their
ability to sway the manufacturer to fix the problem if the payment had been
assigned. Holding back payment as a threat won’t work against a bank; they
will just repossess the goods.
3. Delegation of Duties
a) A party delegating is contractual duties is still liable to the original party it
contracted with if the delegated party does not perform correctly.
b) Contemporary Mission v. Famous Music Corp., 557 F.2d 918 (1977)
(1) Facts: Π, a group producing music sold its rights in return for royalties to Δ,
a distributor. Δ then assigned its record division (and Π’s music) to a 3rd
party. When the 3rd party refused to participate in part of the contract, Π sued
Δ.
(2) Issue: Who is liable for the breach?
(3) Held: Δ is liable for any obligation that was not fulfilled, even after
assigning responsibilities or performance to the 3rd party.
c) A party may assign but the new party must grant adequate assurance that it will
perform under the agreement.
d) UCC §2-210 deals with assignment of duties.
(1) Also look at UCC §9-404 (p 806) in short is that the assignee takes subject
to the defenses that the assignor had. So, the assignee needs to make sure the
assignor performs in some cases.
e) UCC §3-305 Defenses and Claims in Recoupment (under Negotiable Instruments)
(1) Except where otherwise provided in this section, the right to enforce the
obligation of a party and pay an instrument is subject to the following:
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(a) Infancy of the obliger, duress, lack of legal capacity, or illegality of the
transaction, fraud, insolvency…
f) In re Nedwick Steel Co., 289 B.R. 95 (2003)
(1) Facts: before bankruptcy, B was the exclusive distributor for N. Now
bankrupt N wants to assign its duties of performance to a third party W
whence the original creditor B does not want the assignment to occur
because it feels W is a competitor to B.
(2) Held: W was a direct competitor to B thus clearly increasing the risk
imposed on B. B had the right to refuse the assignment, and did so.
(3) Borrowed: Sally Beauty, 801 F.2d 1001, 1006, held that the duty of
performance under an exclusive distributorship cannot be delegated to a
direct competitor without the obligor’s consent because such an agreement
does not bargain for best efforts of his competitor when the contract was
entered into.
B. Suretyship and Guaranty Contracts
1. Definitions
a) A surety is one who undertakes to pay the money or perform other acts in the event
that his principal fails to do so; the surety is directly and immediately liable for the
debt.
b) A payment bond pays the subcontractors should the general contractor default on
payments to them.
c) A performance bond promises the other party of the contract that the contract will
be performed in the event that the contractor fails.
2. Beware of statute of frauds issues with surety contracts. UCC §2-201
3. If the underlying obligation is secured by a security interest in collateral and the
oblige impairs the value of that interest, the secondary obligation is discharged to the
extent that such impairment would otherwise increase the difference between the
maximum amount recoverable by the secondary obligor pursuant to its subrogation
rights and the value of the secondary obligor’s interest in the collateral. Restatement 3d
§42 (Suretyship)
4. National Surety Corp. v. United States, 118 F.3d 1542 (1997)
a) Facts: Π backed the performance of D for the government. When D failed to
perform, Π completed the work as contracted. As part of D’s contract, D was
required to have 10% retainage kept from his payment until satisfactory
performance was completed. Government did not actually keep the retainage, but
since there was no completion, Π is suing the government for the retainage which it
was entitled to.
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b) Result: Gov’t was liable for improper release of retainage; release did not implicitly
modify the contract; failure to notify gov’t of D’s default did not affect Π’s right of
subrogation; damages were not to be based on full retainage amount but on Π’s
actual damages.
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