GOOD FAITH
Good faith and Long term Contracts
Term
Rent
Breach
Result
Goldberg
9 yrs
13.8K per year & 10% gross receipts
Diverted stock to another store to reduce
gross sales of store
Breach of good faith obligation
Tailored Woman
10 years
Rent = fixed amount + 4% gross
Diverted stock to another floor to reduce gross
sales
No breach: lessor could have contracted for
lessee to sell on certain floors: (882) “Lack of
foresight does not create an obligation”
1. Good faith determined by analyzing joint maximization in long term Ks
a. Ex ante, in long term K, it is what parties would have agreed upon
b. Says little about distribution
2. Might reconcile Goldberg & Tailored Woman cases this way:
a. Background:
i. Lessor provide gross receipts, not profits, b/c easy to manipulate costs to
make gross profits low; easier to determine sales receipts
ii. Length (10 years) makes it hard to contract for all contingencies
b. How can you reconcile these two cases (both are in same state):
i. But given Tailored Woman rationale, Goldberg lessor could have also
explicitly contracted to avoid strategic behavior as well
c. Tailored dissent (883): implicit in Ks lessee shd act w/ lessor’s interest in mind
d. Hypo:
Location
A
A+B
A + B’
Gross Rev
from A
1000
900
600
Gross Rev
from B
0
200
400
Non-rent
tenant cost
50
60
60
Rent
200 + 10
180 + 10
120 + 10
Tenant
Profit
740
850
810
Total
Profit
950
1040
940
e. T signs lease for Location X & requires rent = 20% gross sales. T sells stuff,
including furs. T also leases at Location Y at fixed rate. Y previously warehouse:
T moves furs there. T moves furs to location B and B’. Breach of good faith?
i. No, B – T gains 110, L loses 20; not zero-sum (could give L more)
ii. Yes, B’ – T gains 70, L loses 80; negative-sum; T gain at L’s
iii. Efficiency: don’t impute breach of good faith at B b/c by recontracting
(assuming low costs) T could share wealth w/ L; not possible in B’,
negative-sum deal in which T benefits at L’s loss
iv. Under strict view, either move to B or B’ would be break of bad faith
f. Parties would contract for A + B ex ante?
i. W/o without thinking about distribution, they are better off
1. Court would have difficulty thinking about distribution
ii. Parties would have wanted to maximize jt profits: ex ante, their interests
will conflict sometime, so should focus on joint profit max.
1. Theoretically, both sides can be better off
g. So court calls good faith; tries to fill gap that can’t be filled in long-term Ks
h. Under UCC, good faith requires honest in fact (no lying)
i. Gillette – to discern intent, assume good faith = increase in size of pie,
3. Problems w/ & answers to joint max theory:
a. Cts can’t always calculate numbers to figure out joint max: must use surrogates
i. In Food Fair (890), ct used trade custom as surrogate to determine, since
over time, lessors & tenants have done this b/c it maximizes joint profits
b. Distribution: often, joint max only possible at great loss to one party
i. May be contexts in which good faith requires more than joint profit max
c. Joint max = useful tool to determine good faith, but not panacea
i. May at least indicate lack of good faith, even if it doesn’t always define it
4. Bill’s criticism: should have rule that never allows action that harms other party
a. If “breach” = joint profit max, then make parties renegotiate to redistribute profits,
don’t just allow one side to screw the other
Implied Warranty of Merchantability
1. Overview:
a. Applies to merchants: (ex: auto dealer, yes; regular person, no)
i. B/c merchant = repeat player, best position to know/allocate risk
ii. Assymetry of info
b. Applies only to ordinary use; only insures ordinary purpose
i. Ordinary users don’t want to insure others wild (& expensive) uses of car
ii. Ex: No warranty: breakdown of drag-raced Honda: not ordinary use
iii. Ex: No warranty: I sell cigarettes, put tobacco & additives other makers
use; some contract lung cancer: no warranty? Disclaim warranty?
2. Tiderman v. Fleetwood Homes (Sup 1)
a. Particle board
b. Ct. overturned trial ct, held that there was ordinary use, no breach of warranty
c. Ex: Seller makes lipstick w/ strawberry extract; small % of population has
genetically disposed to allergic reaction. P has reaction. Breach of warranty?
i. May believe that asymmetry information doesn’t apply?
ii. Consumer may have better information of adverse consequences
iii. But seller may still be best placed to signal potential problem to consumer
1. In strawberry lipstick, easy scratch test
2. Or in case of Tiderman, maybe have formaldehyde detector
iv. No allegation in these cases that D knew of defect; two innocents
1. Is this just a deep pockets argument?
2. Difference in power; = difference in knowledge b/c merchant in
better position to know of defect in product
3. Asymmetric information –
d. More efficient to have seller be expert in knowledge b/c
i. Seller = repeat player, Buyer = casual purchaser of good
ii. Efficiency: seller can spread cost of defect over many buyers
iii. Seller can better know defect rate, properly value “insurance” for buyers
iv. Seller can keep transaction costs low
v. Seller knows materials in RV; buyer doesn’t know formaldehyde in RV
vi. 20-25% people have “some allergy” (not necessarily formaldehyde fumes)
e. What if P were bubble-boy, extraordinarily rare allergy to formaldehyde?
i. No liab. for warranty b/c not asymmetry info, can’t expect seller to price
cost of liability for rare allergy into product
ii. But if P part of large class of people, shd have enough info to insure
iii. Is severe reaction = extraordinary allergy (vs. many w/ mild reaction)?
iv. What if buyer poor w/ unique reaction, seller = monopolist w/ power?
f. Court does not ask, in particular, what frequency of formaldehyde allergy is
i. Then do you employ theory that you should redistribute wealth?
ii. Ex: assume monopolist seller sells 1000 mobile homes per year
iii. One person has allergic reaction & suffers $500K in damage
iv. May hurt poor people b/c will raise price for all mobile home makers
3. Explanation for implied warranty of merchantability
a. Sellers in relatively good position to price “insurance” info into their goods
b. Assumption not that merchant has info, just that he’s got better chance to know
c. Put burden of coming forward w/ info on those w/ idiosyncratic info
Warranty for particular purpose (UCC 2-315)
1. Standard: seller…
a. Must have reason to know particular purpose
b. Must know buyer is relying
c. Need not be merchant in 2-315, can just be regular guy (e.g., selling used car)
2. Reason for requirements: rules assume buyer knows nada, seller knows more or fakes it
a. Induces sellers w/ better info to come forward
b. Dissuades sellers w/o info from trying to lull buyers into buying
3. Ex: P buys computer at store, tells seller he needs one that can run Windows 2000. P gets
working computer that can’t run Windows 2000
a. P signaled to seller particular purpose & seller knows P is relying
b. Note: not odd use for computer, just particular
4. Doe v. Miles – no particular purpose b/c blood was being used for ordinary purpose
Freebird
UCC adopts multi-warranty approach to improper performance on K
Some allocations about info made by law (implied)
But parties can make own allocations of info: sellers can claim goods have certain kind of
Express Warranty
1. General overview:
a. Clearly, sellers say things that might take form of negotiations or advertising
b. Which statements should be categorized as express warranties
c. Specificity implies
2. Royal Business Machines v. Lorraine (900)
a. Claims made by RBM not considered warranty:
i. Goods are high qualitystatement of opinion
ii. Frequency of repairs low
iii. Replacement parts available
1. Probably this should be warranty, not “puffery”
iv. Machines extensively tested
v. Machines = profits
b. Ct considered these claims warranty:
i. Maintenance & supplies cost low, ½ cent per copy
1. Ct. says “maintenance” = warranty, statement on supplies not
2. Seems incoherent: both statements about future
3. But: maintenance refers to machine, so warranty applies; supplies
don’t refer to seller’s goods
ii. Safe & can’t cause fires
iii. Service calls required every 7000-9000 copies
c. Reasoning: statements of which buyers ignorant differ from opinions by seller
i. UCC 2-313: express warranty when seller states fact & has more info
ii. Allocate risk of ignorance b/c since sellers systematically have more info
iii. Implied warranty for particular purpose = volunteering of info
1. Allocation of imperfect knowledge
d. Ex: statements about car: “This car will get 18 mpg city/22 highway”
i. Explicit, specific statement implies research to attain knowledge
ii. Implies buyer should rely on statement, need not do research
iii. “This car is really fuel efficient”: expresses opinion, not research
e. Reliance by buyer: statements considered express warranty = basis of bargain
3. Balog v. Center Art Gallery –
a. Facts: sellers claimed express warranty of
b. Ct says, yes, express warranty
c. Hypo: buyer buys painting seller says is great example of Dali’s early work, but
art historians say it’s a bad work by Dali, worth only 1/3 of what buyer paid
i. Not basis of bargain if buyer just wanted Dali. Price puffery or fact?
ii. Can rely on seller: “This is Dali.” – How does “This is good Dali” differ
d. Breach of express warranty
i. Seller ostensibly has expertise as to whether Dali painted piece
ii. But Balog (S14) says knowing if work by artist “never be more than an
educated guess or opinion”
iii. Can it still be express warranty? Follow this, seller says: (1) High quality
Dalis worth 30K on market (2) This is high quality Dali (3) Give me 30K
1. So this is an express warranty
e. In Balog, Ct. of App. rules against D
i. When Ds made statements, reasonable basis for doing so? Did they have
reasonable expertise to make that
ii. Warranty = SL, not neg; liab for misrepresentation even if non-negligent
f. But in Balog, use negligence standard. Why?
i. G: this odd. Do we want SL for warranty?
ii. Yes: but either way, shd put liab. on seller to induce investment in
authenticity or at least not misrepresent (ex: “This painting’s attributed to
Dali”)
iii. G: D could argue it really expensive for P to authenticate painting, so why
make D do it as well (say, costs $8K to authenticate $10K painting)
iv. But sometimes may be more cost effective for seller to authenticate (ex, if
can get assessment at cost, better resources to get someone to do it)
g. Hypo: Seller says, “This was represented to be a Dali,” buyer buys it, & seller
later says, “You’re in luck! IT’s a real Dali” Express warranty?
i. No if buyer didn’t rely on it (ex: in Balog)
ii. But buyer may later do something relying on post-purchase statement
1. Ex: buyer buys beams, seller later says, “they support 1 ton” &
doesn’t so building collapses
h. Comment 7 on UCC 2-313: timing of language relied upon doesn’t matter;
statements made after K modify it & should be considered to be relied
i. Remember, no consideration needed for modification
Express Disclaimer of Warranty
1. Schneider v. Miller (1990, 917)
a. Facts: buyer bought rusty 1966 Chevy w/ K that said “as is” & car not fit to
drive. Trial and App. cts rule against buyer
i. G: did buyer really understand “as is” language = disclaimer of warranty
ii. Salient, therefore, used-car-salesman as seduced buyer
b. Hypo: Seller’s K said explicitly, “all warranties are disclaimed”
i. UCC 2-316(2): to disclaim warranties, must do so in writing
ii. To disclaim implied warranty: must mention “merchantability”
iii. Conspicuous: language stands out
c. Buyer: argues car unfit for ordinary use
i. By UCC 2-316(2), seller’s K didn’t mention “merchantability” & not
conspicuous, but 2-316(3)(a) says “as is” “all faults,” etc. suffice for
disclaimer of warranty of merchantability
d. G: Why require specific steps in 2-316(2) & say “nevermind, you don’t need
them” in 2-316(3)?
i. In ordinary commercial usage, “as is” understood to mean “no warranties”
ii. Maybe true btwn merchants, who understand commercial term usage
1. But why use general language if they understand each other? Why
not use technical language & save common-usage for consumers?
iii. Buyer should have argued, “I’m not commercial buyer. I do not
understand trade usage, such as “as is”:
1. Words have meaning in context
e. Pretend neither “as is” language nor other trade usage is found in K, no 2-316, etc.
i. Seller’s still not dead: if buyer had chance to fully inspect goods, 2316(3)(b), then buyer has said no warranties
f. Reason for rule, why allow warranty disclaimers:
i. If damages from defect on party who can best bear them, want incentive
for buyers to inspect goods (they’re know best if goods satisfy their needs)
1. So justification for warranty disappears
g. Here, interesting that buyer already has 1966 Impala
i. Assumes buyer has some expertise of Impalas
ii. Ex. in Balog, if buyers = Dali experts: might say no warranty b/c buyer
doesn’t rely on of seller’ representations, they have info, can find out
2. UCC 2-316 statute is subject to many interpretations
a. Could support court’s decision – that there should be no warranty
b. Statute does not lead to inexorable result that court suggests
c. Seller might make warranty: might be cost effective & attract buyers
d. Warranties but must be properly priced for seller to make profit
3. PELC v Simmons – Welch argues ????
4. Maybe shouldn’t bar disclaimer: some lose out if they don’t want and can’t use warranty
a. Warranty may make product too expensive for some consumers
i. But should we allow access to consumers of un-warranted goods
b. Higher price for warranty
i. Ex: P = price w/o warranty, P +10 = w/ warranty
ii. If breakdown cost = 12, P + 10 = good deal
iii. Might not want warranty if risk seeking OR can repair yourself at < 10
iv. But if negotiation costs 3, wouldn’t buy warranty (10 + 3 > 12 )
c. Different pools of people:
i. Inefficient for some to disclaim warranty
ii. Inefficient for others to try to take warranty
iii. Where greatest inefficiency lies = default rule if transaction cost high
d. Ex: washing machine has limited life based on use; 1st buyer overuses & resells
i. 2nd owner underuses machine & implicitly subsidizes 1st owner’s overuse
ii. 1st consumer happier if 2nd consumer could just purchase at P, not P +10
e. Cognitive dissonance may explains some apparently irrational decisions
i. Ex: take out loan & spend life savings on Ferrari that could break down at
any time. You then, irrationally, discount probability of break down
ANTICPATORY REPUDIATION
1. UCC 2-610 allows action to stop strategic ambiguity on breach, Hochster v. De La Tour
a. Facts: D decided not to hire P, courier, for tour long before tour happens
i. But when do you know D opted out?
b. Ct should let P bring action before K must be completed b/c wasteful not to: P
need not make expenditures, can’t enter another K while suing
c. Campbell, J: if can’t treat early renunciation as breach, promisee must act as if K
is fully enforced (ergo, must let promisee sue immediately)
i. Is this really right? What other alternatives are there?
ii. Could do nothing until time of performance then sue
iii. OR that promisee could make other preparations and still sue?
iv. UCC 2-610(a): promisee may await performance (for reasonable time);
610(c) can suspend performance, need not bring action immediately
d. Reasons to allow immediate action for breach:
i. 610(b) says you can sue – can resort to “any remedy for breach”
ii. Hypo: D says to courier (P), in May, “looks like I probably won’t make
trip after all.” But if P must wait for time of performance to sue, he, takes
another job & doesn’t sue. D returns & says, “Let’s go!” P can’t perform.
e. Reasons D might hint “I may not be able to perform”
i. Long-term relation: don’t want other party to think I’m dishonest.
ii. G’s view: D wants to create ambiguity to make P mitigate
1. Forces clarity? Determine breach at early stage (I am not clear on
this … why would courier ever act on ambiguous statement then?)
iii. OR: why courier could, under 610, bring immediate action: otherwise,
courier accepts other job, then must pay damages on 1st trip-taker’s trip
1. Must pay if ct. says courier wrongly interprets ambiguity as breach
f. Problem w/ 610: allowing “promisee” to stop performance but not mitigate
2. Seller can speculate w/ buyers money awaiting repudiation, Harrell v. Sea Colony
a. Facts: condo buyer tells seller he’s thinking about repudiating. Seller takes
ambiguous statement as repudiation and sells condo w/o telling buyer
i. Original K price = $74.9K, New sale price = $80.0K
b. Trial ct. found that Buyer breached, not seller
c. Seller arg: based on May 28 conversation (not rescission letter), Buyer repudiated
d. Buyer arg: said would only repudiate under certain conditions (return of deposit:
K says he forfeits by repudiating) & seller didn’t meet conditions but voided K
e. As Sea Colony (seller), if buyer were ambiguous, what would you do?
i. Not helpful: Just waiting or ask buyer for clearer answer
ii. Right answer: bring action, make buyer to clarify if he’s breaching or not
f. Problem w/ UCC doctrine: Seller can screw buyer, speculate w/ buyer’s money
i. Problem, “anticipatory repudiation” aside: if buyer clearly repudiates in
May, 2-610 gives seller option to sue now or await performance:
1. Gets upside when market good – need not share w/ promisor
2. Avoids downside when mkt bad – can sue promisor for damages
ii. Hypo: In May, house price = $80K. K complete in Dec, price = $90K
1. Your damages would be 0, just enjoy the profits
iii. May price = $70K, Aug = $67.5K, Dec $65.0K
1. Damages = $9.9K if you sue
iv. Seller need not mitigate, can await performance & sue for whole amt
1. Also could say thought he was helping buyer, waiting for price to ↑
g. Hypo: Under 2-610, say 2 scenarios: #1, seller ecstatic buyer will repudiate; #2,
seller will sue to recover damages from buyer
Kontract Price:
May
August
December
i.
ii.
iii.
iv.
Scenario 1
74,900
80,000
82,900
90,000
Scenario 2
74,900
70,000
67,500
65,000
Unfair: shouldn’t punish buyer; breach not necessarily bad (normatively)
Why let seller wait until Dec to sue? Why not make seller to sue now?
2-611: buyer can retract repudiation (still doesn’t protect him), sell condo
Holt arg: buyer can play mkt as well: if he can predict price drop, can fix
damages by performing: limit damages to [K – May] price v [K – Dec]
h. Answers to argument that buyer can watch market?
i. Different costs watching mkt: maybe high for buyer (here seller has agent)
ii. Ways to address difference:
1. Allay concerns of penalizing buyer: seller may only wait
“commercially reasonable” time, needn’t wait until K deadline
2. Aggrieved party (seller) must care for other party’s interests
iii. But how do you determine “commercially reasonable time”
i. Summary:
i. Hard to know when repudiation occurs
1. = uncertainty & incentives for parties to capture benefits
ii. Parties can do following facing uncertainty:
1. Could have progress payments
2. More highly tailored clauses defining repudiation: (but expensive,
results in more investment in negotiation)
3. Parties would like to void costs of negotiating w/ state-sponsored
clause (law) that tells them when repudiation occurs
a. I.e., default rule = negotiating benefits w/o transaction cost
b. Arguably this is what 2-609 is supposed to do
3. Scott v. Crown
a. Timeline
i. 3/13 – seller performs K1 – payment is due 4/13
ii. 3/15 – seller partially performs K2
iii. 3/15 or so – seller hears bad info about buyer, seller refuses to load
iv. 3/21-4/6 – seller seeks to get buyer
v. 4/4 – buyer contingently cancels
vi. 4/6 – Seller’s lawyer sends letter
vii. 4/7 – Buyer cancels
b. Seller’s arg:
i. Need not load: thought buyer wouldn’t pay = “reas. ground for insecurity”
c.
d.
e.
f.
ii. Tried to call buyer, got no response: reason to be edgy, since another
buyer didn’t return phone calls & later defaulted
1. Buyer arg: why let experience give seller’s right to cut off buyer
Buyer’s arg:
i. No grounds for insecurity: cut off grain w/o proof buyer can’t pay
ii. Buyer has not yet made any late payments to seller
Who’s right? What did UCC drafters intend when drafting 2-609? Why isn’t
anticipatory repudiation doctrine enough?
i. Finding repudiation hard: uncertainty as to when damages measured gives
parties incentives to act strategically
ii. “Reasonable insecurity” doctrine used/needed to clarify ambiguous signals
1. Can suspend performance until other party provides more info
iii. But buyer argues he wasn’t making any ambiguous signals
Why make standards of insecurity depend on “commercial standards”?
i. Needn’t write long K, waste resources if custom indicates “insecurity,”
Based on this, seller may have reasonable grounds for insecurity:
i. Not returning call may be industry signal of imminent breach
ii. Note: ct didn’t check grain industry customs to determine “reasonable
insecurity,” makes it up: but 2-609 directs ct to look at industry practice!
1. If 2-609 really reduces strategic behavior, prices reflect this?
iii. Seller shd have demanded adequate assurances in writing before 3?
(before seller refused to load grain)
iv. But: buyer incentive to write ambiguously, induce seller’s breach (make
him think buyer will breach but give seller no good reason to think so)
v. Suggests 2-609 changes strategy, but still have strategic behavior, no clear
std for “reasonable insecurity” & “adequate assurance of performance”
vi. Or maybe 2-609 helps but isn’t panacea for strategic behavior
Material Breach
1. General overview
a. Substantial Performance means aggrieved parties don’t ask for damages per se
(e.g., make them whole) but rather excuse from performance
i. Cases not for sale of goods so UCC inapplicable, at least on its face
ii. If breaching party substantially performed, aggrieved party must also
perform but gets some damages
b. Ct finds material breach by Bowen but not Foster. Ct ultimately finds material
breach by Lane. How does ct know if material breach occurred?
i. In B&B, ct says portion of performance not tendered relatively small
(small amt of money left to pay) matters to ct
ii. In B&B, ct looks to R §275 (989) for factors determining breach. In Lane,
also look to five factors for determining materiality from Rst. (2nd) §241
(995). Difference: B&B uses 1st Restat, Lane uses 2nd
c. Hypo: K to build luxury apt for $100M. At 80% done, buyer realizes seller used
crappy goods in construction, so final product = low quality. Material breach?
i. See (b) (995): easy to compensate lower amt (builder pays back some $$).
ii. Look to (e), was builder in good faith. May work in other direction from
(b). Are these factors helpful?
iii. Much discretion given to cts – problematic?
iv. One view: helps to understand factors if aimed at particular goal, maybe
“ex ante, what would parties have wanted to constitute material breach?”
v. Kind of default rule: keep transaction costs low.
d. Why let aggrieved party skip performance if damages would fully compensate
i. B&B: in theory expectation damages full compensate; but sometimes in
reality hard to determine actual damages
ii. Also may not satisfy legal standard to get fully compensatory damages
iii. So cancellation OK: allows aggrieved party (i) not to suffer more harm &
(ii) some liquidated damages for past harm (Bowen’s stock increased from
$15K to $82K). Unclear if damages over/under compensate
e. Like anticipatory repudiation: can wait, gamble w/ breaching party’s $$
2. Lane v Foster
a. Facts: Lane wants out at 1st: “Foster’s failure to pay $7K lets us get out of K”: b/c
you didn’t pay, we get off scot-free. Must be another notion of material breach.
b. Lane’s arg: ex ante parties would have agreed to let Lane walk away: wasteful to
keep Lane in K (can’t coat bridge works, no ability! Expect can’t do Stage II, too)
i. So just let Lane out of K, compensate Foster so he can K w/ 3rd party.
ii. Lane agrees it must remedy (already paid $10K), but wants Foster to
mitigate by hiring 3rd party. Trying to avoid performance yet again
iii. Lane seems to not want to have to perform Stage I, collect $7K & also not
pay for additional costs for another company to perform Stage II
c. Ct says Lane not victim of material breach, can’t walk away. But Foster = victim
of material breach & can walk away, enter K w/ 3rd party & collect damages
i. (998 last ¶) ct uses “material breach” language confusingly, begins by
using it as trigger to let parties walk, says Foster can sue for damages
d. Let party walk b/c problems w/ (i) compensation, (ii) waste: trying to mitigate
damages &/or hard to determine compensation.
e. Require “material” breach instead of letting party walk away for non-comformity?
i. Deters strategic behavior, cuts off inefficient performance
f. Don’t want to allow aggrieved parties to engage in strategic behavior as well
Perfect Tender (UCC 2-601)
1. Mechanics of perfect tender rule: (1) Seller tenders goods (2) Buyer inspects goods, can
accept or reject (3) Seller may cure if buyer rejects (3) If cured, buyer must accept goods
a. UCC 2-601: buyer can reject any non-conformity
i. Goods must have perfect tender to require buyer to perform
ii. Not service case, sale of goods has no substantial performance rule
b. Under UCC 2-508, seller cannot be forced to cure; just an option
c. Hypo: seller agrees to deliver 1000 bushels of green apples on March 1. Buyer
may reject all of these: (1) Seller delivers 990 bushels on Feb 28; (2) eller delivers
990 green, 10 red apples on Feb 28; (3) Seller delivers 1000 on March 2
d. Ex ante, parties to service K prefer substantial performance; parties to goods Ks
prefer perfect tender: b/c services can’t be resold, but goods can be
i. Criticism: if easy to get compensation for something w/ thick market, shd
be more willing to hold parties to Ks – since easy to get damages
ii. But it’s not what rule says; it allows rejection of any non-conformity
iii. If concerned about costs of strategic behavior in thick markets; if buyer
acts strategically to reject goods, seller can sell elsewhere – is this right?
2. Strategic incentives created by perfect tender & cure:
a. Buyer’s incentives to use perfect tender to reject strategically
i. Can reject even if seller’s cure cost-minimizes (ex: deliver 10 bushels)
ii. If prices ↓; buyer has strategic reason to exit by rejecting tender
iii. If buyer not happy w/ deal at 1st, can escape on minor, technical defect
b. So right to cure gives seller chance to avoid Buyer’s strategic behavior
i. Often assumes seller makes inadvertent mistake
c. Seller’s incentives to act strategically (especially in increasing market)
i. Cure lets sellers chisel (ex: maybe just deliver 990 bushels on purpose)
ii. Cure reduces incentive to perform in timely fashion
iii. Incentive to offer crappy 1st tender b/c they can fix it
d. Downsides to cure: makes buyer deal w/ seller who already signaled, “I don’t
conform” so buyer may be skeptical about future performance of seller
e. On balance, UCC must think buyers more likely to act strategically than sellers
i. Or: benefit (stopping buyer strategic rejections) > costs (seller chiseling,
strategic behavior, buyer unhappy w/ already non-conforming seller)
f. Cure good if cts. could discern good reasons for non-conformity
i. Want to allow cures when buyer act strategically, not when sellers do
ii. Check cases: are cts good at at figuring this out:
3. Hard to tell sometimes if buyer or seller acts strategically, Wilson v. Scampoli
a. Facts: color TV fails after purchase, seller tries to fix it, buyer wants new TV
i. Buyer already accepted; warranty only guaranteed free replacement/repair
b. Who’s strategic: ct. thinks buyer is, seller never had chance to cure
i. Looks like buyers acts strategically: asks for new TV, doesn’t let seller fix
ii. Replacement costly, warranty = right to free repairs, not full replacement
iii. Note: trial ct. returned purchase price to buyer
c. Counterstory [my notes]: buyer never used or accepted TV, seller acted
strategically by selling crappy TV, inconvenient to repair
d. Does 2-508 permit repair as cure?
i. New TV cost $675. Shd buyer have taken new but repaired TV for $675?
ii. Seller forces buyer to take “cheaper” repaired TV for price of new TV,
imposes cost of breach on buyer, acting opportunistically
iii. If everyone knows new TVs need adjustment (both parties expect nonconformities) then repair OK as cure (ex: common w/ buying new cars)
iv. But doesn’t mean it’s always the case where cure includes repair
4. Bilateral monopoly may induce strategic use of perfect tender rule, T.W. Oil v. Con Ed
a. Also: trying to avoid cost of inefficient strategic negotiation over tender
b. Facts: Buyer rejects oil shipment b/c K-ed for .5% sulfur content & got .9%;
c. Ct thinks buyer acted strategically (seller should have had chance to cure)
i. Buyer wanted to take advantage of drop in oil prices after K; claimed nonconformity even though it could have used up to 1.0% sulfur content
d. But why did buyer refuse seller’s offer to ↓ price based on different sulfur content
e. Seller can never = perfect tender, delivered too late though otherwise conforms
i. Ct.: buyer had duty to take cure b/c seller offered “within reasonable time”
ii. 2-508(2) – allows cure after time of performance has passed
iii. Under 2-508(2) must show reasonable grounds to believe initial tender OK
f. Ct. thought OK to make buyer wait for cure: made ConEd wait 1 mo for oil
i. Buyer didn’t prove immediate need for oil or harm; didn’t plead prejudice
ii. Thought buyer acted strategically b/c could use up to 1% sulfur content oil
g. So if buyer does not buy oil, then seller would have to sell at market price
i. Buyer will have to incur some search costs to buy replacement oil
h. Bilateral monopoly: room for bargain (both can be better off), but they don’t
i. Mutual benefit: buyers won’t get better price elsewhere, seller won’t get
better price than market: they can’t go elsewhere
ii. Both parties act strategically, try to exploit: seller offers less concessions
than buyer’s true breach cost; buyer demands more than true breach cost
iii. But litigation costs may be high, exceed difference btwn market & K price
iv. So seller = absolute rt to cure to avoid inefficient strategic negotiation
1. Give entitlement to party assumed to be less likely to be strategic
(or it doesn’t matter if both equally likely)
v. UCC 2-508 may be saying risk of buyer misbehavior no worse than seller
misbehavior, but entitlement ends costly renegotiation game
1. But maybe cure does little, may just lead to good faith bargaining
vi. Problem is bilateral monopoly: very volatile games, don’t know outcome
5. One objective in study of breach is to minimize the cost of contractual breakdown
a. Presumably parties prefer b/c reduces ex ante contracting costs
b. Question for cure: does remedy provided by UCC satisfy this?
c. If buyer can get exactly what he bargained for, then no cost except for delay
i. But if buyer got exactly what he wanted, wouldn’t contest cure
ii. So refusing to allow cure, buyer shows he’s not getting benefit of bargain;
iii. But buyer may resist cure to act strategically
6. Cure may be OK, even if buyer must take cure that isn’t full benefit of bargain
a. TV hypo: say seller repairs for $25; but to buyer, repaired TV only worth $625,
not $675; also, resale cost of seller is $100 if he must take back
i. Seller gets breach costs of $125 ($25 + $100, all to seller)
ii. If seller can repair, total breach cost = $75 ($25 to seller, $50 to buyer):
seller shd give buyer up to $50 discount, put breach costs on buyer
iii. Could negotiate btwn $75 & $125
iv. Problem w/ 2-508: lets seller to impose breach costs fully on buyer b/c he
must take repaired goods, not perfect & new
v. Buyer can act strategically: if seller gets price of TV rights & offers $50
discount, buyer will try to guess true breach cost to seller & get $125
b. Maybe UCC written to avoid wasteful renegotiation costs: situations where buyer
bears some breach costs but not as much as they demand from seller
i. So you demand seller bear breach costs, but avoid renegotiation costs
Revocation
Decision tree
Tender
↓
Inspection ↔ Reject
↓
↓
Acceptance → Cure
↓
Revocation
7. Revocation = same set of strategic possibilities for buyers and sellers
a. Probably more possibilities of strategic behavior for buyers
b. But reason to believe that buyers less likely to revoke goods?
i. To reject, buyers need only prove non-conformity
ii. To revoke, must show substantial impairment: higher burden of proof
1. 2-608 allows rejection if it “substantially impairs” value to buyer
2. Also, (1)(a) allows rejection when buyer’s goods are not cured
c. UCC doesn’t allow cure: revoking costlier to buyers than rejecting
i. Some cts. allow cure, some don’t for revocation (see Johannsen, below)
ii. UCC writers suggested changing 2-608 to allow post-revocation cure
iii. CG: big mistake, incentive for sellers to breach again w/o offset to buyers
8. “Substantial impairment” = std. for revocation (= reject after acceptance): Ramirez
a. Why: Buyer incentive to act strategically: revocation for minor defects bad b/c if
market price ↓ after buyer accepts, she revokes & buys elsewhere for less
i. Also lets sellers get on w/ lives: maybe costs to worry about revocation
b. Ramirez facts: buyer picks up RV & see defects only later, goes back to dealer
and rejects. Buyer already accepted goods, but dealer cannot ignore him
i. R must prove that defects “substantially impairs value” of goods
ii. Issue: Autosport gave Ramirez title w/o their knowing it; change of title =
acceptance, triggers higher “substantially impair value to them” std.
c. But problem “substantial impairment” std: may not minimize breach costs
i. Why: possible seller strategic act, dump minor defects onto buyer
ii. Perfect tender would minimize breach costs here, so rule demanding
“substantial impairment” doesn’t serve goal of minimizing breach costs
iii. Ex: $75 defect in $2K good, repair = $50. If buyer must show substantial
impairment, stuck w/ $75 less value. If buyer can revoke for any flaw,
seller would take back good & repair at $50: society $25 better off
d. Must believe reasons for substantial impairment outweigh cost of not imposing
perfect tender in hypo above [G does not know, really]
i. But infer UCC drafters thought cost of perfect tender after acceptance >
cost of having substantial performance doctrine
ii. 2-608: (mistake in Barnett, 2-608(3) should read, “A buyer who so
revokes has same rights & duties w/ regard to goods as if he had rejected”)
iii. Expressio unius est exclusio alterious: expression of one excludes other:
suggests if seller must cure post revocation, buyer must still take it
iv. Or: maybe buyer just has duty not to damage goods but need not take cure
1. Under 2-602, only duty = take care of goods after rejecting
2. But 2-608 ambiguous: duty to maintain goods safe, not take cure
9. Buyer can revoke & use goods to mitigate, Johannsen v. Minnesota Valley Ford Tractor
a. Facts: Ford sold farmer bad tractor, knowing it didn’t work, farmer kept using
b. Mitigation: lets buyer minimize damages by continuing to farm w/ tractor
i. Makes it revoking & keeping tractor consistent
c. What if buyer left 9700 tractor at seller & then bought another tractor to use then
he could have charged seller for damages if the mitigation tractor?
d. Ct.: seller may not cure substantial impairment (can only cure minor defects)
Risk of Loss
1. General rule = place risk on party best able to afford loss
a. Also create default rule to minimize transaction costs
2. When bailee acknowledges receipt of goods to buyer, buyer shd insure, Harmon v. Dunn
a. Assumes we say that bailee becomes buyer’s agent by continuing to hold goods
b. Facts: Harmons own horse, boarded by Dunn. D instructed to sell. June 30,
having sold horse, D gives Hs check from Scarborough & Hs sign transfer of
ownership document to Scar. July 1, Dunn tells S he has docs but doesn’t give
them. S tells D he wants to transfer Horse on July 5. July 4, horse dies.
c. Scar’s arg: Risk of loss on Harmons b/c (1) I never got papers or horse (2) It
doesn’t matters if Dunn is bailee or not:
i. If yes, I don’t bear risk of loss unless I got non-negotiable docs (see UCC
2-509 (2)(a)), and I never got them
ii. If no, I never got horse AND seller = merchant
d. Harmon’s arg: I’m not merchant, also, under 2-509(2)(b), acknowledged buyer’s
right to possession: Scar knew he owned (when Dunn told Scar he had papers)
1. Counter argument: (2)(b) irrelevant, it deals w/ cases where docs
unavailable, Scar could have received documents but did not.
ii. Colorable claim that Scar got horse: Dunn = Scar’s agent, not just bailee
1. Agent’s receipt = principle’s too; if Dunn = Scar’s agent, when
Harmon gave Dunn papers, Scar got them, so bears risk of loss
e. So bailee = buyer’s agent when buyer knew could possess but left horse w/ bailee
i. Arguably, policy reason for resolving conflict, not just statutory analysis
f. So 2-509 should be interpreted to minimize transaction cost by placing risk of loss
on party best able to avoid it: so put it on party who has control of goods
i. Or we should place the risk of loss on the party best able to bear the cost
g. Hypo: buyer has 2 options: pay $1K for goods & assume risk of loss or pay
$1,020 & let seller take risk (costs buyer $30 to insure b/c not repeat player)
i. Ex ante, would, put risk of loss on seller at higher cost
ii. Seller as repeat player knows optimal amount of insurance; buyer may not
h. So generally, 2-509 seems to place risk of loss on the party best able to handle it
i. In Harmon hard to tell who could best limit loss since bailee had control of goods.
i. When bailee tells buyer “you have goods” & seller received check & had
no reason to have interest in it; buyer shd have known to buy insurance
3. Jason’s Food Posner says must determine legal obligation 1st, then say who buys
insurance, not other way around; don’t determine legal obligation by who insured
a. So Posner might say Harmon analysis circular
b. Big ambiguity: unclear if (1) acknowledgement triggering risk of loss occurred
(2) underlying policy best served by placing risk of loss on buyer or seller
INCOMPETENCE & OTHER EXCUSES
General overview
1. Assumptions about K formation include:
a. Parties for K may act autonomously – they may enter anything
b. Parties = best judges of their own welfare & , and if we allow them to make their
own decisions, they will do so in their own best interest
Incompetence
2. Ortelere v. Teachers Retirement Bd of New York
a. Facts: Mrs. O changes pension benefits shortly before her death in 1965; after
death, her husband says she was incompetent to go back to earlier election
i. 1958 election: take small amounts now, husband gets balance at death
ii. 1965 election: Take max payments on pension now, no survivor benefits
b. Ct. says that mental incompetence can render K voidable (not same as void)
i. If the K is void, then any party can disregard K
ii. Party representing incompetent party can render K void if ct. wants to
make K voidable; other party (retirement board) can’t render K void
c. CG question: Is it okay, ever, to excuse a K based on incompetence?
i. Ct below says K valid, no incompetence (but said it can be used)
ii. Reasons to enforce K anyway? What if no defense of incompetence?
1. Mostly want to enforce K: competent parties may strategically
claim incompetent
2. Reliance: hurts other party who doesn’t know party is incompetent
3. People who may wear social signals might be blocked from
making Ks that they need b/c people
iii. Ortelere ct. recognize incompetence as valid doctrine b/c neither
assumption of contract law applies
1. Autonomy: people not really autonomous?
2. Efficiency: do people not know how to maximize their welfare?
d. What should incompetence test be?
i. What does Ct. look at to make K voidable based on incompetence?
1. School bd knew Mrs O (1) on medical leave (2) had mental illness
2. Ct calls Mrs. O’s choice “foolhardy,”focuses on substance of K to
infer incompetence!
ii. But Mrs O has rational reasons for her election: (1) Maximize income
during lifetime (2) Unconcerned for welfare of survivors (3) Thought she
would live long or at least outlive husband
iii. Look at facts; some support rationality of Mrs. O’s election:
1. Husband retired, may need more income now
2. Mrs. O took out a loan
3. Mrs. O didn’t know she was going to die soon
4. Mr. & Mrs. O had a good relationship, or so claims Mr. O;
a. Mr. O tries to change her benefits to her daughter
b. Makes it seem that she’s not happy with that
iv. So very factors that suggest rationality cause ct. to infers incompetence
e.
f.
g.
h.
v. Also, would trust actually offer options no rational person would expect?
1. She may have made a bad gamble as opposed to being incompetent
vi. But ct instrumentally bent law to get incompetence (sympathetic reasons)
1. None benefit if Mr. O’s blocked access to funds: no harm, no foul
Ways to develop consistent, good laws & improve Ortelere decision
i. Ct thinks Mrs. O knew what she was doing so applied modern insanity test
1. Test = can invalidate K even if person has cognitive understanding
but is inexorably driven to certain choices
2. But is this really good? Don’t we all make impulse choices?
3. But you can’t go back to stores and ask for your money back
ii. Does Ortelere say uncontrollable impulse allows you invalidate K
1. How would a salesman distinguish Ortelere?
2. While ct. infers Mrs. O’s purchase irrational, she does at least have
a history of mental illness, also school board knew this
We are concerned w/ upsetting transactions upon which sellers relied
i. 751 –ct. does consider this, says that they are “balancing interests”
ii. So how does the court strike the balance btwn those who bargain in good
faith & people w/o control of their faculties
iii. Here, school bd had reason to know that Mrs. O was insane
1. Might infer bad faith if person knowingly bargains w/ the insane
2. Seller, therefore, should not have entered transaction
3. Also 2R and ct. of appeals
If Mrs. O had no cognition, probably can get out of K regardless if other party
knew of her mental defect
i. Different b/c hard to tell if person can’t control self but seems rational
ii. Person w/o cognition seems insane, send clear signals of irrationality
iii. But mostly, insane people would send signals that they
iv. [Insert graph on Insane people]
v. Most people insane and act irrationally (but some judicial error here)
vi. Some people insane and act rationally (subset of acting rationally – cts.
will be unable to tell insanity and make judicial error)
So to keep down litigation costs, presume seller shd know person is insane
i. Best rule: may sometimes hurt sellers & break good Ks but accept this
cost to keep litigation down
ii. Except “reason to know” by sellers when P’s insane & acts rationality
iii. Safety value case: problem for those who act insane but aren’t & marginal
iv. Sellers may avoid these people but they might get out of K easy
Misrepresentation
1. Excuse b/c don’t want to let sellers lulls buyers w/ misinfo, Halpert v. Rosenthal (1072)
a. Facts: P (seller) told buyer no termites, no need for termite inspection, etc.
i. Ct. held that there was misrepresentation and D could get out of K
b. If seller lied & knew there were termites, then buyer should be excused
i. Shouldn’t benefit from deception: no autonomy or moral reason to allow
c. BUT: No reason to think seller knew of termites. So why allow buyer out of K?
i. Ct. said that it doesn’t matter that seller’s representation was innocent
ii. Buyer relied on seller’s statements
iii. Similar to warranty for particular purpose: don’t want seller to just guess
1. Implied warranty of fitness for particular purpose & express
warranty, buyer sends signals, “this info key to my decision”
2. If seller says “I dunno” buyer can make his own inspection
3. But if seller says “no,” buyer lulled into not inspecting
d. Lulling inefficient: misinformation reduces likelihood of jointly maximizing value
i. Then we could say that each party bears the cost of obtaining its own info.
ii. But presumably, we want to mimimize search cost for info, so then we
want to make party who is best placed to avoid mistakes of info
iii. So make seller provide info (or lack thereof) to buyer
e. Hypo: Buyer asks, “Termites?” seller honestly says, “Haven’t seen any,” but he
has evidence there may be termite problem
i. Seller’s info technically true but not responsive. Could buyer invalidate?
ii. Now there is a language game under 159 f. Hypo: seller says, “No evidence of termites” but later learns of termites?
i. Duty to correct statement, since he is again lulling buyer
g. Hypo: seller knew of termites but buyer didn’t ask, buyer later discovers termites?
i. Maybe non-disclosure, so don’t impose duty to disclose in absence of
ii. May not require seller to guess at buyer’s idiosyncratic concerns
iii. But should make seller disclose material issues
1. Seller has info so why not place burden on him to disclose
2. Like implied warranty case, assume silence implies no termites
3. But: maybe house prices reflects termite infestation
iv. Information investment:
1. If party invested to discover info, should let them capitalize on it
2. If info discovered casually (I see sawdust) then must disclose
3. But on other hand, clear rule either way will force buyers to know
to ask direct questions or inspect on their own
2. Vokes v. Arthur Murray, Inc. (1083)
a. Facts: Studio encourages woman, induced by “motivated acquaintance” (1083-4),
to pay $31K for dance lessons, telling her she’s talented; she’s not, and sues
b. Ct. says she was induced to enter dance lessons thru “undue influence, suggestion
of falsehood, suppression of truth, & free exercise of rational judgment”
i. Vokes ct invalidates K b/c: “her will overcome by conferral of praise”
ii. But no real evidence studio overcame her will: it took advantage of her
desire to be dancer but didn’t wear her down after initial resistance
c. Also, Vokes got benefit (emotional satisfaction), despite not becoming expert
dancer: maybe she got $31K in emotional support even if she knew studio lied
d. CG: Ortelere & Vokes involve women, suggest highly gendered position in K law
when it comes to mental capacity
i. In both cases, ct. voids K b/c in name of protecting women from infirmity
ii. CG suggests in both cases, if men had been involved, outcome different
iii. Ct. intervenes in “bad choices”; may say they protect vulnerable women;
but if ct. intervenes b/c of in capacity, may say women = incapable
1. Vokes language suggests ct. doesn’t take P seriously
Duress
1. General points
a. Unlike other cases: no cognitive error, misrepresentation or fraud inducement
b. To CG, merely constrained choice not duress
i. Ex, plea bargaining: prosecutor says to defendant: plead guilty to 2nd
degree manslaughter & 10 years in jail; we won’t go for death penalty
ii. Likely no duress b/c free to evaluate chances; prosecution uncertain
c. Restatement on Duress: R175 says improper K invalid; R176 defines improper
i. Must make 2 inquiries: (1) Improper threats (2) improper exchange
ii. Clear impropriety if threat = crime/tort; don’t even look at K terms
iii. Presumption that terms improper (Unfair terms is predicate of R176(2))
d. Monopoly presumed to generates improper terms: at least evidence of
i. But not always prima facie wrong (ticket scalping not illegal everywhere)
ii. But is monopoly improper? Seems to meet “prior unfair dealings”
iii. Look at 176(2)(c) – “use of power for illegitimate ends”
1. But is this really helpful here? Threat vs. offer?
e. Threat v. Offer: does it matter for invoking duress defense to breach?
i. Hypo: X threatens Y’s life for money = clearly illegitimate. But if Z offers
to rescue Y from X (& Z unrelated to X)? Invalid? Duress?
ii. Should threat v. offer really matter for invoking duress defense?
1. No viable alternative here, w/ either K – w/ Z or X??
2. Discourage use of duress to encourage offering of services & investment in them
a. Hypo: Perfect Storm: people on boat in storm, private helicopter rescue service
arrives & tells people, “We rescue for $1M each.” People live & don’t pay,
rescuers sue, Sailboaters would argue duress
b. Reason to enforce K: encourage rescuers, let them get benefit of their investments
3. Hypo: Godfather offer: sign K or die; later, you repudiate, duress very clear
a. Inffficiency: enforcing Ks = people invest too much in force & avoiding it
b. Autonomy: even w/o efficiency, good to have people trust you w/ promise
c. Direct physical force: can, but needn’t, be justified by efficiency & autonomy
4. Difference between “Perfect Storm” and “Godfather”?
a. Perfect storm, the threat is external, whereas if P threatens D
b. But: if X threatens D & P says to D, “I’ll save you if give me all your money!”
c. Duress = sort of monopoly that leads us to think that it is a value maximizing K?
Maybe monopoly is evidence
5. Hypo: “Sign K or I’ll tell your spouse about your affair” You sign & then don’t pay.
a. See Silsbee v. Webber: if “affair” K should be enforced, Holmes is wrong
i. Holmes in Silsbee: K isn’t necessarily valid just b/c threat legal
b. But it might well be blackmail, but
6. Monopoly situations: Ask in each of these cases what the restatement would do?
a. Hypo: you really want to see Marky Mark concert but missed tickets. At face,
tickets = $50 but people resell at $500; they take IOU & later, you just pay $50
i. Is this why we don’t allow ticket scalping?
b. Hypo: Michael Jordan signs K for $1M w/ Bulls: they buy costly stadium & need
him to fill it, but next year, Jordan says, “I’ll play for $5M” Bulls agree & then
refuse to pay, claiming duress. Monopoly?
c. Hypo: huge snowstorm blocks driveway; if you don’t get out, lose $1M deal.
Snowplow says: “I’ll plow for $950K,” leaves you $50K; he plows, you don’t pay
i. Arg.: entitlements only give you valid duress case?
ii. No: can characterize anything as entitled: “I’m entitled to plow at
reasonable rate”
d. Is either Jordan or Plow hypo duress? Might find 176(a) in analyzing this case
7. Hypo: SCt heard case where employees claimed they had to sign, to get jobs, Ks in which
they agreed that they would arbitrate, not go to ct, if had problem w/ employer
a. So what if employee can only get job if they submit to arbitration: later, he claims
sexual harassment & wants jury trial, but employer says, “you must arbitrate”
b. Employee says arbitration clause = non-volitional choice & acted under duress
i. Many jobs w/ arbit. clause = higher wage maybe b/c expected value of arb
ii. Maybe like plea bargain case, constrained choices
c. But Souter called it unequal bargaining power: even if individual fully informed
of arbitration clause, many people who aren’t informed drive down wage?
i. CG: But if people know of arbitration clause, employer can’t enforce b/c
d. Unclear if arbitration helps employees: more wages, arbitration cheaper &
quicker, but damage awards lower (but if likelihood of bringing action vs.
employer is low, trade off vs. longer process & higher damage award)
e. Note: saying “no duress” here assumes perfectly competitive labor market
i. If labor mkt isn’t, law should intervene, constrain K choices
ii. Here, somewhere btwn monopolist & perfect competitor: but Restat. not
helpful on how close to extremes must we be to know intervention needed
Undue Influence:
1. Seems largely defined by what it’s not: differences from other excuses:
a. Misrepresentation: no false opinions per Vokes in undue influence
b. Incompetence: similar, someone takes advantage of temporary incompetence
i. Party claiming undue influence generally competent, though
c. Duress: may not have improper threat (see Odorizzi)
2. Odorizzi v. Bloomfield
a. Facts: teacher arrested for homosexual acts; after, principal told him to sign letter
of resignation or else make arrest public & fire him; didn’t let him consult lawyer
b. Trial Ct.: finds undue influence
c. Not incompetence: Odorizzi generally competent but will was overcome
d. Not duress (so says ct) but something wrong about way Odorizzi threatened
i. Under CA law then, valid to threaten to disclose arrest for homosexual
acts (but why threat = proper? B/c he was arrested or b/c gay = illegal)
ii. Today, maybe just treat as duress b/c threat now
iii. Or maybe violative enough of privacy to disclose someone’s sexuality?
1. Dilemma: in 1960s, disclosure of threat = bad; but now, in 2000, if
homosexuality’s not bad, then disclosure shouldn’t be threat?
e. Not economic duress: Odorizzi didn’t argue his economic survival depends on it
i. But if he did claim, would be valid if he could prove situational monopoly
(e.g., school district said, “we’re your only possible employer”)
f. Ct’s criteria: = persuasion overcoming will w/o convincing judgment (Odorizzi)
i. Circumstances of person claiming it (like temporary incompetence)
ii. Willingness of other party to exploit these circumstances
iii. Could give these standards to jury & have them decide: any reason not to?
3. Hypo: 3 days before wedding (planned for 9 mos), groom presents bride pre-nup forcing
her to forgo all rts. to property groom brings, alimony, etc.
a. She rejects & then signs after consultation w/ lawyer
b. Analysis: (1) problem of saying bride = servile? (2) Had lawyer (3)
Circumstances unclear
4. Problem w/ undue influence = we get it every day
a. Don’t want people to escape Ks they like at 1st but later regret
i. Many sales techniques meant to make party act precipitously, not reflect;
so we want to avoid people who just buy normal shit this way
b. We want to limit Ks to those that are value-maximizing to both parties
i. To determine if K = value-max, each party must enter K w/ some
rationality: ability to do cost-benefit analysis, etc.
c. But sometimes, person not rational, and we excuse: mentally retarded, etc.
i. But smaller vices: impulsiveness, weak will. We don’t excuse these guys.
ii. Maybe don’t want to make (sellers) determine if someone is irrational
iii. May want people to take losses: maybe best remedy for mild irrationality
is to induce people to become more rational? So don’t let them off
iv. But need metric for when rationality deviates so much, shd allow breach
v. Has Odorizzi ct. provided proper criteria?
UNCONSCIONABILITY
1. UCC accepts unconscionability as defense, but no definition
a. Absence of meaningful choice for 1 party + K terms unreas. favorable to other
2. Procedural v. Substantive unconscionability
3. Williams v. Walker Thomas
a. Facts: furniture store, buy multiple furniture rent-to-own; missing one payment
means store can retake all of them; Buyers say that clause in K is unfair
b. Posture: (1) trial ct. rejects claim, says no remedy available though sympathetic,
even suggests Congress should pass law (2) App. Ct. says it’s possible to use
unconscionability to invalidate K but doesn’t (3) DC Cir invalidates K
c. Judge Wright must to find (1) unequal bargaining power
i. He’s looking at procedural and substantive unconscionability;
ii. What in Wrights’ view here that makes it possible to find unconsc.
1. He didn’t say there was unconsc., but found enough ev. to remand
iii. Looks at whether the people who purchased understood the terms of the K
1. 1132 – one term upsets him and calls it rather obscure
2. “Cross-collateralization clause” installment payments for all, miss
one payment & seller takes back all items
iv. Did Ms. Williams understand this K term? Was this the issue?
1. Wright, on 1135, says that ordinarily someone who signs K w/o
fully understanding terms still held to K
2. What makes difference here? There’s little bargaining power
3. Probably wouldn’t allow law student to get out of K; reasonable
law student vs. reasonable welfare mother?
4. Wright focuses on education & circumstances of Ms. W
5. True: can’t have judicial system doling out ad hoc justice; must be
rough guidelines b/c high cost to get lots of info in each case
6. Is the ct. here engaged in some rational generalization of people
who find themselves in circumstances of case?
7. Want legal rule that’s wide enough not to make costs high but
narrow enough to be pretty accurate
v. If Ms. W. understood terms, could she have bargained around it?
1. She didn’t have choice of terms, but could have chosen not to buy
vi. If objective of K is value-max or autonomy, and we have neither of those,
then we should let people out?
d. Ex: CG tries to go to movies, costs $9.50 every where he goes and can’t bargain
 True here? Do all furniture stores have same cross-collateral terms?
 If all stores have the same clause?
 If no stores have the same clause?
o Note that Wright cites Corbin – suggest that unconsc. Is compared to business
mores & practices at the time. If every store did the same thing
o Union of substantive defect and procedural
 Not just bargaining power, but unfair terms
o If buyers can’t bargain around clause, why do sellers put it in there?
 Seller puts in protection from default payments
 Buyer advantaged? Reduced transaction costs?

•
•
•
•
Buyers might not otherwise be served – sellers might not otherwise make
credit sales at all or at very high interest rates
 Maybe it increases availability of contracting markets for number of
people who can pay credit
o Answer: but poor could still get same terms w/o cross collateralization!
 But: if late default, goods, after being held for long time, worthless
 Also, Walker-Thomas doesn’t sell used goods
 So they can’t just get items back individually b/c market price
Should K be enforced v. Mr. Zimmerman (educated), but not v. Ms. Williams
(uneducated)
o More like procedural unconscionability
Substantive unconscionability: arguable – could provide poor easier access to goods
even if you are concerned w/ procedural unconscionability
[Note, Wright is not clear – this is why]
Wright – finds that you need both procedural and substantive unconscionability
o Wright distinguishes “I didn’t understand the term” v. “I wasn’t capable of
understanding the term.”
o So on 1135 – does not generally allow people to get out of Ks even if they sign K
w/o knowing its contents
o Why does he invoke the trial ct.’s initial opinion –
 Trial ct. doesn’t invalidate K but wanted to
 They thought K was fundamentally unfair b/c customers were too poor to
buy goods (Ms. Willams had 5 children, on welfare) – AND WalkerThomas knew this
 Hypo: woman saves $500, says, “I want to buy a stereo,” then returns and
says, “I revoke K – I can’t feed my kids! Stupid!”
o What is Wright getting at here? Why does he invoke this language?
 He’s in agreement w/ it – it is unconscionable for company to knowingly
sell to customers who can’t afford it
 So does it matter, in hypo, that goods are sold on credit or cash?
• Is it cash/ credit? Maybe cash K would be enforceable but credit K
wouldn’t b/c customer didn’t understand long-term consequences
of credit sale?
 If it is only the fact that seller knows buyers socioeconomic status, then
cash/credit distinction doesn’t matter at all
 Restat: uncon. if seller knows buyer can’t pay off goods on credit terms
• Buyer was lulled into K?
• But none of this comes into play in cash sale, b/c you’ve
completed K just by buying
 What if you were Walker-T’s lawyer and WT asked you to draft crosscollateralization K – how do you write it?
• Draw notice to cross-coll clause (this is what students say, not CG)
 Also, how can WT sell to Ms. Williams-like character
• Draw notice to cross-coll clause, explain it to her! (this is what
students say, not CG)
o We have so far used efficiency to argue that the Ks are good – may maximize
welfare by permitting access to credit.
 May make other argument: enforcing cross-coll Ks hurt welfare/efficiency
• Maybe individuals are overly optimistic about prospects to pay
credit bills
o In short, maybe market doesn’t internalize cost of crosscoll clause
• Consumer suffers from cognitive error
 Best case is that seller can accurately calculate interest rate based on
default rate, etc. – STILL what might buyer not know
• Buyer may not know if he will get enough money to pay for goods
• So K may not be
• Maybe buyer discounts default risk too optimistically: buyer does
not understand signal: high interest rate b/c of highly likely default
• So may be welfare maximizing for seller but not buyer, and is thus
not joint-welfare maximizing
• Asymmetric information
o But maybe asymmetric info overpredicts number of Ks that should be invalidated
 There are informational asymmetries, but problem is that we may not trust
cts. of when this problem is great enough to invalidate K
 So whom do you trust? Cts. to make these distinctions
Wille v. Bell – excludes consequential damages on take-it-or-leave-it-K
• To what extent should uncon be affected by boilerplate, take-it-or-leave-it Ks?
• [None of Wright’s analysis in Williams applies here]
• Facts:
• Also, no procedural uncon. – Wille was reasonably sophisticated (businessman), could
have just read “no damages” clause on back of K
o Wille had other advertising options, no monopoly on advertising by Bell
o Wille admitted he made up for Bell’s fuck up by advertising elsewhere
• Is there substantive uncon – even if K was agreed to, was the term itself unfair?
o Doesn’t this remind you of Hadley v. Baxendale?: Hadley justification
o Arg that it’s fair:
 Boilerplate may be upheld
 Keep price of advertisement low by not paying consequential damages to
those who get screwed
• Ad hoc negotiation costs for would also raise advertising price
• High variance in damages for fucking up advertising
 Problem for Yellow pages = would will have hard time pricing advertising
 If price based on average lost profits, only those would suffer huge
consequential damages would buy advertising
 Adverse selection problem: worthwhile for those w/ likely consequential
damages > average
 So this is why Yellow pages = self-exculpatory clause
 **Variance = key problem: if Yellow pages could predict losses, might be
okay to make Yellow pages insure consequential damages for mistakes

Does it add anything that it is standard form contract?
• It reduces costs to advertiser: it was boilerplate
o Arg that it’s unfair: it’s take-it-or-leave-it, reflects unequal bargaining power
o Is saying “it was boilerplate” may be surrogate for doing analysis that we did –
shouldn’t just dismiss saying “standard form contract” – should do the analysis
Carnival Cruise v. Shute (1149)
• Different from Wille: not business v. business, it’s consumer v. business
o Likely that consumer didn’t read boilerplate terms and didn’t understand
o Would these, presented on take-it-or-leave-it, invalidate?
• Why do we have these terms? Benign & malign stories
o Benign: how can we validate even though people don’t read or undestand
 As result of clause, people who take cruises can pay less for tickets
 Or, if customers could bargain for forum: would accept more inconvenient
forum for lower price
o Malign? (didn’t go over this yet)?
o Question: MUST people read the ticket to notice provision
 Not everyone need read K, it suffices that some people read K IF the
interest of those who read K coincide w/ those who don’t
 Free-ride on efforts of those who read Ks
• Ex: I order a Dell, and NYU also orders Dells. I order 1 computer
& NYU orders millions worth. Probably NYU read K carefully, so
best strategy for me is not to read K
• To extent that my interest coincides w/ NYUs, I am treated fairly
 Assume that customers would freely bargain for this deal
 Key assumption: that enough people w/ other market possibilities and can
bargain to change K terms are your proxies
• Assume Carnival has to bargain w/, say, 10% of customers
unhappy, they change K & assume make other 90% happy
 If this assumption is not true, arg. falls apart
o Why doesn’t Carnival make it a default rule, not a take-it-or-leave-it rule
o And is there a malign story that’s just as compelling as the benign
• Anomaly under benign story: no opt-out clause; why not offer it?
o W/o opt out, not just memorialization of the default rule, but it’s mandatory
o Strategic problem: can’t tell ex post who really wanted to opt out of clause ex ante
(those injured & resident in inconvenient forums will say “I wanted opt out)
o So why not allow opt out: what benefit to make mandatory
 Seems like take-it-or-leave-it = seller is losing a sale
o Seller wants to be able to control the sellers agents; doesn’t want agents to go out
and make deals, difficulty policing behavior of agents
 Don’t want agents negotiating away forum selection clause, might not
know cost of litigation
• The malign story (Justice Stevens)
o Disparate bargaining power: allow forum selection clauses, doesn’t deter
negligence
o Sellers collude OR no one represents interest of those who don’t read clause
•
•
•
•
o Or maybe buyers can’t evaluate risk & don’t know if clause worth accepting;
Carnival = repeat player, know accident frequency, can easily calculate injury
cost (buyers not repeat player)
o Asymmetric information: ship operator can put in clause that benefits cruise line
but buyer can’t figure out of the clause & price internalizes the interests of buyers
 Could charge monopolist price
Which story should we pick?
o If in fact the situation reflects the benign story, should enforce clause
 Not to enforce = paternalistic; autonomy interest also satisfied here
o If it’s the malign, where parties don’t have much choice, shouldn’t enforce
o CG: not saying boilerplate stuff should always or should never be enforced
 The issue is how do we know what story we’re in: benign or malign
 How do we know cts will consistently get story right? Can they test
robustness of market, availablility of info, overlap btwn interests of
readers and non-readers
o Problem to dissent: can’t read clause until bought ticket, which is non-refundable
Must presume either benign or malign story: then other party has burden of proof
o Must ask yourself, by and large, how do standard form contracts
o If cts. don’t do good deciding ad hoc, must have some presumption
o If presume most stories benign, litigation cost less but throw out valid injury cases
 Or if presumption = malign, make people sue
 False positives and negatives
Better off = conclusive presumption?
o Like Heisenberg uncertainty: you affect the outcome by
o Once you announce that “any P claiming that standard forum clause is that
unconscionable will lose,” companies will rush to put in malign clauses
o So true malignancies will expand b/c parties will exploit the judicial do
From civ pro view, why not assign presumption, not on “benign or malign” but who is
best positioned to overcome presumption
o Here, cruise line has best info to prove clause malign: high burden for customer to
prove that clause was malign
o BUT: if world is mainly benign & jury sympathetic to injured party, false
positives (verdict for customer) would be high
RELATIONAL CONTRACTING
Alcoa
• Doctrinal law = excuse/impracticability,
• But subtheme is kinds of K: normally we assume discrete K, but this is different context,
as we examined good faith: ongoing relationship
o Situation - long term relationship but can’t foresee contingencies on which K is
silent
o Usually problem = materialization of situation, which one regret & other happy;
• Facts: Essex Ks w/ Alcoa. Essex supplies alumina, which Alcoa processes and returns
o Length of K = 1967 to 1983: Essex has unilateral right to extend for 5 years
o Price: variable based on inputs, could change depending on various indices:
 But there’s a price cap: Essex won’t ever have to pay more than cap no
matter what happens to input prices
 If contracted for price cap, expect to see price floor as well, but there is no
floor really
o During this period, aluminum price has increased b/c of non-labor input costs
increase (OPEC embargo makes electricity generation expensive)
o Also Essex gets aluminum at $0.3635 /lb v. current market price of $0.73
 You would expect that Alcoa production costs would be close to $0.73
 Problem: WPI was suppose to account for non-labor cost, but that index
didn’t sufficiently follow actual price increase
 Alan didn’t foresee OPEC crisis, which dramatically ↑ price of using plant
 Also, pollution controls make it more expensive to run
• What is it that Essex wants out of this?
o Essex wants to enter aluminum market, long-term supply to signal commitment
o Alcoa thinks it can get $0.04/lb
o Both parties think they’ve entered joint profit maximizing venture
o Now, changed circumstances: difference between projected labor costs and actual
labor costs, so Alcoa is not as well off as it anticipated, Essex is wildly better off
o But if we fix this, no Pareto world: To help Alcoa, you hurt Essex
• Impracticability: 3standards under (UCC 2-615)
o Did seller assume greater obligation?
o Did contingency materialize, non-occurrence of which was basic K assumption?
o Was the contingency one that renders the K impracticable?
• Here, go thru the questions:
o Did Alcoa assume greater obligation?
 Existence of price cap: it agreed that no matter what, they were not going
to charge Essex more than some amount
 They didn’t have option to renew K, but Essex did
 What about the pricing scheme itself? This is signal that parties have fully
negotiated what will happen, so that neither will try to get out of K
 Posner in NIPSCO: long term K = zero-sum gamble: bet that fixed price
favorable
• Parties make opposing bets, both can’t be right, so Posner says it’s
wrong to save party who loses by allowing them to re-contract

Response to Posner: parties still anticipated certain range of outcomes
when they made gamble based on historical parameters: their gamble
wasn’t predicated on ahistorical event occurred
 The debate, here then is whether Alcoa did accept a higher burden
o Did contingency materialize, non-occurrence of which = basic K assumption?
 Depends how event characterized: just price increase or “energy crisis”?
 What is this question really asking? What did parties think really was
going to happen, what was foreseeable
• But ct wants to avoid this inquiry, want to focus on allocation of
risk inferred from the circumstances known at the time of K
o But this still sounds like foreseeability!
 Then we ask, how do we know if something is foreseeable or not?
• Might not much more than, “this wasn’t worth bargaining about”
 But how do you frame question?
• Couldn’t predict OPEC embargo but could predict price spike
might happen
• Bottom line: this is completely indeterminate b/c foreseeability of
contingency depends on how we frame the question:
o Was the contingency one that renders the K impracticable?
4/24/01
• Skip the doctrine, and think about this:
o What kind of obligations did the parties think they took on for contingencies?
o Why do gaps arise in contracts?
 High transaction costs to plan for every contingencies: calculus, some
things are not worth bargaining for
 Incomplete info about the future: can’t plan for everything even if you try
 Willing to accept default rule for contingencies & don’t bother to bargain
• This is the point of the UCC: saves parties from negotiating
 Renegotiation:
 Inadvertence:
• Doesn’t strike both parties the same way – may not be neutral
 Information asymmetry:
o Source of the gap in K might tell us what parties intended to do:
 If you think that cts will be good at figuring out reason for gap, then okay
to let them decide cases and excuse performance or adjust obligations
 If you don’t think cts can tell, then …
o If you think long term relational K is like little partnership, then should make
them fix Ks
 What then would default rule look like: what do most parties intend on
long-term relational Ks
o Say: if there is something totally unsually that could happen, as you get ready to
sign long-term K. If something happens really good for one and really bad for
other, then might agree to share gains. OR could try to walk away from K
 Seller & buyer. Each has a couple of options:
Buyer
Adjust/Perform
Exploit
Seller Adjust/Perform (-2000, -2000)
-10,000, 5000
5000, -10000
Exploit
-3000, -3000
 Prisoner’s dilemma: both parties have incentive either way to exploit, so
both will lose 3,000 (see bold)
• But they could have agreed, if anticipated event, to both adjust
• Individuals pursuing their self interest are worse off than if they
had agreed to cooperate
 Ct could say that given that rational parties, ex ante, would have agreed to
cooperate in a contingency, I will interpret K in a way consistent w/ that
assumption
• I assume that completely contractual gap they would have agreed
to adjust
• Maggie: points to corporate counsel survey that says that they
would not necessarily do this: wouldn’t adjust
o But CG skeptical of surveys AND pure theory
o How do you expect parties to signal that they wanted out of this situation? What
contractual signal would you send to show you wanted to be relational or not?
 Could say so explicitly: if something bad happens, we intend to help each
other out
 A force majeure clause: can get out under certain circumstances
o Extra legal factor in Alcoa:
 Alcoa doesn’t want to seem like they’re chiseling Essex (Alcoa doesn’t
want to have Essex go around talking shit about Alcoa)
 So the need for reputation and repeat play between the 2:
 So may have no need to make ct. readjust
o Judicial readjustment may have negative affect:
 May have one party know of risk and the other doesn’t: could cost both
$50K and can avoid w/ investment of $30K
• Learned Hand: want party to make investment & avoid loss
 But one party thinks that if they’re silent and it happens, ct. will force
them to adjust AND divide the cost between them: so their total lost $25K
• Rather take latter
 Might have less rigorous bargaining under mutual adjustment