CONTRACTS § 2
PROF. BARNES
SPRING 2005 OUTLINE
REMEDIES FOR BREACH:
Remedies for breach of K are designed to provide relief to the aggrieved party.
There are four fundamental assumptions made by courts enforcing promises:
 Relief of promise is to redress breach
 Relief granted to promisee should attempt to put promisee in the position they would have
been in had the promise been performed
 The appropriate form of relief is substantial rather than specific
o Substitutional relief: relief that is intended to give the promisee something in
substitution for the promised performance, as when the court awards a buyer of
goods money damages instead of goods
o Specific Relief: relief that is intended to give the injured party the very performance
that was promised.
 Punitive damages cannot be awarded for a breach of K.
(1) EQUITABLE RELIEF: if money damages cannot adequately compensate the aggrieved party and
the determination of damages would be too speculative, or damages are simply not a substitute
for D’s performance of the K, or where it is not likely damages will be collected, then it may be
appropriate for the court to grant equitable relief.
a. INJUNCTION: directs a party to refrain from doing a certain act
i. Most common cases involve employee contracts, such as preventing the
employee from working for a competitor (also sports and entertainment)
ii. Injunction granted when damage remedy is inadequate
iii. Benefits of substituting injunction for damages
1. shifts burden of determining cost of Δ conduct from court to parties
b. SPECIFIC PERFORMANCE: orders the promisor to render the promised performance
(basically used in property, unique goods and long-term K)
i. A court will not order a performance that has become impossible,
unreasonably burdensome, or unlawful.
ii. UCC 2-716: specific performance when goods are unique (output Ks and
heirlooms)
iii. Restatement:
1. §359: specific performance will not be awarded unless damages are
inadequate
2. §360: How do you determine if damages would be adequate:
a. reasonable certainty problems
b. difficulty of procuring
c. damages not likely to be collected
c. Cases (specific performance):
i. Laclede Gas v. Amoco Oil: money damages would not be an adequate
relief, evidence shows that P cannot find another propane supplier willing to
enter into a long term supply K like the one present.
ii. Klein v. Pepsico.: there are similar G-II jets available on the market, the fact
that the price has risen does not justify SP- the price rise could be handled by
money damages
d. LIMITATIONS ON THE AVAILABILITY OF EQUITABLE RELIEF AS REMEDIES:
i. Adequacy Test: Only if money is not adequate:
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ii. Indefiniteness: court will not grant SP or injunction to enforce a K unless the
terms of the K are sufficiently definite to provide the basis for an appropriate
order;
iii. Insecurity: a court will not compel performance if a substantial part of the
return performance has not been rendered unless the rendering of that part
can be secured to the court’s satisfaction. A party in breach should not be
compelled to perform unless assured of receiving what it bargained for in
exchange.
iv. Difficulty in enforcement or supervision: a court will not grant specific
enforcement or an injunction if this would impose on it burdens of
enforcement or supervision that are disproportionate to the advantages to be
gained.
1. this limitation is often used in construction contracts.
2. And, courts are often unwilling to use SP in personal service Ks
a. Often presents public policy concerns
(2) REMEDIES AT LAW (money damages): Money damages are rewarded where adequate; Three
main measures of money damages:
a. EXPECTATION: §344(a) same place the non-breaching party would have occupied
had there been full performance (most common); the benefit of the bargain; P
awarded:
i. Out of pocket costs she incurred, plus
ii. The profit which she would have made had the K been completed
iii. Expectation damages are only recoverable if P proves them with reasonable
certainty. If not shown, other measures of damages available.
iv. Measuring Expectation: usually means the non-breaching party is
awarded the profit which she would have made had the K been performed
1. the usual formula for calculating expectation damages: A P’s
expectation damages are usually said to be equal to:
a. value of Δ promised performance (generally the K price) +
other loss minus whatever benefits, if any, the P received
from not having to complete his own performance
2. § 347: Expectation Formula: loss of value + other losses – Cost
avoided – Loss avoided
a. Loss in value: difference b/w the value to the injured party of
performance that should have been received & the value of
what was actually received
i. Measured by
1. K value: seller builds a house for $100 &
buyer breaches, the K value is $100
2. Mkt Value of product/work: buyer wants a
house built for $100, if it doesn’t get built his
loss in value will be the MV of a similar house
3. Difference in value: Jacobs & Young v. Kent:
Ct held that loss in value was the difference in
value b/w the Reading pipes and other pipes
b. Other losses: Incidental and consequential damages
c. Cost avoided: Amount injured party saves by not having to
perform (product costs saved)
d. Loss avoided: amount salvaged by the injured party (Ex.
Reallocating resources that would have been devoted to the
performance of the K)
v. Compensatory Damages: most common form ($ awards)
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vi. Consequential Damages: anything a consequence to the breach itself; not
considered “arising naturally” but only as a result of the special
circumstances under which the K was actually made; include any loss
resulting from the needs which the seller had reason to know of at the time of
the K and which could not be prevented by cover or otherwise. Ex. Profits, or
b/c of breach I had to breach a contract with union employees,
vii. Incidental Damages: necessary to work through the breach but are not the
consequence of the breach; includes all commercially reasonable expenses
in cover or resulting from breach [extra fuel expenses in obtaining the
substitute goods]
viii. Overhead: business expenses (such as rent, utilities, or support-staff
salaries) that cannot be allocated to a particular product or service; fixed or
ordinary operating costs; since overhead is by definition fixed, there is no
saving of any of it as a result of P’s not having to finish the K, if the P has not
finished performing at the time of D’s breach, P cannot recover a portion of
his overhead.
ix. Cover Price: A buyer may recover the extra expense of buying goods
elsewhere when the original K seller cancels the K to sell goods (the
difference between the costs of the substituted goods and the original
contract price)
x. RE Davis v. Diasonics: Seller may recover, after resale, lost profits from
original sale if he can show subsequent sale would have occurred absent the
breach.
**Spot market: a market (esp. in commodities) in which payment or delivery is immediate
b. RELIANCE: §344(b) attempt to put P in as good a position as she was in prior to
making the K. This is done by allowing P to recover her out-of-pocket expenditures
incurred in performing the K. (generally reliance damages will never be greater than
K price) (cost to P, not value to D)
i. § 349: compensates the injured party based upon his reliance on the
breacher’s promise
ii. The promisee is said to have a reliance interest if it has changed its position
to its detriment in reliance on the promise
iii. The promisee may have incurred expenses in preparing to perform or may
have lost opportunities to make other Ks
iv. The promisee’s injury consists of being worse off than if the promise had not
been made
v. Situations in which reliance damages may be appropriate:
1. P cannot show his lost profits with sufficient certainty, but can show
items of expenditure
a. Recover for preparing to perform K
b. And compensation for expenditures from partial performance
2. P is a vendee under a land K who sues the vendor for the latter’s
refusal to convey the property to him, and the jurisdiction is one in
which expectation damages are not awardable in this situation; and
3. there is no legally enforceable K but the P is entitled to some
protection (situation typified by cases invoking the doctrine of
promissory estoppel)
vi. Sullivan v. O’Connor: patient against plastic surgeon, P shows the doctor
affirmatively promised to achieve a particular result
vii. Limits on recovery: sometimes limited to a sum smaller than his actual
expenditures
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1. Limited by K price: if D’s only obligation was to pay a sum of moneythen reliance damages are limited to K price
2. Limited to profits: most courts refuse to allow reliance damages to
exceed expectation damages, but place the burden of proof on the D
to show what the P’s loss would have been
a. If D’s breach has prevented P from completing performance,
and neither D nor P presents satisfactory evidence of how
much it would have cost P to complete the K, the P may
recover his entire reliance damages, limited only by K price.
b. If D is able to prove that P would have suffered a net loss on
the K had it been completed, the P’s reliance recovery will be
limited to what his expectation damages would have been.
3. Two kinds of reliance:
a. Essential Reliance: consists of preparation for and
performance under the K in question, it includes the price the
party must pay for what it is to receive under the K
b. Incidental Reliance: preparations for collateral transactions
that a party plans to carry out when the K is performed; those
made by P b/c he anticipated that the K would be performed,
but which do not relate directly to performance
c. Most courts award essential and incidental reliance damages
so long as they are reasonable and foreseeable
4. Expenditures prior to signing of the K: not made in reliance on the K
c. RESTITUTION: (§344(c)) attempt to prevent the unjust enrichment of D by returning
to a plaintiff who has partially performed the value of the performance she has
rendered to the D (returning the benefit to the injured party that conferred it).
i. §371: (1) the value by which I’ve increased your property OR (2) the
reasonable value of item on market.
1. §371 is the soft-line approach. (Majority Rule) :
a. How much would it cost to have someone else finish?
(generally gives the higher amount)
b. (b) How much has the value increased?
ii. § 373: restitution when the other party is in breach
1. the promisee has a restitution interest if he has not only relied on, but
conferred a benefit on the promisor, thereby preventing unjust
enrichment. This allows the promisee to recover any out-of-pocket
expenses that he has conferred upon the promisor.
2. The injured party is entitled to restitution for any benefit conferred on
the other party by way of part performance or reliance.
3. If full performance then only expectation damages are available.
iii. The court may as justice requires pick either of the two. Usually, court will
pick higher amount as long as party is not the breacher.
iv. Idea of restitution and disgorgement is to put you in the place you would have
occupied prior to performance.
v. No officious intermeddlers (run around installing garage doors in order to get
restitution damages)
vi. Quantum Meruit: as much as deserved and measures recovery under
implied K to pay compensation as reasonable value of services renderedmeasured by the amount for which such services could have been purchased
from one in the P’s position at the time the services were rendered.
1. A promisee is allowed to recover in quantum meruit the value of
services he gave to D regardless of the profitability of the contract
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a. unjust impoverishment,
b. unjust gain (enrichment), and
c. “Double Injustice” – if A not only causes B to lose one unit but
appropriates that unit to himself, the resulting discrepancy
between A and B is not one unit, but two).
(3) UCC: SELLERS’ REMEDIES
a. §2-703: General seller’s remedies
i. Seller may cover, cancel or get damages
ii. Buyer wrongfully
1. Rejects
2. Revoked
3. Failed to make payment
4. Repudiated
b. §2-706 – resale (reasonable)
i. The seller may resell the goods and still recover damages
ii. Damage calculation is easy = K price – resale price + incidental damages –
expenses saved due to the breach
iii. Resale must be in good faith and in a commercially reasonable manner
iv. this comports well with the expectation formula supra
c. §2-708 – (general) damages for non-acceptance or repudiation
i. (1) difference bt/w M-price and K-price at time/place of tender + incidental
damages – expenses saved (very similar to Rstmt formula but different b/c
UCC)
ii. (2) If the measure of damages provided in (1) (the K price/mkt price
differential) is inadequate to put the seller in as good a position as
performance would have done, then the measure of damages is the profit
(including reasonable overhead) which seller would have made from full
performance by the buyer, together with any incidental damages… due
allowance for costs reasonably incurred & due credits for pmts or proceeds of
resale.
d. Lost volume seller: may recover lost profits; must prove
i. Capacity
ii. discernable market (i.e. another buyer)
iii. profitability of second sale
e. Many sellers have a relationship to their own suppliers such that they can obtain from
the latter as many items as they can sell. When the customer of such a seller
breaches his K and the seller resells the item to another customer at the same price,
the seller will end up making one fewer sale b/c of the breach. This is b/c the new
customer would have brought an item anyway, regardless of whether the 1st
customer had breached. The seller in this situation is a lost volume seller.
(4) UCC §2-711: BUYERS REMEDIES
a. § 2-711: Buyer’s remedies in general: the buyer may cancel and recover any money
he has paid as “cover” or recover damages for non-delivery, or demand specific
performance
b. Seller in breach
i. fails to deliver
ii. Repudiates
c. §2-712 – Cover- to provide an alternative purchase- after breach the buyer may
purchase goods in substitution for those not delivered
i. Formula: Damages= Cover cost – K price + incidental & consequential
damages – expenses saved
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ii. Must be:
1. in good faith
2. without unreasonable delay
3. reasonable purchase
iii. Cover is not required, but is preferred by the code b/c it increases the stream
of commerce
d. §2-713 – damages for non-delivery or repudiation
i. difference b/w M-price at the time the buyer learned of the breach and the Kprice + incidental & consequential damages – expenses saved
ii. caps damages b/c you need to buy before the price rises too high
e. §2-714 – Buyer’s damages for breach in regard to accepted goods (goods weren’t as
warranted)
i. Formula: Damages = value of goods had they been as warranted – value of
goods at the time & place of delivery + incidental & consequential damages.
f. §2-715: Buyer’s incidental and consequential damages
i. (1) allows an aggrieved buyer to recover incidental damages (includes
expenses reasonably incurred in inspection, receipt, transportation and care
and custody of goods rightfully rejected, any commercially reasonable
charges, expenses or commissions in connection with effecting cover and
any other reasonable expense incident to the delay or other breach.
ii. (2) allows consequential damages which include any loss resulting form
general or particular requirements and needs of which the seller at the time
of contracting had reason to know and which could not reasonably be
prevented by cover or otherwise; and injury to person or property proximately
resulting from any breach of warranty. Usually awarded as part of
expectation damages, they may presumably be granted as part of a reliance
award as well.
g. §2-716: specific performance
(5) LIMITATIONS ON DAMAGES:
a. AVOIDABILITY: The injured party incurs no liability for failure to mitigate damages,
recovery is the same regardless, but the injured party is precluded from recovering
for loss that it could reasonably have avoided.
i. Restatement § 350: An aggrieved promisee is not allowed to recover loss
that it could reasonably have avoided w/o undue risk, burden or humiliation.
1. (1) inferior and substantially different is not acceptable
2. (2) non-breaching party does not have a duty to accept
ii. UCC 2-713: where there is a market for goods, a buyers’ damages are
based on the assumption that the buyer could reasonably have avoided
greater loss by obtaining substitute goods on the market; Measure of
damages is the difference between the contract price and the market price
1. This is the majority view designed to encourage the honoring of Ks
and market stability
2. The minority view is to award lost profit only (1-106)
iii. UCC 2-704: Seller’s right to identify goods to the K notwithstanding breach
or to salvage unfinished goods
iv. UCC 2-712: If the seller fails to deliver goods, the buyer can go into the
market and “cover” by obtaining substitute goods, so that the buyer’s
damages should be based on the difference between a presumably greater
price that the buyer will have to pay on the market and the lesser contract
price (as long as reasonable, in good faith and timely).
v. UCC 2-706: If the buyer fails to take and pay for the goods, the seller can go
into the market and resell to a substitute buyer, so that the seller’s damages
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vi.
vii.
viii.
ix.
x.
xi.
should be based on the difference between the presumably greater contract
price and a lesser price it will receive on the market.
UCC 2-713: If the seller fails to deliver goods, the buyer fails to go to the
market and cover, then its damages are based on the difference between the
market price and the contract price. Market damages should be avoided
when seller breaches
UCC 2-708: If the buyer fails to take and pay for goods, the seller fails to go
into the market and resell, then damages are based on the difference
between the market price and the unpaid contract price.
UCC 2-711: Buyer’s Remedies (general)
Avoidability and Cost to remedy defect vs. decrease in value:
1. if P should be put in the same position he would have been had the K
been performed, then
2. what about those situations where the difference b/w the economic
value of a complete performance under the K and the value of the
defective performance is less than the cost of remedying D’s
defective performance (will cost substantially more to fix it), so the
question is:
3. Should the P be awarded the net economic loss he has sustained by
virtue of D’s breach (the lesser sum) or the cost of remedying D’s
defective performance (the greater sum)
Economic Waste: a court is not likely to award the cost of competition where
the defect is minor and its completion would involve “economic waste.” This
is frequently the case in building Ks where remedying would require
destruction of what is built
1. Jacob & Young v. Kent: Damages to repair except (1) economic
waste and (2) breach is trivial and the damages are nominal (cost to
repair is disproportionate to the value it would give you); the law
presumes you will get cost to repair unless it results in economic
waste or disproportionate to value. Contractor may recover on the K
since he substantially performed and the correct measure of
damages is not the cost of replacement, which would be great, but
the difference in value which would be nominal or nothing. The cost
to repair would be economically wasteful and grossly disproportionate
to the good attained.
2. Groves v. John Wunder: b/c D intentionally breached his promise to
restore the land the breacher must pay the $60K to restore the land
(willful and w/o good faith)
“Clearly Disproportionate” § 348: the court should not grant the cost of
remedying the defects “if the cost is clearly disproportionate to the probable
loss in value to the P.”
1. Cost of performance v. Value Rule: establish what the purpose of
the K is
2. Peevyhouse v. Harland Coal and Mining: where the lessee agrees
to perform certain remedial work on the premises at the conclusion of
the lease, and the contract is otherwise performed by both parties,
the measure of damages is the reasonable cost of performance of
the work however, where the contract provision breached was
merely incidental to the main purpose in view, and where the
economic benefit which would result to lessor by full performance of
the work is grossly disproportionate to the cost of performance, the
damages by which lessor may recover are limited to the diminution
in value resulting to the premise because of the nonperformance
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b. FORESEEABILITY: breaching party was aware at the time she contracted of the losses
likely to result if she breached
i. Damages are not recoverable for loss that the party in breach did not have
reason to foresee as a probable result of the breach when the K was made.
ii. Loss is foreseeable if it occurs:
1. in the ordinary course of events or
2. as a result of “special circumstances” beyond the ordinary course of
events, that the other party had reason to know
iii. Special Situations: Hadley v. Baxendale: new rule- when two parties K, and
one breaches, damages should be those that
1. arise naturally, or
2. may reasonably be supposed in the contemplation of both
parties at the time the K was made.
3. Special circumstances must be made known, damages are those
circumstances that you are aware of
4. Indirect or consequential damages are only recoverable if reasonably
foreseeable by both parties at the time of the K and arising naturally
from such breach.
iv. § 351: Unforeseeability and Related Limitations on Damages: you will
be liable for those damages which you knew were to occur or possibly would
occur because of the reasonable circumstances of the contract you are
dealing with or because of a special circumstance known to you under this
particular K (the UCC 2-715 says the same thing)
v. UCC 2-712(2): buyer’s recovery of incidental or consequential damages
vi. UCC 2-708(1): seller’s recovery of any incidental damages
vii. UCC 2-715: incidental and consequential damages of seller’s breach; (2)(a)
any loss with reason to know
viii. UCC 2-710: incidental damages to an aggrieved seller (seller’s do not have
many consequential damages because if buyer breaches then seller can
resell)
ix. Delchi v. Rotorex: entitled to natural and consequential damages when those
damages are the probable result of the breach when they are 1) known
specially to the parties or 2) they are contemplated in the ordinary course of
events. (Hadley v. Baxendale)
x. Kenford v. Erie: Damages must have been brought within contemplation of
the parties as the probable result of a breach (Special Circumstances can
include profits)
c. EMOTIONAL DISTRESS: § 353- excluded unless the breach also caused bodily harm or
the K or the breach is such a kind that serious emotional disturbance was a
particularly likely result.
d. CERTAINTY: §352 – uncertainty as a limitation: not recoverable for loss beyond what
evidence permits to be established with reasonable certainty
i. Fera v. Village: a new business may recover lost profit damages for breach
of a lease if profits are not excessively speculative
ii. Ways to prove certainty w/ future profits:
1. past performance: juries will listen to how you’ve done before
2. Similar past enterprises (if you don’t have 1)
3. expert views and opinions
(6) LIQUIDATED DAMAGES AND PENALTIES:
a. LIQUIDATED DAMAGES: the parties may include in the K specific provisions limiting or
fixing the amount of damages that can be recovered if breach occurs; requires a
good faith effort to estimate
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b. PENALTY: the parties may include in the K a fixed, definite sum to be paid in the event
of a breach. The goal of the penalty is punishment which the treat of will prevent a
breach.
c. Two requirements for a valid stipulated damages clause:
i. Damages must be difficult to estimate at the time of the K
ii. The amount agreed upon must be a reasonable forecast of actual damages,
i.e. a reasonable forecast of fair compensation for the harm that would occur
if breach
d. §356(1) – damages for breach by either party may be liquidated in the agreement but
only at an amount that is reasonable in the light of anticipated or actual loss caused
by the breach and the difficulties of proof of loss. A term fixing unreasonably large
liquidated damages is unenforceable on grounds of public policy
e. UCC §2-718 – liquidation or limitation of damages; damages for breach by either
party may be liquidated in the agreement, but only at an amount which is reasonable
in the light of the anticipated or actual harm caused by the breach, the difficulties of
proof of loss & the inconvenience or non-feasibility of otherwise obtaining an
adequate remedy.
i. permits liquidated damages agreements if the tests above are met and if it is
inconvenient or infeasible to otherwise obtain an adequate remedy;
unreasonably large liquidated damages provisions are declared void as
penalties
f. UCC §2-103 – consumer contracts defined
g. Reasoning of the policy against penalties: there is a long standing judicial policy
clause enforcement of penalties for breach of K, the purpose of damages is to put
the P in the same position he would have been in had the K been performed, not a
better one.
h. Where a provision that is labeled a “liquidated damages” clause really serves to
penalize a party for breach in an amount far beyond the loss suffered by the P, the
courts simply refuse to enforce the provision and award ordinary damages
i. Intent irrelevant: if the amount stipulated in the liquidated damages clause is
unreasonable, it is irrelevant whether the parties subjectively attempted to
provide for liquidated damages rather than a “penalty” save this clause in this
situation.
i. Damage Computation keyed to gross revenues or the like: where the damages
clause is keyed to the P’s lost gross revenues, lost gross profits, or other financial
figure, that is not necessarily tried to actual profits, the court is likely to view the
clause skeptically as being a poor estimate of actual losses and thus unenforceable if
it deviates materially from the actual losses.
j. Wasserman’s v. Middletown: liquidated damage clauses will be allowed. Punitive
damage clauses will not be allowed (not to discourage breach. Clause is designed to
put P back in position he would have occupied had there been no breach)
k. Dave Gustafson v. State: the liquidated damages clause is valid because there is no
way to measure actual damages for the delay in construction of a new highway. As
long as the amount specified by the liquidated damages clause was intended as fair
compensation for the loss, inconvenience, added costs, or deprivation of use caused
by the delay, it may be deemed reasonable. This court said liquidated damages
clause was enforceable because:
i. Reasonable amount
ii. Difficult to determine damages
FINDING THE LAW OF THE CONTRACT
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(1) Parole Evidence Rule: Where an agreement has been reduced to writing which the parties
intend as the final and complete expression of their agreement, evidence of any earlier oral or
written expressions is not admissible to vary the terms of the writing.
a. R §213 – Effect of Integrated Agreement on Prior Agreements (Parol Evidence
Rule)
i. A binding integrated agreement discharges prior agreements to the extent
that it is inconsistent with them
ii. A binding completely integrated agreement discharges prior agreements to
the extent that they are within its scope
iii. An integrated agreement that is not binding or that is voidable and avoided
does not discharge a prior agreement. But an integrated agreement, even
though not binding, may be effective to render inoperative a term which
would have been part of the agreement if it had not been integrated.
b. R §211 – Standardized agreements
c. R §215 – (209 or 210) no contradiction; prior contemporaneous oral agreements or
negotiations are not admissible to contradict a written, integrated agreement, so
where the parties have deliberately put their entire agreement in writing, the law
declares the writing the only evidence of the agreement.
d. Why is the written K important to the courts?
i. Evidence: memorializing the K
ii. Cautionary: warning, put this in writing
iii. Written v. Spoken: if you have written it then it wins over anything oral which
contradicts it.
1. Reasoning is judicial economy to prevent fraud and loss of memory
over time.
e. Gianni v. R. Russell & Co.: no parol evidence is allowed if the writing appears to be
a complete K w/in itself and the parol evidence is related to the same subject matter
of the K; all preliminary negotiations are merged in and superseded by the
subsequent written contract unless fraud, mistake, or accident, and cannot change
the written terms
i. The test from this case: PN RULE: When does the oral come within the field
embraced by the written one?
1. Compare the two and determine whether the parties would have
naturally and normally included it in the written.
a. If it is one that would have naturally been included, then the
court will EXCLUDE the oral agreement
b. If they relate to the same subject matter & are so interrelated
that both would be executed at the same time & in the same
K, the scope of the subsidiary agreement must be taken to be
covered by the writing.
2. Where the parties without any fraud or mistake have deliberately put
their engagements in writing, the law declares the writing to be not
only the best, but the only evidence of their agreement.
3. Restatement §209: Integrated Agreements: an integrated agreement
is a writing that constitutes a final expression of one or more terms of
an agreement. If the writing appears to be complete, it is to be taken
as integrated unless other evidence proves otherwise.
a. R §210 – completely integrated agreements: a completely
integrated agreement adopted by the parties as a complete
and exclusive statement of the terms of the agreement. It
contains all the details of their agreement.
b. R §210 -- partially integrated agreements: if the document is
not intended by the parties to include all the details of their
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agreement, it is said to be partially integrated. A partial
agreement is an integrated agreement other than a
completely integrated agreement.(ex: anything less than
settling the full agreement, - you agree to buy the Volvo
without setting the price or without agreeing if the stereo
comes with it)
f.
g.
h.
i.
j.
k.
a.
Parol Evidence
i. Partially integrated agreement
1. cannot contradict a partially integrated agreement
2. can supplement a partially integrated agreement
ii. Completely integrated agreement
3. no evidence of prior or contemporaneous agreements or negotiations
(oral or written) may be admitted which would either contradict or add
to the writing
UCC 1-205: trade usage; express terms, course of dealing
i. Course of Dealing: sequence of previous conduct b/w the partiesestablishes a common basis of understanding for interpreting their
expressions and other conduct
ii. Usage of trade: 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
iii. Express terms: construed reasonable and consistent- but if not, course of
dealing and trade usage controls
UCC 2-202: consistent additional terms not reduced to writing may be proved unless
the court finds that the parties intended the writing to be a complete and exclusive
statement of their agreement. And, if the court finds the additional terms are such
that, if agreed upon, they would certainly have been included in the document, then
evidence of their alleged making must be kept from the trier of fact.
Test of Complete Integration: A strict formulation of the rule under which- whether
there was integration is to be determined solely from the face of the instrument, and
the question for the court is whether it appears to be a complete agreement.
§210: A writing cannot of itself prove its own completeness, and wide latitude must
be allowed for inquiry into circumstances bearing on the intention of the parties.
Merger Clauses: clauses in contracts such as: “No promises, verbal understandings
or agreements of any kind pertaining to this contract other than specified herein.”
No-Oral Modifications Clauses: Modifications to the contract are made orally after
the contract is made, traditionally are not enforceable; However, a party that seeks to
escape the effect of the clause can often do so by showing reliance on the oral
modification.
i. UCC 2-209(2): a signed agreement which excludes modifications or
rescission except by a signed writing cannot be otherwise modified or
rescinded
1. (4) what may fail to be effective as a modification or rescission may
nevertheless be effective as a waiver
2. (5) a material change of position in reliance on the waiver may
prevent its retraction
(2) Interpretation of Contract:
a. The parol evidence rule deals with whether and when the parties to a written K may
use evidence of a prior oral or written agreement to add new, substantive terms that
either contradict or supplement the writing. We turn now, to different, but related
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b.
c.
d.
e.
f.
g.
h.
problem- how the parties may show the meaning of the terms contained in writing.
This is a problem of interpretation. That is, the parties seek not to introduce new
terms that are not contained in the writing, but to interpret the meaning of the terms
which are contained in the writing.
The Modern Approach: is to allow the parties to introduce evidence of what they
subjectively thought the terms in a writing meant, even if the writing is integration.
Oral evidence showing the meaning of words should be allowed to the same extent
whether or not the parties thought that the writing was a final expression of their
agreement.
i. Plain Meaning Rule: when the court goes to decide whether a term used in
the agreement is ambiguous, the court will not hear evidence about the
parties’ preliminary negotiations, but the court will hear evidence about the
circumstances or context surrounding the making of the agreement.
ii. R. §214: agreements and negotiations are admissible evidence to determine
if the agreement is integrated (NY doesn’t apply this rule, but other
jurisdictions handle these circumstances like so); applies only if there is an
ambiguity in the writing; if clear- 214 not applicable
Modern courts reject the plain meaning rule: under which the meaning of any writing
which appears to be clear, complete and not ambiguous on its face will be
determined without resort to any extrinsic evidence at all.
i. R. §212: determination of meaning or ambiguity should only be made in light
of the preliminary negotiations
WWW Associates v. Giancontieri: if writing is in clear and complete terms, writing
should be enforced and extrinsic evidence is generally inadmissible; will not consider
parol evidence when it (actually) adds ambiguity- the more conservative rule of not
allowing P to prove his subjective understanding differs from what’s written by
admitting parol evidence
Burden of Persuasion: a party who is allowed to give testimony about what the
parties intended by a term will still have problems of proof. If he is the P, his burden
of persuading the court that the meaning favorable to him was in fact the one
intended by the parties may be substantial.
Frigaliment v. BNS: a word used in a contract has the meaning a RPP would attach
to it unless P can prove special circumstance, practice or knowledge
i. If the evidence is ambiguous and divided then the court says the person who
wins is the person that can prove a special or subjective meaning.
ii. The objective meaning is what is put on the paper.
iii. Where the contract is deemed to be ambiguous or the word used is
ambiguous then the reasonable and objective meaning will be associated
with it, when there is more than one the court will adopt its ordinary meaning.
Maxims of Interpretation: there are a number of frequently cited maxims that
courts make use of in deciding which of the two conflicting interpretations should be
followed.
i. Primary Purpose Rule: if the primary purpose of the parties in making the K
can be ascertained, that purpose is given great weight
ii. All terms made reasonable, lawful and effective, all terms will be interpreted,
where possible so they have a reasonable, lawful and effective meaning
iii. Construction against the draftsman, an ambiguous term will be construed
against the drafter.
Misunderstanding: for a k to exist there must be meeting of the minds- both parties
agreeing to the deal. Sometimes both parties will think they are agreeing to the
same terms, but each has a different subjective belief about what the deal is. If this
discrepancy in subjective belief (misunderstanding) is sufficiently major, it may
prevent a K from existing at all.
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i. §20: Effect of Misunderstanding- “attach materially different meanings to
their manifestations,” and “neither party knows or has reason to know the
meaning attached by the other”
ii. Distinguish between ambiguous and vague
1. Ambiguous: words that have two entirely different connotations so
that it may be at the same time both appropriate and inappropriate
2. Ambiguity of syntax: an ambiguity of grammatical structure
3. Vague: words when its applicability in marginal situations is uncertain
iii. Raffles v. Wichenlhaus: No contract ever formed because there was no
mutual assent. Latent ambiguity so mutual mistake.
iv. R §201: Whose meaning prevails: If they have something different in mind,
and they both contract under the different meaning, then will apply an
objective meaning of the term.
1. (2)(a): innocent and you knew I was unaware; person who knows of
the ambiguity and resolves it
2. (2)(b): reason- you had reason to know but I did not- person has
reason to know of the ambiguity and resolve it
v. Comparing §20 with §201:
1. §20: talking about formation ideas- no K if misunderstanding is about
formation of the K
2. §201: is misunderstanding of interpretation after the agreement has
been made
i. R §214: ‘meaning of terms’ allows parol evidence- evidence of prior
contemporaneous agreements and negotiations is allowed to establish the character
of the written agreement
i. Whether or not it is integrated
ii. Whether it is completely or partially integrated
iii. Illegality, fraud, duress, mistake
1. Bollinger: Court of equity has power to reform a writing as long as
mutual mistake exists (exception to PA rule)
j. Waiver: you can waive the parol evidence rule, you can say that you want to allow
evidence of prior negotiations admitted
k. §216 – (complete 210) no additional if complete but OK if partial (natural omission)
Parol evidence is allowed if such terms might be naturally omitted from the
agreement under the circumstances. So, if the terms would have naturally been
included then you can’t admit any evidence (remember, the evidence will not be
admitted if it contradicts the writing)
i. Masterson v. Sine: CA Rule: when only part of the rule is integrated, the
same rule applies to that part, but parol evidence may be used to prove
elements of the agreement not reduced to writing. (opposes PN rule. The
CA rule is majority and in line with Restatement view)
ii. If two parties go to the trouble of putting together an integrated agreement,
then the oral agreements prior to the writing are not included. Three factors
in this case are
1. they are non-business people,
2. use a form contract, and
3. kind of term that might not have been expressed. These factors make
it the kind of thing that might naturally be omitted.
iii. Contradiction vs. Interpretation (§§ 214 and 217 of Restatement)
iv. Three categories
1. those things that contradict (can never use parol evidence to
contradict)
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2. those things that supplement (if completely integrated may not
supplement, is permitted if partially integrated)
3. those things that explain (whether complete or partial integration you
can always explain)
v. Restatement Rule used in Masterson: (page 562) naturally and normally
might be excluded from the agreement- restatement is much broader than
the Pennsylvania rule; gives the court more power to the judge to listen to the
subjective intent (240(1)(b))
vi. Pennsylvania rule- will permit the evidence if the type of things that would
naturally and normally included in the agreement (if not there the court is not
going to listen to it)
vii. UCC Rule: only those things that certainly would have been include (UCC §
2-202); UCC is more liberal w/ allowing parol evidence. Evidence is
excluded only if it “certainly” would have been included in the agreement.
viii. NY Rule: Can’t introduce parol evidence to try to interpret an unambiguous
term
ix. CA Rule: if language is reasonably susceptible to extrinsic evidence, it may
be introduced (rejects 4 corners rule)
x. §209(2): all decisions regarding parol evidence are a matter of law and are to
be decided by a judge.
l. Oswald v. Allen: “When any of the terms used to express an agreement is
ambivalent, and the parties understand it in different ways, there cannot be a K
unless one of them should have been aware of the other’s understanding.”
m. R. §212: Modern/ Liberal View: rejection of the plain meaning rule under which the
meaning of any writing which appears to be clear, complete and not ambiguous on
its face will be determined w/o resort to extrinsic evidence
i. Pacific Gas v. GW Thomas: Test for extrinsic evidence: is not whether it
appears to the court to be plain and unambiguous on its face, but whether
the offered evidence is relevant to prove a meaning to which the language of
the instrument is reasonably susceptible
1. The court says that the only test for admissibility of extrinsic evidence
is whether the offered evidence is relevant not just if the K is plain
and unambiguous on its face. Words do not have absolute and
constant reference but they vary with the verbal context and the
circumstances and their readers.
2. Parol evidence rule: completely integrated cannot be added to or
subtracted from with other evidence, if not completely integrated can
always be supplemented
n. Although extrinsic evidence is not admissible to add to, detract from or vary the terms
of a written K, those terms must first be determined before it can be decided whether
or not extrinsic evidence is being offered for a prohibited purpose.
o. Rules in Aid of Interpretation:
i. Purpose Interpretation: generally contracts will begin with a series of
recitals of the surrounding circumstances and the objectives of the parties
1. If the recitals are clear and the operative part is ambiguous- recitals
govern
2. If the recitals are ambiguous and operative is clear- operative prevails
3. If the recitals and operatives are clear but inconsistent- operative is
preferred
ii. Public Interest: contracts can affect public policy, promote trade and
liberties, etc.
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iii. Maxims: contracts are to be interpreted against its author or proffererbecause the party who decided the contract language had superior
bargaining power
p. Hurst v. W.J. Lake: Even if not ambiguous on its face, evidence of custom and usage
can be used to interpret meaning
q. Eastern Air v. Gulf Oil: where a history of having done so exists, a party does not
breach a contract by taking delivery where its costs will be the least; this is a custom
and trade usage issue
r. express terms outweighs
i. course of performance outweighs
ii. course of dealing outweighs
iii. usage of trade
s. The UCC recognizes 3 different sources which may be used in interpreting the terms
of a K:
i. Course of Performance: refers to the way the parties have conducted
themselves in performing the particular K at hand. (UCC 2-208(1))
ii. Course of Dealing: also a pattern of performance b/w the 2 parties but it
refers to how they acted w/ respect to past Ks, not with respect to the K in
question. If a particular term had been used in previous Ks b/w the same
parties and had been interpreted by them in a certain manner this
interpretation would be admissible under the UCC to show how the term
should be interpreted by them in a certain manner, this interpretation would
be admissible to show how the term should be interpreted in the current K
(UCC 1-205(1))
iii. Trade Usage: defined by the Code as “any practice or method of dealing
having such regulatory of observance in place, vocation or trade as to justify
an expectation that it will be observed with respect to the transaction.” UCC
1-205(2)
(3) Gap Fillers: courts will generally imply terms to fill gaps to the agreement if necessary to
assure the intention of the parties.
a. Objective: fill gaps to meet the meaning a reasonable person would attach
b. The court will not imply terms that contradict the express terms of the K
c. Types of Terms court will imply:
i. Good faith:
1. § 205: every K imposes upon each party a duty of good faith and fair
dealing in its performance
a. Dalton v. Educational Testing Service: implicit in all contracts
is a covenant of good faith and fair dealing
b. According to the UCC, good faith requires:
i. Honesty in fact (can’t be motivated by malice or illwill)
ii. Act in a commercially reasonable manner
c. Can’t vary the express term w/o a supplied implied term.
d. Burger King v. Weaver: where a party to a contract has in
good faith performed the express terms of the contract, an
action for breach of the implied covenant of good faith will not
lie
2. Test for Gap Fillers:
a. What’s the Gap?
b. What’s the standard by which we fill the gap?
c. What will be the gap filler itself?
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3. Dickey v. Philadelphia Minit Man: A lease provision specifying a
certain use of the premises is a covenant against a non-complying
use not a covenant to use. What is the purpose of D using the clause
to require him to continue washing and waxing the cars? The gap
begins to develop by looking at the purposes, the context and the
other implicit understandings of the parties. The common purpose is
money. Gap filled in with good faith and exercise of good business
judgment- exercise of reasonable commercial judgment
ii. Best efforts:
1. 2-306: when a K is made for requirements or outputs, good faith will
be implied. For exclusive dealings, best efforts will be implied
2. Bloor v. Falstaff: best efforts means best efforts; liquidated damages
based on best efforts to promote and maintain a high volume of sales
under the P that is triggered if D allows the substantial decrease in
distribution of P’s product
a. What is the gap? ‘best efforts’ is ambiguous-reasonable,
commercial effort. no need to drive company into bankruptcy.
b. no parol evidence rule problems because not dealing with any
prior negotiations
c. Reasonable efforts depend on what a reasonable person
would have done
iii. Reasonable Efforts: every K has an obligation of good faith, must give the
parties the fruits of the K
1. Zilg v. Prentice Hall: a publishing contract requires the publisher to
use best initial efforts to promote the work, yet allows discretion to
guide continuing marketing efforts; initial effort is critical to ‘best
efforts’ but publisher’s ability to rely on its own judgment in trying to
make the book a success while not losing their ass by throwing good
money on top of bad. Good faith business judgment at publisher’s
discretion
(4) Time Period for Exclusive Agreements
a. Reasonable recovery period allowed- must allow the party to an exclusive
agreement, a reasonable time to allow the party to recoup investments
i. Bak-A-Lam: Gap: how long is the exclusivity agreement? Reasonable time
to allow the party to recoup investment
(5) Public Policy:
a. §2-314: warranty of merchantability
b. §2-315: fitness for a particular purpose
c. Termination of employment K- “Woods Rule” At will employment is still approved- so
you may quit at any time and they may fire you at any time
i. Limitation of Wood’s rule: can’t fire for unconstitutional reasons or for a
reason protected by a statute (natl guard or jury duty)
ii. Can’t fire employee trying to effectuate a purpose that is recognized by public
policy
iii. A client may fire his attorney for any reason he wishes
(6) Course of performance, course of dealings, trade usage: all of these may be used to imply
terms.
a. Hierarchy under § 1-205
i. Express Terms of K
ii. Course of Performance
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iii. Course of Dealing (prior dealings)
iv. Trade usage
b. Contradiction of Express term under the UCC: UCC states that course of dealing,
course of performance and trade usage may not be used to contradict the express
terms of the K - §2-208(2) provides that these items must be construed as consistent
with the express terms, wherever it is reasonable to do and then goes to say that
“when such construction is unreasonable, express terms shall control” So, if the
court concludes that there is no way to harmonize, say a trade usage asserted by
one of the parties w/ an express provision of the K, the court must treat the express
term as controlling.
i. Some courts have gone to great lengths in order to find that a particular
custom or usage merely supplemented and did not contradict an express
contractual term. One way courts do this is to hold that custom or usage
merely removes part of the express term, rather than negating that express
term completely. So, as long as the custom or usage does not wholly
swallow up the express term, the court may find that the 2 can be reasonably
construed to co-exist.
ii. Nanakuli Paving & Rock v. Shell: exceptions will be allowed if they don’t
negate the express term; the price protection was proven to be a trade usage
in the industry, “does not swallow the express term.”
**UCC 1-203: obligation of good faith and fair dealing
PERFORMANCE AND BREACH
(1) DEFINITIONS
a. §224: A condition is an event, not certain to occur, which must occur unless its nonoccurrence is excused, before performance under a contract becomes due.
i. Condition Precedent: until the condition is satisfied, the duty doesn’t arise
ii. Express conditions: conditions that are agreed to by the parties (strict
compliance is normally required)
iii. Constructive conditions: not express but “implied in law.” The court is
assuming that had the parties thought about it, they would have made one
party’s performance to be dependent on the happening of some event,
typically the other party’s contemporaneous performance (not normally strict
compliance).
b. Duty: a positive obligation, whereas a condition is uncertain. The obligation must be
fulfilled or remedy will result. An obligation for the breach of which will provide a
remedy
c. Language such as “provided”, “if” and “when” indicates an express condition
d. Functions of conditions
i. Establish order of performance
ii. Secure the expectation of the parties
(2) EFFECT OF CONDITIONS:
a. §225: Non-occurrence:
i. performance of a duty subject to a condition cannot become due unless the
condition occurs or its non-occurrence is excused,
ii. unless excused, the non-occurrence of a condition discharges the duty when
the condition can no longer occur
iii. non-occurrence of the condition is not breach by a party unless he is under a
duty that the condition occur.
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b. Luttinger: the buyer was able to obtain a refund for his house deposit because he
couldn’t obtain the interest rate agreed upon in the K. Court required strict
compliance with the condition (interest not to exceed 8.5%)
c. Internatio Rotterdam: when a sales K specifies a delivery time and requires the
buyer to provide delivery instructions, is the buyer obligated to provide timely delivery
instructions as a condition precedent to receiving the goods? Yes b/c D’s facilities
were working at full capacity in Dec. and its storage capacity was limited, the
requirement for Dec. shipment went to the essence of the K. Since there is nothing
express saying they’ll get it in Dec. we have to construct it to give the seller and
buyer the fruits of the bargain. The condition is implied. Once P failed to satisfy the
condition precedent D could rescind the K or treat its contractual obligation as
discharged. The K was severable as to the 2 ports, so D’s continued shipments to
one part did not constitute an election to proceed with the entire K.
d. Interpretation Problems: In an ambiguous situation, the law will prefer the
interpretation that results in non-forfeiture, unless the condition is entirely within the
power of the promisor.
i. Peacock Construction Co.: no express language of a condition, court
considered the context of the language and the parties’ intent- that intent is
that such provisions do not create conditions precedent b/c subs will not
ordinarily assume the risk of the owner’s failure to pay. The parties may shift
this risk to the sub, but only by clear unambiguous language.
e. Satisfaction Clauses:
i. Personal Satisfaction:
1. §228: when it is a condition of an obligor’s duty that he be satisfied
with respect to the obligee’s performance or with respect to
something else, and it is practicable to determine whether a
reasonable person in the position of the obligor would be satisfied, an
interpretation is preferred under which the condition occurs if such a
reasonable person in the position of the obligor would be satisfied.
2. §205: Duty of good faith and fair dealing imposed in every contract
ii. Satisfaction for commercial purposes: the law requires a claim of
dissatisfaction to be made in good faith, rather than in an effort to escape a
bad bargain.
iii. Third-Party Satisfaction: duty is conditional upon the satisfaction of an
independent third-party, generally an expert. This is common in construction
contracts- owner’s duty to pay contractors if architect is satisfied. This
expert’s decisions are final if they are made in good faith. The test is for
honest satisfaction.
(3) EXCUSE OF CONDITIONS: Mitigating Doctrines (ways the courts mitigate the harsh effect that
the nonoccurrence of a condition may otherwise have.)
a. Hindrance: a party cannot willfully prevent the occurrence of a condition. If she
does, the condition is excused.
b. Waiver: if a party begins performance after learning that a condition to his
performance has failed to occur, he may be held to have waived the benefit of the
condition. However, don’t find waivers to have occurred unless you are sure that the
buyer knowingly and intentionally declined to take the benefit of the condition’s
non-occurrence. Excuse of the nonoccurrence of a condition of a duty (a
requirement that a condition occur may be eliminated by an agreement between the
parties) Restatement § 84- voluntary relinquishment of a right that is known to you to
exist at the time.
c. Prevention: one who prevents the occurrence of a condition of one’s own duty may
be precluded from later asserting the non-occurrence of the condition
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d. Estoppel: non-voluntary relinquishment of rights based on reliance; a party that
without consideration has waived a condition that is within the other party’s control
before the time for occurrence of the condition can retract the waiver and reinstate
the requirement that the condition occur unless the other party has relied to such an
extent that retraction would be unjust. If this reliance has occurred a party can be
estopped from retracting.
i. UCC 2-209(5): a party that 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.
ii. Restatement Second § 84(2)- if such a promise is made before the time for
the occurrence of the condition has expired and the condition is within the
control of the promisee or a beneficiary, the promisor can make his duty
again subject to the condition by notifying the promisee or beneficiary of his
intention to do so if
1. (a) the notification is received while there is still a reasonable time to
cause the condition to occur under the antecedent terms or an
extension given by the promisor, and
2. (b) reinstatement of the requirement of the condition is not unjust
because of a material change of position by the promise or
beneficiary; and
3. (c) the promise is not binding apart from the rule stated in (1)
iii. firms a waiver that is otherwise retractable, upon reliance the waiver
becomes non-retractable
e. Election: signifies a choice, one that is binding on the party that makes it, even
without reliance by the other party. A party that chooses to disregard the
nonoccurrence of a condition is bound by an election to treat the duty as
unconditional.
i. when time for occurrence of condition has expired the party who has a duty
that is conditional can choose to either determine their duty as being
discharged or treat the duty as unconditional and disregarding the
nonoccurrence of the condition.
ii. by it’s terms you have one or the other but you can’t have both
f. Disproportionate forfeiture: §229: a condition may be excused to avoid
disproportionate forfeiture unless its occurrence was a material part of the agreed
exchange
(4) STANDARD OF PREFERENCE WITH REGARD TO CONDITIONS: §227: only use §227 when there is
a doubt or ambiguity (don’t use if you can infer from the circumstances or express language),§
227 prefers a duty if the language is ambiguous. A duty is preferred unless it’s wholly within the
obligee’s control, or the circumstances indicate that he has assumed the risk.
a. (1) in resolving doubts as to whether an event is made a condition of an obligor’s
duty, and as to the nature of such an event, an interpretation is preferred that will
reduce the obligee’s risk of forfeiture, unless the event is within the obligee’s control
or the circumstances indicate that he has assumed the risk.
b. (2) Unless the K is of a type under which only one party generally undertakes duties,
when it is doubtful whether
i. (a) a duty is imposed on an oblige that an event occur, or
ii. (b) the event is made a condition of the obligor’s duty, or
iii. (c) the event is made a condition of the obligor’s duty and a duty is imposed
on the oblige that the event occur
c. The first interpretation is preferred if the event is within the obligee’s control.
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d. (3) In case of doubt, an interpretation under which an event is a condition of an
obligor’s duty is preferred over an interpretation under which the non-occurrence of
the event is a ground for discharge of that duty after it has become a duty to perform.
(5) TENDER OF PAYMENT BY BUYER, PAYMENT BY CHECK: UCC 2-511: unless otherwise agreed,
tender of payment is a condition to the seller’s duty to tender and complete any delivery.
(6) PAROL EVIDENCE AND CONDITIONS: §217: where the parties to a written agreement agree
orally that performance of the agreement is subject to the occurrence of a stated condition, the
agreement is not integrated with respect to the oral condition.
a. Rule: parol testimony is admissible to prove a condition precedent to the legal
effectiveness of a written agreement.
i. Hicks v. Bush: parol testimony is admissible to prove a condition precedent
to the legal effectiveness of a written agreement… if the condition does not
contradict the express terms of such written agreement.
Summary: how to approach an express condition:
Step 1: condition or duty
Step 2: How to decide?
 Express
 Reasonable Prudent interpretation
 227- if ambiguous
Step 3: Look at the effect
Step 4: Mitigating Doctrines
 Prevention
 Estoppel
 Waiver
 Election
 Disproportionate Forfeiture
(7) CONSTRUCTIVE CONDITIONS: conditions which are not agreed on by the parties, but which
are supplied by the court for fairness, used in bilateral contracts – where each party makes one
or more promises to the other, each party’s substantial performance of his promise is generally
a constructive condition to the performance of any subsequent duties by the other party.
a. Dependent Covenants: Kingston v. Preston: the court held that the promises were
not independent, and that the giving of security by P was a condition to D’s duty to
convey the business. To compel D to turn over his business to P w/o the security for
which he had explicitly bargained, and to leave D only the remedy of an action for
breach, by which time the business might be hopelessly ruined and the buyer
judgment-proof would be the greatest injustice.
b. Three types of covenants:
i. Mutual and Independent: either party may recover damages from the other
in the event of breach by the other, and an alleged breach y one party is not
an excuse for the other party.
ii. Conditional and Dependent: performance of one party depends on the
prior performance of the other and until the prior condition is performed, the
other party will not be held to performance of his covenant. This is the rule
applied in Kingston.
iii. Simultaneous: if one party tender and the other party refuses to perform,
the first party has an action for default against the refusing party. (mutual
conditions to be performed at the same time)
c. Progress Payments: Stewart v. Newbury: if there is no agreement or custom
regarding time of payment, P was not entitled to anything until he finished the job,
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and by walking off the job prior to completion he breached. Where a K is made to
perform work and no agreement is made as to payment, the work must be
substantially performed before payment can be demanded.
i. UCC §2-507(1): tender of delivery is a condition to the buyer’s duty to accept
the goods and pay for them
ii. UCC §2-511(1): tender of payment is a condition to the seller’s duty to
tender and complete any delivery
d. Mitigating Doctrines: this doctrine is normally applied in construction Ks where
hardship is created if the owner is allowed to retain the value of the building w/o
payment just b/c the builder made some small mistakes- generally prefer an
interpretation that avoids forfeiture.
i. Mitigating Doctrines of Conditions: (1) substantial performance, (2)
Divisibility, and (3) Restriction
ii. Material Breach/ Substantial performance: the condition deemed satisfied
if there was “substantial performance” by the party who had to satisfy the
condition.
1. 3 factors to determine if breach was material:
a. How completely was the party who benefits from the condition
deprived of her expected benefit in entering the contract?
(more = more likely material)
b. Can A be adequately compensated for the breach with money
damages (if so the breach is more likely to be non-material)
c. Was the breach willful? Yes= material
2. Determining if performance was substantial:
a. Does the performance meet the essential purpose of the K,
b. Substantial performance gives you the fruit of the bargain
c. §241: in determining if a failure to render or to offer
performance is material, these circumstances are significant:
i. The extent to which the injured party will be deprived
of the benefit he reasonably expected
ii. The extent to which the injured party can be
adequately compensated for the part of that benefit of
which he will be deprived
iii. The extent to which the party failing to perform or to
offer to perform will suffer forfeiture
iv. 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;
v. The extent to which the behavior of the party failing to
perform or to offer to perform comports with standards
of good faith and fair dealing.
3. Jacobs & Young v. Kent: P got the fruits of the bargain & the
difference in value b/w the 2 pipes is sufficient to compensate P;
They are independent and collateral of one another.
a. They are divisible, each one stands on its own basis,
therefore the breach of one does not constitute the breach of
the other. Each has their own right to damages
b. Exceptions:
i. If you expressly state that every little detail must be
met, or you don’t get paid, then it must be met, you
can’t use mitigating doctrine
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iii.
iv.
v.
vi.
vii.
ii. §241: willful breach: willful deviation from the terms
will always preclude a finding of substantial
performance
iii. SP- does not mean every detail must be in strict
compliance w/ the specifications & the plans – the
basic test is have you received the essence of the K?
iv. Plante v. Jacobs: court held that substantial
performance had occurred, even though the living
room wall had been misplaced
Perfect Tender Rule: if the goods deviate from the K even in just a nonmaterial way, the buyer can reject them (send back and refuse to pay)
1. Nonbreacher’s options: UCC 2-601: if shipment is composed of
non-conforming and defective goods he can
a. Reject the whole shipment
b. Reject just the part that’s defective
c. Or accept the entire shipment and sue
2. Exceptions to PT Rule:
a. Cure: seller has a right to try to cure the nonconformity after
rejection
b. Revocation of acceptance: if the buyer has already
accepted the goods the buyer may revoke the acceptance
only if the non-performance is substantial
c. Installment Ks: if so, if 1 installment is substantially nonconforming the buyer may not cancel the entire K unless the
problem with the 1 substantially impairs the value of the entire
K.
UCC 2-513: unless otherwise specified, every buyer has an implicit right to
inspect the goods before acceptance or payment. Buyers bear the
expenses, but may recover if goods do not conform. Inspection must be
reasonable in time, place and manner.
UCC 2- 606: What constitutes acceptance of goods:
1. occurs when the buyer
a. after a reasonable opportunity to inspect the goods signifies
to the seller that the goods are conforming or that he will take
or retain them in spite of their nonconformity; or
b. fails to make an effective rejection, but such acceptance does
not occur until the buyer has had a reasonable opportunity to
inspect them, or
c. does any act inconsistent with the seller’s ownership; but if
such act is wrongful as against the seller it is an acceptance
only if ratified by him.
2. Acceptance of a part of any commercial unit is acceptance of that
entire unit.
UCC 2-607: once you have accepted the goods you must pay for themupon acceptance goods can no longer be rejected unless such acceptance
was on the reasonable assumption that a non-conformity would be
seasonably cured and such was not cured. The buyer must notify the seller
of any breach w/in reasonable time after he discovers or should have
discovered the breach.
UCC 2-608: a buyer may revoke acceptance of goods whose non-conformity
substantially impairs its value to them
1. on the reasonable assumption that defects would be cured, or
2. w/out discovery of such non- conformity,
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if his acceptance was reasonably induced by either the difficulty of discovery
or the seller’s assurance. Revocation must occur w/in a reasonable time
after discovery and is not effective until the seller is notified.
viii. Divisibility: A divisible K is one in which both parties have divided up their
performances into units or installments, in such a way that each part
performance is the rough compensation for a corresponding part
performance by the other party. If a K is found to be divisible it will for
purposes of constructive conditions be treated as a series of separate
contracts.
1. §240: a K is divisible if it can be apportioned into corresponding pairs
of part performances so that the parts of each pair are properly
regarded as agreed equivalents.
2. Ultimate Objective Test: whether a K is entire or divisible is
determined by the ultimate objective of the K. If securing specific
pieces is the objective, the K is divisible. If the end result is the
purpose, the K is not divisible.
3. Factors to consider: payment means, subject matter, place of
delivery, purpose/use of buyer
4. Significance of Divisibility: if a K is divisible, a party who has
performed one or more parts can collect the K price (expectation) for
those parts completed, even though he breaches the other parts.
ix. Restitution as a mitigating doctrine: if you fail to meet a condition, you still
get restitution (even if you’re a dirty breacher)
1. §371: measure of restitution interest:
a. Value conferred- “increase in value of the other person’s
property” or
b. FMV of the same services provided by someone else
2. §373: restitution when other party is in breach- the injured party is
entitled to restitution for any benefit that he has conferred on the
other party by way of part performance or reliance
3. §374: restitution in favor of party in breach-(1) if a party justifiably
refuses to perform on the ground that his remaining duties of
performance have been discharged by the other party’s breach, the
party in breach is entitled to restitution for any benefit that he has
conferred by way of part performance or reliance in excess of the loss
that he has caused by his own breach, (2) to the extent that, under
the manifested assent of the parties, a party’s performance is to be
retained in the case of breach, that party is not entitled to restitution if
the value of the performance as liquidated damages is reasonable in
the light of the anticipated or actual loss caused by the breach and
the difficulties of proof of loss.
4. Ways to determine restitution:
a. FMV- amount of increased value to property,
b. Cost- the cost of obtaining similar goods,
c. The court will usually award the lower of the 2 to the
breaching party
5. Britton v. Turner: P breached his employment K of 1 year at 9.5
months, the court allowed him to recover a reasonable sum for the
services he had performed.
6. Kirkland v. Archbold: Contractor didn’t do the work as stipulated, the
court allowed him to recover the benefit conferred.
(8) REQUESTS FOR ASSURANCE OF PERFORMANCE:
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a. If a party has reason to worry that the other party won’t perform, the insecure party
may demand assurances that the other party will be able (and willing) to perform all
its obligations. The demanding party may then suspend his own performance until
he receives the assurances. A failure to provide assurance is a breach. (see section
under Anticipatory Repudiation)
(9) BREACH IN COURSE OF PERFORMANCE:
a. Implied duties in the performance of a K:
i. Good faith
ii. Secure expectations
iii. Not to materially breach
iv. Substantial performance
b. The implied covenant not to materially breach.
i. Whether a breach is material or minor is to be determined on a case by case
basis.
1. Intent: the most important factor in determining whether the parties to
the K intended for the breach to be material. A slight delay in
performance would normally be a minor breach. However, if the K
contains a “time is of the essence” clause, the delay becomes a
material breach.
2. Factors in determining if breach is material: Q for fact finder
a. extent to which the injured party will be deprived of the benefit
reasonably expected.
b. Extent to which the injured party can be adequately
compensated for the part of that benefit of which he will be
deprived.
c. 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 with standards of
good faith and fair dealing
3. Barnes says the question to ask is “have you substantially impaired
the fruits of the K by what you’ve done today?” So after an uncured
breach occurs, then must ask “have you substantially interfered with
the fruits of the bargain, so the injured party is released from his
obligations?” Failure by substantial breach = failure of condition
ii. Walker v. Harrison: D refused to make payments to P b/c P was delayed in
cleaning the sign. The court held for P (who was suing D to pay) b/c P’s
failure to give maintenance was a breach, but the tomato did not make it a
material breach which was needed to release D from the K. By not paying, D
was the first to breach.
iii. K& G Construction v. Harris: the court found for P b/c P’s obligation to make
the progress payments was dependent upon fulfillment of all D’s prior
promises, including that the work be in a workmanlike manner. When the
house was damaged a condition to P’s duty to make progress payments
failed to occur, and P did not have to make payment. Since P was not in
default by refusing to make payments, D breached the K by walking off the
job and is liable for P’s extra cost of completion.
iv. §241: circumstances significant in determining whether a failure is
material
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c. Effects of breach:
i. Material: gives rise to an immediate cause of action for breach of entire K,
excuses further performance by the non-breaching party. This is due to an
implicit condition in every K that says “if you don’t, I don’t have to either.”
ii. Minor: gives rise to immediate cause of action for whatever damages were
caused by the breach, may suspend, but do not excuse further performance
by the non-breaching party.
d. Responses to breach:
i. If A’s breach is material, B may:
1. sue for damages, but let K continue
2. terminate K
ii. If A’s breach is minor, B may:
1. sue for damages, but not terminate the K
e. Hindrance and Prevention: Ex: selling of the Volvo, you agree to buy but you want
to inspect for conclusion, the day before, Barnes stops the inspection and repudiates
the K, the time for performance has not occurred, has the repudiation destroyed the
fruits of the K?
i. Generally- there is an implied covenant not to hinder or prevent performance
by the other party flows from the covenant not to materially breach.
However, increased difficulty is not prevention or hindrance.
ii. In asking whether the interference is normal, presumptive, consider:
1. good faith/ bad faith
2. fruits of the K
3. Should competition be expected
4. if it is normal, presumptive, court will normally allow it
iii. Iron Trade Products: The court says the test of hindrance is to deny the
reasonable expectations of the contract; the seller breached b/c he failed to
deliver the goods. Seller alleged that buyer had hindered seller’s
performance b/c the buyer bought rails from someone else. There is no
hindrance b/c the buyer entering the marketplace did not affect the fruit of the
bargain. To avoid this, the K must explicitly state that the buyer will not enter
the marketplace. P’s conduct merely made D’s performance more difficult,
but not impossible.
f. Notice of breach: no notice is owed unless it is stated in the K. When notification on
the ground if D could show detrimental reliance on the ground asserted, P would be
restricted on the ground asserted, otherwise, P may assert any defense available.
i. When notification of a ground for termination is sent to a party to be in
breach, the person notifying is limited on that ground IF the breaching party
could show detrimental reliance on that ground asserted; otherwise, nonbreaching party may assert any defense available.
1. Loranger: Gen. terminates K w/ sub b/c work wasn’t progressing
quickly enough. If sub had relied on the notice and hired extra
workers the gen would be precluded from asserting another reason
for breach.
2. Notice is permissive if you want to get me out of the job, you don’t
have to give notice with reasons, but if the notice causes some
reliance then there are estoppel issues.
ii. UCC 2-605: Waiver of Buyer’s Objections by failure to particularize
1. the buyer’s failure to state in connection with rejection a particular
defect which is ascertainable by reasonable inspection precludes him
from relying on the unstated defect to justify rejection or to establish
breach
25
a. where the seller could have cured it if stated seasonably, or
b. b/w merchants when the seller has after rejection made a
request in writing for a full and final written statement of all
defects on which the buyer proposes to rely.
2. payment against documents made w/o reservation of rights precludes
recovery of the payment for defects apparent on the face of the
documents.
(10)
PROSPECTIVE NONPERFORMANCE (ANTICIPATORY REPUDIATION)
a. ANTICIPATORY REPUDIATION: occurs when (1) the promisor makes clear statements
that he will not perform; (2) uses ambiguous language accompanied by conduct that
evinces an unwillingness to perform or (3) commits a voluntary act that renders his
performance impossible
i. When AR occurs, the party negatively affected can sue immediately for
breach even though the repudiator’s time for performance has not yet
arrived. (Hochster v. De La Tour)
ii. Repudiation may usually be retracted if the retraction is communicated to the
aggrieved party before he has changed his position materially in reliance on
the repudiation.
b. UCC §2-610: Anticipatory Repudiation: when either party repudiates a K w/ respect
to a performance not yet due the loss of which will substantially impair the value of
the K to the other, the aggrieved party may
i. (a) for a commercially reasonable time await performance by the repudiating
party; or
ii. (b) resort to any remedy for breach, even though he has notified the
repudiating party that he would await the latter’s performance and has urged
retraction, and
iii. (c) in either case suspend his own performance or proceed in accordance
with the provisions of this article on the seller’s right to identify goods to the K
notwithstanding breach or to salvage unfinished goods.
c. §2-610, Comment 2: a request for greater performance (more favorable terms)
than that provided for under the K is a repudiation when under a fair reading it
amounts to a statement of intention not to perform except on conditions which go
beyond the K.
d. R.2d §250: Repudiation: A repudiation is (a) a clear statement by the promisor to
the promisee indicating that the promisor will commit a breach that would of itself
give the promisee a claim for damages for total breach under §243, or (b) a voluntary
affirmative act which renders the promisor unable or apparently unable to perform
w/o such a breach.
i. Total Breach: if the breach is relatively severe and material, it will have the
effect of suspending or discharging the other party’s obligation to perform
under the K.
ii. Partial Breach: If the breach is not material, it does not relieve the aggrieved
party from continuing to perform under the K.
e. Repudiation can be: if a party does not make it perfectly clear that they intend to
breach, the court can interpret any positive statement by the obligor to the obligee
which is reasonably interpreted by the obligee to mean that the obligor will not or
cannot perform his contractual duty; 3 categories that may constitute repudiations:
i. A statement by the promisor that he intends to not perform
ii. An action by the promisor making his performance under the K impossible
(like selling the goods to a 3rd party), and
iii. An indication by the promisor or via some other means that the promisor will
be unable to perform, although he desires to perform.
26
f.
§250, Comment B: it is not enough that the promisor states vague doubts about his
willingness or ability to perform but the expression of such doubts may entitle the
promisee to request assurance of performance, and the promisor’s failure to give
assurance would be a repudiation (see §251 and 2-609(1) below).
g. §256(1): The promisor’s statement of unwillingness must be made to the promisee,
not a third party.
h. §2-610 and §243 require that the repudiation substantially impair the value of the K
“impairs the fruit of the K”
i. Right to adequate assurance of performance: if party A conduct does not
constitute a repudiation but gives an ambiguous indication that party A may not
perform, party B may suspend, but not cancel, his performance. Or, the party B can
demand assurances from party A that he will perform. If party A fails to provide
assurances this failure will be considered a repudiation and party B is entitled to
cancel the K.
i. §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. B/w merchants the reasonableness of grounds for insecurity and the
adequacy of any assurance offered shall be determined according to
commercial standards.
3. Acceptance of any improper delivery or payment does not prejudice
the aggrieved party’s right to demand adequate assurance of future
performance.
4. After receipt of a justified demand failure to provide w/in a reasonable
time not exceeding 30 days such assurance of due performance as is
adequate under the circumstances of the particular case is
repudiation of the K.
5. in every K there is an obligation not to interfere with the expectationsa. if you do impair, I need to cover (a release)
b. by my going out and covering, I’ll reduce the damagesc. this is also damage control because cover saves everyone
money.
ii. R.2d §251: Failure to give reasonable assurances when obligated to give
them
1. when reasonable grounds arise to believe that the obligor will commit
a breach by non-performance that would of itself give the oblige a
claim for damages for total breach under §243, the oblige 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.
iii. Adequate assurance and insolvency: a party’s bankruptcy is generally
considered an AR, which has the effect of allowing the other party to make a
claim in the bankruptcy. A party’s apparent insolvency does not constitute an
AR.
27
j.
k.
l.
m.
n.
o.
p.
1. But the party does have a right to demand adequate assurance of
future performance if it has reasonable grounds to believe that the
other party will commit a breach
Repudiation with a partial breach: the repudiation in combination with a defective
performance which would have otherwise only have been a partial breach, would
give the right to bring an immediate action for total breach of K.
§256(1)- Retraction of a Repudiation: a repudiation may be retracted until the
aggrieved party has either:
i. Sued for breach
ii. Changed his position materially in reliance on the repudiation
iii. Stated that he regards the repudiation as final.
U.S. v. Seacoast Gas Co.: when a party repudiates a sales K, he may withdraw that
repudiation until the injured party indicates that the repudiation is accepted as final or
detrimentally relies on the repudiation.
UCC 2-611(1): the repudiating party may w/draw its repudiation unless the aggrieved
party has canceled or changed its position or otherwise indicated that he considers
the repudiation final.
DUTY TO MITIGATE: a repudiatee may not ignore the repudiation and continue to
perform, if doing so would aggravate damages- instead- there is a duty to mitigate
(she will be barred from recovering for those damages which she could reasonably
have avoided).
i. §350: damages are not recoverable for loss that the injured party could have
avoided without undue risk, burden or humiliation, his efforts must be
reasonable
ii. §2-610(a): only permitted to wait a “commercially reasonable time” beyond
that constitutes a bar from recovery
Insisting on performance: most modern courts hold that the repudiatee does not
lose any rights by insisting on performance and that she may later change her mind
and sue for damages
i. §257: the injured party does not change the effect of a repudiation by urging
the repudiator to perform in spite of his repudiation or to retract his
repudiation.
ii. §2-610(b): takes the same view that repudiatee’s insistence on performance
does not constitute a waiver of his right to sue for breach.
The effect of repudiation on the other party’s duties
i. §253:
1. Where an obligor repudiates a duty before he has committed a
breach by non-performance and before he has received all of the
agreed exchange for it, his repudiation alone gives rise to a claim for
damages for total breach.
2. Where performances are to be exchanged under an exchange of
promises, one party’s repudiation of a duty to render performance
discharges the other party’s remaining duties to render performance.
ii. *repudiation has the effect of a material breach
iii. Repudiatee’s inability to perform: Anticipatory repudiation is excused
when it’s impossible for the non-breaching party to perform.
1. §254(1): A party's duty to pay damages for total breach by
repudiation is discharged if it appears after the breach that there
would have been a total failure by the injured party to perform his
return promise.
2. Kanavos v. Hancock: even though D repudiated, D does not have to
pay damages unless P shows that he would have been willing and
able to come up with the purchase price had he been given the
28
required notice. In a concurrent K, one party cannot put the other in
default unless the former is ready, willing and able to perform.
iv. The repudiator may be relieved from the duty to pay damages if the duty
repudiated would have been discharged by impossibility, impracticability or
frustration.
1. §254(2): A party's duty to pay damages for total breach by
repudiation is discharged if it appears after the breach that the duty
that he repudiated would have been discharged by impracticability or
frustration before any breach by non-performance.
(11)
DAMAGES FOR ANTICIPATORY REPUDIATION
a. If the aggrieved party does not owe any further duty, then the courts generally refuse
to allow immediate suit based on AR.
i. Acceleration Clauses: loans and mortgages usually contain these, under
which the fact that a party misses one payment causes all future installments
to become immediately due. That way, the creditor can sue immediately,
and on a single occasion for all outstanding principal.
b. §2-713(1): the measure of damages for… repudiation by the seller is the difference
b/w the market price at the time when the buyer learned of the breach and the K
price, together with any incidental and consequential damages.
i. Seller fails to deliver goods: the buyer learns of the breach at the time the
goods should have been delivered
ii. Seller repudiates before delivery due: time buyer learns of the repudiation
or on the last day of the “commercially reasonable time” 2-610(a)
c. Options of the non-breaching party under §2-610 and §253
i. await performance for a commercially reasonable time, or
ii. resort to any remedy available for breach, or
iii. in either case, suspend his own performance
d. §243: supports 242, link you get damages for total breach only if you are in the
position of having your duties discharged
1. Total damages arise
2. duties are discharged
3. Right to cover
e. Remedies -Buyer:
i. §2-713 Cover: §2-713: Buyer’s Damages for Non-delivery or Repudiation
1. Subject to the provisions of this Article with respect to proof of
market price, the measure of damages for non-delivery or repudiation
by the seller is the difference b/w the market price at the time when
the buyer learned of the breach and the K price together with any
incidental and consequential damages provided in this article, but
less expenses saved in consequence of the seller’s breach.
2. Marker price is to be determined as of the place for tender or, in
cases of rejection after arrival or revocation of acceptance, as of the
place of arrival.
ii. Damages = market price when the buyer learned of the breach – K $ +
incidental and consequential damages – expenses saved in consequence of
the seller’s breach.
iii. When does the buyer learn of the breach?
1. There are 3 interpretations:
a. Time of repudiation
b. Time of repudiation + reasonable time to cover (Maj. Rule
Cosden) must act w/o unreasonable delay under §2-712
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c. Jury would determine what reasonable period of time is
iv. §2-712: “Cover”; Buyer’s Procurement of Substitute Goods
1. After a breach w/in the preceding section the buyer may “cover” by
making in good faith and w/o unreasonable delay any reasonable
purchase of or contract to purchase goods in substitution for those
due from the seller.
2. The buyer may recover from the seller as damages the difference b/w
the cost of cover and the K price together with any incidental or
consequential damages as hereinafter defined, but less expenses
saved in consequence of the seller’s breach.
3. Failure of the buyer to effect cover w/in this section does not bar him
from any other recovery.
4. *The Code prefers cover. Cover is about limiting damages- not
building them up (prevent the building of unnecessary damages)
v. 2-610: when either party repudiates the K with respect to performance not
yet due, the loss will affect the value of the K
f. Seller:
i. §2-708 Seller’s Damages for Non-acceptance or Repudiation:
1. If non-acceptance or repudiation by the buyer, the measure of
damages is the difference b/w the market price at the time and place
for tender and the unpaid K price together with any incidental
damages, but less expenses saved in consequence of the buyer’s
breach.
2. If the measure of damages is inadequate to put the seller in as good
a position as performance would have done then the measure of
damages is the profit (including reasonable overhead) which the
seller would have made form full performance by the buyer, together
with any incidental damages, due allowance for costs reasonably
incurred and due credit for payments or proceeds of resale.
ii. Only use 2-708 if 2-706 or 2-709 do not apply
g. Repudiation must be one that materially impairs
BASIC ASSUMPTIONS: MISTAKE, IMPRACTICABILITY AND FRUSTRATION:
Other ways for contractual duties to be discharged other than by actual performance or tender of
performance. These same ways can discharge conditions as well.
(1) Mistake: R.2d §151- a belief not in accord with the facts
a. There is no mistake if it is a misunderstanding.
i. §20: Misunderstanding- attached different meanings to the manifestation
ii. If you knew (subjective) or should have known (objective) that there is a
misunderstanding than the risk falls upon you and it is not a mistake, but a failure to
clarify a misunderstanding
1. Frigaliment
2. Peerless
b. Mutual Mistake: (§152) when both parties have acted on the same mistaken belief, the K is
voidable by the party adversely affected if he does not bear the risk of the mistake under
§154, and if he can show
i. Basic Assumption: that the mistake concerns a basic assumption on which the K
was made
1. Test: one must search for the facts for unexpected, unbargained-for gain on
the one hand and unexpected, unbargained- for loss on the other.
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2. Sherwood v. Walker: both parties believed the cow was sterile but before
delivering the cow seller discovered it was pregnant. Seller then refused to
deliver the cow. The court held for the seller on the ground that both parties
contracted for a different type of animal- this was a mutual mistake that went
to the very nature of the thing
3. Wood v. Boyton: sold stone to buyer thinking it was topaz but really was a
diamond- the court denied rescission to seller b/c in the absence of fraud,
this was not a mistake to the identity of the thing sold but was a question of
the adequacy of the price..
ii. Material Effect: that the mistake had a major effect on the fairness of the deal
1. The party must show that the resulting imbalance in the agreed exchange is
so severe that he cannot fairly be required to carry it out. (R.2d §152)
2. Must also show advantage to the other party because of the mistake
iii. Allocation of risk: that the risk of this type of mistake was not allocated to the party
who is trying to rescind. An allocation of risk can occur either by intent of the parties
or by the court’s own decision about what is reasonable.
1. §154 lists three ways in which the risk of loss will be allocated to a party
a. The risk is allocated to that party by agreement of the parties
b. He is aware at the time the K is made that he has only limited
knowledge with respect to the facts to which the mistake relates but
treats his limited knowledge as sufficient (if you have limited
knowledge you should cure it), or
c. the risk is allocated to him by the court on the ground that it is
reasonable in the circumstances to do so.
i. Watkins & Son v. Carrig: allowed the builder to fix the
problem with increased price for the unexpected rocks
2. Stees v. Leonard: if a contractor contracts to build a building which
collapses through not fault of his own, he must complete the building anyway.
Both were aware they had limited knowledge- but the contractor is an expert
and is supposed to have superior knowledge. When the builder contracts to
perform he undertakes all risks because he is bound and this is his business.
 Make this decision early on- is it a linguistic problem or a mistake
about fundamental belief
 If it is a mistake about fundamental belief then it is a 152 issue
(Misapprehension)
 If it is about formation- do we have a deal objectively- it is a §20 case
(Misunderstanding)
3. Exception: Renner v. Kehl- generally, risk is assignable to one party or the
other; They are both equally ignorant and neither one specializes, so neither
party has a greater responsibility; when a party rescinds for mutual mistake
he is entitled to restitution for any benefit conferred on the other party. The
objective is not compensation but the avoidance of unjust enrichment. The
rescinding party is not entitled to consequential damages.
c. Unilateral Mistake: (§153) where only one party has acted on the mistaken belief it is harder
for her to get rescission than in the mutual-mistake situation. Must show
i. Basic Assumption
ii. Material Effect
iii. Allocation of risk
iv. Either enforcement of the K would be unconscionable or
v. The other party had reason to know of the mistake or actually caused it.
(2) Impracticability: performance that is extremely time-consuming or costly, or impracticable, though
not impossible.
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a. §261: Where, after the K is made, a party’s performance is made impracticable w/o his fault
by the occurrence of an event the non-occurrence of which was a basic assumption, on
which the K was made, his duty to render that performance is discharged, unless the
language or the circumstances indicate the contrary.
b. Mineral Park Land v. Howard: the buyer of gravel in a requirements K was not required to
take gravel from below water level. To do so, would be very costly, which makes the
performance of impracticable.
c. To prove impracticability of performance, the increase in the cost of performance must be
extreme and it must also be shown that the K has not made the risk of impracticability
upon the party seeking that defense.
i. Transatlantic Financing Corp. v. U.S.: when impossibility is alleged, the court must
consider a condition of performance based on changed circumstances, involving
these considerations:
1. Contingency must have occurred -unexpected occurrence
2. risk of unexpected occurrence is not allocated by agreement or custom
3. occurrence must have rendered performance commercially impracticable
ii. This was a foreseeable risk that was assumed by the silent K. P should have
recovered quantum meruit for the entire trip.
d. §2-615: Excuse by Failure of Presupposed Condition
i. Excuses a seller from timely delivery of goods contracted for, where his performance
has become commercially impracticable b/c of unforeseen supervening
circumstances not w/in the contemplation of the parties at the time the K was made.
(basic assumption of the parties at the time the K was made that this event would not
occur- otherwise performance is not deemed impracticable and excused)
1. CL doctrines of frustration of purpose and impossibility
2. Showing of unprofitability is not enough
3. Must be extreme impracticability to excuse the seller’s performance
4. those things that could be thought of as impracticable:
a. severe shortage of raw materials or supplies as a result of a war,
embargo, local crop failure or unforeseen shutdown of a major source
of supply that causes a marked increase in cost or prevents the seller
from securing supplies necessary to perform
b. however, increased cost alone or the rise or collapse in the market do
not justify unless there is an unforeseen contingency that alters the
essential nature of performance
e. How foreseeable is the increase in costs? The more foreseeable the less likely it is that the
parties intended that the buyer of the goods or services would bear the risk of a large cost
increase.
i. If the parties agree on a fixed price and the risk of a rise in the market price is
foreseeable the court will generally hold that the parties implicitly allocated the risk.
1. Eastern Air Lines v. Gulf Oil: the parties intended to be bound by the prices
set in Platt’s List. Even if D could have proved a hardship, the energy crisis
and government regulation were foreseeable therefore it 2-615 does not
apply. Since Gulf was aware of the possibility of price increases, it bears the
risk.
f. §266: existing impracticability or frustration
i. (1) Where, at the time a contract is made, a party's performance under it is
impracticable without his fault because of a fact of which he has no reason to know
and the non-existence of which is a basic assumption on which the contract is made,
no duty to render that performance arises, unless the language or circumstances
indicate the contrary.
ii. (2) Where, at the time a contract is made, a party's principal purpose is substantially
frustrated without his fault by a fact of which he has no reason to know and the non-
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existence of which is a basic assumption on which the contract is made, no duty of
that party to render performance arises, unless the language or circumstances
indicate the contrary
g. How impracticability differs from frustration:
i. Impracticability- the affected party must have had no reason to know at the time the
contract was made of the facts on which he later relies.
ii. The effect of these rules is to prevent a duty from arising in the first place rather than
to discharge a duty that has already arisen.
h. Where a party has partly performed before discovery of the impracticability or frustration, he
may claim relief including restitution under the rules stated in §§ 240 and 370-77.
(3) Frustration of Purpose: events may occur to cancel one party’s purpose for entering the contractand even though performance is still possible, these events are said to constitute frustration of
purpose.
a. §265: where after the contract is made, one party’s principal purpose is completely or almost
completely frustrated w/o his fault by such supervening events (the non-occurrence of was a
basic assumption on which the K was made), most courts will discharge his performance,
unless the language or the circumstances indicate otherwise.
b. Krell v. Henry: Coronation Case- D is excused from performance b/c the essential purpose
of the K was frustrated when the coronation did not occur. Performance is not impossible
since D could still stay at the apartment but b/c he would not receive any benefit by doing so,
he is excused from performance.
i. This was not a mistake case because mistake occurs before contract (mistake as to
facts as existed during formation)
ii. There was no way to know the king would become ill
iii. Not impracticable but substantially frustrated
c. Factors to consider:
i. Foreseeability: the less foreseeable the event, the more likely the court will excuse
performance based on frustration of purpose
ii. Allocation of risk: if the parties implicitly allocated the risk to the promisor, the court
will not excuse performance
iii. Extent of the deprived benefits: the more complete the prevention of the benefit,
the more likely the court will excuse performance
iv. No personal fault: if the party seeking discharge was at fault in bring about or
failing to prevent the event- the court will generally refuse to excuse performance
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