Following the picket fence:
Defenses to Enforcement  contract meaning  third parties?  performance and
breach  remedies
I. Defenses to Enforcement
duress:
involves an absence of meaningful choice; involves a replacement of the subservient
party's will with the will of the dominant party with physical threat to person or
property; leaving the party with no reasonable alternative but to assent to the offer [i.e.,
success with this defense is rare]  contract is thus voidable by victim
undue influence:
involves a replacement of the subservient party's will with the will of the dominant party
with non-physical persuasion; leaving the party with no reasonable alternative but to
assent to the offer [i.e., success with this defense is rare] – classic example is the parentchild relationship; typically when the parent is very old and greedy kid persuades oldster
to agree to something bad]
misrepresentation:
-reckless or intentional [do not call this fraud, which is a tort]: knowingly or recklessly
makes as assertion not in accord with the facts [also see Hoell]; no need to prove
materiality for intentional/reckless misrepresentation
-negligent misrepresentation: unintentional (i.e., person may have believed their
assertion to be true, but it was not) misrepresentation that was material (i.e., it induced a
person to assent and would have induced a reasonable person to assent as well)
-"fraud" in factum (e.g., I didn't know what I was signing because I was told that
it was something else by X)/"fraud" in the inducement (e.g., say that a car is great
to induce someone to buy it)
-NB: if a reasonable and prudent person could have avoided the dispute by taking
reasonable actions (i.e., if the person was negligent), then misrepresentation may not be
asserted as a defense
mistake related to K formation:
-mistake: "a belief or assumption not in accord with the facts"
-Mutual mistake related to contract formation: (pp. 496-508)
Defense to contract enforcement or used to seek rescission and gain restitution
(possibly reformation) if . . .
1. mistake relates to subject of the contract or some basic assumption on
which the contract was made;
2. mistake is "material"1;
3. risk of the mistake was not allocated or properly allocable to the party
seeking relief;
4. mistake of party seeking relief was not due to that party's gross
negligence [normal negligence is permitted] or bad faith; and
5. party seeking relief gave prompt notice of mistake after discovery
1
that is, the mistake is extremely important to the formation of the contract. Big question on materiality:
should the test be: 1) had it not occurred, the party would never have entered the bargain [RH – seems like
materiality normally need not rise to this level].
1
-Unilateral mistake related to contract formation: (pp. 496-508)
Defenses to contract enforcement or used to seek rescission and gain restitution
(possibly reformation) if . . .
1. Elements 1 through 5 of mutual mistake are satisfied and . . .
2. party seeking relief must also prove either that . . .
a) the other party knew/had reason to know of the mistake or
caused the mistake . . .
OR
b) to provide relief would not cause undue hardship on the nonmistaken party . . .
AND
enforcement of the contract would be "unconscionable" to the
mistaken party seeking relief
unconscionablility (UCC §2-302 / CL):
[*Note: -question of law (i.e., court, not jury, decides); - determined according to
circumstances at time of contract formation; - dominant party may rebut with evidence]
1. usually a dominate/subservient relationship (absence of meaningful choice), i.e., an
adhesion contract that . . .
(this relationship is transaction specific;
sometimes a wealthy corporation may be
subservient if the other party is in a
STRONG position)
2. . . . produces a contract that abnormally/unusually/unexpectedly allocates a risk of the
bargain from the domianate to the subservient party that is either . . .
3. . . . substantively unconscionable (shocks the court's conscience) . . .
or
. . . procedurally unconscionable because the subservient party neither . . .
a) "genuinely" assented (was this a take-it or leave-it offer; did party have
any other reasonable alternative); nor
b) "apparently" assented (terms are hidden in the contract and/or even if
someone knew of and read the terms, he probably would not have
understood the legal ramifications of those terms – very similar to the
court theories in treating standardized contracts – [historically, this is what
happens as we move away from the freedom of contract theory and to
increasing uncertainty of outcome)
Unconscionabilitity is a policy recognition that despite the contract theory that we all are
rational people and in control of our agreement, in reality we are not always in control of
that to which we are agreeing.
2
standard form K:
adhesion contract:
1) unequal bargaining position; "take-it or leave-it" (a dominant
party and a subservient party – often education level, age, and
emotional state of the subservient party is focused on)
2) adhesion contracts are a narrow, but highly effective version of
the unconscionability doctrine
Reasonable expectations doctrinei) if party using standard form contract creates an expectation in the signing party that
is not reflected in the terms of the contract, then the reasonable expectation prevails
ii) the expectation is determined by a totality of circumstances
iii) for reasonable expectations doctrine to apply, there must be:
a) ambiguity;
b) obscure/technical language; or
c) hidden provisions
iv) otherwise normal contract interpretive principles apply
good faith: A duty imposed by both UCC and CL.
There is a duty of good faith in the bargaining process, as well as an implied duty [i.e.,
each contract should be seen as having a term that says "good faith" required – UCC and
CL] of good faith in the performance of the contract. Therefore, when this duty of good
faith is breach, it acts as though a term of the contract were breached, which permits the
non-breaching party from performing the contract.
UCC §1-203: every contract or duty within UCC imposes an obligation of good faith in
its performance or enforcement. Defined in §1-201(19) as honesty in fact in the conduct
or transaction [NB: no requirement for reasonable action]. And this is altered for
merchants in §2-103(1)(b) saying that they must observe honesty in fact and observance
of reasonable {not a negligence standard] commercial standards of fair dealing in the
trade.
CL: if a party is inexperienced relative to the contract at issue, the courts tend to say that
that type of party merely needs to be honest; if a person has more bargaining power or
more experience, that person is often held to what resembles a reasonableness standard
[knowledge creates responsibility].
illegality:
"Criminal" Illegality
"Illegality" when contract violates a
judicially recognized public/social
policy2
1. General rule: courts "leave the parties
1. Covenants not to compete [very
where they find them" unless the
common]: to be enforceable, it must be
statute/reg provides otherwise: US
reasonable as to scope – duration,
Nursing, Rahmeni, Carrol
geographic area, conduct
2. However, courts may provide relief
Fine Foods
after balancing these factors:
2. Contracts involving marriage
2
the unruly horse
3
a) relationship of illegality to the
-those that affect normal/usual
contract: direct/indirect?
rights of spouses in a "legallyb) seriousness of illegality: malem in
recognized" marriage
se/malum prohibitum?
-those that treat a relationship as
c) relative involvement of the parties:
marital when it is not a "legallyin pari delicto?
recognized" marriage
d) magnitude of unjust enrichment if
Wilcox
no relief given?
incapacity: (makes contract voidable until party realizes benefit after incapacity has been
removed or destroyed)
1. mental incapacity: cognitive test (did party understand the nature and consequences of
the transaction?); other party test (if other party knew of the mental illness that interfered
with contracting ability, then voidable)
2. minor or ward: under 18 and wards can't legally contract
3. intoxication: only if other party has reason to know that the drunk is unable to
understand the nature and consequences of the transaction
impossibility/impracticability:
1. "Event" occurs after contract creation but before performance is complete.
2.The occurrence of the event must have been reasonably
unexpected/unforeseeable.3
3. The non-occurrence of the event must have been a basic assumption on which
the contract was made
4. The risk of the occurrence of the event must not have been expressly or
impliedly allocated to the party asserting the defense
5. The occurrence of the event must have made performance impracticable (not literally
impossible – i.e., wiggle room).
6. The occurrence of the event must not have been the result of intentional or negligent
conduct of the party asserting the defense
7. Reasonably prompt notice of intent to assert the defense must be given to the other
party so other party does not continue to rely on expectation of performance.
frustration:
[NB: except for 5 and 6, elements are the same as impracticability]
1. Event occurs after contract creation but before performance is complete
2. occurrence of event must have been reasonably unforeseeable/unexpected (especially
to party asserting the defense)
3. non-occurrence of event must have been a basic assumption on which the K was made4
4. risk of occurrence of event must not have been expressly/impliedly allocated to the
party asserting the defense
5. (*) occurrence of event must have totally, or nearly so, destroyed the
Read
value of the contract given the purpose for which the party asserting the
#5 & 6
defense entered the contract
together
6. (*) that purpose must have been within the contemplation of both5
3
NB: if it was reasonably foreseeable, then the parties must have simply assumed the risk of the event as
part of the contract.
4
the "basic assumption" can be implicit, rather than one the parties actually discussed or even thought
about
4
parties as a principal purpose
7. Occurrence of the event must not have been the result of intentional or negligent
conduct of the party asserting the defense
8. reasonably prompt notice of intent to assert the defense must be given to the other
party
II. Contract Meaning
parole evidence rules:
1. is there a writing/record? if yes, move to 2
2. is there an allegation of a prior (written/oral) or contemporaneous (oral) agreement that
would add to or contradict/vary the writing? if yes, move to 3
3. is the writing completely or partially integrated, or not integrated at all (this is the most
critical step in the analysis)? go to 4.
Def. "integration": are previously agreed upon terms included in the writing or
record? were they in fact intended to be included by the parties?
"if terms in the writing were not intended to be final or intended to be a complete
representation, then we should not give too much weight to the writing/record
because it is not a good representation of intention." - RH
procedure for determining integration:
- four corners/appearance approach (traditional approach)
-i.e., the court looks exclusively at the writing itself, and will decide
whether the reasonable and prudent person would decide that the writing
was completely integrated
-integration/merger/zipper clause: a clause that in the contract explicitly
states that the writing is indeed a complete and integrated statement of the
intention of the parties. (not merely included as boilerplate)
-these clauses are often highly respect by courts, whether at CL or
under the UCC
-comparison approach (modern trend, though four corners approach coming
back)
court will hear a profer of evidence in advance (out of earshot of jury) and
compare this to the existing writing/record and will then decide on the
level of integration of the parties' agreement. The court will use some of
the "tests" below to reach its conclusion:
-natural omission/natural inclusion "test"  separate
consideration? [if sep consideration, then it shows that the terms
could stand alone as a separate contract and therefore it would be
natural to omit the terms]
-would a reasonable and prudent person have naturally
omitted the terms from the writing but would also have
5
i.e., knowledge of the purpose required
5
naturally assumed that the terms were nevertheless part of
the agreement. Therefore, the agreement is not fully
integrated and evidence is admissible.
- would a reasonable and prudent person have naturally
included the terms in the writing. Therefore, the agreement
is fully integrated with respect to the topic and the evidence
is inadmissible.
-certain inclusion "test"  separate consideration?
-UCC encourages this test
-would a reasonable and prudent person under same
or similar circumstances have certainly included those
terms if they intended those terms to be in the writing. if
yes, then omission of these terms must have been
intentional and therefore the evidence is inadmissible
-Wigmore aid (cf. writing omission test)
-if we have a record of BFE and it contains some sort of
reference to the topic in conflict, then we should rule any
evidence about that topic inadmissible
not really "tests" in terms of a rule, but merely descriptions of how courts go about
determining the level of integration
4. apply complete or partial integration rules, or non-integration rule.
UCC Parole Evidence:
The UCC Permits explanation and supplementation, but not contradiction, with:
1. course of dealing (repeated performances, known to other party, with opportunity to
object); course of performance (sequence of previous conduct between parties that is
basis for common understanding); trade usage (normal custom)
and
2. consistent additional (diff from CL) terms if writing is only partially integrated,
with no ambiguity requirement
interpretation/gapfilling:
1. Vagueness or ambiguity problem [question of law (i.e., the judge, not jury, decides;
four corners or comparative approach; relationship to Parol Evidence Rules], then,
2. Intention of the parties is determinative (objective test), then,
3. The "plain/ordinary" meaning will be used (since it is assumed that the objective
reasonable and prudent person would intend this meaning). But, either party may
introduce evidence to show they intended a "special" (i.e., different from the "plain and
ordinary" meaning) meaning, then,
6
4. The proponent of the "special" meaning must prove* either that . . .
[* - if proponent fails to carry burden of proof, the "plain/ordinary" meaning will
be used unless the other party objects in which case there may be an absence of
mutual assent.6]
5. a) Both parties in fact intended the "special" meaning, or . . .
b) The proponent intended the "special" meaning and the other party knew/should have
known of that meaning and did not object (thereby the other party is estopped from
arguing that the plain meaning should be used).
promises/conditions:
Interpretation of contract (court must decide there is a need for interpretation due to a
vagueness or ambiguity problem); if there is a problem (based on proffer or four-corners
approach), then with regard to promises/conditions, the court will use the following
definitions: [while interpreting promise/condition issue, the court will start with a
rebuttable presumption that a term is a promise, this is so because a condition can
have the horrible effect of forfeiture, which courts do not want to find unless obvious]
Promise: "a commitment or an undertaking by a party that a certain event will or will
not occur in the future"; promises can be unconditional/independent where the duty to
perform is not dependent on any external events
Condition: "an event not certain to occur the occurrence or non-occurrence of which
gives rise to or terminates a duty of performance"
 promises:
 conditions:
(functional effect)
-failure to perform is a breach of contract
-as to conditions precedent or concurrent:
failure to occur excuses the duty to perform the
conditioned promise [policy: more catastrophic
than a breach because it causes a forfeiture, i.e., the
other party gets nothing, whereas in a breach they
would receive a remedy]
-as to conditions subsequent: occurrence of
condition excuses/terminates the duty to perform
the conditioned promise
 promise/condition
hybrid:
-both functional effects of a promise and a condition
CL Treatment Given Promissory Terms7
(1) Assuming a term is a promise and that there are exchanged promises . . .
6
if both parties attempt to argue a special meaning, and both fail to prove what they argue, then court will
probably simply say there was a lack of mutual assent and therefore there was no agreement and thus
nothing to be enforced.
7
to study, apply this framework to the facts in the cases pp. 619-680.
7
(2) Question: are the exchanged promises dependent8 or independent9?
-interpretation: intent controls
-but: rebuttable presumption of dependency (that is, the promises are
"constructive/implied" conditions of each other10) (see John v. United Ad:
attempt by party to show that there are subsets of independent promises, therefore,
failure to fulfill one promise only excuses performance of the corresponding
promise, but not the other promises – each sign and each payment was dependent,
but the seven signs represented independent promises that could be severed)
(3) Question: order of performance of dependent promises?
-interpretation: intent controls
-but: rebuttable presumption of concurrent performance (actually
"tender"11 of performance) (Bell: if we have dependent promises, one must be
performed before the duty to perform the other promise is activated, we have to
know who has to perform first. What if performance order is not specified? Then
we have a rebuttable preseumption of concurrent performance. Performance is
not literally required, but rather merely the tender12 of performance)
(4) Question: are expressly dependent promises treated differently than
constructive/implied dependent promises?
expressly dependent promises: exact/complete performance required unless promise is
immaterial to the agreement. If no exact/complete performance, then 1) breach of
contract occurred and 2) dependent promise excused.
contructively/implied dependent promises: only substantial performance required;
immaterial breach is tolerated. If only an immaterial breach, breach of contract has
occurred, but dependent promise is not excused unless breach is willful. (Walker: shows
that unfair forfeiture is a concern and the courts will not excuse a party from performance
if breach is immaterial) and (Cherwill-Ralli: breach is material)
8
dependent: if one promise is breached, then the other party need not fulfill his promise.
independent: if one promise is not fulfilled, the other party has an action for breach of contract but still
must continue to fulfilled his promsie
10
a performance of one promise is a constructive condition precedent for the performance of the other
promise
11
exhibit willingness or ability to perform promise
12
promisor evidencing to promisee that promisor is ready, capable, and willing to perform the promise
9
8
UCC Treatment of Exchange of Promises
Buyer's Promise to pay  (dependent*)  Seller's promise to
for goods
deliver goods per contract terms
SELLER
Tenders
delivery of
nonconforming
goods and/or
tenders late
delivery (UCC
2-503)
BUYER
SELLER
Accepts
nonconforming
good or late
delivery (2-606)
BUYER
Must pay price but may
offset damage sustained
against price paid (i.e., a
remedy) (2-607(1) & 2714)
-Rejects nonconforming
goods (2-601, 2-106(2),
1-201(3, 11), 2-612)
-Accepts nonconforming
goods and later revokes
acceptance (2-608)
May have
right to
cure (2508)
Never tenders
delivery at all
Can cancel and
recover price
paid; also recover
damages. In other
words, buyer is
excused from
performing his
promise but can
bring breach of
contract action.
(2-711, -712,
-713, -715)
*UCC assumes promises are dependent and makes no
distinction between expressly and impliedly/constructively
dependent promises.
----------------------------------mistake related to reducing K to writing:
Reformation (i.e., relief sought) granted if . . .
1. parties entered a prior contract;
2. parties agreed to reduce the contract to a writing; and
3. Due to a mistake (or misrepresentation, duress, undue influence)
the writing varies from the actual contract
unconscionability (risk allocation issues, esp):
if a single term is deemed unconscionable, the court may simply excise it and then
enforce the rest of the contract
standard form K:
good faith:
illegality:
9
III. Third Parties
3rd-party beneficiary:
Structure of Third-Party Beneficiary Contract – Terminology
(B) Promisee
(B) Promisor
promise/performance
promise
Promisor (A)
Promisee (A)
3rd party
beneficiary
component
of total
BFE
performance
Creditor or
Donee
Third-party
beneficiary (C)
Total
bargained
-forexchange
when there is an "intended 3rd-party beneficiary" [whether or not a donee or creditor
beneficiary] to a contract, that person is given the right to enforce that contract in order to
fulfill the expectation of the 3rd-party beneficiary and of the contracting parties who
intended the 3rd-party to benefit
Two ways to establish 3rd party beneficiary was intended:
1. easier: contracting parties intended as a main purpose for entering the contract to
benefit the 3rd party
2. more strict: prove that parties had the main purpose to benefit AND prove that the
parties intended to create a direct obligation to the 3rd party beneficiary [aka, the parties
must have manifested an intent that the 3rd party had a right to enforce the promise of the
promisor]
Vesting:
subsequent to creating 3rd-party beneficiary BFE, can the parties in privity in contract get
together and modify the contract in a way that adversely affects 3rd-parties rights without
the 3rd-parties consent?
-the facts in this case reveal a creditor beneficiary relationship. This is important because
it affects vesting in a historical sense: donee contracts vested immediately; creditor
beneficiary rights vested when:
1. beneficiary is informed of the contract and consents to receipt of
benefits from the contract (expectation interest created); or
2. 3rd-party knew of the beneficiary contract and reasonable relied
on it (reliance idea); or
3. once 3rd-party filed a suit against promisor
if 3rd-party beneficiaries rights have "vested" before parties in privity have modified the
10
contract, then 3rd-party can enforce the contract's terms prior to modification
the R2C idea is the historical creditor beneficiary idea, that is applied to all intended
beneficiaries (whether donee or creditor).
[a few jurisdictions maintain the historical version of donee/creditor vesting]
-EXCEPTION: if contract terms reserve to the parties in privity the right to
change terms of the agreement w/out consent of 3rd-party, this will be permitted
without respect to vesting [mention this possibility in any EXAM answer, even if
not raised by the fact pattern]
Defenses:
a. promisee in breach: if promisor's could defend against promisee because of breach
by promisee, then promisor may assert the defense against the 3rd party beneficiary
[absent a contrary contract provision]
b. 3rd party in breach to promisee on a separate matter: (creditor beneficiary
relationship assumed) prior obligation exists between promisee and 3rd party [i.e., these
people have entered into a separate contract at some point in the past]: a 3rd-party's
breach against a promisee cannot be used as a defense by the promisor to the 3rd-party's
claim against the promisor. [absent a contrary contract provision]
i. aka, promisor cannot assert a remote defense
assignment:
Promisee
Promisor
Promisor
(Obligor/
Debtor)
Promisee
(Assignor)
assignment of contract rights (may
be for consideration or donative)
Assignee [outside the BFE]
manifestation of intention by the possessor of the assignor:
1) to extinguish the right in onesself and then
2) to establish it in the assignee [assignee then has right to enforce the contract right that
has been transferred]
the assignment may be for consideration or donative [recall that with
donative, the promise is revocable while the contract is executory – i.e., before delivery
or before a writing (or some other instrument) delivered to indicate that gift has been
made, though goods not delivered yet]
cannot assign if:
increases risk to obligor
materially alters the benefits to obligor [cf UCC 2-210]
arguable cannot assign if there is an anti-assignment provision
statutes can also prohibit this
11
Defenses (assignee stands in shoes of assignor):
-if C sues A for non-payment of debt, can A assert a defense that B breached?
yes, assignee is subject to any defenses that arise from the contract itself.
-i.e., the assignee stands in the shoes of the assignor
-if B assigns right to collect money to C without telling A and then B collects the
payment. A can defend against C's claim that he was not paid by saying he had
already fulfilled his duties. Notice of assignment is required.
when assignement occurs, obligor can discharge obligation under contract once they have
received notice of assignment only to the assignee. If no notice, obligor can satisfy
obligation by performing to the assignor.
NB: do not confuse assignment with 3rd-party beneficiary. the key here is that an
assignment is made after the BFE and without consent and usually without knowledge of
one of the parties to the preexisting contract. Remember, 3rd-party beneficiaries must be
intended by the parties in privity of contract while they were making the BFE [RH
emphasizes this difference]
delegation:
(A) Promisee
Promisor (B)
Promisor
(Obligor/
Delegator)
Promisee
(Obligee)
delegation of contract duties
(may be for consideration or donative
Delegatee [outside BFE]
Definition delegation (2-prong test): manifestation of intent
1. by delegator to transfer the contractual obligation that one has to another,
2. coupled with the manifestation of intent by the delegatee to in fact perform the
promise
1. obligee has an action against delegatee
2. delegator is not excused from performing merely because he delegates his duty
and the delegatee defaults (in other words, both the delegator and delegatee are
liable to the obligee)
-for delegator to get out of the contract entirely, there must be a novation.
This requires a mutual rescission of the original contract and then a new
12
agreement that the delegatee will step into the shoes of the original
delegator
limits on delegation:
-if it increases risks to obligee,
-statutory limits
-contract provisions that prohibit delegation
Defenses:
1. delegatee may assert any defense against obligee that delegator could have
asserted
2. delegatee is liable to obligee, while delegator also remains liable
novation:
requires both parties to the original contract creating the obligation to explicitly recognize
that the obligation was being transferred in its entirety to another party
i. therefore, there must be objective proof of this intention and mutual assent to the
intention
IV. Performance and Breach
present breach:
the time for performance of a promise is passed and the promise has not been performed
repudiation manifested at the moment when performance is due; time normally explicitly
included in the contract, if not explicit time, then court says performance must occur
within a reasonable time
-functional effect of failure to perform a promise is breach
anticipatory breach/anticipatory repudiation/repudiation:
prior to the time performance was necessary, the promisor makes it clear that he or she is
not going to perform
Anticipatory repudiation - CL
-manifestation of intent not to perform an agreed to promise at some time before
the moment for the performance of that promise has arrived
(functional effect: injured party not immediately excused as with present breach)
-requires unequivocal repudiation
Therefore, non-repudiating party may:
-treat contract as presently immediately breached: resulting
in action for breach or recission
-party can also sit around an hope other party changes his
mind
-equivocal repudiation
-other party cannot treat this as a breach
-not fair for other party to maintain readiness to perform or
continue performing
-what if non-repudiating party has already performed his promise?
13
-courts need not allow this party to treat the contract as in
immediate breach (e.g., debtor/creditor – debtor stops
paying on a loan and law seems like it should make creditor
have to bring an action for each payment. Therefore,
common to put in an acceleration clause where if a single
payment is missed, the entire balance comes due.
Therefore, easier to bring an action for breach as promise is
shifted to a single moment.)
-once a repudiation has occurred, repudiating party may retract the repudiation (Flatt) if
the other party has not relied on this repudiation and has not materially changed position
or made it known that party treats the repudiation as breach (notice can take the form of
service of summons and complaint!)
UCC – 2-609, 610, 611, 612
If reasonable grounds for insecurity arise with respect to the performance of one party,
the other party may:
1. demand in writing adequate assurance of due performance
2. may, if commercially reasonable, suspend any performance for which he has not
already been paid
After receiving a justified demand, failure to provide assurances within a reasonable time,
not to exceed thirty days, is a repudiation of the contract
UCC follows CL definition of unequivocal anticipatory repudiation; also follows CL
saying that an equivocal repudiation may be retracted if the other party has not relied on
that repudiation and materially changed his position.
UCC Installment Contracts:
-if default on one installment or delivery of non-conforming goods that substantially
impairs the value of the whole contract, there is a breach of the whole.
-the aggrieved party, however, reinstates the whole contract if he accepts a nonconforming installment without seasonably notifying of the cancellation or only brings an
action on past installments or demands performance as to future installments
V. Remedies
theory:
A. Object is relief to the promisee, not punishment (cf. Allapattah) of the promisor.13
B. Promisee's remedy usually is substitutional (monetary damages), not specific.14 Types
of damages:
this has everything to do with the economic efficiency argument – that is, efficient breach. contract law
is not based on moral obligation, but merely protecting the expectation interest in the bargained-forexchange theory.
14
NB – the policy behind this is that it would cost the government mega bucks to enforce specific
performance in all instances; paying money is just more efficient and easier to verify. Moreover, trying to
enforce people to perform something they don't want to do could lead to bad performance.
13
14
-general/direct damages: awarded to compensate the aggrieved promisee for the value of
the bargain itself lost because of breach
-special/consequential damages: awarded for harm caused as a result of the loss of the
bargain but harm that was in addition to the value of the bargain itself
-liquidated damages: amount agreed to by parties to be paid in the event of breach
-punitive/exemplary damages: [cf 2-710 and 2-715 in UCC]
C. Promisee's expectation interest is the primary interest to be protected, but reliance15
and restitutionary16 interests are worthy secondary interests.
Limits on damages:
foreseeability: (Hadley v. Baxendale)
certainty: must prove causation between breach and harm and prove amount of money
need to compensate for that harm
mitigation: can't recover for harm that could have been avoided by reasonable actions
under the circumstances
liquidated damages: For a clause to be considered a liquidated damages clause, three
conditions should be met:
i. damages expected from breach were uncertain17 in amount or difficult to prove
ii. intent by the parties to liquidate damages in advance
iii. amount stipulated was reasonable and not greatly disproportionate to the amount of
presumed (or in many courts, the actual) loss
application:
Employment Contract Remedies
I. Employer is in breach – Employee's Remedies
A. Employee has fully performed/completed the task . . .
Expectation damages = contract price (salary) plus consequentials
B. Employee has not performed yet or only partially performed . . .
Expectation damages = contract price less amount employee received or
could have received from replacement employment plus consequentials
C. Alternative to A or B – liquidated damages
II. Employee is in breach – Employer's Remedies
A. Expectation damages = net damages caused by having to hire another
employee at a higher price plus consequentials18
(note, however, there is some authority that permits breaching employee
restitution for work he did perform)
B. Alternative to above – liquidated damages
Damages are collected either by cash payment or writ of execution for sheriff to seize and sell goods in
order to pay the award or writ of garnishment used to serve notice of garnishment on 3rd-party who holds
property in which debtor has an interest or to serve notice to a 3rd-party who owes money to the judgment
debtor (e.g., employer, bank).
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relied on promise and suffered economic loss as a result
16
promisee has conferred an economic benefit on promisor who then breaches; the benefit must then be
required to return [disgorge] the benefit
17
very important requirement; where damages are certain, this alone causes many courts to hold the
liquidated damages clause unenforceable – if damages are uncertain, this is a way for parties to reduce the
risk of entering into the agreement
18
e.g., I hire a person to work for 10,000; this person bails before starting work; so I hire someone for
12,000, and have to expend money for recruiting or delaying opening business. Expectation damages =
2,000; consequential damages = additional foreseeable and certain results of the breach
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Construction Contract Remedies
I. Owner is in breach – contractor/builder remedies
A. If owner breaches before contractor starts work . . .
Expectation damages (profits) = contract price less cost to perform plus
consequentials
B. If owner breaches after contractor starts work and contract would profitable…
Expectation damages = profit plus expenditures to date plus
consequentials or contract price less costs saved by not completing job
plus consequentials
C. If owner breaches after contractor starts work and contract would result in a
loss . . .
either formula from I(B) could be used (no recovery) or
restitution/reliance interests might be protected or some other
compromise!
D. Alternative to above: liquidated damages clause
II. Contractor/builder is in breach – owner's remedies
A. If contractor breaches before work begins . . .
Expectation damages = contract price charged by second contractor less
price of the contract in breach plus consequentials [cost of completion
formula]19
B. If contractor breaches after part performance . . .
Expectation damages: Majority general rule: cost of completion less what is
due under the contract plus consequentials
Majority exception to general rule (minority general
rule): value property would have had if contractor
performed completely less value of property as
partially complete and less amount saved by owner
not paying full price plus consequentials
[diminution in value formula]
NB: majority exception applies if breach is immaterial and not intentional
or if completion of job produces "economic waste"
C. Alternative to above: liquidated damages
EQUITABLE RELIEF
Steps:
1. show inadequacy of legal remedy of monetary damages: three situations when
this is most common:
1) expectation/reliance/restitutionary damages not provable with
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assumes that second contractor is charging a higher fee and that fee was reasonable
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reasonable certainty
2) UCC:
1) buyer's remedy unique/scarce goods 2-716 (1,3): if it is impracticable
for buyer to adequately cover, specific performance is provided (Sedmak
v. Chevrolet); see [giving buyer the usual remedy of the difference
between the cover/market price would not satisfy expectation damages]
2) sellers remedies when impracticable 2-709 (1b): where legal remedy is
inadequate, specific performance available; normally occurs when the
seller cannot sell the goods to another person (i.e., when there is no
market). This typically means that the buyer will be ordered to pay the
price [seller must then deliver goods]
3) Land-sale contracts, at least where seller is in breach [see chart "Real
Property Sales" below]
2. Injunctive Relief
-used mainly in contract law as a way to enforce express contracts not to compete
-non-compete agreements cannot be enforced through money damages because of
the uncertainty of how business was affected by the violation of the agreement
-RARELY used in implied covenant not to compete [cf. Beverly Glen
Music v. Warner, where court refused to enjoin Warner from employing
Anita Baker]
-may be applied especially where trade secrets or highly sensitive
IP is involved
3. certain areas are not subject to equitable relief
-personal service contracts
Real Property Sales Contracts
Seller is in Breach – Buyer's Remedies
A. Fulfill expectation by either . . .
-[most common solution] specific
performance plus consequential damages
causes by delay, etc, in conveyance
or
-expectation damages: cover/market
price less contract price plus consequential
damages [occurs where seller is unable to
specifically perform because land has been
sold to a good faith buyer20, which means
he doesn't have to give up the land to the
aggrieved buyer]
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B. Alternative to above:
-liquidated damages
[NB: "mutuality of remedy" – that is, the
remedies for breach in each situation
ought to be the same for both parties: this
is irrational and nonsense here because
substiutional relief works just fine for
B. Alternative to above:
-if expectation damages are
uncertain/speculative or specific
performance not possible, recover
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Buyer is in Breach – Seller's Remedies
A. Fulfill expectation by either . . .
-specific performance plus
consequential damages caused by delay
in getting paid
or
-expectation damages: contract price
less resale/market21 price of property plus
consequential damages
i.e., the person had no NOTICE that a previous sale had been pending
market price used when the resale price was unreasonable [i.e., too high?]
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reliance/restitution damages
-rescission and restitution or possible
reliance damages
-liquidated damages
seller – after all, they wanted $$ for their
land.]
When will reliance interest be protected?
When will restitution interest be
protected?
1. when the promisor's breach is
material/substantial22 or there is a
complete defense to enforcement of the
contract available to the promisee, the
promisee can rescind and seek
restitutionary damages.
(Anderson v. Schwegel; CBS)
2. when expectation damages are
speculative/uncertain
3. when the expectation is a loss (note
restitutionary damages will not be
reduced by the loss) (US v. Algernon
Blair)
4. when breaching promisor has bestowed
a benefit on the promisee, the promisor
can have restitution reduced by amount of
damages caused the promisee by the
breach. (Gardner v. Olson)
5. "quasi-contract" situations
1. when expectation damages are
speculative/uncertain (CBS v. Merrick)
2. when the expectation is a loss [i.e., if
party had performed, it would have
resulted in a loss of money] (note reliance
damages will be reduced by the loss)
(mentioned in Bausch & Lomb v.
Bressler)
3. when detrimental reliance/promissory
estoppel is a validation device [since
reliance is the reason for the action, it
should dictate the remedy: e.g., Goodman
v. Dicker, p. 350]
Quasi Contract:
-contract-type relief, usually in the form of restitutionary damages, is permitted in a
situation where there is no contract
-two areas for quasi contract:
1. confers a benefit on another mistakenly (e.g., mistaken transfer of cash)
- nota bene: however, can't recover the money if the transferee has relied
on the transfer in good faith (i.e., spent the money that he believed he was
owed)
2. acting reasonably, and not as officious intermeddler, and in so doing bestowed
a benefit on another under circumstance where they were not intending a gift but
had a reasonable expectation that they would receive reimbursement
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recall that dependent promises mean that when there is a material breach, the contract may be treated by
the other party as ended, that is, rescinded (rescission can also come in a mistake situation which will
terminate the contract) . [party may also treat it as merely a breach and recover expectation damages –
fork in the facts/law]
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Steps: i. acting reasonably
ii. not intending a gift [gifts can never be required to be returned]
UCC Remedies:
See charts handed out in class
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