I. K Contract Formation in the Form Contract Setting & UCC 2-207
A. 2 Questions to Ask:
1. Was a K formed?
2. If so, what terms govern?
B. Common Law: Mirror image rule! No K formed if offer & acceptance are not mirror images!
Not practical so use UCC 2-207
C. Form K’s create problems of conflicting terms. To Avoid:
1. Don’t bury favored terms in boiler-plate clauses; make acceptance conditional;
communicated w/ other party to ensure forms have identical terms/meanings; have
other party sign specific clause in overall agreement; return to old school or having K
signed by both parties w/ mutually agreed to terms.
D. UCC 2-207:
1. A definite and seasonable expression of acceptance OR a written confirmation
which is sent w/in 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;
(1) A proposed alternation in an acceptance is material and does not enter
the K if it would result in surprise or hardship to the other party
c) Notification of objection to them has already been given or is given w/in a
reasonable time after notice of them is received.
(1) Note: 2-207(2) require that the transaction be b/w merchants and both
must be merchants, and if either is not a merchant, end the matter.
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 w/ any supplementary
terms incorporated under any other provisions of this Act.
a) Gap Fillers: (unless the parties otherwise agree)
(1) 2-308 states that delivery must takes place at the seller’s premises
(2) 2-310 requires payment n delivery
(3) 2-314, 2-315 provide for minimum warranties
b) Under 2-207(3) a K is recognized on the terms on which the writings agree
(description, quantity, price, delivery, and payment) and the other stuff falls
out
(1) See HYPO – price of tractor, delivery, etc remains if agreed to and
arbitration clause will fall out.
E. UCC 2-207:
1. Material Alteration (P. 498)
a) Comment 4. Material Alteration Examples (causes surprise or hardship)
(1) A clause negating such standard warranties as that of merchantability
or fitness for a particular purpose in circumstances in which either
warranty normally attaches
(2) A clause requiring a guaranty of 90% or 100% deliveries in a case
such as a K by cannery, where the usage of the trade allows greater
quantity leeway
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2.
3.
4.
5.
(3) A clause reserving to the seller the power to cancel upon the buyer’s
failure to meet any invoice when due
(4) A clause requiring that complaints be made in a time materially shorted
than customary or reasonable
b) Comment 5. Non-Material Alterations (where no element of surprise or
hardship and which therefore are incorporated into K unless notice of
objection is seasonably given)
(1) A clause setting forth and perhaps enlarging slightly upon the seller’s
exemption due to supervening causes beyond his control, similar to
those covered by UCC on merchant’s excuse by failure to
presupposed conditions or a clause fixing in advance any reasonable
formula of proration under circumstances
(2) A clause fixing a reasonable time for complaints w/in customary limits
or in the case of a purchase for sub-sale, providing for inspection by
the pub-purchaser
(3) A clause providing for interest on overdue invoices or fixing the seller’s
standard credit terms where they are w/in the range of trade practices
and do not limit any credit bargained for
(4) A clause limiting the right of rejection for defects which fall w/in the
customary trade tolerances of acceptance “w/ adjustments” or
otherwise limiting remedy in a reasonable manner (see also 2-718 –
liquidating damages and 2-719 – K modification)
Additional Term: if it adds new matter not covered in the offer
Different Term: if it varies or contradicts something provided for in the offer
Are additional terms a part of the agreement?
a) Comment 6:
(1) If no answer is received w/in a reasonable time after additional terms
proposed, it is both fair and commercially sound to assume that their
inclusion has been assented to.
(2) In the event that there are clauses that conflict on form sent by both
parties, they are construed as being in objection to each other and the
requirement of notice in subsection (2) is not satisfied and thus the
terms do not become part of the K.
(3) The K then consists of the terms originally expressly agreed to, terms
on which the confirmations agree, and terms supplied by this Act,
including subsection (2).
“Additional” versus “Different”:
a) If additional terms NOT made conditional on acceptance, under 2-207(2),
terms will be considered proposals for addition to the K UNLESS, see (2)(a,
b, and c).
b) If additional terms made conditional on acceptance, and there was no
express acceptance of these terms, then go to 2-207(3) and the K is
governed by the terms on which the 2 writings agree. Then go to UCC as a
“gap filler” (2-305 and 2-311)
c) If different terms, various rules apply:
(1) Knock-out Rule (White): Conflicting terms cancel each other out
under Comment 6 and K consists of terms to which both writings
agree. Once conflicting terms are knocked out, go to UCC as gap
filler.
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(a) Policy: preserving a K and filling in any gaps is the purpose of
the UCC; protects offeree since neither term would govern and
the UCC would fill in an appropriate term
(2) First-Shot Rule (Summers): Different terms just fall out (unless
offeree expressly objects to the original term) and original term applies.
(a) Policy: Offeror is the master of the offer: while this rule may give
offeror an advantage, Summers argues such advantage is not
unearned – offeror’s have slightly more reason to expect that
their clauses will control than offerees
(3) Roto Lith Rule: any responding document which states a condition that
MATERIALLY ALTERS the obligation SOLELY TO THE
DISADVANTAGE of the offeror is expressly conditional and thus does
not operate as acceptance
(a) Note: Summers/White disagree w/ Roto-Lith b/c it is inconsistent
w/ the word “acceptance” in 2-207(1) and contrary to the
drafter’s policy to whittle down the counteroffer rule
F. Cases:
1. Daitom, Inc. v. Pennwalt Corp. (pg. 503): (different term case)
a) Seller’s doc. sent PO, including a 1 yr SOL period; Buyer’s doc. Suggests the
PO carries remedies implied by or available at law (usually 4 yrs). Issues: Is
there a K? Does the 1 yr SOL period become part of the K? Holding: the
terms are not additional – they are different, so subsection (2) does not apply;
thus, using Knock-out rule, the terms cancel out, and pull in the UCC’s 4 yr
SOL; UCC provides the gap filler
b) Rule: White’s approach: Knock-out Rule
2. ProCD v. Zeidenberg (pg. 515)
a) Rule: terms inside a box of software bind consumers who use the software
after an opportunity to read the terms and to reject them by returning the
product; only terms known to the consumer at the moment the K is formed
are part of the K and provisos inside the box do not count (in Hill, the warranty
terms were distributed at time of K)
3. Hill v. Gateway 2000 (pg. 515): (no exchange of forms)
a) H bought computer that had arbitration clause in terms; H kept computer
more than 30 days and brought suit; Gateway tried to enforce clause;
Holding: by keeping computer beyond 30 days, Hills accepted Gateway’s
arbitration clause
b) Rule: ProCD rule
c) NOTE: this was not a traditional battle of the forms case since a phone convo
is not really a “form” but then again, 2-207 applies when the parties’ conduct
indicates that a K has been formed but fail to adopt expressly a particular
writing so unclear
4. Step-Saver Data Systems v. Wyse Tech., Inc. (pg. 518): (additional term case)
a) Facts: S-S bought computer software from Wyse and brought suit for breach
of warranty when software developed problems; Issue: do the disclaimer of
warranties and limitation of remedies printed on the package containing
software = terms of agreement? Holding: S-S never expressly agreed to
terms of the box-top license, and the terms should be treated as additional
terms; since they would materially alter, they don’t become a part of the
agreement
b) Rule: 2-207(2)(b) governs
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c) Note: Also may have been found to fall out under 2-207(3) as buyer had
already paid for software and tried to use it.
G. HYPO: buyer send PO for tractor that says any dispute will be resolved by arbitration.
Seller responds w/ acknowledgment that says no arbitration. All other terms are agreed to
(Price, delivery, quantity, etc.)
1. Under CL – no K under mirror image rule
2. Under 2-207 if the bargained terms on PO and acknowledgment agree  K
3. Is seller’s acknowledgment a confirmation based on an oral K or is it an acceptance
in reply to an offer
a) An acceptance
4. What result under Roth-Lith Rule?
a) Rule: a condition, which materially alters the obligation solely to the
disadvantage of the offeror, is expressly conditional and doesn’t operate as
an acceptance.
b) Did it materially alter?
(1) Buyer would argue yes – extra costs, different rules of evidence, etc
(2) Seller would argue No – it is ancillary/incidental term of overall K
c) Was it solely to disadvantage of offeror?
(1) No – buyer may wish to take advantage of ct system at times
(2) Yes – buyer wants an arbitration clause and seller does not
d) Note that Roth-Lith no longer applies in most jdx
5. If Roth-Lith doesn’t apply, acceptance is not conditional; Buyer asks seller to ship
and seller doesn’t. Can buyer sue for breach of K?
a) Yes – K exists under 2-207(1)
b) Does the buyer the arbitrate or go to ct?
(1) Is 2-207(2) invoked? Determine if additional or different term.
(a) Most likely different terms as it conflicts in both party’s writings.
(b) 2-207(2) only apply to additional terms.
(i) Minority opinion says different terms are included here,
but this is not majority rule.
(c) 2-207(3) points out that only terms where writings agree are
terms of K. So buyer can go to ct as arbitration clause falls out
under Knock-Out Rule (White - conflicting terms cancel each
other out).
(d) First-Shot Rule
6. What is tractor was shipped, if there a K under CL?
a) Yes – seller making acceptance w/ different terms is seem as counter-offer
b) By making payment and taking delivery, buyer has accepted to the no
arbitration clause.
7. What if buyer didn’t have arbitration clause, and sell still had no arbitration clause?
a) Then 2-207(2) would be invoked as it is an additional term
(1) Check to see if meets the sections unless factors
b) What if the buyer goes ahead and pay and the tractor is shipped
(1) Then 2-207(3) applies and conflicting terms fall out
(a) Additional term then not arbitration clause would not be in K
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II. Policing Doctrines (defenses where there is grossly unfair terms or overreaching by one party at
the bargaining or promising stage (or both)
A. Duress
1. Elements of Duress: (from reasonable person standard)
a) Must be a threat
b) Threat must be improper (RST 176)
c) Threat must induce victim’s manifestation of assent
d) No reasonable alternative
2. Note: a threat to refuse performance of a K cannot be made the predicate of legal
duress (Cable v. Foley, pg. 527)
3. Rules:
a) RST 176: When a Threat is Improper
(1) A threat is improper if
(a) What is threatened is a crime or a tort, or the threat itself would
be a crime or tort if it resulted in obtaining property,
(b) What is threatened is a criminal prosecution,
(c) What is threatened is the use of civil process and the threat is
made in bad faith, or
(d) The threat is a breach of the duty of good faith and fair
dealing under a K w/ the recipient.
(2) A threat is improper if the resulting exchange is not on fair terms,
AND
(a) The threatened act would harm the recipient and would not
significantly benefit the party making the threat
(b) The effectiveness of the threat in inducing the manifestation of
assent is significantly increased by prior unfair dealing by the
party making the threat, or
(c) What is threatened is otherwise a use of power for illegitimate
ends
b) Standard Box: In cases of alleged duress to make a payment:
(1) There must be some compulsion or coercion, some threatened
exercise of power or authority over his person or property, which can
be avoided only by making the payment.
(2) Such payment is not to be regarded as compulsory unless made to
free the person or property from an actual and existing duress imposed
upon it by the party to whom the money is paid.
(3) Mere threat to w/hold from a party a legal right, which he has an
adequate remedy to enforce, is not duress.
c) S.P. Dunham: Has the person complaining of duress been constrained to do
what he otherwise would not have done? (Reasonable person standard)
d) Undue Influence: the pressure must be exerted by a person enjoying a
special relationship w/ the victim that makes the victim especially susceptible
to the pressure.
4. Cases:
a) Standard Box Co. v. Mutual Biscuit Co. (pg. 526) (no duress)
(1) Π box seller offer ∆ option to buy boxes at a certain price. An
earthquake raises prices and ∆ attempts to buy under old pricing, but π
says that option is no longer available. ∆ accepts boxes at mkt price,
refuses to pay later, and π sues. Ct finds that option expired so no K
existed b/w π and ∆. No grounds for duress as π was only charging
mkt price, there was no K b/w parties, and ∆ acted voluntarily.
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(2) Different result is option K has been accepted and π said it would only
sell as market price
(3) Different result if π raised prices just for ∆ or for everyone in mkt – ct
would look to see if price was excessive or burdensome.
b) S.P. Dunham & Company v. Kudra (pg. 529): (duress)
(1) Π has dept. store w/ area leased to fur restorer who outsources to ∆.
When fur restores went bankrupt, he owed ∆ money and ∆ had
possession of all furs. Π asked ∆ to return furs, but it said it would only
do so if π paid off the debt or it could give ∆ the list of people and it
would return. Ct found that ∆ made improper threat by forcing π to
make K so that it could get furs back to customers ASAP (also dead of
winter)
(2) Under RST 176(1)(a) – could be seen as tort for conversion as they
would keep furs unless π made K
(3) Reasonable Alternative – ct said π should not have to resort to RA and
that there was none in this case
c) Remedies for Duress
(1) Rescission
(2) Restitution
B. Misrepresentation
1. Elements of Misrepresentation:
a) State of mind is irrelevant
(1) Misrepresentation can be innocent, negligent or intentional
b) There must be justifiable reliance by π
(1) Gullible people sometimes protected
c) Must be a misrepresentation of fact
2. RST 552C: Misrepresentation in Sale, Rental or Exchange Transaction
a) One who, in a sale, rental or exchange transaction w/ another, makes a
misrepresentation of a material fact for the purpose of inducing the other to
act or to refrain from acting in reliance upon it, is subject to liability to the
other for pecuniary loss caused to him by his justifiable reliance upon the
misrepresentation, even though it is not made fraudulently or negligently.
b) Damages recoverable are limited to the difference b/w the value of what the
other has parted w/ and the value of what he has received in the transaction.
3. Innocent Misrepresentation:
a) General Rule: a person seasonably (timely) may rescind a K to which he has
been induced to become a party in reliance upon false, although innocent,
misrepresentations respecting a cognizable material fact made as of his own
knowledge by the other party to the K.
(1) Bates v. Cashman (pg. 535): During negotiations, π represented there
was a right of way, a substantial factor affecting purchase by ∆, which
turned out to be false although innocently made; Holding: ∆ can
rescind b/c of π’s false statements (although innocently made).
4. Negligent Misrepresentation:
a) Gibb v. Citicorp Mortgage Inc: ∆ sold house to π w/ an “as is” disclaimer, but
had indicated that termite problem was limited to certain area and had been
fixed. Ct finds disclaimer is not absolute, jury may still find if fraud controlled
bargain. Ct finds that ∆ was liable of negligent misrepresentation. Π did not
have a duty for further investigation.
(1) Misrepresentation can be used as a shield (avoid K) or a sword (retain
K, but make the other party correct the defects).
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5. Fraudulent Misrepresentation:
a) π must allege and prove:
(1) That a representation was made as a positive assertion;
(2) That the representation was false;
(3) That when made, the representation was known to be false or made
recklessly w/o knowledge of its truth or falsity
(4) That it was made w/ the intention that π should rely on it;
(5) That π reasonably did so rely;
(6) That π suffered damage as a result.
b) Holcomb v. Hoffschneider (pg. 541): ∆ sold π land guaranteeing 6.6 acres,
but it fell short. π sued for misrepresentation and won. Ct said that buyer did
not have to conduct its own survey and could rely on ∆’s assurances.
(1) Factors: π asked ∆ numerous times, ∆ made a specific guarantee, both
walked the property together
(2) Note: Vague statement may not result in misrepresentation as not
reasonable to rely on such statements.
c) Porreco v. Porreco (pg. 544): fake engagement ring; Holding: W’s reliance on
ring’s value was not justifiable
(1) Distinction b/w Porreco and Holcomb: the property did not yet belong
to them; Porreco owned the ring and had possession
6. Misrepresentation and Damages:
a) 3 Categories:
(1) Innocent misrepresentation:
(a) Π can recover restitution damages – usually in sale, exchange,
rental, etc.
(b) Bates indicated rescission also allowed
(2) Negligent misrepresentation:
(a) Π can recover reliance damages – usually limited to
commercial, employment, pecuniary transaction
(3) Fraudulent misrepresentation: (RST 549)
(a) Π can get expectancy damages – usually only in commercial
transactions.
C. Concealment
1. Fraudulent Concealment:
a) π must allege and prove:
(1) That ∆ concealed or suppressed a material fact;
(2) That ∆ had knowledge of this material fact;
(3) That this material fact was not w/in the reasonably diligent attention,
observation, and judgment of π
(4) That ∆ suppressed or concealed this fact w/ the intention that π be
mislead as to the true condition of the property;
(5) That π was reasonably so misled; and
(6) That π suffered damage as a result.
b) General Rule: silence may be fraudulent where, under the circumstances, the
seller is bound in conscious and in duty to disclose to the other party and in
respect, to which he cannot, innocently, be silent. If the fraudulent
concealment is material enough, this may justify rescission of the K
(1) Weintraub v. Krobatsch (pg. 546): (active concealment)
(a) After inspecting home illuminated, ∆ signed contract w/ π, but
before closing, ∆ discovered a REALLY BAD roach infestation
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and rescinded; π sued for value of the deposit and broker fee; ∆
claimed the π was aware of and concealed infestation
(b) Holding: ∆ can maintain action for fraud
c) “As Is” Clauses: allegations of active concealment trump “as is” clauses: in
order for “as is” clause to be enforced, there must be no allegations of
fraudulent concealment
(1) Gibb v. Citicorp Mortgage, Inc. (pg. 535): ∆ acquires house through
mortgage foreclosure; ∆’s agents informed house is termite infested,
but instead of remedying, they just cover it up; ∆ tells π damage been
repaired and no problem; π purchases property and signs “as is”
clause. π then attempts to rescind based on fraud misrepresentation
and concealment
(a) Holding: As is clause is not a bar to pursuing COA
D. Duty to Disclose
1. Kronman: Mistake, Disclosure, Information and the Law of Contracts
a) “Deliberately acquired information”: info whose acquisition entails costs which
would not have been incurred but for the likelihood that the info in question
would actually be produced (Ex: direct search costs, cost of school)
b) “Casually acquired information”: info that would have been acquired in any
case
c) The distinction b/w the 2 helps to understand when a duty to disclose arises:
(1) Cases requiring disclosure involve info which is likely to have been
casually acquired
(2) Cases permitting nondisclosure involve info which is likely to have
been deliberately produced
d) When looking to see how information was acquired – look at parties intent
e) Thus, disclosure cases give the appearance of promoting allocative efficiency
by limiting the assignment of property rights to those types of information
which are likely to be the fruit of deliberate investment
2. Fried: (p. 550) ct may still require disclosure despite above based on duty of good
faith
E. Public Policy (basic tension w/ this defense is balancing interests in autonomy and public
policy)
1. Cases in which a K is contrary to Public Policy
a) Penalty clauses
b) Unduly retraining of trade or sale of real property
c) Unduly interfere w/ judicial or govt processes
d) K’s made by ppl not properly licensed (Bloomgarden: B didn’t have license to
charge for finder’s fee; Building K’s: if you don’t have a license to build, cant K
for it)
e) Illegal Ks such as K’ing to commit a crime
2. Exculpatory Agreements (Disclaimers)
a) RST 574: a bargained-for exemption from liability for the consequences of
negligence not falling greatly below the standard established by law for the
protection of others against unreasonable risk of harm is legal
(1) McCutcheon v. United States Homes Corp. (pg. 553): (paternalism)
(a) Agreement which exculpates LL in multi-dwelling complex from
liability regarding duty to maintain common areas = void as
against public policy; π injured falling in unlit stairs of ∆’s
apartment complex recovered despite disclaimed in lease. Ct
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held such disclaimer was contrary to public policy and at CL, ∆
had duty of safety in common areas.
(2) Weaver v. American Oil Co. (pg. 551): lease exculpated American Oil
from liability and required Weaver to indemnify AO for any liability for
AO’s negligence
(a) Conditions for a K to be unenforceable:
(i) It is unconscionable b/c of unequal bargaining power
(ii) It is used to the stronger party’s advantage
(iii) Is unknown to the lesser party
(iv) Causes great risk or hardship on the lesser party
(b) The party seeking to enforce such a K has the burden of
showing that the provisions were explained to the other party
and came to his knowledge and there was a real and voluntary
meeting of the minds and not merely an objective meeting
(3) Kalisch-Jarcho, Inc. v. New York City (pg. 556): exculpatory clause
unenforceable since city acted in bad faith
(4) NOTE: In Weaver, the court invalidated the exculpatory clause partly
b/c American Oil failed to explain it to Weaver, an unsophisticated
contracting party (unconscionable in process). But in Kalisch-Jarcho,
exculpatory clause was unenforceable even though it was b/w two
sophisticated contracting parties b/c of the intentional wrongdoing by
the city (unconscionable in substance).
(5) Molina v. Games Management Services (pg. 557): (disclaimer OK
under public policy) ct honors disclaimer when ∆ sells π winning
lottery ticket, but loses his copy which is required to pay award.
Winning a lottery may not be as important to public policy and ∆ was
only negligent.
3. Contracts Not to Compete/Non-Compete Agreement
a) Arise under 2 situations generally
(1) Sale of business
(2) Employment K’s
b) Questions to Address When Presented w/ Non-Compete Clauses:
(1) Does the agreement even apply at all?
(a) Try to interpret the clause narrowly so that it does not reach
client
(2) Is the party actually injured as a result of the clause?
(3) See if clause can be invalidated based on public need, not behavior of
party
(4) Is the agreement reasonable in time, geography, scope, etc?
(a) Cts want to make sure that clause is not unreasonably broad
(5) If it is unreasonable, what should the court do?
(a) 3 options to deal w/ unreasonable non-compete clauses:
(i) Automatically throw out the whole thing
(ii) Severance: go through the clause and strike out the parts
of the clause making it unreasonable (Karpinski)
(iii) Rewrite agreement to serve intended purpose
(a) This approach has freedom of K issues, but at
least you’re not throwing the whole thing out as in
option (i)
c) Rules
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(1) General Rule: a non-compete agreement is enforceable if reasonable
as to scope, time, territory and protects legitimate business interests
(a) Karpinski v. Ingrasci (pg. 563): (partial enforcement)
(i) Agreement preventing oral surgeon from practicing
“dentistry” w/in 5-county area forever is unenforceable
since its scope (dentistry) is too broad considering the
party seeking enforcement has legitimate interest in
preventing employee from practicing oral surgery in this
area
(ii) Power to sever – ct could enforce part of the clause
(geographic limitation) and sever unreasonable part
(can’t practice any dentistry)
(2) Quandt’s Wholesale Distributors v. Giardino (pg. 556): (trade secrets)
(a) Agreement only enforceable if reasonably limited temporally and
geographically to extent necessary to protect against
employee’s use/disclosure of trade secrets or confidential
customer list
(b) Ct held that a non-compete clause b/w π employer and ∆ exemployee could not be enforced focusing on the claim of trade
secrets or confidential customer lists. Ct found this info was in
phone book and was readily available (therefore not a secret)
(3) Dwyer v. Jung (pg. 559): (public need)
(a) Ct held that non-compete agreement b/w attorneys could not be
enforced as contrary to public policy. Public should have right to
choose one attorney over the other.
d) Other Examples of K’s Against Public Policy
(1) K Made by mentally handicapped person (RST 15)
(a) Includes senile and drunk people w/ limitations
(2) K made by infant
(a) May ratify after reaching adult age
(b) May be enforced if infant states he is an adult
(3) K to commit crime or tort
(4) K which requires license, but party does not have said license
F. Inequality of the Exchange: Constructive Fraud
1. Doctrine of Constructive Fraud: if a person is in a confidential relationship AND it
turns out that the price paid and the value of the land is so disparate, the court
will find fraud regardless of whether there was an intent to deceive (distinction: intent
to deceive is an essential element for actual fraud but not constructive fraud)
a) Jackson v. Seymour (pg. 571): (constructive fraud)
(1) Ct found that business savvy ∆ who unknowingly purchased π’s land
for $275, but later found out it was worth more for its timber had
committed constructive fraud.
(2) Constructive fraud requires
(a) Confidential relationship
(b) Reliance to one’s detriment
(c) Gross in adequacy in price
(i) Standard – shocks the conscious
(d) Mutual Mistake on the parties
(i) Neither party knew how much the land was worth at the
time
(3) Ct allows rescission of K
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(a) Π can recover value of timber removed
(b) ∆ can recover price paid ($275) + interest, taxes, expenses, etc.
G. Unconscionability (unethical, unreasonable, undue, unfair, underhanded)
1. Generally
a) If the provision of a K are so grossly unfair as to shocks the conscious of the
ct, judge may decline to enforce the offending terms or the entire K.
2. Approaches
a) Adhesion K’s
(1) General Rule: cts generally do not like to enforce adhesion K’s
(a) Must show that clause is unconscionable or thwarts reasonable
expectations
(2) Policy of Adhesion K’s
(a) Pros
(i) Reduces negotiating time
(ii) Lower cost to K
(iii) Efficiency
(b) Cons
(i) One party can alter K – forcing a take it or leave it
situation
(ii) Nobody reads the fine print on K’s
b) Doctrine of unconscionability
(1) UCC 2-302 (p. 597) (see below)
(a) Decided by ct not jury
(b) Looks to see if unconscionable at time K was made
(c) Latitude in remedy – refuse to enforce K, enforce remainder of
K, limit application by striking clause
(2) Types
(a) Procedural and Substantive (see below)
3. Procedural vs. Substantive Unconscionability
a) Procedural: involved w/ K formation process, focusing on high pressures
asserted by the parties, fine print of K, misrepresentation, or unequal
bargaining power
(1) Refers to when one party was induced to enter the K w/out having a
meaningful choice
(2) Example – boiler plate clauses, high pressure salespeople, illiterate
consumers, person drugged and induced to sign K, etc.
b) Substantive: involved w/ content of K terms (e.g. inflated prices, unfair
disclaimers, termination clauses)
(1) Is a K term unduly fair or one-sided
(2) Example – excessive price, modification of either seller or buyer’s
remedies
(3) Last Penny Clauses
(a) Generally held to be unenforceable
(b) Clauses state that all products under installment plan will be
forfeited if at any point consumer defaults on payment – even if
only one penny left
c) *When both procedural and substantive unconscionability are present, the
case is strongest for finding unconscionability
4. UCC 2-302: Unconscionable Contract or Clause
11
(1) If the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made, the
court may:
(a) Refuse to enforce the contract, or
(b) Enforce the remainder of the K w/o the unconscionable clause,
or
(c) So limit the application of any unconscionable clause as to
avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any
clause thereof may be unconscionable, the parties shall be afforded a
reasonable opportunity to present evidence as to its commercial
setting, purpose and effect to aid the court in making the
determination.
b) UCC § 2-302 comment: Basic test is, whether in light of the general
commercial background and the commercial needs of the particular trade or
case, the clauses involved are so one-sided as to be unconscionable under
the circumstances existing at the time of the making of the K (Ryan v. Weiner
(pg. 576)
(1) Factors:
(a) Inadequacy of bargaining power (age, experience, education of
parties)
(b) Unconscionable financial terms
(c) Innocent failure on π’s part to understand transaction
(d) Predatory practices on part of ∆
5. Cases:
a) Industralease Automated & Scientific Equipment Corp. v. R.M.E. Enterprises
(pg. 583): (Substantive – modifying remedy)
(1) ∆ purchases trash incinerators from π. K between parties include
disclaimer on warranties in bold. Incinerators don’t work but π is still
required to pay. π sues ∆ for unpaid balance but ∆ denies liability
claiming that disclaimer of warranties was unconscionable. Court finds
the warranty disclaimers were unconscionable since ∆ had no other
alternatives (duress: sign 2nd K or not delivery of incinerators) and he
depended on π’s expertise.
(2) Other Defenses
(a) Duress
(b) Misrepresentation
(c) See UCC 2-313, 2-314, 2-316 for warranty disclaimers
b) Dillman & Associates, Inc. v. Capitol Leasing Co. (pg. 589): (equal footing –
no unconscionability)
(1) Copy machine lease found to not be unconscionable b/c
(2) Distinguishable from Industralease b/c:
(a) Terms were understandable and lessee accepted “as is”
(b) Disclaimer was repetitive (occurred in 3 places); conspicuous
(c) Parties had equal bargaining power (both savvy businessmen)
(d) Lessee was under no compulsion to lease (no duress-like
circumstances).
(e) Lessee did not rely on lessor in choosing a product
(f) Machine was not worthless – was unable to handle lessee’s
volume
(g) Lessor was not mfg so lessee could still sue mfg
12
c) Jones v. Star Credit Corp (p. 591): (excessive price/remedy of reformed K)
(1) π’s are welfare recipients who seek to avoid K where ∆ is charging
them nearly $900 for a $300 freezer on which they have already paid
$600. Ct reforms K to set price at $600 by finding that ∆’s actions were
unconscionable
(2) Ct found that ∆ took advantage of π’s financial situation that was
known by him. While financing was necessary and ∆ can charge higher
price for increased risk, the terms were excessively high.
d) In Re Lisa Fay Allen (pg. 594):
(1) Lease for washer/dryer not unconscionable b/c there was no
oppressive bargaining practice (lessee sought lessor out), lease was
written in understandable terms, terms were not unreasonably
favorable to lessor, and the purchase price was not shocking
H. Standard Form/Adhesion Contracts
1. Contracts of Adhesion: unequal bargaining power where terms were forced upon
one party by the other; cts will look closely at such K’s for unconscionability
a) Fairfield Leasing Corporation v. Techni-Graphics, Inc. (pg. 599): (adhesion
clause – 7th amendment right)
(1) Jury trial may be waived if done knowingly and intentionally, but cts
will indulge every reasonable presumption against waiver. ∆ has heavy
burden of proving that π knowingly, voluntarily, and intentionally
agreed to the jury waiver provision. Such a waiver must be
conspicuous and stand out in the K. Ct finds here that it was not
conspicuous (noticeable) and holds the waiver invalid.
2. RST 234/208: Unconscionable Contract or Term
a) If a K or term is unconscionable at the time the K is made, a court may refuse
to enforce the K, or may enforce the remainder of the K w/o the
unconscionable term, or may limit the application of the unconscionable term
to avoid unconscionable result
(1) Comment Factors: gross inequality of bargaining power,
unreasonably favorable terms for the stronger party, lack of alternative
for weaker party, lack of assent by weaker party, unfair surprise,
notice, and substantive unfairness
b) Caspi v. The Microsoft Network (pg. 612): (forum selection clause)
(1) class action regarding B of K and consumer fraud; ∆ moves to dismiss
based on forum selection clause in their online user agreement; π
claims they weren’t given adequate notice of the clause; ct holds
clause enforceable since it was clear and unambiguous and was
presented in a fair and forthright fashion (relies heavily on Carnival
Cruise Line v. Shute (pg. 613))
(a) Notice is important
(b) items value matters
3. Doctrine of Reasonable Expectations:
a) RST 237 comment f: Although customers typically adhere to standardized
agreements and are bound by them w/out even appearing to know the
standard terms in detail, they are not bound to unknown terms which are
beyond the range of reasonable expectation.
(1) Factors:
(a) Term is bizarre or oppressive
(b) Term eviscerates the nonstandard terms explicitly agreed to
(c) Term eliminates the dominant purpose of the transaction
13
b) RST 211: Standardized Agreements:
(1) 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.
c) C&J Fertilizer, Inc. v. Allied Mutual Insurance Co. (pg. 603): (reasonable
expectations doctrine)
(1) π buys burglary insurance from ∆. K required visible marks on entry of
building exterior in order to collect $. π never reads this. π sues. Ct
holds the clause is unconscionable and protected by doctrine of
reasonable expectations.
(2) Corbin Rule: MAJORITY RULE is that insured’s are not bound to know
the contents of the insurance K.
(3) Argument that ct got it wrong: president of C&J was aware of policies
like this
(4) Reasonable Expectations – both parties reasonable expected to insure
and pay for a theft accomplished by a non-employee w/ reasonable
proof of such theft
(5) Substantive Unconscionability – definition of burglary given by ∆ is not
in line w. common knowledge and not negotiated
(6) Procedural Unconscionability – clause was in small print and buried;
nor was it explained to π w/ not much education and no expertise in
such legal matters
d) Markline Co., Inc. v. Travelers Insurance Co. (pg. 608): (RE doctrine not
recognized)
(1) Similar theft case where the ∆ refuses to pay unless π shows visible
marks of burglary according to K.
(2) same facts as C&J (burglary) but court does not recognize doctrine of
reasonable expectations and even if it did, it would not apply since π
didn’t reasonable except coverage to include anything else.
(3) Argument that court gets it wrong: president testified that he thought
the coverage was complete; insurer was aware that π expected full
coverage; parties discussed requiring a burglar alarm be installed and
to notify insurer if it went off
4. Problem 5-5 (pg. 611): Representing Ms. Williams (all of her furniture is threatened
by repo)
a) Arguments that she should not be bound by agreement:
(1) K language does not actually permit repossession (note: always
examine clause to be sure they can do what they’re claiming they can
do – interpret narrowly so as to prevent them from doing it)
(2) Linguistic maze (Gladden pg. 611): language makes it unconscionable
(3) Unconscionability: Ryan v. Weider: w/ her education level, there is
likely unconscionability since they can come in and take all her stuff
even though she’s paid for all but one
(4) Article 9 of the UCC: Secured Transactions
(5) Consumer protection laws (jdx specific)
(6) Non-disclosure (Weaver case)
(7) Doctrine of Reasonable Expectation (RST 211)
I. Modification of Contracts and Pre-Existing Duty Rule
1. Note: Look to facts to determine whether there was a modification, recession and/or
new contract, or waiver
2. Traditional Rules:
14
a) Common Law: in order for a K to be enforceable if modified, new
consideration was necessary
b) Pre-existing Duty Rule: a party who refuses to perform and coerces a promise
from the other party to the K to pay an increased compensation for doing
what he is already legally bound to do takes unjustifiable advantage of the
other party
(1) Alaska Packers’ Assoc. v. Domenico (pg. 627): (pre-existing duty)
(a) Ship workers agree to do work for a set price but then while at
sea, they stop work and demand more $. Supervisor agrees to
extra $. Ct finds that the K modification was not enforceable b/c
the workers had a pre-existing duty
(b) Also agent who modified K lacked power to do so
3. Modern Rules: (ways to get around Pre-exiting Duty Rule)
a) RST 89D(a): A promise modifying a duty under a K not fully performed on
either side is binding if the modification is fair and equitable in view of
circumstances not anticipated by the parties when the K was made
(1) 3 Requirements under 89D(a): modification is enforced only if
(a) The parties voluntarily agree
(b) The promise modifying the original K was made before the K
was fully performed on either side
(c) The underlying circumstances which prompted modification
were unanticipated by the parties
(d) The modification was fair and equitable
(2) Angel v. Murray (pg. 636): (RST § 89)
(a) π (garbage man) is under K w/ city and requests more $ due to
increase in residences; Ct holds the modification is enforceable
b) UCC 2-209: Modification, Rescission, and Waiver
(1) An agreement modifying a contract w/in this Article DOES NOT NEED
CONSIDERATION to be binding
(2) A signed agreement which excludes oral modification or rescission
except by a signed writing cannot be otherwise modified or rescinded,
but except as b/w merchants such as a requirement on a form supplied
by the merchant must be separately signed by the other party
(3) The requirement of the statute of frauds section of this Article must be
satisfied if the K as modified is within its provisions
(4) Although an attempt at modification or rescission does not satisfy the
requirements of subsection (2) or (3) it can operate as a waiver
(5) A party who has made a waiver affecting an executory portion of the K
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
(6) Official comment: modifications must meet test of good faith
imposed by Act; effective use of bad faith to escape performance on
the original K terms is barred and the extortion of a modification w/o
legitimate commercial reason is ineffective as a violation of good faith
duty. (See 2-103 for good faith standard for merchants)
c) Schwartzreich v. Bauman-Basch (pg. 630) Rule: (mutual rescission)
(1) Provided there is mutual expressed intention, parties may formally
rescind K and enter into a new one regardless of how much time (if
any) exists between rescission and the new K (Note: this rule can be
15
used to get around CL rule that there must be new consideration for a
K modification – if there is not a modification but a rescission and a
new K formed, the CL rule wont apply)
(2) π words for ∆ and disagreement arose when π was to leave to work for
another, but ∆ kept him on for higher ay, only to fire him later before K
expired. Both parties have different account of facts, but ∆ asserts lack
of consideration disallowing modification of K. ct looks at evidence of
tearing up old K and finds for π
(3) 2 Step Process:
(a) Rescission of K based on some consideration
(b) New K is written on a clean slate
d) United States v. Stump Home Specialties MFG, Inc. (pg. 635) Rule: slight
consideration will suffice to make a K or a K modification enforceable (but
then look to see if there is duress)
J. Accord & Satisfaction
1. RST 281: an executory accord is an agreement by the parties by which one
promises to render a substitute performance in the future, and the other promises to
accept that substitute performance in discharge of the existing duty.
a) Creditor is held to its standard once time for performance ripens
b) If debtor breaches before t ripens, creditor can claim original amount
c) Creditor cannot unilaterally change terms before performance ripens or
debtors breaches
2. Checks – generally when there is a bona fide dispute, and the debtor sends a check
w/ works “payment in full”, cashing the check is deemed as accepting an offer of
accord and satisfaction.
3. Substitute Agreement
a) RST 279 – parties may make a substituted agreement by which the pervious
K is immediately discharged and replaced with a new agreement.
(1) Creditor can only sue for breach of new K, not any older obligation
(2) The more informal the substituted agreement, the more likely its an
accord
4. Rules
a) Common Law Rule: Where an amount due is in dispute, and the debtor
sends a check for less than the amount claimed and clearly expresses his
intention that the check has been sent as payment in full and not on account
or in part payment, the cashing or retention of the check by the creditor is
deemed an acceptance by the creditor of the conditions stated, and operates
as an accord and satisfaction of the claim.
(1) Con Ed. v. Arroll (pg. 644): (accord and satisfaction – check)
(a) ∆ believes that he is being charged too much for his power bill
and sends payments to ConEd for a lesser amount (which
reflected an average of past bills) that clearly stated that the
payments operated as an accord and satisfaction of the amount
owed. All 5 checks were retained and deposited by ConEd.
Since ∆ honestly believed that he owed less, clearly stated
intention that payments operate as accord and satisfaction, and
since the checks were retained and cashed by ConEd, ∆’s
payments were effective as accord and satisfaction.
b) UCC 1-207: Performance or Acceptance Under Reservation of Rights
(1) A party who with explicit reservation of rights performs or promises
performance or assents to performance in a manner demanded or
16
offered by the other party does not thereby prejudice the rights
reserved. Such words as “without prejudice,” “under protest” or the like
are sufficient.
(2) Subsection (1) DOES NOT APPLY TO AN ACCORD AND
SATISFACTION.
c) UCC 3-311: Accord and Satisfaction by Use of Instrument (see pg. 111 of
supp)
17
III. Parol Evidence Rule (Oral declarations)
A. Background
1. Parol Evidence Rule: When 2 parties have made a K and have expressed it in a
writing to which they have both assented as to the complete and accurate integration
of that K, evidence (whether parol or otherwise) of antecedent (previous)
understandings and negotiations will NOT be admitted for the purpose of varying or
contradicting the writing (Corbin).
a) Parol – generally oral, but can be other extrinsic evidence that could/could not
be allowed to explain the purpose and meaning of the K
b) Parol evidence rule bars admission of evidence regarding prior (antecedent)
or contemporaneous agreements but NOT agreements made after the writing
c) Parol evidence CANNOT be used to contradict an unambiguous writing (ct
makes this determination)
(1) Anti-contradiction Rule: applies whether the integration is complete or
partial; you cannot intro parol evidence that would contradict terms in
the written instrument
(a) Baker v. Bailey (p. 665): (total integration, anti-contradiction)
(i) In absence of fraud, duress, mutual mistake, all extrinsic
evidence must be excluded if the parties have reduced
their agreement to an integrated writing that is clear and
unambiguous. All prior and contemporaneous
negotiations or understandings of the K are merged once
that K is reduced to writing.
(ii) Π had a water use agreement w/ ∆ and later sued when
∆ refused to provide water to 3rd party to whom π was
going to sell land. Ct reversed and disallowed parol
evidence showing general understanding was to allow all
subsequent purchasers to use water. Ct held that writing
was explicitly in only limiting water use to π and not
assignees.
(2) Anti-supplementing/varying/altering Rule: UCC 2-202(b) – if total
integration, parol evidence of additional terms not allowed
(a) Masterson v. Sine (pg. 658): (anti-supplementation rule)
(i) π conveyed land to ∆, but reserved option t buy back. π
goes bankrupt and trustee attempts to exercise the buy
back clause, but ∆ refuses saying it was a right personal
to π only – not his assigns. Ct must determine if the ct
was correct in not allowing ∆ to present parol evidence
showing π intended grant to be personal. Ct allows
evidence based on anti-supplementary rule and finds for
∆ as:
(a) Deed does not says it’s a complete integration
(b) Deed is silent on assignability
(c) Deed too formal to include additions to it
(ii) Dissent argues
(a) Basic property law indicates all property
conveyances are normally assignable
(b) It would be easy to change deed to say if nonassignable
(b) Parol evidence can only be used for elements of the agreement
NOT reduced to writing
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(c) Collateral agreements must be analyzed to determine whether
the parties intended the subjects of negotiation it deals with to
be included in, excluded from, or otherwise affected by the
writing. Circumstances at the time of the writing may also aid in
the determination of such integration.
(d) RST 240(1)(b) permits proof of collateral agreement if it is such
an agreement as might naturally be made as a separate
agreement by parties situated as were the parties to the written
K
(e) UCC 2-202, comment 3: if additional terms are such that if
agreed upon would certainly have been included in the K in the
view of the court, then evidence of their alleged making must be
kept from the trier of fact (strict test)
2. Complete vs. Partial Integration
a) Complete integration: a writing is complete if it integrates all prior or
contemporaneous terms (RST 228)
(1) A finding of a complete integration will preclude use of parol
evidence
(a) Approaches to determine whether there is a complete
integration:
(i) Williston: look ONLY to the writing itself (4 corners of the
agreement)
(ii) Corbin: Must look at BOTH the writing and everything
else (contextual), including the alleged parol agreement,
to determine if there is a complete integration
(b) Generally, cts will find a complete integration if there is a
MERGER CLAUSE (clause saying that written instrument
embodies all past negotiations and agreement)
b) Partial integration: if the written instrument is silent on whether it is a total
integration, it may be considered a partial integration of K terms.
(1) Parol evidence rule DOES NOT apply to part that is not integrated
(only the part that is)
3. Policy Rationales Behind Parol Evidence Rule
a) Avoiding fraud in K’s
b) Implementing the intentions of the parties
c) Guarding against unintentional deception
d) *REMEMBER: if these policies are not being effectuated, Llewellyn would say
that where the reason stops, there stops the rule (thus, the exceptions, see
below)
B. UCC 2-202: Final Written Expression: Parol or Extrinsic Evidence
1. Terms, w/ 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 w/ 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 by:
a) Course of dealing or usage of trade or by course of performance; and
b) 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
C. Exceptions to the Parol Evidence Rule
19
1. Collateral Contract Exception: if agreement is collateral to the written K, it is not
barred by rule.
a) Mitchell v. Lath (pg. 654): (general parol evidence case)
(1) Icehouse case; Parol evidence rule covers situations where there is an
attempt to modify a K by parol, but does not apply when there is a
parol collateral K distinct and independent of the written agreement.
(2) Π sues ∆ who conveyed land to her, but failed to remove icehouse.
Deed did not contain this oral agreement. Ct has 3 part test to
determine is parol evidence of this agreement is allowed
(a) Agreement must be collateral to written one; cant have separate
basis of consideration
(b) Cannot contradict express or implied provisions of written
agreement
(c) Must be one not ordinarily put in writing (π loose here and ∆
wins)
(3) Dissent
(a) Written agreement alone cannot show full and complete
agreement w/out referring to oral agreements and negotiations
(b) Agreement to remove icehouse and to convey land were
mutually dependent
2. Ambiguity Exception: oral agreement is not contradictory but merely clarifies an
ambiguous K; UCC 2-202(a) allows introducing evidence of course of performance,
course of dealing and trade usage.
a) Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co. (pg.
678): (ambiguity rule)
(1) π argues that the indemnity clause makes the ∆ liable for damage to
π’s property but ∆ argues that the clause only indemnifies them from
damages to third parties; Court reasons that the word “indemnity” is
ambiguous and therefore parol evidence should be admitted
(2) TEST: if the court decides, after considering all the evidence, that the
language of the K, in the light of all the circumstances, is fairly
susceptible of either one of the two interpretations, extrinsic evidence
relevant to prove either of such meanings is admissible
b) Trident Center v. Conn. Gen. Life Ins Co. (pg. 681): (ambiguity rule)
(1) Criticizes the Pacific Gas opinion saying that parties can be extremely
clear and yet risk that at point of dispute the ct will negate writing and
say it could mean different things. This could lead to costly and
protracted litigation, frustration and delay.
3. Condition Precedent Exception: if there is a condition precedent to the legal
enforceability of a written K, cts sometimes hold parol evidence admissible to prove
the condition
a) Harrison v. Fred S. James, P.A., Inc. (pg. 688): (merger clause)
(1) employee alleging the employer breached a term of an oral K that he’d
been employed for 2 years but there is a later written K that includes
both a merger clause and says the writing supersedes all prior
agreements and allows for a 15 day notice period before termination
ends; employee is terminated and sues; Ct says the K is unambiguous,
so then ct looks to see if the K is ineffectual in and of itself; employee
argues 5 theories: fraud, duress, mistake, lack of meeting of minds,
and no consideration ct doesn’t really buy any of them
(2) Arguments that the parol evidence should have been admitted:
20
(a) Argument that this was a new K, not a modification
(Schwartzreich)
(b) Even if it was a modification, modifications don’t necessarily
need separate consideration (think 2-209 assuming it applied)
(c) Assuming the first K was made, it might not be enforceable
since it was not performed w/in one year and thus would be
unenforceable under SOF
4. Fraud, Duress, & Mistake Exception: evidence attacking validity of the K itself can be
admitted.
5. Promissory Estoppel Exception: most jdx are not comfortable w/ this one, especially
if there is no separate consideration.
21
IV. Contract Interpretation
A. Common Law Rules of Interpretation:
1. Language in a K is interpreted according to its ordinary meaning
2. K shall be construed as a whole so that all its parts are harmonized as much as
reasonably possible
3. K is interpreted in light of its underlying purpose/intention of the parties
4. If K is susceptible to more than one interpretation, pick the one that is most fair
and customary such as prudent men would naturally execute it and reject the
interpretation that is inequitable, unjust, or unusual (p. 707 Sutter Insurance)
a) Turner Holdings v. Howard Miller Clock Co. (pg. 702): HMCC was to be
obligated to THI for success fees after termination of K for any company
which as been under consideration; dispute was over the meaning of “under
consideration”; Ct uses the above rules of interpretation to determine that the
∆’s interpretation of “under consideration” was too narrow and goes with the
commonly understood meaning thus holding that the language was not
ambiguous.
(1) Rule: one party’s un-communicated understanding concerning the
specialized meaning of K language is not binding on the other party.
5. Expression of certain things excludes other things (see Haines v. City of New York,
below)
B. Statutory Rules of Interpretation:
1. RST 201: Whose Meaning Prevails
(1) Where the parties have attached the same meaning to a promise or
agreement or a term thereof, it is interpreted in accordance w/ that
meaning.
(a) If parties attach same meaning to K – use that meaning
(2) Where the parties have attached different meanings to a promise or
agreement or a term thereof, it is interpreted in accordance with the
meaning attached by one of them if at the time the agreement was
made
(a) That party did not know of any different meaning attached by
the other, and the other knew of the meaning attached by the
first party; or
(b) That party had no reason to know of any different meaning
attached by the other, and the other had reason to know the
meaning attached by the first party
(3) Except as stated in this Section, neither party is bound by the meaning
attached by the other, even though the result may be a failure of
mutual assent.
b) Berke Moore Co. v. Phoenix Bridge Co. (pg. 699): (trade usage is meaning)
(1) π attached meaning to construction K to include construction of all
sides of bridge, but ∆ maintained it only applies to top of bridge. Ct
decided that ∆’s meaning is correct as payment was in square yards,
customarily applies just to top surface measurements.
(2) This is odd as ct is giving deference to subjective meanings rather than
objective manifestations. Still appears to be correct outcome.
1. UCC 1-203: “Agreement” means the bargain of the parties in fact as found in their
language or by implication from other circumstances including course of dealing or
usage of trade or course of performance
2. UCC 2-208: Course of Performance or Practical Construction
22
(1) Where the contract for sale involves repeated occasions for
performance by either party with knowledge of the nature of the
performance and opportunity for objection to it by the other, any course
of performance accepted or acquiesced in without objection shall be
relevant to determine the meaning of the agreement
(2) The express terms of the agreement and any such course of
performance, as well as any course of death and usage of trade, shall
be construed whenever reasonable as consistent w/ each other; but
when such construction is unreasonable, express terms shall control
course of performance and course of performance shall control both
course of dealing and usage of trade
(3) Subject to the provisions of the next section on modification and
waiver, such course of performance shall be relevant to show a waiver
or modification of any term inconsistent w/ such course of performance
(a) NOTE: difference b/w course of performance and waiver is very
important!! It makes a difference as to what interpretation is
adopted
(b) If there is only one occurrence, then it is treated as a waiver
(see waiver prov)
3. UCC 1-205: Course of Dealing and Usage of Trade
(1) A course of dealing is a sequence of previous conduct b/w the parties
to a particular transaction which is fairly to be regarded as establishing
a common basis of understanding for interpreting their expressions
and other conduct.
(2) A usage of trade is any practice or method of dealing having such
regularity of observance in a place, vocation or trade as to justify an
expectation that it will be observed w/ respect to the transaction in
question. The existence and scope of such a usage are to be proved
as facts. If it is established that such a usage is embodied in a written
trade code or similar writing, the interpretation of the writing is for the
court.
(3) A course of dealing b/w parties and any usage of trade in the vocation
or trade in which they are engaged or of which the are or should be
aware give particular meaning to and supplement or qualify terms of an
agreement
(4) The express terms of an agreement and an applicable course of
dealing or usage of trade shall be construed wherever reasonable as
consistent w/ each other; but when such construction is unreasonable
express terms control both course of dealing and usage of trade and
course of dealing controls usage of trade.
(5) An applicable usage of trade in the place where any part of
performance is to occur shall be used in interpreting the agreement as
to that part of the performance
B. Hierarchy of Interpretive Tools Under the UCC
Express Terms of K
I
Course of Performance
I
Course of Dealing
I
Usage of Trade
23
Cases:
1. Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc. (pg. 709): (trade usage, course of
performance)
a) Π sues for breach of K when ∆ asphalt supplier does not honor price
protection when it has done so in past. ∆ has in K that posted price controls.
Cts finds for π based on trade usage and course of performance.
b) Trade Usage
(1) All other paving material supplies in area offer price protections, so
evidence that ∆ should have as well
(2) Ct says trade usage may apply to place or trade
(a) Place factor applies as ∆ was in the same mkt as everyone else
(b) ∆ also part of general trade, not requiring specific knowledge on
his part or extra burden
(c) Paving mkt is small, so ∆ is likely to know of such usage
(i) agent knew
c) Course of Performance
(1) ∆ offered protection before – should do it again
(2) ct applies complete negation test –so long as the term is not
negated, then it is ok to incorporate trade usage/course of performance
evidence.
D. K Interpretation and Gap Filling w/ a little Parol for fun...
1. Greenfield v. Philles Records, Inc. (pg. 674): record K was silent as to whether co.
could issue licenses to 3rd parties to use π’s recordings. Ct held the agreement
should be construed in accord w/ parties’ intent and the K is the best evidence of
such intent; if a K is unambiguous, the Ct is not free to alter it; since the recordings
became property of ∆, ∆ could reproduce them in any form and when read as a
whole, seemed that ∆’s were allowed to license to 3rd parties
C.
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V.
Gap Filling
A. Gap Filler per se – K is truly silent on a term and ct fills it in based on law (UCC)
B. Two methods:
1. Court may fill gap by interpreting written K language in light of extrinsic evidence and
the circumstances
2. Court may purport to ascertain intentions even though the parties clearly had no
intentions
C. RST 204: an essential term necessary to determine rights/duties may be supplied by the ct.
D. UCC 2-204(3): Even though one or more terms are left open, a K for sale of goods does
not fail for indefiniteness if the parties have intended to make a K and there is a
reasonably certain basis for giving an appropriate remedy (see 2-305 – 2-311); the more
terms the parties leave open, the less likely it is that they have intended to conclude a
binding agreement, but their actions may be frequently conclusive on the matter despite the
omissions.
E. “Reasonable Time” Rule: where parties have not clearly expressed the duration of a K, cts
will imply that they intended performance to continue for a reasonable time (if a duration
may be fairly and reasonably supplied by implication, a K is not terminable at will)
1. Exception: (p. 723) rule does not apply to K’s for employment or exclusive agency,
distributorship or requirement K’s. In these situations, K is terminable at will.
2. Haines v. City of NY (pg. 721): (omitted term replaced w/ reasonable term)
a) Π town sues ∆ city, which has promised to build, maintain, and extend sewer
facilities in return of promise to use town’s creek for water. ∆ refuses to
expand as plant is already operating at full capacity.
b) Issue – how long must ∆ maintain plant since K is silent on duration?
(1) Cts says for a reasonable time
c) Even though the city at one time extended the line, this is not course of
performance since it only happened once (thus was a waiver).
F. “Time of Delivery” Rule: where parties have reached an enforceable agreement for sale of
goods but omit terms of payment, the law will imply, as part of the agreement, that payment
is to be made at time of delivery.
1. Southwest Engineering Co. v. Martin Tractor Co. (pg. 729): (UCC 2-204(3))
a) Π sues ∆ when ∆ fails to deliver generator based on negotiations. Π has to
cover and sue for damages. ∆ points to fact that there was no written K and a
memo showing agreement on the 2 choices of generators was silent on
payment terms. Ct cites 2-204(3) and says that K still stands and that the
payment terms were incidental as parties did not show extrinsic evidence
showing price was a deal breaker.
G. Gap-Filler UCC Provisions (for when the fact-finder determines a K exists but certain
terms absent):
1. UCC 2-314 –implied warranty of merchantability – absent express terms, this fills
gap.
2. UCC 2-305 – open price term
3. UCC 2-306 – quantity
4. UCC 2-308 – place of delivery
5. UCC 2-309 – time of delivery
6. UCC 2-310 – terms of payment
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VI.
Good Faith
A. Rules
1. UCC 1-203: Every K or duty w/in this Act imposes a duty of good faith in its
performance or enforcement
2. RST 205: Duty of Good Faith and Fair Dealing: Every K or duty within this Act
imposes a duty of good faith and fair dealing in its performance or enforcement
a) Meaning of Good Faith: varies somewhat w/ context; good faith
performance or enforcement of a K emphasizes faithfulness to an agreed
common purpose and consistency w/ the justified expectations of the other
party; excludes conduct characterized as involving “bad faith” b/c it violates
community standards of decency, fairness or reasonableness; remedy varies
w/ circumstances
b) Good Faith Performance: subterfuges and evasions violate the obligation of
good faith performance even though the actor believes his conduct to be
justified. Fair dealing MAY require more than just honesty
(1) Instances of bad faith recognized in judicial decisions
(a) Evasion of spirit of bargain
(b) Lack of diligence and slacking off
(c) Willful rendering of imperfect performance
(d) Abuse of power to specify terms
(e) Interference w/ or failure to cooperate in other party’s
performance
3. UCC 2-306: Output Requirements and Exclusive Dealings
(1) A term which measures the quantity by the output of the seller or the
requirements of the buyer means such actual output or requirements
as may occur in good faith, EXCEPT that no quantity unreasonably
disproportionate to any stated estimate, or in the absence of a stated
estimate, to any normal or otherwise comparable prior output or
requirements may be tendered or demanded
(a) Actual output should be in good faith
(b) Output should not be unreasonably disproportionate to prior
estimate or prior output
(2) A lawful agreement by either the seller or the buyer for exclusive
dealing in the kind of goods concerned imposes, unless otherwise
agreed, an obligation by the seller to use best efforts to supply the
goods and by the buyer to use best efforts to promote their sale
b) 2-306 Comment: Subsection (2) makes explicit that contracts are held to
have impliedly, even when not expressly, bound themselves to use
reasonable diligence as well as good faith in their performance of the K.
c) Feld v. Henry S. Levy & Sons (pg. 747): (output K)
(1) bread crumb maker agrees to sell all crumbs produced for a 1 yr
period; maker performs for most of the year and then stops b/c he says
making it is not economical; when buyer claims breach, maker’s
defense was that the K did not require that bread crumbs be produced
until end of the K but that whatever crumbs were produced were to be
sold to buyer;
(2) 2 forms of K’s: requirement K’s and output K’s
(a) We have an output K here, so UCC 2-306 applies
(3) Output Ks present 2 questions:
(a) Consideration: does such a K fail b/c of lack of mutuality of
obligation?
26
(b) Definiteness: since the quantity is so hard to predict, it is hard to
define
(4) Ct found that good faith required continued production of crumbs even
if no profit; maker would be justified in good faith in ceasing if losses
from continuance would be more than trivial (which is a question of
fact)
B. Common Law Rules
1. Good faith applies to “at will” K’s too; all K’s contain an implied covenant of good
faith and fair dealing and thus a bad faith termination is a BoK
a) Fortune v. National Cash Register Co. (pg. 734): (general good faith case)
(1) Employment K terminable at will; employee terminated w/o cause
(which was allowed by K) but on the brink of making a sale of which he
would have gotten large commission; jury found he was terminated in
bad faith. Ct finds for π employee.
2. Tymshare, Inc. v. Covell (pg. 740): K that ties commission to a quota but allows the
employer to retroactively raise quota and employer has sole discretion at any time
a) Court found that this did not mean that it could be done for any reason
whatsoever no matter how arbitrary, so no bad faith could reasonably be
found
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VII.
Conditions
A. Terminology
1. Condition: an event, not certain to occur, which must occur, (unless its nonoccurrence is excused) before performance under a K becomes due (RST 224)
(1) A fact upon which the parties’ duties depend
(2) Operates as a condition only by agreement of both parties
(3) Made to postpone an instant duty and its occurrence/being satisfied
creates a duty
(4) Indicated by the word “shall” (usually)
(5) NOTE: failure of condition DOES NOT warrant a BoK – just means the
other party’s obligation to perform does not mature (unless of course
there is a specified promise to perform the condition)
(6) Reasons to impose a condition on duty to perform:
(a) Shift risk of nonoccurrence to obligee
(b) Induce the obligee to cause the event to occur
b) Express Condition Precedent: what is required to occur prior to a duty
maturing
(1) If an express condition is missing, Ct turns to parol evidence, course of
performance, etc
c) Implied-in-law Condition Precedent: absent K language, X must occur before
Y
(1) Also called a “dependent covenant” or “constructive condition
precedent” meaning that it is not to be performed unless and until the
other party performs (as opposed to an “independent covenant” which
refers to a duty to perform independent of the other party’s duty to
perform)
(2) Rule: When a duty to perform has not matured, a party’s duty is
discharged when it is “too late” for the condition to occur
d) Implied-in-fact Condition: gap filler used to ascertain the intent of the parties,
which is based on a course of dealing b/w the parties and indicates one which
party has the obligation to perform first
2. Promise: a manifestation of intention to act or refrain from acting in a specified way,
so made as to justify a promisee in understanding that a commitment has been
made (RST 2)
a) Made by act(s) of ONE party to express intention
b) Its making creates a duty or disability in the promisor
c) Its fulfillment discharges a duty; non-fulfillment = breach & creates a right to
damages
3. Promissory Condition: event that is both a promise and a condition
4. Note – Express conditions require strict compliance; implied require substantial
performance
B. Express Conditions
1. Uses of Express Conditions and their Operation and Effect
a) General Principle: While a contracting party’s failure to fulfill a condition
excuses performance by the other party whose performance is so
conditioned, it is not, w/o an independent promise to perform the condition, a
BoK subjecting the non-fulfilling party to liability for damages
(1) Merritt Hill Vineyards Inc. v. Windy Heights Vineyard, Inc. (pg. 761):
(express condition only)
(a) Parties K to sell vineyard w/ express condition that seller will
produce title of insurance at closing. At closing no title is
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produced and buyer refuses to go through w/ deal. Buyer sues
for return of deposit. CT says Buyer’s duty to pay was expressly
conditional on seller’s duty to bring title – therefore buyer’s duty
did not mature. Buyer can only get back deposit.
2. Fulfillment of Conditions
a) General Rule: Conditions which are express or implied must be exactly
fulfilled or no liability can arise on the promise which such conditions qualify
(Williston) – reasons is if parties expressly state/write condition they must
have meant it.
(1) Brown-Marx Assoc., Ltd. v. ES Bank (p. 768): (express condition
only) BoK action for failure to give the ceiling loan; lender defends w/
“failure of condition” and was thus under no duty to give ceiling loan; π
argues judge should adopt substantial performance doctrine; ct finds
sub. pef. not enough since this involved non-occurrence of a condition,
not non-performance of a duty (like Jacob v. Young, see below)
(2) Exception: “Substantial Performance” Doctrine: if there is a gap w/
regard to quality of performance, a builder must substantially perform
in order to satisfy an implied-in-law condition precedent to the owner’s
duty to pay; if there is substantial performance w/ no material breach,
duty to pay whole amount is triggered, less a reduction for the
difference in value (if any); DOES NOT APPLY IN CASE OF A
CONDITION – ONLY IN CASE OF A DUTY!
(a) Jacob & Youngs, Inc. v. Kent (pg. 763): K explicitly stated
Reading pipe was supposed to be used in building of house;
builder did not use it in some places; big question was whether
the builder substantially performed; if substantially performed,
duty to pay by owner is triggered
(i) Cardozo Test weighs:
(a) Purpose to be served
(b) Desire to be gratified
(c) Excuse for deviation
(d) Cruelty of enforced adherence
(ii) Dissent: homeowner contracted as he wished and due to
intent or gross negligence by builder, wishes of buyer
were ignored so even though the pipes were fine, they
were not what K specified and forced buyer to pay for
house he didn’t contract for which shows disrespect for
autonomy
(iii) What should have been included in K: “installing Reading
pipe = condition precedent” and “substantial performance
is NOT sufficient to mature duty of homeowner to make
final payment”
b) RST 237 Comment d: If there has been substantial although not full
performance, the building contractor has a claim for the unpaid balance and
the owner has a claim only for damages. If there has not been substantial
performance, the building contractor has no claim for the unpaid balance,
although he may have a claim in restitution. If, however, the parties have
made an event a condition of their agreement, there is no mitigating standard
of materiality or substantiality applicable to the non-occurrence of that event.
If, therefore, the agreement makes full performance a condition, substantial
29
performance is not sufficient and if relief is to be had under a contract, it must
be through excuse of the non-occurrence of the condition to avoid forfeiture
3. Interpretation of K Language to Determine if it Creates an Express Condition
a) General Rule: there is a strong preference in interpreting K clauses as
promises rather than conditions in order to prevent forfeiture; provisions of a
contract will not be construed as conditions precedent in the absence of
language plainly requiring such constructions; further, if condition, cts will
read clause narrowly so as to avoid forfeiture
(1) Howard v. Federal Crop Ins. Corp (p. 775): (2 susceptible meanings)
(a) π farmer sued insurance co for BoK b/c insurer did not pay for
damage to crop; defense was failure of condition precedent; ct
found clause at issue to be a promise to avoid forfeiture
b) Factors used in Interpretation of K’s: (Glahom v. Hays (pg. 773))
(1) How words fit into the whole agreement/linguistic context of clause
(2) Common usage
(3) Underlying purpose of K (analogue to Llewellyn’s rule following reason)
(4) Intent of the parties
(5) (note also that presumption is for promise to avoid forfeiture, see
above)
4. Interpretation of the Content of Express Conditions
a) Gibson v. Cranage (pg. 779): action to recover K price of portrait of ∆’s
deceased daughter; defense = failure of condition; ∆ argued that since the
portrait was not satisfactory to him, he didn’t have to pay; ct makes no inquiry
as to whether there was substantial performance b/c this was not a duty but a
condition; since duty to pay was conditioned on satisfaction, and ∆ was not
satisfied, ct held π to the K since it did not violate public policy and was not
tainted by fraud or mistake
(1) Remember: Satisfaction Clauses from Mattei v. Hopper (pg. 75): buyer
must act in good faith in declaring dissatisfaction
5. Excuse and Avoidance of Express Conditions
a) Rule: If the non-occurrence of a condition was the fault or consequence of the
party who’s duty it was to effectuate the condition, the party must pay the
other party restitution
(1) Du Pont Co. v. Schlottman (pg. 789): (excuse of impossibility)
(a) Π sold plant to ∆ who was to pay π extra amount if plant was
worth a certain amount after 1 yr. ∆, however, prior to 1 yr sells
plant which is then dismantled.
(b) Operating plant for one yr was express condition of duty to pay
extra amount, but ct found that ∆ has made the maturing of duty
to pay extra impossible by selling and dismantling
(c) Condition is then excused and jury is allows to determine what
π should get based on UE theory – π gets restitution damages
b) Rule: When failure of condition was a result of fraud or bad faith, court will
excuse non-occurrence and duty matures
(1) Rizzolo v. Poysher (pg. 787): (condition excused if fraud)
(a) K b/w builder and owner and the owner’s duty to pay is
conditioned on securing an architect certificate; architect does
not issue certificate, so owner says he doesn’t have to pay;
since it was not issued due to bad faith/fraud, the court excuses
non-occurrence of the condition and holds that the duty to pay
matured
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c) Rule: Where the performance of a duty created by law is prevented by
inevitable accident w/o the fault of a party, the default will be excused; but
when a person by express K engages absolutely to do an act not impossible
or unlawful at the time, neither inevitable accident nor other unforeseen
contingency not within his control will excuse him, for the reason that he might
have provided against them by his K
(1) Hanna v. Comm Travelers’ Mutl Accid Assoc.(p. 791): (impossibility
not allowed)
(a) man disappears; 4 years later, cause of death is discovered and
wife tries to collect on life insurance; insurance co’s defense =
failure of condition, claiming notice of accident was not given
within K-specified time; Ct finds that the conditions in the policy
were conditions precedent and based on above rule, wife can’t
recover for failure to meet condition
d) Rule: A limitation which renders warranties ineffective as regards latent
defects, literally covered by the warranty but not discoverable w/in the
limitation period of the K, is manifestly unreasonable and therefore invalid
(1) Q. Vandenberg & Sons v. Siter (pg. 799):
(a) flower bulb case; seller warranted bulbs would flower properly;
condition that claim must be presented w/in 8 days after receipt
of goods; but since defect could not be discovered w/in 8 days
of receiving bulbs, court held limitation invalid
(b) UCC 2-607(2): Acceptance of goods by the buyer precludes
rejection of goods accepted, AND if made w/ knowledge of a
non-conformity, cannot be revoked b/c of it UNLESS the
acceptance as on the reasonable assumption that the nonconformity would be seasonably cured but acceptance does not
itself impair any other remedy
(c) UCC 1-204: Time; Reasonable; “Seasonably”
(i) Whenever this Act requires any action to be taken within
a reasonable time, any time which is not manifestly
unreasonably may be fixed by agreement
(ii) What is a reasonable time for taking any action depends
on the nature, purpose, and circumstances of such action
(iii) An action is taken “seasonably” when it is taken at or
within the time agreed or if no time is agreed at or within
a reasonable time
6. Conditions and Waivers
a) Corbin: if party waives condition, duty to pay matures
b) Hillman:
(1) Parties can waive non-material duties w/o having consideration
(2) For material duties, usually need consideration to make the waiver
effective
c) Need voluntary express to waiver condition
d) Waiver may be retracted if no reliance by other party
(1) Material and detrimental reliance on waiver prevents retraction
7. Overriding Express Conditions to Prevent Forfeiture
a) Rule: in cases where there is an option to renew the lease, and tenant has in
good faith made improvements of a substantial character, intending to renew
the lease, if the LL is not harmed by the delay in giving notice and the lessee
would sustain substantial loss in the case that the lease were not renewed,
31
the equitable doctrine of excusing the condition is used to avoid forfeiture
(Pomeroy)
(1) JNA Realty v. Cross Bay Chelsea, Inc. (p. 799): (override if no harm)
(a) Π is suing ∆ to allow renewal of lease that is failed to make on
time. Timely renewal notice was express condition of LL ∆’s
duty to renew. Ct overrides condition if ∆ is not harmed and π
was not willfully lax or grossly negligent.
(b) Dissent says this decision messes up stability of K law, allows
fraudulent claims, and ignores essence of time clauses in K’s
(2) Q. Vandenberg & Sons v. Siter – (override if unreasonable)
b) RST 229: To the extent that the non-occurrence of a condition would cause
disproportionate forfeiture, a court may excuse the non-occurrence of that
condition UNLESS its occurrence was a material part of the agreed exchange
c) Rule: if a party incurs a forfeiture by reason of his failure to comply w/
condition, he may be relieved there from upon making full compensation to
the other party, UNLESS there is gross negligence, willful, or fraudulent
breach of duty
(1) Holiday Inns of America, Inc. v. Knight (pg. 807):
(a) Argument that it is a stronger case for excusing condition than
JNA: payment was sent on time and was sent by mail and was
received only one day after deadline, thus a good faith effort to
comply;
(b) Argument that it is a weaker case: there are not improvements
to the leased property itself and thus there is less of a forfeiture
than in JNA; nevertheless, ct finds forfeiture ($30K paid for right
to exercise option)
C. Implied Conditions/Constructive Conditions (Must be ready, willing & able to perform)
1. Simultaneous Exchange: law favors simultaneous performance
a) UCC 2-507(1): Tender of delivery is a condition to the buyer’s duty to accept
the goods and, unless otherwise agreed, to his duty to pay for them. Tender
entitles the seller to acceptance of the goods and to payment according to the
K.
b) UCC 2-511(1): Unless otherwise agreed, tender of payment is a condition to
the seller’s duty to tender and complete any delivery.
c) RST 234(1): Where all or part of the performance to be exchanged under
an exchange of promises can be rendered simultaneously, they are to that
extent due simultaneously, unless the language or the circumstances indicate
the contrary
(1)
d) To sue for breach, MUST out other party in breach by performing your duty
e) Rule: Must always put the other party in breach! If you don’t tender
delivery, you cant sue successfully for breach if the other party does not pay,
and the constructive condition of tender will be excused
(1) Cohen v. Kranz (p. 814): (exception to concurrent conditon – time
to cure)
(a) π contracted to buy ∆’s house; K does not specify who is to
perform first; π finds out title is not marketable and so
demanded return of deposit, which was refused; π brought suit
and ∆ counterclaimed for BoK; ct found that π’s rejection failed
to specify title defects, leaving ∆ unable to remedy; since π
rejected title in advance, thereby not making tender of payment,
32
and this constituted an anticipatory breach of K; this bars π from
recovery of deposit assuming the title defects were curable;
(b) Rule: a vendor whose title defects are curable is not
automatically in default but, rather, must be put in default by the
vendee’s tender of performance and demand for good title deed
(whereas vendor w/ incurable title defect is automatically in
default and rule does not apply); vendor in case of curable
defect is entitled to a reasonable time to make title good;
2. Sequential Performances
a) Rule: Where a K does not specify which party is to perform first, the builder
must build first, and for the duty to pay to mature, there must be substantial
performance. Party’s who performance will take longer goes 1st)
(1) Stewart v. Newbury (p. 817): (payment post sub. performance)
(a) Parties K to build house. Π makes some progress and then bills
∆. ∆ says will not pay until house is finished. Π claims he would
be given progress payments based on custom and phone
convo. Ct says ∆ should make payments at reasonable times
but ct says ∆ must only make payment after sub. Performance
(like Jacobs v. Young) (See UCC 1-204)
b) Arguments that substantial performance is satisfied and recovery should be
allowed:
(1) There was substantial performance
(2) Waiver
(3) Unjust enrichment
(4) Breach by owner
(5) Course of dealing
(6) Trade usage
(7) Complete negation test
3. Implied Conditions Fixing Quality of Performance
a) Rule: a promisor who has substantially performed is entitled to recover
although he has failed in some particular to comply w/ his agreement
(1) Factors to determine whether there is substantial performance:
(a) Extent of non-performance: if deficiency is so pervasive as to
frustrate the purpose of the K, it will not be sufficient to mature
duty to pay
(b) Weigh purpose to be served
(c) Desire to be gratified
(d) Excuse for deviation
(e) Cruelty of enforcing strict adherence
(f) Ratio of money value of tendered performance and of promised
perf.
(2) O.W. Grun Roofing and Construction Co. v. Cope (pg. 825):
(constructive condition requires sub performance)
(a) K to re-roof a house; K specified roof was to be a uniform color
but roof turned out streaky; owner claimed defects and refused
to pay; roofer filed mechanics lien on property and π brought
action to remove lien; substantial performance rule used; ct
found there was not substantial performance b/c owner’s only
remedy was to have the roof redone and roofer had no claim for
UE b/c he conferred no benefit to owner;
33
(b) Note that Ct found that mere taste may be controlling w/
homeowner
(c) Distinguishing Jacob v. Young (Reading pipe): here, shingles
were defective but there the walls would have had to be torn
down and pipe was fine; can see roof and not see the pipes that
are hidden behind walls
b) Rule: in order to repudiate a K, there must be a material breach by the other
party.
(1) RST 275: Factors determining whether there is material breach:
(a) Extent to which injured party will obtain the substantial benefit
which he could have reasonably anticipated; LESSOR
(i) Stain not a big deal; rain
(b) Extent to which injured party may be adequately compensated
in damages for lack of complete performance; LESSEE
(i) Will damages adequately compensate lessee
(ii) Hard to determine what stain caused in damage
(c) Extent to which the party failing to perform has already partly
performed or made preparations for performance; LESSOR
(d) The greater or less hardship on the party failing to perform in
terminating the K; (forfeiture - clause G b/c custom sign; could
sign be salvaged) - LESSOR
(e) The willful, negligent or innocent behavior of the party failing to
perform; LESSEE called many times to get help w/sign
(f) The greater or less uncertainty that the party failing to perform
will perform the remainder of the K
(2) Walker & Co. v. Harrison (pg. 828): (constructive condition upheld
when minimal breach)
(a) drycleaner leased neon sign from sign owner; drycleaner failed
to pay; sign maker sues seeking full amount of K by invoking
acceleration clause; drycleaner defends w/ argument that sign
maker did not comply w/ terms of K and claimed material breach
(thereby entitling him to repudiate); ct finds there is a breach but
not so material as to justify repudiation of K (use RST 275)
c) Rule: If K contains several and distinct items to be furnished/performed, the
consideration to be apportioned to each item according to its value and as a
separate unit, then the K is divisible/several
(1) This depends on:
(a) Intent (evidenced from K terms)
(b) Manner in which it is to be performed
(c) Method of payment
(d) Circumstances attending to execution and operation
(2) Carrig v. Gilbert-Varker Corp. (pg. 836): (divisible K)
(a) K for 35 homes to be built; builder erects 20 and refuses to build
other 15; owner does not want to pay for 20 b/c they don’t
conform w/ specs; owner gets damages for failure to erect 15;
issue is whether the builder can get the owner to pay for the 20;
Ct finds K was divisible so the breach does not bar the payment
for the first 20 houses since they were each completed
substantially
d) UCC 2-717: Deduction of Damages from Price
34
(1) The buyer on notifying the seller of his intention to do so may deduct
all or any part of the damages from any breach of the K from any part
of the price still due under the same K
e) RST 237: Effect on Other Party’s Duties of a Failure to Render Performance
(1) 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
f) RST 241: Circumstances Significant in Determining Whether a Failure is
Material
(1) In determining whether a failure to render or to offer performance is
material, the following circumstances are significant:
(a) The extent to which the injured party will be deprived of the
benefit which he reasonably expected;
(b) The extent to which the injured party can be adequately
compensated for the part of that benefit which he will be
deprived;
(c) The extent to which the party failing to perform or to offer to
perform will suffer forfeiture;
(d) The likelihood that the party failing to perform or to offer to
perform will cure his failure, taking account of all the
circumstances including any reasonable assurances;
(e) The extent to which the behavior of the party failing to perform
or to offer to perform comports w/ standards of good faith and
fair dealing
g) RST 242: Circumstances Significant in Determining When Remaining Duties
are Discharged
(1) In determining the time after which a party’s uncured material failure to
render or to offer performances discharges the other party’s remaining
duties to render performance under the rule stated in section 237, the
following circumstances are significant:
(a) Those states in 241
(b) The extent to which it reasonably appears to the injured party
that delay may prevent or hinder him in making reasonable
substitute arrangements;
(c) The extent to which the agreement provides for performance
w/o delay, but a material failure to perform or offer performance
on a stated day does not itself discharge the other party’s
remaining duties UNLESS the circumstances, including
language of the agreement, indicate performance or an offer to
perform by that day is important
VIII. Conditions and the UCC
A. Rejection of Goods
1. UCC 2-601: Buyer’s Rights on Improper Delivery: Subject to the provisions of this
Article on breach installment contracts (2-612), and, unless otherwise agreed, under
sections on contractual limitations of remedy (2-718, 2-719), if the goods OR tender
of delivery fail in any respect to conform to the K, the buyer may
a) Reject the whole; or
b) Accept the whole; or
c) Accept any commercial unit or units and reject the rest.
35
2. UCC 2-602(1): Rejection of goods must be within a reasonable time after their
delivery or tender. It is ineffective UNLESS the buyer SEASONABLY notifies the
seller.
3. UCC 2-711 – w/out perfect tender, buyer can reject, and recover all that he paid
4. UCC 2-717 – if buyer has payment still due, may deduct damages caused by seller
after giving notice.
5. UCC 2-508: Cure by seller of improper delivery; replacement
(1) Where any tender or delivery by the seller is rejected because nonconforming and time for performance has not expired, the seller may
seasonably notify the buyer of his intention to cure and may then within
the K time make a conforming delivery.
(2) Where the buyer rejects a non-conforming tender which the seller had
reasonable grounds to believe would be acceptable w/ or w/o money
allowance, the seller may, if he seasonably notifies the buyer, have a
further reasonable time to substitute conforming tender.
b) Wilson v. Scampoli (pg. 850): (2-508(2) – conform in reasonable time)
(1) Rescission of sales K for color TV; ct finds that rescission was not
justified since the seller should have under 2-508 a reasonable time to
correct and the buyer would not be at great inconvenience or loss; no
breach of warranty entitling purchaser to rescission or new TV.
B. Revocation of Acceptance
1. UCC 2-608: Revocation of Acceptance in Whole or in Part
(1) The buyer may revoke his acceptance of a lot or commercial unit
whose non-conformity substantially impairs its value to him IF he has
accepted it
(a) On the reasonable assumption that its non-conformity would be
cured and it has not been seasonably cured; or
(b) W/o discovery of such non-conformity if he acceptance was
reasonably induced either by the difficulty of discovery before
acceptance or by the seller’s assurances
(2) Revocation of acceptance must occur w/in a reasonable time after the
buyer discovers or should have discovered the ground for it and before
any substantial change in condition of the goods, which is not caused
by their own defects. It is not effective until the buyer notifies the
seller of it
(3) A buyer who so revokes has the same rights and duties w/ regard to
the goods involved as if he had rejected them
C. Installment K’s
1. UCC 2-612: “Installment Contract”; Breach
(1) Installment contract is one which requires or authorizes the delivery of
goods in separate lots to be separately accepted, even though the
contract contains a clause “each delivery is a separate K” or its
equivalent
(2) The buyer may reject any installment which is non-conforming if the
non-conformity substantially impairs the value of that installment and
cannot be cured or if the non-conformity is a defect in the required
documents; but if the non-conformity does not call w/in subsection (3)
and the seller gives adequate assurance of its cure, the buyer must
accept that installment
(3) Whenever non-conformity or default w/ respect to one or more
installments substantially impairs the value of the whole K, there is a
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breach of the whole. But the aggrieved party reinstates the K if he
accepts a non-conforming installment w/o seasonably notifying of
cancellation or if he brings an action w/ respect only to past
installments or demands performance as to future installments.
(a) Substantial; impairment requirement is to preclude a party from
cancelling a contract for trivial defects
b) Hubbard v. Utz Quality Foods, Inc. (pg. 853): (installment K)
(1) potato chip color case; installment K; question is whether there had
been a substantial impairment to the value of performance by way of
the delivery of potatoes that are not quite the right color that the seller
says was contracted for; ct concludes there was substantial
impairment of entire K b/c the K was very specific as to quality of
potatoes
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IX.
Anticipatory Repudiation and Prospective Inability to Perform
A. Common Law Rule: there can be no breach until the K date arrives b/c that is when the
performance is actually due
1. Hochster v. De La Tour (p. 859): (conduct was act of repudiation)
a) Issue was whether the employee can abandon the K and sue or sit around
and wait until date of performance when the employer has anticipatorily
breached; ct held that he has to wait)
B. RST 250: When a Statement or an Act is a Repudiation
1. A repudiation is
a) A statement by the obligor to the obligee indicating that the obligor will commit
a breach that would of itself give the obligee a claim for damages for total
breach, OR
b) A voluntary affirmative act which renders the obligor unable or apparently
unable to perform w/o such a breach
2. Comment b: Nature of Statement: language must be sufficiently positive to be
reasonably interpreted to mean that the party will not or cannot perform. Mere
expression of doubt as to his willingness or ability to perform is not enough to
constitute a repudiation (see
a) Examples pg. 863
(1) A tells B that he will not perform = repudiation
(2) B fails to make payment and tells A he wont be able to pay for at least
a month due to financial issues. If, after a month, it would be too late
for B to cure his material failure of performance by making the delayed
payment, B’s statement = repudiation
(3) “I am not sure that I can perform, and I do not intend to do so unless I
am legally bound to” ≠ repudiation
3. Comment c: Nature of Act: in order to constitute a repudiation, a party’s act must be
both voluntary AND affirmative AND must make it actually or apparently impossible
for him to perform
a) Examples pg. 863
(1) A K’s to sell with B to buy land but on before A gives deed and B pays
for land A sells land to C = repudiation
(2) Same as above expect A mortgages land to C = repudiation
(3) A K’s to employ B, and B to work for A, employment to last 1 yr starting
in 10 days. 3 days after making K B leaves on ship voyage. B’s act =
repudiation.
C. UCC 2-610: Anticipatory Repudiation
1. When either party repudiates the K w/ respect to performance not yet due, the loss
of which will substantially impair the value of the K to the other, the aggrieved
party may
a) For commercially reasonable time await performance by the repudiating
party; or
b) Resort to any remedy for breach (2-703 or 2-711), even though he has
notified the repudiating party that he would await the latter’s performance and
has urged retraction; and
c) In either case suspend his own performance or proceed in accordance w/
the provisions of this Article on the seller’s right to identify goods to the K
notwithstanding breach or to salvage unfinished goods (2-704)
D. Hathaway v. Sabin (pg. 864): (conduct was act of repudiation)
1. Π Band sued ∆ hall owner when ∆ fails to provide hall on day of concert w/pretextual reason of bad weather making it impossible for π band to make it. Ct says ∆
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closed hall as expected small turnout and less profit. ∆’s voluntary act made him
breach the K. ∆ should have gotten assurances from π regarding whether or not
they would make it.
E. UCC 2-609: Right to Adequate Assurance of Performance
1. A K for sale imposes an obligation on each party that the other’s expectation of
receiving due performance will not be impaired. When reasonable grounds for
insecurity arise w/ respect to the performance of either party, the other may in
writing demand adequate assurance of due performance, and until he receives
such assurance, may, if commercially reasonable, suspend any performance
for which he has not already received the agreed return.
2. After receipt of a justified demand, failure to provide assurance w/in reasonable time
(limit 30 days) is repudiation of K
3. NOTE: the RST 251 has also adopted this approach (see below)
F. RST 251: When failure to give assurance may be treated as repudiation
1. Where reasonable grounds arise to believe that the obligor will commit a breach by
non-performance that would of itself give the obligee a claim for damages for total
breach, the obligee may demand adequate assurance of due performance and may,
if reasonable, suspend any performance for which he has not already received the
agreed exchange until he receives such assurance.
2. The obligee may treat as a repudiation the obligor’s failure to provide w/in a
reasonable time such assurance of due performance as is adequate in the
circumstances of the particular case
a) Magnet Resources v. Summit MRI, Inc. (p. 866): (suspension of
performance, RST 251)
(1) Using RST 251 principle, ct found it was appropriate for MRI to
suspend performance until adequate assurances were received b/c
MRI had reason to believe Summit would not fulfill its K obligations b/c
of their history of non-performance and failure to pay upon promise of
payment; MRI could have invoked RST 250 but once is demanded
assurance from ∆ it became subject to RST 251.
(2) RST 237
(a) A material breach by either party to a bilateral K excuses the
other party from rendering any further contractual performance.\
(b) Factors to examine: (1) Evaluates the ratio quantitatively which
the breach bears to the K as a whole and (2) the degree or
probability or improbability that such a breach will be repeated
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X.
Grounds of Rightful Cessation:
A. Full performance (most common), Lack of consideration, Unconscionability, Material
breach, Failure of express condition, Non-compliance w/ SOF, Lack of Valid Agreement
B. Mutual Mistake
1. General Rule: a party who learns that the circumstances at the time of contracting
were materially different from what the parties had assumed at that time may claim
relief on ground of mutual mistake.
a) Sherwood v. Walker (pg. 881): (general mutual mistake)
(1) Π and ∆ K for sale of cow that is allegedly barren, but ∆ refuses to
deliver upon discovering its pregnant. Π wins in lower ct but higher ct
reverses for new trial as it finds mutual mistake. It finds both parties
thought cow was barren and the mistake went to the substances of the
K as a fertile cow would have sold for more $.
(2) Dissent disagrees as it finds that ∆ seller assumed risk when it
repeatedly asserted during negotiations that cow was barren, but
π said he hoped cow could reproduce. Further ∆ made no conditions
or warranties in the K. cow should have gone to π.
(3) Think about how this would come out under RST 152/154
(a) Under 154 likely would have gone to π as well
(4) UCC 1-103 applies as well if use breach of warranty
2. RST 152: Elements of Mutual Mistake
When:
a) Both parties are mistaken,
b) At the time the K was made,
c) As to a basic assumption on which the K was made,
d) Which has a material effect on the agreed exchange of performance,
e) The K is voidable by the adversely affected party UNLESS he bears the risk
of the mistake
3. RST 154: A Party Bears the Risk of Mistake when:
a) The risk is allocated to him by agreement of the parties, or
b) He is aware, at the time the K is made, that he has only limited knowledge w/
respect to the facts to which the mistake relates but threats his limited
knowledge as sufficient, or
c) The risk is allocated to him by the court on ground that it is reasonable
in the circumstances to do so
4. UCC does not have mistake provision, but CL applies under 1-103(b)
5. RST 152/154 applied:
a) Wood v. Boynton (p. 887): (assumption of risk by knowledge deemed
sufficient)
(1) π diamond finder seller is held to her K when she pawns the stone to ∆
jeweler ad at the time of sale neither knew stone was a diamond. Π
bears risks as she has the stone longest, had it appraised before, but
went ahead w/ the deal deeming her knowledge sufficient. It tables
were turned, jeweler would have been held to K as well.
6. Rule: Rescission in the event of a mutual mistake will be granted when the mistaken
belief relates to a basic assumption of the parties upon which the K was made
and which materially affects the agreed performance of the parties, evaluated on
a case-by-case basis; rescission is an equitable remedy granted in the discretion of
the court
a) Lenawee Co Bd of Health v. Messerly (p. 888): (assumption of risk by
agreement)
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(1) Land is sold that has a preexisting violation of health codes (not
suitable for operating a septic system on land); land is too small to
accommodate sewage system, so no real remedy; there was mutual
mistake but the risk had been assigned to the buyer in the “as is”
clause, so no rescission allowed
(2) One could argue that buyer accepted present condition (non-sewage
leaking state).
7. Rule: Misunderstanding is not mutual mistake and thus not grounds for rescission
a) Shrum v. Zeltwanger (pg. 902): (misunderstanding ≠ mistake)
(1) Misunderstanding as to the word “cow”; the parties assigned the word
different meanings (like the Peerless ship case/RST 20); since both
parties were not laboring under the same misconception in respect to
terms of the written K, summary judgment as to mutual mistake should
not have been granted;
C. Unilateral Mistake
1. RST 153: Unilateral Mistake
(1) Where a mistake of one party at the time a K was made as to a basic
assumption on which he made the K has a material effect on the
agreed exchange of performances that is adverse to him, the K is
voidable by him if he does not bear the risk the mistake under 154 and
(a) The effect of the mistake is such that enforcement of the
contract would be unconscionable, or
(b) The other party has reason to know of the mistake or his fault
caused the mistake
b) Donovan v. RRL Corporation (pg. 909): case of the Jaguar advertised
incorrectly; car dealer made a unilateral mistake of fact which the ct held
justified his rescission of the K;
(1) RST 157: Only where the mistake results from a failure to act in good
faith and in accordance with reasonable standards of fair dealing is
rescission unavailable. (p. 913)
2. CL Majority Rule: allow relief by rescission from a unilateral mistake in the bid
situation when the following criteria are met:
a) Bidder acted honestly, in good faith, and w/o gross or willful negligence
b) Bidder was reasonably prompt in notifying the contracting party of the error
c) Mistake pertained to a material part of the K
d) Mistake was of such magnitude that enforcement or forfeiture would be
unconscionable
e) Relief would return the parties to the status quo w/o prejudice to the
contracting party
f) Evidence is presented which convincingly establishes the mistake in fact
exists
3. CL Minority Rule: In absence of fraud, unilateral mistake will not excuse nonperformance
a) Triple A Contractors, Inc. v. Rural Water District No. 4 (pg. 906): (agreement
to bear risk)
(1) Π made error in bond that it discovered after the bid was opened and it
was revealed that its bid was too low. Π wished to retract bid and
recover bond, but ∆ wished to retain bond according to terms. Ct ruled
that π m must forfeit bond in light of keeping bid process consistent.
This might be seen as liquidating damages or limitation of remedy.
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Further, it is more equitable then holding π to overall K where he would
have sustained a much larger loss.
(2) Under RST 152 – π’s case would have merit to rescind, except that
under RST 154, the bond may be viewed as his agreement to bear
risk.
(3) Dissent says ct could have found for π on following
(a) Bidder acted in good faith
(b) Bidder was prompt in notifying of the error
(c) Mistake was as to material part of K
(d) Forfeiture would be unconscionable
(e) Relief would return parties to status quo
(f) Evidence that mistake in fact exists
(g) Further
(i) ∆ is UE enriched
(ii) ∆ likely had knowledge of error
4. Reigert – while a unilateral mistake may excuse the K, the non-rescinding party may
be entitled to reliance damages if it changed its position in reliance.
D. Impossibility of Performance
1. General Principle: if parties do not contemplate unforeseen consequences in the K
by way of express or implied warranty, the K is construed as being subject to an
implied condition that the parties shall be excused where performance becomes
impossible; in the event of impossibility, BOTH parties are excused from
performance of the K.
a) Taylor v. Caldwell (pg. 918): (classic impossibility)
(1) Π made K with ∆ to secure surrey hall for specified dates in future.
Before 1st date, hall burned down and π sued. Ct finds neither party is
at fault due to impossibility and so the K is excused.
(2) Risk of loss: argument could be made that ∆ should have had
insurance.
2. Rule: Value of work done prior to destruction is recoverable based on UE
a) Bell v. Carver (p. 920): (party at fault for impossibility pays damages)
(1) Π was installing AC in ∆’s building when it burned down. ∆ did not
rebuild and so π sued to get value of material and labor to that point.
Ct granted π relief in UE. Π’s duty made impossible by ∆’s refusal to
rebuild.
(2) Π could have gotten expectancy damages if ∆ was at fault for fire.
3. Rule: Just b/c something is hard or too expensive to perform does not discharge
duty – it must be impossible to do b/c of being destroyed or something
a) Canadian Industrial Alcohol Co. v. Dunbar Molasses Co. (p. 925): (assumed
risk ≠ impossibility)
(1) Π made K w/ middle man to get molasses for particular refinery. When
refinery doesn’t produce, ∆ doesn’t deliver required molasses and π
sues. ∆ cites impossibility, but ct says it bears the risk and should have
contracted around its dependence.
(2) Today,  may have excuse under UCC 2-615 (Excuse by Failure of
Presupposed Conditions)
(3) Make sure to read comments for 2-615
4. Rules regarding Risk of Loss:
a) General Rule in Sale of Land K: Where the purchaser goes into possession
under a binding executor K for sale of improved realty which the seller is
unable to convey, but where, before the transfer of legal title is consummated,
42
the improvements are destroyed by fire, without the fault of either party, the
loss falls on the purchaser as owner of the equitable title. If in such a case the
property was insured by the seller, he holds the insurance money which he
may collect on the bargained property as trustee for the purchaser, subject,
however, to his own claims for any unpaid purchase money plus the
insurance premiums. (Davis v. Skinner (pg. 922))
b) Uniform Vendor and Purchaser Risk Act: (minority following - enacted in
only a few states, including CA and NY)
(1) If neither title nor possession has passed, and property destroyed
w/out fault of purchaser, vendor cannot enforce
(2) If title or possession has passed, buyer held to K
c) UCC 2-509: Risk of Loss in the Absence of Breach
(1) ***
(2) ***
(3) In any case not involving a carrier or bailee, the risk of loss passes to
the buyer on his receipt of the goods if the seller is a merchant;
otherwise the risk passes to the buyer on tender of delivery; if risk
of loss doesn’t pass to buyer, he can avoid the K under UCC 2-613,
but cannot get expectancy damages
(4) The provisions of this section are subject to contrary agreement of the
parties
d) UCC 2-104(1) Merchant (p. 924)
(1) Means a person who deals in good of the kind or otherwise by his
occupation holds himself out as having knowledge or skill peculiar to
the practices or goods involved in the transaction or to whom such
knowledge or skill may be attributed by his employment of an agent or
broker or other intermediary who by his occupation holds himself out
as having such knowledge or skill.
e) UCC 2-613: Casualty to Identified Goods
(1) Where the K requires for its performance goods identified when the K
is made, and the goods suffer casualty w/o fault of either party before
the risk of loss passes to the buyer, then
(a) If the loss is TOTAL, the K is avoided; and
(b) If the loss is PARTIAL or the goods have so deteriorated as no
longer to conform to the K, the buyer may nevertheless demand
inspection and at his option either treat the K as avoided or
accept the goods w/ due allowance from the K price for the
deterioration or the deficiency in quantity BUT w/o further right
against the seller
E. Impracticability
1. Rule: Impracticability will excuse performance ONLY when there is EXTREME
difficulty, expense, injury, or loss, which goes well beyond the normal range of what
might have been expected, and whether the parties failed to allocate such risk.
a) Marchovich Land Corp. v. J.J. Newberry Co. (pg. 927): (impracticability
must be extreme)
(1) Π sues for lost profits when ∆ lessor refuses to rebuild leased building
that burden down. ∆ cites defenses of unconscionability, impossibility,
and impracticability but ct finds for π as ∆ made no effort to secure
financing for rebuilding. ∆ asserted that rebuilding would not be
profitable and ct said that this is not enough to meet high standard of
impracticability
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(2) Must be dire circumstances
b) Mineral Park Land Co. v. Howard (pg. 933): (impracticability)
(1) Parties make K to remove estimated amount of gravel from π’s land to
build bridge. When ∆ removes less than ½ of estimated amount, π
brings action. ∆ cites impracticability of removing additional gravel as it
was below water level and would have cost excessive amount. Ct finds
for ∆.
(2) Since there was no clause allocating risk, no way to get insurance, and
there was extreme difficulty, ct grants relief to burdened party
(3) This could be case of mutual mistake, but not clear is π or ∆ bears risk.
(a) Π owned land and had better reason to know of its quantity
(b) ∆ observed land and have chance to inspect
2. UCC 2-615: Excuse by Failure of Presupposed Conditions
(1) Except so far as the seller may have assumed a greater obligation and
subject to the preceding section on substitute performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller
who complies w/ paragraphs (b) and (c) is not a breach of his
duty under a K of sale if performance as agreed has been made
impracticable by the occurrence of a contingency, the nonoccurrence of which was a basic assumption on which the K
was made or by compliance in good faith w/ any applicable
foreign or domestic governmental regulation or order whether or
not it later proves to be invalid.
(b) Where the causes mentioned above 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 K 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 (b),
of the estimated quota thus made available for the buyer
(2) Comment: note that this is commercial impracticability, not strict
impossibility
b) Mishara Construction Co. v. Transit-Mixed Concrete Corp. (pg. 942):
(construction context)
(1) Co. fails to deliver concrete b/c of labor dispute on property (picket
line); ct finds that labor disputes does not excuse performance even in
light of 2-615; In order for impracticability to be excused under 2-615:
(2) The performance must be impracticable;
(3) The impracticability must be caused by the occurrence of a
contingency (a future event), the non-occurrence of which was a basic
assumption upon which the K was made
F. Frustration of Purpose
1. NOTE: FOP is usually being asserted by the party obligated to pay under the K,
while impossibility and impracticability are usually asserted by the performer
2. FOP Doctrine:
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a) If all of these questions are answered in the affirmative, then both parties are
discharged from further performance of the K (viewed on a case-by-case
basis):
(1) What was the foundation of the K?
(2) Was the performance of the K prevented?
(3) Was the event, which prevented the performance of such a character
that it cannot reasonably be said to have been in the contemplation of
the parties at the date the K was entered into?
b) Krell v. Henry (pg. 946): (general FOP)
(1) ∆ wanted to watch the coronation of the king and so rented π’s flat for
that purpose on particular days; however, since the coronation did not
occur on the days it was supposed to b/c king was sick, ∆ refused to
pay for the room not used, claiming FOP; ct applies principle of Taylor
v. Caldwell (which seems weird) and finds that purpose was frustrated
and lets ∆ off the hook
(2) Cab hypo: ct distinguishes b/c K made to go see derby, but when
derby cancelled no FOP as derby was not foundation of K and other
cabs were available (here flat was unique in its view of coronation)
3. Rule: To get FOP defense, must show:
(1) Risk of frustrating event was not reasonably foreseeable, and
(a) Frustration must not be foreseeable
(2) The value of the counter performance is totally or nearly totally
destroyed
b) Lloyd v. Murphy (pg. 950): (≠ FOP – ≠ foreseeable & not substantial loss)
(1) ∆ rents property from π to run new/used car lot and gas station, but
abandons property when sales dip after govt passes restrictions on
sales due to war. Ct finds no grounds for FOP b/c
(a) sales dip was foreseeable due to war legislation passed shortly
before K was made and
(b) not substantial loss of value as ∆ could still sell cars and gas
4. RST 285 comment a: decrease in profits is not enough to claim frustration
a) Downing v. Stiles (pg. 954): (identifying purpose of K)
(1) ∆ leases restaurant from π and has most of is business come from
nearby bar. When bar shuts down, ∆ made payments for a while, but
then stops due to lack of business. ∆ cites FOP in ct, but this is no
valid as purpose of K was to run restaurant – no provision of reliance
on bar.
b) See also p. 955 illustration 7 of RST 265
5. NOTE: depending on how you construe the purpose of the K can make a difference:
a) The more broadly the purpose is construed, the more difficult it is to claim
frustration since the purpose could arguably still be achieved under a broader
definition
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XI.
Remedies for Mistake, Impossibility, and Frustration
A. Traditional Rule: In the event of impossibility or FOP, both parties are excused from the
K but neither can recover anything for part performance – Ct leaves parties whey it
found them (See Siegel v. Eaton & Prince (p. 961)- no damages rule)
1. 20th Century Lites, Inc. v. Goodman (pg. 960): (no damages w/ FOP)
a) π leases sign to ∆, but ∆ later told π to back sign b/c new govt regulation bars
neon sign at night. Π sues as is it has no use for the sign that was custom
made for ∆. Ct says FOP defense valid & leaves parties where it found them.
b) Ct distinguishes San Joaquin v. Costaloupes case which did not let the power
buyer out of the K since K could still be performed (build another building
which could use power) and the condition was under party’s control
c) Here since the regulation was not w/in party’s control, ct allows frustration
defense; Ct excuses both parties’ performance but give no remedy (See
Siegel v. Eaton & Prince (pg. 961)- no damages rule)
B. Common Law Rule: Restitution (return of value received) is the only available form of
damages in cases of impossibility or FOP; neither party can be compelled to pay for the
other’s disappointed expectations, but neither can be allowed to profit from the situation
1. Quagliana v. Exquisite Builders, Inc. (p. 962): (≠ be allowed to profit, restitution)
a) Π K’s w/ architect and builder to erect house that has a view of the valley.
Work starts and π makes some payments, but then building stops when
discovered that the plans would violate an ordinance. Ct excuses K citing
FOP. Rule (see above) – neither must pay/profit.
b) Ct remands to determine damages by considering benefit to π from ∆’s work
when π sold lot at profit, amount π has already paid and ∆’s expenses.
C. Wrought-Into Principle: Where a building K has been rendered impossible of performance
a π may not recover for expenses incurred in preparation for performance, but may recover
only for the labor and materials “wrought into” the structure.
1. Exception: Albre Marble and Tile Co. v. John Bowen Co. (pg. 964): (UE)
a) Subcontractor is to do tile/marble work; in preparation, does some samples
but never installs anything; general contractor loses deal so sub sues general
and general asserts impossibility; ct lets general off (finding impossibility even
though it was general’s fault);
b) Narrow holding: recovery may be had only for expenditures, which, but for the
supervening at, would have endured to the benefit of ∆ as contemplated by K;
in this particular case.
c) The ct found that since ∆ contributed to the eventual impossibility of the K
(submitting an unlawful bid) and ∆ included provision requesting certain work
be done by π in prep for performance (clause in K) that sub could recover
D. RST 158(mistake)/272(Impossibility/FOP): Relief Including Restitution
1. In any case governed by the rules stated in this Ch., either party may have a claim
for relief including restitution
2. In any case governed by the rules stated in this Ch., if those rules together w/ rules
stated in Ch.16 will not avoid injustice, the court may grant relief on such terms
as justice requires including the protection of the parties’ reliance interests.
E. Remedy for Judicial Reformation
1. Thieme v. Worst (pg. 968): buyer enters into sale of land K on which they thought
water would be suppliable; they were wrong; ct concludes there was mutual mistake;
trial judge reshapes the K and requires sellers to provide water to property
2. ALCOA v. Essex Group (pg. 973): (ct reforms terms of K)
a) Parties make K for AL, but then sudden fuel costs and pollution control prices
rise making the K a huge loss for ALCOA. CT devises remedy where ALCOA
46
will get 1 cent per profit on each pound of AL produced. Parties appeal this
decision and settle out of ct. RARELY FOLLOWED DECISION.
b) Dawson
(1) Ct is not an expert nor is it entirely privy to parties’ intentions, it is
merely re-writing the K.
(a) This goes against parties’ autonomy, bargaining and
negotiations process
(b) Ct should stick to conventional damages
3. Nat’l Presto Indus. Inc. v. U.S. (pg. 982): (equitable to reform K)
a) Sometimes it is equitable to reform the K so that each side bears a share of
the unexpected loss – reformation can be molded to be fair
4. UCC 2-615 Comment: in situations in which neither sense nor justice is served by
either answer when the issue is posed in flat terms of “excuse” or “no excuse”,
adjustment under the various provisions of this Article is necessary, especially the
sections on good faith, insecurity and assurance and on the reading of all provisions
in light of their purposes, and the general policy of this Act to use equitable principles
in furtherance of commercial standards and good faith.
a) When conventional remedies do not serve justice, equitable principles
should be used in furtherance of commercial standards and good faith.
5. Note: parties may always K around such unexpected scenarios and resort to
specified approaches or arbitration.
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XII. Third
Party Beneficiaries
A. Intended and Incidental Beneficiaries
1. General Rule: Where one person makes a promise to another for the benefit of a 3rd
person, that 3rd person may maintain an action upon it (Lawrence v. Fox (pg. 986))
a) Lawrence v. Fox (classic case of 3rd party)
(1) H owes $300 to π. H loans $300 to ∆ and ∆ promises to pay π. ∆ does
not pay and π sues. ∆ in his defense says π cannot sue b/c there was
1) no consideration and 2) no privity.
(2) Ct says consideration does not have to come from ultimate beneficiary
(π); it came from H
(3) Ct says privity implied in situation
(a) Ct cites English Rule (which at time allowed such a 3rd party
action, overturned in Seaver)
(b) Ct says ∆ holding money for π in constructive trust.
(4) Ct does not consider ∆’s argument that H could have demanded $
back at any point and changed the 3rd party beneficiary to someone
else. Since it didn’t happen the ct didn’t address it.
b) Seaver v. Ransom (p. 990) (paternalism; personal will)
(1) Dying aunt gets husband to promise he will leave house to her niece
(π). Husband dies w/out fulfilling promise and π sues on promise. At
the time, NY only had 4 ways for 3rd party to bring suit:
(a) Pecuniary obligation running from promisee to beneficiary
(b) K made for benefit of wife
(c) Public K where municipality intended to benefit its citizens
(d) At request of party to K, benefit runs directly to beneficiary w/out
consideration
(2) Ct did not find π in any of these types, but made analogy to parent
leaving child something in her will.
2. RST 133: Definition of Donee Beneficiary, Creditor Beneficiary, Incidental
Beneficiary
(1) Where performance of a promise in a K will benefit a person other than
the promisee, that person is
(a) A donee beneficiary if it appears from the terms of the promise
in view of the accompanying circumstances that the purpose of
the promise in obtaining the promise of all or part of the
performance thereof is to make a gift to the beneficiary or to
confer upon him a right against the promisor to some
performance neither due nor supposed or asserted to be due
from the promisee to the beneficiary
(i) Purpose to make gift
(b) A creditor beneficiary if no purpose to make a gift appears
from the terms of the promise in view of the accompanying
circumstances and performance of the promise will satisfy an
actual or supposed or asserted duty of the promisee to the
beneficiary, or a right of the beneficiary against the promisee
which has been barred by the SOL or by a discharge in
bankruptcy, or which is unenforceable b/c of the SOF
(i) Allows actions where right of beneficiary against
promisee has been barred by SOL, SOF, bankruptcy
(c) An incidental beneficiary if neither the facts stated in Clause
(a) no those in Clause (b) exist.
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3. Refinements of the General Rule:
a) RST 302: Intended and Incidental Beneficiaries
(1) Unless otherwise agreed b/w promisor and promisee, a beneficiary of
a promise is an intended beneficiary if recognition of a right to
performance in the beneficiary is appropriate to effectuate the intention
of the parties and either
(a) The performance o the promise will satisfy an obligation of the
promise to pay money to the beneficiary; or
(b) The circumstances indicate that the promisee intends to give
the beneficiary the benefit of the promised performance
(2) An incidental beneficiary is a beneficiary who is not an intended
beneficiary
b) To recover as a 3rd party beneficiary, the individual must be primary and
immediate, not incidental to the K
(1) H.R. Moch Co. v. Rensselaer Water Co. (pg. 993):
(a) K b/w city and water co to furnish water to city residents, giving
incidental benefit to public; ct holds warehouse owner who’s
building burned could not bring suit against water co as a
beneficiary since he was not a direct beneficiary
c) Children do not have standing to enforce support provisions in parents'
separation agreement, but they may enforce provisions specifically for them,
e.g. duty to pay college tuition (Drake v. Drake (pg. 999))
d) K must have been entered into for party’s DIRECT benefit; must look to the K
and to the surrounding circumstances to ascertain if intended beneficiary
(1) Alaniz v. Schal Associates (pg. 999):
(a) π worker sued as 3rd party beneficiary for personal injuries
resulting from breach of K with contractor by CM to follow safety
laws. Personal injury apparently barred by SOL. Contractor
intended to protect itself from litigation, fines by requiring CM to
follow law; although π would have benefited, this benefit is
incidental to the purpose of the clause. Baker case cited
explicitly stated that ∆ would repair any damage caused by its
blasting. Baker evidenced an intent to benefit the 3rd
parties, but Alaniz K only stated responsibility to follow
safety rules; thus, π is not 3rd party beneficiary
4. UCC 2-318: Third Party Beneficiaries of Warranties Express or Implied
a) Alternative A: A seller’s warranty, whether express or implied, extends to any
natural person who is in the family or household of his buyer or who is a guest
in his home if it is reasonable to except that such person may use, consume
or be affected by the goods and who is injured in person by breach of
warranty. A seller may not exclude or limit the operation of this section.
b) Alternative B: A seller’s warranty, whether express or implied, extends to any
natural person who may reasonably be expected to use, consume, or be
affected by the goods and who is injured in person by breach of the
warranty. A seller may not exclude or limit the operation of this section.
c) Alternative C: A seller’s warranty, whether express or implied, extends to any
person who may reasonably be expected to use, consume, or be affected by
the goods and who is injured by breach of the warranty. A seller may not
exclude or limit the operation of this section w/ respect to injury to the person
of an individual to whom the warranty extends
5. UCC 2-313A: see pg. 1005
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B. Defenses
1. RST 143: a discharge of the promisor by the promisee in a K or variation thereof by
them is effective against a creditor beneficiary if the creditor beneficiary doesn’t
bring suit upon the promise OR otherwise materially change his position in reliance
thereon before he knows of the discharge or variation
a) Morstain v. Kircher (pg.1006): (Promisor discharged of obligation)
(1) Brown wrote promissory note to π as mortgage on their property of
$400; Browns then sell to ∆ subject to the mortgage and ∆ promises to
pay off the mortgage; ∆ makes payments but then conveys premises
back to Browns subject to the mortgage (which means Brown took the
property back and thus discharged ∆ from the promise to pay the
creditor); thus, π can’t maintain action against ∆ since ∆ is no longer
under duty to pay
2. RST 311: Variation of a Duty to a Beneficiary
(1) Discharge or modification of a duty to an intended beneficiary by
conduct of the promisee or by a subsequent agreement b/w promisor
and promisee is ineffective if a term of the promise creating the duty so
provides
(2) In the absence of such term, the promisor and promisee retain power
to discharge or modify the duty by subsequent agreement, BUT
(3) Such a power terminates when the beneficiary, before he receives
notification of the discharge or modification, materially changes his
position in justifiable reliance on the promise or brings suit on it or
manifests assent to it at the request of the promisor or promisee
(4) If the promisee receives consideration for an attempted discharge or
modification of the promisor’s duty, which is ineffective against the
beneficiary, the beneficiary can assert a right to the consideration so
received. The promisor’s duty is discharged to the extent of the amount
received by the beneficiary
3. Rule: One who promises to make a payment to the promisee’s creditor can assert
against the creditor any defense that the promisor could assert against the promisee
(a promisor can assert any defense he can assert against the promisee against the
creditor)
a) Rouse v. U.S. (pg. 1008): (RST 309(1))
(1) W K’s w/ AC where AC install heating plant. W executes a note that is
guaranteed by π – US Gov’t/ AC transfers this note to Bank. W then
conveys the property to ∆ (R), who promised to pay $850 of W’s debt
on heating plant. W defaults on the note, π pays off bank and asserts
collection rights against ∆. Ct reversed finding for π as ∆ had a claim of
fraud against W in misrepresentation of the heating plan which could
be assert against π (like RST 309(1) – K unenforceable due to fraud)
(2) Ct struck ∆’s 2nd defense – AC did not install properly as this was a
defense that W could assert against AC, not one that ∆ could assert
against AC. ∆ had promised to pay $850, but it had promised to pay
what W owed to AC, it could have gotten off as W could owe AC $0 for
improper installation.
(3) If ct finds against ∆ on remand, ∆ can still recover
(a) Sue W for breach of general warranty
(b) Sue AC under UCC 2-318 as a reasonable person affected by
the good.
rd
4. Rule: 3 Party Beneficiary DOES NOT get put in a better position than the promisee
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5. RST 309: Defenses Against the Beneficiary
(1) A promise creates no duty to a beneficiary UNLESS a K is formed b/w
the promise and promisee; AND if a K is voidable or unenforceable at
the time of its formation, the right of any beneficiary is subject to the
infirmity
(2) If a K ceases to be binding in whole or in part b/c of impracticability,
public policy, non-occurrence of a condition, or present or prospective
failure of performance, the right of any beneficiary is to that extent
discharged or modified
(3) Except as stated in (1) and (2) and in 311 or as provided by the K, the
right of any beneficiary against the promisor is not subject to the
promisor’s claims or defenses against the promisee or to the
promisee’s claims or defenses against the beneficiary
(4) A beneficiary’s right against the promisor is subject to any claim or
defense arising from his own conduct or agreement
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XIII.
Assignment and Delegation
A. Terminology
1. Assignment of a Right: Quit your own right to the promisor’s benefit and give it to
another (legal action in which someone else becomes the payee)
a) Like a football – once you hand it off, you don’t have the right anymore,
someone else does
b) Can be either gratuitous or for consideration
(1) Gratuitous is generally irrevocable if in writing
c) Legally valid present transfer of that right
2. Delegation of Duty:
a) Like a cold – once you get my cold, you have it but I still have it too
B. Assignment of Rights
1. RST 332: Gratuitous Assignment and Assignment for Consideration (p. 1012)
a) A gratuitous assignment is irrevocable if:
(1) In writing signed by the assignor and delivered to the assignee, OR
(2) Accompanied by delivery of writing of a type customarily accepted as a
symbol or as evidence of the right, such as a savings bank book
b) A gratuitous assignment is revocable if:
(1) The assignment is oral and notifies of the revocation, OR
(2) The assignor’s death, incapacity, or subsequent assignment
terminates the assignee’s rights
c) A revocable gratuitous assignment becomes irrevocable if:
(1) The assignee obtains payment or a judgment against the obligor, OR
(2) Enters a new contract w/ the obligor directly, OR
(3) Reasonably relies thereon
d) An assignment for consideration (oral or written) is irrevocable, UNLESS it
falls w/in an applicable statute of frauds provision
C. Limits on Assignment of Rights
1. Personal in Character Rule: If rights and duties are so personal in character that
assignment of them defeats the intent of the parties, then the assignment will be
impermissible.
a) Crane Ice Cream. v. Terminal Freezing & Heating Co. (p. 1012): (personal K)
(1) F’s right: right to buy as much ice (not to exceed 250 tons/wk) as
needed from TFH; F assigns the K to C and then TFH does not want to
deliver; C sues for BoK; TFH asserts two defenses: 1) invalid
assignment: they relied on F’s integrity in order to be sure he would get
paid each week and made the deal in reliance on his track record of
being financially responsible and having good judgment so the change
of this right to someone else changed the nature of the transaction;
and 2) F repudiated K (Similar to RST 317(2))
2. RST 317: Assignment of a Right
(1) An assignment of a right is a manifestation of the assignor’s intention
to transfer it by virtue of which the assignor’s right to performance by
the obligor is extinguished in whole or in part and the assignee
acquires a right to such performance
(2) A contractual right CAN be assigned UNLESS:
(a) The substitution of a right of the assignee for the right of the
assignor would MATERIALLY CHANGE the DUTY of the
obligor, or MATERIALLY INCREASE the BURDEN or RISK
imposed on him by his K, or MATERIALLY IMPAIR his chance
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of obtaining return performance, or MATERIALLY REDUCE its
value to him, or
(b) The assignment is forbidden by statute or is otherwise
inoperable on grounds of public policy
(c) Assignment is validly precluded by K
3. UCC 2-210(2): Unless otherwise agreed, all risks of either seller or buyer can be
assigned EXCEPT where the assignment would materially change the duty of the
other party, or increase materially the burden or risk imposed on him by his K, or
impair materially his chance of obtaining return performance. A right to damages for
breach of the whole K or a right arising out of the assignor’s due performance of his
entire obligation can be assigned despite agreement otherwise
4. RST 321: Assignment of Future Acts
a) A right expected to arise under a K not in existence is not a present
assignment, but operates only as a promise to assign (p. 1018)
b) Example: A has not made in assignment if A, an unemployed gardener,
promises to pay B money that A hopes to earn in the future from C, who is
opening a new gardening store. As a result, even if C employ’s A, C does not
have to pay A’s salary to B (C may have other defenses as well such as
statutory prohibition of assignment of wages).
5. Farnsworth Article
a) Donor making gift
b) Retailer sells on credit
c) Wholesaler selling to retailer on credit
d) Builder makes construction K
e) Owner of business that furnishes goods to business and sells
6. UCC Article 9
a) Permits assignment of future accounts as collateral for present loans
(1) Account – right to payment for goods sold or leased or for services
rendered whether or not it is earned by performance
(2) Accounts are held similar to security interests and hence governed by
Article 9
(3) UCC 9-138(4) – a contractual term that bars assignment or creation of
security interest for money due or money to become due is ineffective
(4) Instrument must be in writing.
D. Defenses of the Obligor against the Assignee
1. RST 336: Defenses Against the Assignee (see pg. 1020)
a) Assignee has same right to obligor’s duty that assignor had
b) Assignee is subject to any defense or claim of obligor against assignor which
accrued before obligor learned or assignment, but not to those that accrue
thereafter
c) After obligor receives notice of assignment, assignee is still subject to
discharge or modification of its rights in whole or part due to impracticability,
public policy, non-occurrence of condition, etc.
2. RST 338: Discharge of an Obligor After Assignment (see pg. 1021)
3. Note: the assignee should notify the obligor immediately of the assignment (see pg.
1022)
E. Delegation of Duties
1. UCC 2-210(3): Unless the circumstances indicate the contrary, a prohibition of
assignment of “the contract” is to be construed as barring only the delegation to the
assignee of the assignor’s performance
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2. UCC 2-210(4): An assignment of “the contract” or of “all my rights under the
contract” or an assignment in similar general terms is an assignment of rights, and
unless the language or circumstances indicate the contrary, it is a delegation of
performance of the duties of the assignor and its acceptance by the assignee
constitutes a promise by him to perform those duties. This promise is enforceable by
either the assignor or the other party to the original contract
3. See packet
F. Limits on the Delegation of Duties
1. UCC 2-210(1): A party MAY perform his duty through a delegate UNLESS otherwise
agreed OR UNLESS the other party has a substantial interest in having his original
promisor perform or control the acts required by the K. No delegation of
performance relieves the party delegating of any duty to perform or any
liability for breach.
2. Personal in Character Rule: a delegation of duty may be defeated on the ground
that the duties are personal in nature
a) Macke Co. v. Pizza of Gaithersburg, Inc. (pg. 1029): like the Crane case but
comes out the other way; sale of a business w/ a delegation of duty to supply
beverage service by VA Coffee to Macke for the benefit of Pizza shops; Pizza
shops don’t let Macke in and won’t pay; Macke sues; but Ct says this was not
a personal service K so delegation IS allowed
G. Obligor’s Defenses Against the Obligee
1. The Shoe’s Principle: UCC 9-318(1): Unless an account debtor has made an
enforceable agreement not to assert defenses or claims arising out of a sale, the
rights of the assignee are subject to:
a) All the terms of the K b/w the account debtor and assignor and any defense
or claim arising therefrom; and
b) Any other defense or claim of the account debtor against the assignor which
accrues BEFORE the account debtor receives notification of the assignment
2. In other words: the assignee steps into the shoes of the assignor
3. Exceptions or Limitations to the Shoes Principle:
a) Limit #1: Can’t get back amounts already paid (traditional view of most
jurisdictions)
(1) Iselin-Jefferson Financial Co. v. Makel Textiles (pg. 12 of handout)
(2) It is an issue of sword v. shield: You can use the principle as a shield,
but you cant use it as a sword to get an affirmative recovery (by way of
the shoe principle)
(3) Rule of this case has been incorporated into the UCC 9-404(b)
b) Limit #2: UCC 9-206(1) (pg. 12 of handout): Assignment must be for value, in
good faith, and w/o notice of a claim or defense
c) Limit #3: “Holder in Due Course” Principle
(1) This is a part of the “law of negotiable instruments” (course called
“payments systems” or commercial paper and largely have to do w/
checks)
(2) UCC 3-302, 3-305: These rules say that if you’re a holder in due
course of a negotiable instrument, then you take that instrument (which
is after all, a promise to pay), you take it free of defenses, regardless of
anything
(3) Exceptions to the Exceptions: 3-305(a)(1): back in the assignee’s
shoes w/ regard to these particular defenses
(a) Certain defenses, called ‘real defenses’ can be asserted over a
holder in due course (fraud in factum (causing someone to sign
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something they think is something else), duress, discharge in
bankruptcy, etc, see statute!)
d) Limit #4: 9-318(2) (pg. 8 of handout) Deals w/ modification:
(1) What happens if a K right is assigned from B to C. But then B and A
make an agreement to change the deal? Is that enforceable?
(a) In the old days, many jurisdictions said it was not enforceable if
C has already given A notice of the assignment; once C has
given A notice, then A and B can’t monkey around
(i) BUT 9-318(2) departs from traditional approach and
says, in general, A and B can monkey around forever,
even if that prejudices in some way the rights of C
(a) Note that A and B can’t modify however they want
b/c 9-318(2) puts limits on the power to modify
(i) Ex: can’t modify if the right to full payment
has already matured
(ii) Must be executory on both sides
(b) Carries forward the shoes rule b/c if A and b had
just stayed in the K themselves, the modification
would be binding, so it should extend to C
e) Limit #5: Set-offs:
(1) Seattle-First National Bank v. Oregon Pacific Industries, Inc. (pg. 13 of
handout): Deal #1: Buyer gives a note (an account) and the seller
gives wood to buyer and the debt is assigned to a bank which
presumably gives value to the assignment; Wrinkle: this is just deal #1;
Deal #2: buyer and seller have a separate wood K in which there is a
promise to deliver wood and a reciprocal promise to pay which may
have already occurred but there is something wrong w/ this
performance so that the buyer has a right to damages against the
seller under deal #2; Buyer then tries to set off the damages that the
seller owes him against the bank when buyer defaults on the note;
Court analyzes the case under 9-318(1)(b) (NOT a (1)(a) case b/c it
arises out of an entirely different transaction); So the question is
whether the bank steps into the shoes of the seller; This question
depends on when notice of the assignment is given; We find out that
notice was given on Dec. 3 and the breach occurs AFTER the notice of
the assignment was given to the obligor (buyer); Note: the bank was
smart and gave notice promptly!; As a consequence, the attempted
set-off does not work
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