CONTRACTS
Professor Elizabeth Pollman
Loyola Law School, Fall 2013
INTRODUCTION TO CONTRACTS
I. What is a Contract
“A contract is a promise or a set of promises for the breach of which the law gives a remedy, or
the performance of which the law in some way recognizes as a duty.”
- the central purpose for a contract is exchange
A. Sources of Contract Law and Authority
1. Primary
- Judicial opinions
- Statutory law (e.g., UCC)
- Convention on the International Sale of Goods
2. Secondary:
- The restatements
- Legal commentary
II. The Basis of Contractual Obligation: Mutual Assent and Consideration
A. Mutual Assent
BASIC MODEL OF MUTUAL ASSENT: OFFER followed by ACCEPTANCE
- Offeror (the person offering) is the “master of the offer”
- can specify all of the terms and how the contract can be accepted
- Offeree (the person the offer is proposed to) has the “power of
acceptance” as long as the offer is not revoked or expired
- can accept or reject the offer
- if an offeree manifests her acceptance, the contract comes into
being
- Counter-offer: implicit rejection and a new offer
Applicable Restatements
§3: “An agreement is a manifestation of mutual assent on the part of two
or more persons. A bargain is an agreement to exchange promises or to
exchange a promise for a performance or to exchange performances.”
§17(1): “[With limited exception], the formation of a contract requires a
bargain in which there is a manifestation of mutual assent to the
exchange and a consideration.”
§18: “Manifestation of mutual assent to an exchange requires that each
party make a promise or begin to render performance.”
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§19: Conduct can manifest assent (wholly or partly, conduct must be
voluntary, must know or have reason to know that the other party may
infer from his conduct that he assents)
§21: “Neither real nor apparent intention that a promise be legally binding
is essential to the formation of a contract, but a manifestation of
intention that a promise shall not affect legal relations may prevent
the formation of a contract.”
§24: An offer is the manifestation of willingness to enter into a bargain, so
made as to justify another person in understanding that his assent to
that bargain is invited and will conclude it.”
§26: A manifestation of willingness to enter into a bargain is not an offer
the person to whom it is address knows or has reason to know that the
person making it does not intend to conclude a bargain until he has made a
further manifestation of assent.
if
§27: Manifestations of assent that are in themselves sufficient to conclude
a contract will not be prevented from so operating by the fact that the
parties also manifest an intention to prepare and adopt a written
memorial thereof; but the circumstances may show that the agreements are
preliminary negotiations.
perspective
1. Intent to Be Bound: Objective Theory of Contract
Objective Theory: looks at the conduct of the parties from the
of a reasonable person rather than their actual, subjective intentions
(hypothetical reasonable person).
- The objective theory of contracts does not look to the subjective
intentions of each party, but instead it urges the court to look to the actions
of each party as they would be interpreted as a reasonable onlooker.
- Courts don’t look for the “meeting of the minds” (subjective
understanding and intent) anymore
- Pollman: “Whether a reasonable person in the position of the party
who seeks to enforce the K would conclude that a K has been
formed.”
- Party must know or have reason to know that the other party would
interpret his conduct as assent.
prevent
- A manifestation of intention that a promise not to be binding may
the formation of a contract
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- Promisor sometimes didn’t intend for their promise to be taken seriously
i.e. a joke (Reasonable person approach: would a reasonable person take
the other party’s conduct as a promise?)
- Conduct can manifest intent (Rest. 19)
- Conduct has to be voluntary (someone raises your hand, not
voluntary)
2. Offer and Acceptance in Bilateral Contracts
Bilateral Contracts: both parties make mutual promises to each other
- Assent will conclude a bargain
- If proven there was no subjective intent to be bound on BOTH parties =
no contract
- Mailbox Rule (dispatch rule)
- When is a particular communication effective?
Offers, Revocations, Rejections: Receipt
Acceptances: Dispatch
- The communication must be properly addressed
and stamped (if applicable); and
- Acceptance by the type of communication used
must be a permissible mode of acceptance.
Exception: Option Contracts
- Acceptance of underlying offer that is the subject
of an option contract is effective on receipt.
- What happens when a party changes his or her mind? (e.g., mails
an acceptance, but then telephones to reject; or vice versa)
Rejection followed by acceptance:
- Rejection effective if it gets there first;
acceptance effective if it gets there first.
Acceptance followed by rejection:
- Acceptance effective unless:
(a) rejection gets there first; and
(b) offeror detrimentally relies on the rejection
THE OFFEROR IS THE MASTER OF AN OFFER
- They can say, “Your acceptance is effective upon
my receipt.”
OFFER
- Direct, complete proposal that a contract be entered into
- Requires no further consent from the offeror for the offeree to act
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- General Rule: Ads are not an offer, but an invitation to sell
- Exception: offers made to the general public intending the offeror
to be bound without further communication
- Price quotation: Invitation to make an offer
REVOCATION OF OFFERS
General Rule: Offers are generally revocable even if there is a deadline for acceptance...
UNLESS
1. Option Contract
- Common Law Tradition
- Rest. §25, Rest §87(1)(a)
2. Part-Performance of Clear Unilateral Offer
- Rest. §45
3. Merchant Firm Offers
- UCC §2-205
4. Pre-Acceptance Reliance
- Rest. § 87(2)
- Revocation an offer REQUIRES that the offeree knows of the
rejection
- revocation can be direct or indirect (as long as the offeree knows)
- i.e. B knows another contract was made with another party before B had
accepted
3. Offer and Acceptance in Unilateral Contracts
Unilateral Contract: only one party makes a promise, in
the form of an offer, which calls for the other to render some sort of
performance as acceptance.
Unilateral Contract: Offeror offers to exchange his promise for his future
performance (usually to pay money) upon completion of performance by
offeree (no promise necessary, one promisor (the offeror))
- “I don’t want a promise to perform, I want the performance.”
- i.e. Lost dog reward poster
4.5 Indifferent or Ambiguous Offer
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Rest. §32: “in case of doubt an offer is interpreted as inviting the offeree
to accept either by promising to perform what the offer requests or by
rendering the performance, as the offeree chooses.”
Rest. §62: “1. Where an offer invites an offeree to choose between
acceptance by promise and acceptance by performance, the tender or
beginning of the invited performance...is an acceptance by performance. 2.
Such an acceptance operates as a promise to render complete
performance.”
- By walking across the bridge, A is bound and B is bound
Where There’s An Offer for an Act Only (Clear Unilateral Contract)
Rest. §45: “Where an offer invites offeree to accept by rendering
performance and does not invite a promissory acceptance, an option
contract is created when the offeree tenders or begins the invited
performance or tenders a beginning of it”
- Cmts. d-f
- (d) What is the legal effect of beginning to perform?
- In most cases, beginning to perform carries with it
an express or implied promise to complete
performance.
- (e) Who is bound and when?
- Offeror is bound to pay if offeree performs
- Offereee is not bound to perform
- (f) Preparations to perform vs. beginning to perform
- What is begun must be part of the actual
performance invited in order to preclude
revocation
- Preparations to perform
- Preparations to perform may constitute
justifiable reliance to make the offeror’s promise
binding under 87(2)
4. POSTPONED BARGAINING: THE “AGREEMENT TO AGREE”
AND THE DOCTRINE OF INDEFINITENESS
General Rule: No contract comes into being if a material aspect of the agreement is
left indefinite by the parties and the uncertainty can’t be resolved by the process of
interpretation and construction.
Whether there is an unenforceable agreement to agree OR mutual assent
Formation Issue: Whether the parties exhibited sufficient mutual assent to establish a
contract. The more essential terms the parties leave out of a deal, the greater likelihood
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that they have never had a contract in the first place. See Rest. §33 (regarding reasonable
certainty of terms needed to show a manifestation of intent to be bound).
Indefiniteness Issue: Whether one or more essential terms is so indefinite that the court
cannot (or will not) enforce the contract.
Indefiniteness Case Types
Unarticulated Term: Where the parties to a contract have not agreed to a
term (e.g., a term like price or delivery date is left out of the agreement)
Vague Term: Where the parties have agreed to a term, but the term itself
is so ambiguous that its meaning cannot be ascertained.
a
Unresolved Term: Where the parties have “agreed to agree” to negotiate
term sometime later, but then never reach agreement on that point.
- Walker v. Keith
- “business conditions” to determine rent
- not a definitive, objective method to determine price
- “agreement to agree”
Rest. §33
(1) Even though a a manifestation of intention is intended to be
understood as an offer, it cannot be accepted so as to form a contract
unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis
for determining the existence of a breach and for giving an appropriate
remedy.
(3) The fact that one or more terms of a proposed bargain are left open or
uncertain may show that a manifestation of intention is not intended to be
understood as an offer or as an acceptance.
Rest. §204
When the parties to a bargain sufficiently defined to be a contract have
not agreed with respect to a term which is essential to a determination of
their supplied rights and duties, a term which is reasonable in the
circumstances is supplied by the court.
Common Law Indefiniteness Rule (Majority) (Rest. §33) (No Contract)
Where there is an agreement to agree and then a failure to reach an agreement on
that term, there is not an enforceable contract.
- Parties have to manifest sufficiently definite agreement about essential
terms (e.g., subject matter, quantity, price, time and place of performance,
payment terms).
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Modern Trend (Supply Reasonable Terms)
- The Restatement endorses a relaxed indefiniteness rule (add §204 w/ §33)
- Unlike the UCC, the Rest. doesn’t provide express gap fillers for price, etc., but
it has §204 which broadly provides for a court to supply “a term which is
reasonable in the circumstances” when the parties to a bargain sufficiently defined
to be a contract have not agreed with respect to an essential term.
UCC Approach to Terms Not Agreed Upon
UCC §2-204 (3)
Even though one or more terms are left open a contract for sale
does not fail for indefiniteness if the parties have intended to
make a contract and there is a reasonably certain basis for giving
an appropriate remedy.
- Gap Fillers apply where the parties to an otherwise enforceable contract
have not agreed about a term:
- Price of goods (§2-305)
- Mode of delivery (§2-307)
- Place of delivery (§2-308)
- Time of delivery (§2-309)
- Time and place for payment (§2-310)
- Gap fillers are effective when parties make agreements to agree
- No gap fillers about subject matter of the contract or quantity
- UCC §2-305 “open price term” will not prevent enforcement of a
contract if the parties intended to be bound.
- If the parties later fail to agree on price, the court may
enforce a “reasonable price”
- If one party has the power to fix the price, she must do so
in “good faith.”
- If the parties intend not to be bound unless the price be
fixed or agreed and it’s not, then there is no contract
and the court won’t fix a “reasonable” price.
- Cures for indefiniteness in the UCC and Restatements
- Part performance
- Usage of trade
- Course of dealing
- Course of performance
(See UCC §1-303; Rest. §§34(2), 219-223; Indefiniteness Notes)
Quake v. American Airlines
Letters of Intent Possibilities
Contract: LOI is binding, even though a writing is contemplated
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No Contract: LOI is not binding, contemplates a written agreement being
executed
Agreement to Negotiate in Good Faith: In an effort to reach a contract.
LOI is only binding as to bargain in good faith toward the more complete
agreement.
- Can draft letters of intent with statements that say “parties do not intend
to be bound...only intend to be bound when a formal written contract is
executed.”
Agreement to Agree
Parties have reached agreement on a number of matters but have left for
future agreement 1 or more terms.
- Not regarded as definite enough to create an enforceable contract
VS
Formal Contract Contemplated
Parties have reached agreement in principle on at least the major
provisions, but they contemplate the execution of a formal written
contract.
- Oral agreement, contract will be “drawn up”
- Intended effect of their statements (intend to be bound or
negotiations)
- Normally, the parties know that negotiations are not binding (but
sometimes the parties will make definite statements of intent to be
bound)
- Important Point (Factual Question): Were the parties intending to be
bound when they agreed in principle or only after further negotiations
proved
successful?
E&E Chapter 10
Rains Chapter 6 (Indefiniteness)
B. Consideration
Rest. §17: Manifestation of mutual assent + consideration
Rest. §71
(1) To constitute consideration, a performance or a return promise must
be bargained for.
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(2) A performance or return promise is bargained for if it is sought by the
promisor in exchange for his promise and is given by the promisee
in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to
some other person. It may be given by the promisee or by some other
person.
- Consideration is only an issue when there is an outstanding promise to be
enforced
- Promises to make gifts (generally unenforceable)
- Mutual assent supported by consideration (enforceable)
- Other doctrines such as promissory estoppel (enforceable)
1. Defining Consideration
Consideration is a bargained for exchange
KNOW BOTH OF THESE THEORIES
- Only explain these theories if there is a consideration issue
“A contract was formed with the parties’ manifestations of mutual assent to
be bound with an offer and acceptance, and consideration as there was a
bargained for legal detriment or benefit. This is exhibited by x, y, z fact, and
the legal promises induced one another.”
Benefit/Detriment Theory: the court looks for either benefit to the promisor or
detriment to the promisee (Hamar v. Sidway)
Legal Detriment: doing or promising to do something (or not to do
something) that the promisee was under no prior legal duty to do (or not to
do)
OR
Legal Benefit: obtaining or being promised that which the promisor had
no prior legal right to obtain.
Bargain Theory (Used by the Restatements (71))
- Induced the actions of the other (promise induced the detriment,
detriment induced the promise)
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- Doesn’t require actual bargaining (just quid pro quo)
- Pennsy Supply Co. (bid induced
Conditional Gift vs. Consideration*
Consideration: Did the condition benefit the promisor?
- suggests the occurrence was requested as consideration
Conditional Gift: Gift that has an incidental condition (the means or
vehicle used to get the gift)
- the tramp and the overcoat
- “put your hand out and I’ll give you ten dollars”
- Plowman v. Indian Refining Co.
Promise to Make A Gift
Generally not enforceable
2. Applying the Consideration Doctrine
It is often said that the courts are not concerned with the adequacy of
consideration, but...
Rest. §71 cmt. b: “a mere pretense of bargain does not suffice, as where
there is a false recital of consideration or where the purported
consideration is merely nominal...”
Rest. §72, cmt. c: “But formality is not essential to consideration; nor
does formality supply consideration where the element of exchange is
absent.”
Rest. §79, cmt. d: “Disparity in value, with or without other
circumstances, sometimes indicates that the purported consideration was
not in fact bargained for but was a mere formality or pretense. Such a
sham or ‘nominal’ consideration does not satisfy the requirement of
§71...”
But see Batsakis v. Demotsis where courts were not concerned with equality of
consideration
Consideration can be considered lacking if the value difference is so gross it is
clear that the “consideration” offered in exchange was merely nominal or sham.
“Recital” in a contract is not sufficient to establish consideration where it is plain
that none has been given (Dougherty v. Salt)
Sham or Nominal Consideration
- Pledges $100,000 to charity, receives a mug in return
- It’s clear that this is merely a “pretense”
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Past Consideration
If a person makes a promise to compensate another for some prior
performance, that prior detriment generally cannot be consideration for the
promise.
UNLESS (Promissory Restitution)
Rest. §86
(1) A promise made in recognition of a benefit previously received
by the promisor from the promisee is binding to the extent
necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for
other reasons the promisor has not been unjustly enriched;
OR
(b) to the extent that its value is disproportionate to the
benefit.
Pre-Existing Duty
The performance of, or promise to perform, a pre-existing duty is not
consideration. (protects parties taking advantage of another’s position)
- Taxi demanding 150 for an 80 fare halfway through a shady part
of town. (even if rider agrees, only owes 80 at the end of the ride)
Contract Modification
- Generally requires consideration (see Pre-existing duty rule)
- Pre-existing duty rule only applies if the original agreement was all
encompassing of the performer’s obligations (i.e. painting an extra room).
- Modifications allowed at common law in the event of supervening
difficulty
- UCC allows for contract modification without consideration, so long as
it’s in good faith.
Illusory Promises
- If the promise of one party has qualifications or limitations so strong that
they negate it, it is really no commitment at all. It is “illusory.”
- Because it does not bind that party, this lack of consideration voids the
apparent contract, so neither party is bound.
OPTION CONTRACT
An option contract restricts the offeror’s power to revoke an offer for the
agreed-upon period of time.
An option contract contemplates two contracts (option contract, underlying
contract) and consideration must be given for each.
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An option contract requires an explicit statement that the offeror is holding
the offer open until a certain time plus consideration.
Formation of an option contract requires:
1. Offeror’s promise to hold the offer open for a period of time; and
2. Consideration from optionee to form the option contract itself.
Different Rules for Option Contracts
Exception to various consideration rules
- Rest §87(1)(a)
Exception to the Mailbox Rule
- Rest. §63(b)
Exception to the rule that a rejection, counteroffer, death or incapacity of
the offeror terminates the power of acceptance (Rest. §37). This is because
an option contract is a “contract” itself and not an offer.
Rest. §87(1): An offer is binding as an option contract if it...
(a) is in writing and signed by the offeror, recites a purported
consideration for the making of the offer, and proposes an
exchange on fair terms within a reasonable time; or
Rest. §87(1)
1. Purported consideration
- “price” or quid pro quo for holding the option open
2. Writing signed by the offeror
3. Proposes an exchange on fair terms within a reasonable time
Rest §25: An option contract is a promise which meets the requirements for the
formation of a contract and limits the promisor’s power to revoke an offer.
Rest. §63(a): an acceptance under an option contract is not operative until
received by the offeror.
Rest. §37: Power of acceptance under an option contract will not be terminated
by rejection or counter-offer, by revocation, or by death or incapacity of the
offeror.
The rule requiring separate consideration for an option, only applies to forming a
new option contract. There doesn’t need to be separate consideration if
there is
an option granted within an existing contract (renewal terms of a lease,
option).
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If the optionee doesn’t choose to enter into the contract (the acceptance is not
received by the set time of expiration), the option lapses, and the offeror gets to
keep the consideration.
If the optionee gets the “consideration” back if he choses not to accept the offer,
this may not be considered valid consideration and thus there may be no option
contract.
SEE OPTION CONTRACT HANDOUT
C. Contract Formation Under Article 2 of the UCC
Article 2 apples to ALL “sales of goods” (not leases or gifts)
- SOME merchant provisions (i.e. merchant’s rule in SoF)
UCC is built on the backdrop of common law
- common law (i.e. Rest.) still applies except where the UCC
changes/modifies/replaces some aspect of the common law
CONTRACT FORMATION UNDER THE UCC
§2-204: Formation in general
§2-205: “Firm Offers”
§2-206: Offer and Acceptance in Formation of Contract
§2-207: Additional Terms in Acceptance or Confirmation (“Battle of the Forms”)
Statute of Frauds
Key Terms Defined in the UCC
UCC §2-106(1): “a sale consists in the passing of title from the seller to the
buyer for a price.”
- Ownership of the goods must pass from the seller to the buyer;
and
- The buyer must pay for them (with money or otherwise)
SALE = PASSING OF TITLE
UCC §2-105(1): “all things...which are movable at the time of identification to
the contract,” including manufactured goods, livestock, and growing crops.
- Does not include money in which the price is to be paid, real
property, services, and various intangible rights.
- Stock/insurance policies: not sale of goods
GOODS = ALL THINGS MOVABLE
- “Contract for sale” includes both a present sale of goods and a contract to sell
goods at a future time.
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- No clear consensus whether IP rights are “goods” and whether a sale is taking
place
- Sale of a meal in a restaurant?
- Hybrid transaction: involves the sale of food and the provision of
services associated with it (i.e. cooking, serving, etc.)
Predominant Purpose Test
- Determines if a hybrid transaction (goods and services) applies Art. 2
- Is the sale of goods the more significant aspect of the transaction?
(Art. 2 applies)
- Or is the sale of goods ancillary and the other component
predominant? (Art. 2 doesn’t apply; common law applies)
Jannusch v. Naffziger
1. Mutual Assent Under the UCC
UCC §2-204 Formation in General
(1) A contract for the sale of goods may be made in any manner
sufficient to show agreement, including conduct by both parties
which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may be
found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale
does not fail for indefiniteness if the parties have intended to make
a contract and there is a reasonably certain basis for giving an
appropriate remedy.
Reflects a more liberal stance on contract formation. Courts focus on
determining whether there was an agreement between the parties (don’t
worry about technicalities, try to enforce the contract if it exists)
2. Irrevocability by Statute: The “Firm Offer”
UCC §2-205 Firm Offers
This section supplements rather than displaces the common law
rules on option contracts.
Requires:
- Offer to buy or sell goods by a “MERCHANT” (with
respect to the transaction at issue; only the offeror has to be
a merchant)
- In a signed writing (signature can be typed)
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- That gives an assurance to the offeree that it will be held
open
- If the assurance is contained on a form supplied by the
offeree, the offeror must sign the assurance separately
Time Period: UCC §2-205 limits the period of irrevocability to a
maximum of 3 months, so that neither a stated time nor a
reasonable time can exceed that period unless it is renewed by the
offeror or the offerree gives consideration.
Consideration is NOT needed to make the offer irrevocable for the
time stated, or for a reasonable time if no expiry date is specified.
Definition of “Merchant”
UCC §2-104(1): a merchant is a person who deals in goods of the
kind involved in the transaction nor who otherwise by occupation
holds himself out as having knowledge or skill in regard to the
practices or goods involved in the transaction.
2-205 Applies When
1. Sale
2. Goods
3. Merchant
4. Signed writing giving assurance the offer will be held
open
- If form supplied by the offeree - must be separately
signed
5. No consideration needed to make irrevocable for time
stated
- Cannot exceed 3 months (either stated time, or
reasonable time if not stated)
OFFER AND ACCEPTANCE IN FORMATION OF CONTRACT
UCC §2-206 Offer and Acceptance
(1) Unless otherwise unambiguously indicated by the language or
circumstances:
(a) an offer to make a contract shall by construed as inviting
acceptance in any manner and by any medium reasonable to the
circumstances;
(b) an order or other offer to buy goods for prompt or current
shipment shall be construed as inviting acceptance either by
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a prompt promise to ship or by the prompt or current shipment of
[goods]...
(2) Where the beginning of a requested performance is a reasonable mode
of acceptance an offeror who is not notified of acceptance within a
reasonable time may treat the offer as having lapsed before acceptance.
3. Qualified Acceptance: The “Battle of Forms”
Common Law Principles (Exemplified in Princess Cruises v. GE)
Mirror Image Rule: gives a varying acceptance the effect of only a
counteroffer, preventing the contract from being made on the terms of the
original offer.
Last Shot Rule: a party impliedly assents to and thereby accepts a
counteroffer by conduct indicating lack of objection to it. (The
counteroffer is the “last shot” and its terms prevail.)
UCC §2-207 BATTLE OF THE FORMS
Big Picture Mechanics of UCC §2-207
(1) Is the purported acceptance an effective acceptance or is it a
counteroffer?
- If it’s an effective acceptance, then there’s a contract by exchange
of writings and analyze under (2) to figure out the terms.
- If it’s not an effective acceptance, then no contract based on
writings. If they have a contract by conduct, analyze under (3) to
figure out the terms.
(2) The treatment of proposals in an acceptance.
(3) The effect of mutual performances when no contract is formed by the
parties’ writings.
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(Brown Machine v. Hercules)
UCC §2-207 Additional Terms in Acceptance or Confermation
(1) A definite and seasonable expression of acceptance or a written confirmation
which is sent within a reasonable time operates as an acceptance even though it
states terms additional to or different from those offered or agreed upon, unless
acceptance is expressly made conditional on assent to the additional or different
terms.
(2) The additional terms are to be construed as proposals for addition to the
contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given
within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale althouIeqrtwgh the writings of the parties
do not otherwise establish a contract. In such case the terms of the
particular contract consist of those terms on which the writings of the parties
agree, together with any supplementary terms incorporated under any other
provisions of this Act.
When Is “Acceptance” “Expressly Conditional” and Therefore a Counteroffer
- It take something more than just having terms that differ from the offer
- Language of the “acceptance” must be very clear that assent is expressly
conditional on the offeror’s agreement to the offeree’s terms.
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- Is “subject to the following terms and conditions” enough to make a
counteroffer?
- Generally no
UCC §2-207(2)(b): “Materially Alter”
- A proposed alteration in an acceptance is material and does not enter the
contract
if it would result in “surprise or hardship” to the other party (Comment
4)
- “Surprise” is determined with reference to reasonable
expectations in light of common practice and usage
- Would a reasonable merchant have consented to
the term?
- If a term is widely used, its inclusion should be no
surprise.
- “Hardship” refers to an unbargained-for burden on the reasonable
expectations of the other party; hardship is a consequence of material
alteration.
The Gist: A proposed term does not enter the contract if it has more than a
minimal impact on the exchange, and it is not sufficiently common to be
expected.
UCC §2-207 Comment 4
“Examples of typical clauses which would normally ‘materially alter’ the
contract and so result in surprise or hardship if incorporated without
express
awareness by the other party”:
- A clause negating standard warranties such as merchantability or
fitness for a particular fitness for a particular purpose;
- A clause requiring a guaranty of 90% or 100% deliveries in a case
where the usage of trade allows greater quantity leeways:
- A clause reserving to the seller the power to cancel upon the buyer’s
failure to meet any invoice when due;
- A clause requiring that complaints be made in a time materially shorter
than customary or reasonable.
UCC §2-207 Comment 5
“Examples of typical clauses which involve no element of unreasonable
surprise and which therefore are to be incorporated in the contract unless
notice of objection is seasonably given”:
- A clause setting forth and perhaps slightly enlarging upon the seller’s
exemption due to supervening causes beyond his control;
- A clause fixing a reasonable time for complaints within customary
limits;
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seller’s
practice
- A clause providing for interest on overdue invoices or fixing the
credit card terms where they are within the range of trade
and do not limit any credit bargained for;
- A clause limiting the right of rejection for defects which fall within the
customary trade tolerance for acceptance ‘with adjustment’ or otherwise
limiting remedy in a reasonable manner.
Additional vs. Different Terms
Comment 3 Approach: Treat (2) as applying to additional AND different
terms the same
Rest. §59
A reply to an offer which purports to accept it but is conditional on the
offeror’s assent to terms additional to or different from those offered is not
an acceptance but is a counter-offer.
Rest. §61
An acceptance which requests a change or addition to the terms of the
offer is not thereby invalidated unless the acceptance is made to depend on
an assent to the changed or added terms.
- Rest. §59, 61 demonstrate the Common Law being influenced by the Ucc,
easing up a bit on the harshness of traditional common law rules - minor
differences between the offer and response may not disqualify the response as an
acceptance.
D. Electronic and “Layered” Contracting
Law has adapted old contract rules to new, technological circumstances
a
“Rolling” or “Layered” Contracts
- Method for forming standard form contracts
- Tend to involve payment for and delivery of goods before the buyer has
chance to view or assent to the standardized terms
- e.g. a “shrinkwrap” contract, certain tickets, insurance policies
(pay one day and receive a copy of the policy with all of the terms
and exclusions later)
- Referred to as “rolling” because the formation process rolls along
through purchase and delivery process
Shrinkwrap terms
- Order takes place on internet/store/phone
- They don’t have all the terms until they open the shrinkwrap
- Sometimes: “Box-Top-Warning” sticker indicating T and C are included
in the box
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- If the purchaser is dissatisfied with the terms, the purchaser can often
return the product to the seller within a certain number of days (if not,
usually considered assent)
- “Money now, terms later contract”
- Carnival Cruise Lines v. Shute
Clickwrap Terms
- Before you complete your purchase, have to click “I agree”
- Often, if you don’t hit the button, the sale won’t go through
- Business doesn’t want as many barriers as lawyers do (often want a
simpler interface than having a lot of text)
Browsewrap Terms
- By using the site, user agrees the terms of use
- Usually accessible by clicking a button
- Usually isn’t required or encouraged to review the terms
- Assent is found in browsing the site (no action necessary to be bound)
- Issues of conspicuousness and notice often arise
Majority View
- Contract formation occurs when the consumer accepts the full terms after
a reasonable opportunity to refuse them (ProCD/HIll cases)
Minority View
- Contract formed at the time the customer makes the offer
- UCC 2-207 applies, construing the terms and conditions as a proposal for
additional terms.
- Views the buyer as the offeror and the vendor as the offeree, with the
contract formed at the time the order is placed and seller accepts payment
and either ships or promises to ship
III. Liability in the Absence of Bargained-for Exchange: Promissory Estoppel and
Restitution
Promise Defined - Rest. § 2(1)
A promise is a manifestation of intention to act or refrain from acting
in a specified way, so made as to justify a promisee in understanding that
a commitment has been made.
A. Protection of Promisee Reliance: The Doctrine of Promissory Estoppel
Substitute for consideration or
OR
independent theory of recovery (akin to tort law or general equitable
principles)
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1. Promises Within the Family
PROMISSORY ESTOPPEL
A way to hold a promisor accountable for a promise that was not supported by
consideration, but where there is justifiable, detrimental reliance on the part of the
promisee.
- Provides relief for justifiable reliance on a promise given without
consideration.
- Typically, one first considers if a contract has been formed and then, only if
there’s a chance that question is answered in the negative, one turns to promissory
estoppel.
- That is, promissory estoppel is often plead as an alternative argument to
breach of contract - to enforce a promise that otherwise would not be
enforceable.
Kirksey v. Kirksey
CONNECTION TO SoF
- Where a promise is deemed unenforceable because of a technicality
under the Statute of Frauds, a party may still have a claim based on
promissory estoppel.
Rest. §90
(1) A promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promisee or a third person and
which does induce such action or forbearance is binding if injustice can be
avoided only by enforcement of the promise.
1. A PROMISE (manifestation of intent to act/refrain from
acting made so that the promisee understands that a
commitment has been made)
2. which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person
(REASONABLE AND FORSEEABLE RELIANCE)
3. and which does induce such action or forbearance
(DETRIMENTAL RELIANCE ON THE PROMISE)
- CHANGING ONE’S POSITION
- real economic loss, forgoing an opportunity, etc.
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4. is binding if INJUSTICE can be avoided only by enforcement
of the promise.
- The remedy granted for breach may be limited as justice
requires (Court has a lot of discretion in enforcing the
promise)
- Expectation damages (damages if there had been a
contract and the promise had been fulfilled)
- Reliance measure (actual damages incurred in
reliance on the promise)
DETRIMENTAL RELIANCE HAS TO BE BASED ON THE PROMISE
(i.e. a man decides to retire and announces 4 months early, the company
offers him a pension a week before he retires, the promise did not induce
the reliance)
2. Charitable Subscriptions
Charitable Subscription & Marriage Settlements
“A charitable subscription of a marriage settlement is binding under
Subsection (1) without proof that the promise induced action or
forbearance.”
- Rest. §90(2) is not widely adopted by courts.
- Attempts to make it easier for charities to recover for promises to make
charitable gifts
- Promising to name a University Library after a donor
- Could be considered as either reliance or consideration
3. Promises in a Commercial Context
Katz v. Danny Dare
4. Limiting the Offeror’s Power to Revoke: The Effect of Pre-Acceptance
Reliance
Pre-Acceptance Reliance: Promissory Estoppel in the context of
mutual assent
- GC relying on a SC’s bid
- GC’s looking at bids (choose the lowest bid) and make
their own bigger bid
- Can the SC revoke their bid to the GC before the GC
knows if they have been awarded the contract and has not
yet accepted the SC’s bid.
- Drennan v. Star Paving
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- Acceptance by using bid? NO
- Option Contract no evidence of
consideration
- Detrimental Reliance = option contract
(opportunity to accept the SC’s bid)
- No justifiable reliance if GC knew SC’s bid was a
mistake
- Commercial Cases (rarely)
Pre-Acceptance Reliance is rarely applied in commercial circumstances
because it is generally understood that statements made during
negotiations are not binding.
PRE-ACCEPTANCE RELIANCE
Restatement §87(2)
An offer which the offeror should reasonably expect to induce
action or forbearance of a substantial character on the part of the
offeree before acceptance and which does induce such
action or forbearance is binding as an option contract to the
extent necessary to avoid injustice.
- Basically promissory estoppel in the context of mutual assent
- RELIANCE ON AN OFFER BEFORE IT HAS BEEN
ACCEPTED
- Issue is not a lack of consideration
Possible Limitations
- Bid “expressly stated or clearly implied that it was revocable at
any time before acceptance”
- Inequitable conduct by the offeree (GC) (“bid shopping/bid
chopping”)
- If the offeror (SC) made a bona fide mistake, known or should
have been known by the offeree (GC)
B. Liability for Benefits Received: The Principle of Restitution
1. Restitution in the Absence of a Promise (Unjust Enrichment)
- Rest. of Restitution §1
“A person who is unjustly enriched at the expense of
another is subject to liability in restitution”
- Restitution is aimed at restoring money, property, or the value of
property or services when it would be unjust to permit the
recipient to retain what was received without paying for it.
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- There has been no promise and no reliance, we look to the
recipient’s gain
- Unjust enrichment is the COA, Restitution is the remedy
ELEMENTS OF UNJUST ENRICHMENT
1. Plaintiff must have conferred a BENEFIT on the defendant
2. The defendant must KNOW OF AND RETAIN the benefit
3. The circumstances are such that it would be UNFAIR for the defendant
to retain the benefit without paying for it.
- P must have INTENDED TO BE COMPENSATED
- not a Good Samaritan or volunteer
- Must not have been an OFFICIOUS INTERMEDDLER
Credit v. Pelo
Commerce Partnership v. Equity Contracting
Implied in Fact vs. Implied in Law (quasi-contract)
Implied in fact: A contract, term, or promise is implied in fact if it
is not expressly stated, but it can be reasonably deduced as a matter
of factual conclusion from conduct, viewed in context.
Contract Implied in Law (QK): not a contract at all, but a legal
fiction used as a basis for giving relief for unjust enrichment.
These are old terms used to describe an action for unjust
enrichment (for which the court may grant the remedy of
restitution).
- Constructive contract, contract implied in law,
quasi-contract, restitution and unjust enrichment all mean
the same thing.
Rest. of Restitution §116
A person who has supplied things or services to another, although
acting without the other’s knowledge or consent, is entitled to
restitution therefor from the other if:
(a) he acted unofficiously and with intent to charge
therefor, and
(b) the things or services were necessary to prevent the
other form suffering serious bodily harm or pain, and
(c) the person supplying them had no reason to know that
the other would not consent to receiving them, if mentally
competent; and
(d) it was impossible for the other to give consent or,
because of extreme youth or mental impairment, the other’s
consent would have been immaterial.
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“Intent to Be Compensated”
People who are professionals in the field of the service which is
being performed don’t do such as good Samaritans, they normally
get paid (i.e. a doctor, boat salvager), we presume they
have the intent to charge (Rest. of Restitution 20)
Officiousness
Interference in the affairs of others not justified by the
circumstances under which the interference takes place
- Violinist hypo (a benefit conferred “officiously)
Unfair to Retain Benefit
Good Samaritan Rule
- Not unfair for the defendant to retain/accept the benefit when the
benefit was conferred by a volunteer/good samaritan.
- Was the plaintiff acting with an intent to be compensated or was
he doing it as a Good Samaritan?
Officious Intermeddler
- “The world if full of nosy people and shady operators.”
- Someone randomly rakes your yard (no liability to pay)
- When the benefit was not asked for, it is probably officious
unless there was a good reason for conferring it.
2 Requirements for it to be Unfair for the Defendant to Retain the Benefit
Without Payment
1. SC first has to try to get it from the GC
2. Show the owner received the benefit without paying anyone (“Owner
can be liable only where it received a windfall benefit, something for
nothing.”)
2. Promissory Restitution (aka “Moral Obligation”)
General Rule: “Past” consideration and moral obligation are insufficient
to make a promise enforceable. By definition, where a promise was made
in response to some act or forbearance previously undertaken, the promise
could not have been made as part of bargained-for exchange.
- Mills v. Wyman (caring for a sick son, father promises to
pay)
- Plowman v. Indian Refining Co. (pension promised in
light of many years of service; did not induce the action)
Exceptions: debt barred by the statute of limitations, debts incurred by
infants, and debts of bankrupts. (debts that have become inoperative by
positive law). There was “originally a quid pro quo.”
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Rest. §82: A promise to pay a debt barred by the statute of limitations.
Rest. §83: An express promise to pay debts previously discharged in
bankruptcy.
Rest. §85: Obligations of minors that are affirmed either expressly or by
failure to disaffirm within a reasonable time after reaching the age of
majority.
Rest. §82 NOTE
A later promise to pay back a debt can only be enforced at the new
amount promised (i.e. statute of limitations bars recovery of a
$10,000 debt, the debtor tells the creditor that he will pay her back
$7,500, the debtor is only responsible for the $7,500.
Rest. §86 Promise For Benefit Received
(1) A promise made in recognition of a benefit previously received
by the promisor from the promisee is binding to the extent
necessary to prevent injustice.
(2) A promise is NOT binding...
(a) if the promisee conferred the benefit as a gift or for
other reasons the promisor has not been unjustly enriched;
or
(b) to the extent that its value is disproportionate to the
benefit.
There is a presumption that the services were not a gift.
However, if the promisor, who has the burden of proof, can show
that a gift was intended, then the promise is unenforceable for lack
of consideration. (a humanitarian act is NOT A GIFT)
Material Benefit Rule
If a person receives a material benefit from another, other
than gratuitously, a subsequent promise to compensate the
person for rendering such benefit is enforceable.
- Not all courts have adopted the material benefit
rule and Rest. §86.
BENEFIT HAS TO BE RECEIVED BY THE PROMISOR
Webb v. McGowin
- Worker saves boss from falling object
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Remember the Pre-Existing Duty Rule
Relationship Between Promissory Estoppel and Promissory
Restitution
- The promisee may be able to argue promissory estoppel if he
“changed his position” based on the promise.
- Can argue that the promise FOLLOWED the act (the person did
not detrimentally rely in the original scenario (i.e. catching the
brick and falling out the window)).
IV. The Statute of Frauds
A. General Principles: Scope and Application
Genera Rule: law enforces oral contracts
Exception: Statute of Frauds requires some contracts to be
memorialized in some kind of a writing to be enforceable.
Statute of Frauds: a defense against enforcement of a contract and must be
affirmatively pled by the defendant.
Effect of SoF
When a contract falls within the statute and fails to comply with it, and
there is no applicable exception, the contract is unenforceable. That is, if a
party successfully raises noncompliance with the SoF as an affirmative
defense, the contract cannot be enforced against them.
Purpose of the Statute of Frauds
Evidentiary: to provide evidence that the parties truly entered into a
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contract, lessens the danger of perjured testimony
Precautionary: to avoid a fraudulent assertion that a contract was entered
into when it actually was not;
Cautionary: to make parties aware that they are entering into an
agreement with legal ramifications.
SOF Steps of Analysis
1. Is the contract within the statute?
2. If so, is there a writing that satisfies the statute?
3. If not, does an exception apply?
1. Is the contract a type that falls within the statute?
Rest. §110:
- Contracts for the sale of an interest in land/real estate (most states
include leases longer than a year)
- Contracts that cannot be performed within one year of making a
contract.
- Contracts to be secondarily responsible for the debt of another (a
surety or guaranty)
- Contracts of executors or administrators of estates to perform
obligation of the deceased.
- Contracts in consideration of marriage (i.e. pre-nuptial)
UCC §2-201
- Contracts for the sale of goods with a total value of $500 or more
MYLEGS
- Marriage
- Year
- Land
- Executor
- Goods
- Surety
Contracts That Cannot Be Performed Within One Year of Making the
Contract
- Any contract, irrespective of its subject matter, must comply with the
SoF if it cannot by its terms be performed within a year of its making.
- Includes any contract-however short the period of performance may
be-in which the performance will not be completed within a year of
contracting.
- E.g., a contract for a 2-day performance more than a year from
the time of the making of the contract.
- E.g., booking a vacation a year from now
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- Many courts will apply the rule narrowly - to fall within the statute it
must be impossible that the contract can be completed within one year
from the making of the contract.
- E.g., a contract with a 10-year employment term is within the
statute but not a lifetime employment contract (because it
could possibly be completed within a year if the person dies within
the year).
- Contracts of no duration or indefinite duration are not within the
statute.
- Full performance acceptance (18 months of payments, if you
happen to pay it off within a year, it’s considered outside
the statute)
- the 18 month contract itself is within the statute
- If you happen to perform it all within the year, it’s outside
the SoF
- The idea behind this rule: if it’s important to plan in such
advance, it’s important to write it down
If SoF Applies
EITHER a writing that “satisfies the statute OR an exception that applies
to the transaction to “take the contract out of the statute.
Rest. §131: Requires a writing signed by the party to be charged, that reasonably
indicates the subject matter, is sufficient to indicate a contract has been made
between the parties, and states with reasonable certainty the essential terms.
B. The Sale of Goods Statute of Frauds: UCC §2-201
UCC §2-201: Requires a writing signed by the party to be charged that is
sufficient to indicate that a contract for sale has been made between the parties.
The writing must contain a subject matter and a quantity term.
- “A writing is not insufficient because it omits or incorrectly states a term
agreed upon but the contract is not enforceable under this paragraph
beyond the quantity of goods shown in such writing.”
- Merchant’s exception
A Writing
- No formality needed (needs minimum content and signature)
- Doesn’t have to be executed with the deliberate purpose of evidencing
the contract
- Does not have to be the joint product or even delivered to the other party.
Could be an internal memo or a document written for some other purpose.
- It need not be written at the time of contracting.
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- Can be multiple writings that relate to the same transaction with at least
one signed by the party to be charged, and together have the essential
terms (Rest. §§132,133, Crabtree v. Elizabeth Arden)
A Signature
- The person disputing the existence of the contract must have signed it in
person or through an agent
- Thus some contracts will be enforceable against one party, but
not against the other
- A signature is any mark or symbol placed by the party on the writing
with the intention of authenticating it (e.g., initials, letterhead, logo)
- Electronic signature is okay (e.g., email)
- If multiple pieces of paper or records, most courts just require that they
appear to all refer to the same transaction and one is signed ;some courts
require that the signed writing actually makes some reference to the
unsigned ones.
UCC Merchant’s Confirmation Exception
UCC 2-201(2): a writing can be enforced against the party who did not
sign it if:
1. BOTH parties are “merchants”
2. Within a reasonable time of the oral contract, one of the parties
sends a written confirmation to the other,
3. Which is signed by the sender and otherwise satisfies the
statute as against the sender (§2-201(1))
4. The recipient has reason to know its contents; and
5. The recipient does not give written notice of objection to it
within 10 days of receipt.
If a merchant receives an alleged “confirmation” and does not reply within ten
days, they have not somehow implicitly accepted the contract; they have merely
lost their SoF defense. They are clearly allowed to prove that no contracted
existed in court by other means (i.e. lack of consideration, no mutual assent)
EXCEPTIONS
- These permit enforcement despite the lack of a sufficient writing
- Evidentiary--the circumstances tend to show that a contract was made
despite the lack of writing.
- Protection of a party who incurred a detriment in justifiable reliance on
the contract.
General SoF Exceptions (Common Law)
- Part performance or other reliance when transaction involves an interest
in land (Rest. §129; Beaver v. Brumlow)
- Most courts have limited to when injured party seeks specific
performance of oral agreement.
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- Party seeking enforcement must have “changed position” in
reliance on oral contract, and the reliance must be reasonable
(Rest. §129)
- Promissory Estoppel (Rest. §139, Alaska eDm. Party v. Rice)
UCC Exceptions
- Where the seller has begun to make specially manufactured goods for
the buyer (UCC 2-201(3)(a))
- Payment for goods has been made and accepted, or goods have been
delivered and accepted (UCC 2-201(3)(c)); Buffaloe v. Hart)
- Wasn’t immediately returned (rejection)
- Where the party charged admits “in his pleading, testimony or otherwise
in court” that a contract was made (UCC 2-201(3)(b))
- Judicial admission
- Merchants confirmation exception (UCC 2-201(2))
Rest. §129 Part Performance/Reliance Regarding to Contracts..Land
“A contract for the transfer of an interest in land may be specifically
enforced notwithstanding failure to comply with the SoF if it is established
that the party seeking enforcement, in reasonable reliance on the contract
and on the continuing assent of the party against whom enforcement is
sought, has so changed his position that injustice can be avoided only
by specific enforcement.”
- Acting based on the contract
- Changing position based on the contract
- Actually performing the contract
- Seeking specific enforcement
Rest. §139 Promissory Estoppel in SoF Context
(1) A promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promisee or a third person and
which does induce the action or forbearance is enforceable
notwithstanding the SoF if injustice can be avoided only by enforcement
of the promise. The remedy granted for breach is to be limited as justice
requires...
(2) In determining whether injustice can be avoided only by enforcement
of the promise, the following circumstances are significant:
(a) the availability and adequacy of other remedies, particularly
cancellation and restitution;
(b) the definite and substantial character of the action or
forbearance in relation to the remedy sought;
(c) The extent to which the action or forbearance corroborates
evidence of the making and terms of the promise, or the making
and terms are otherwise established by clear and
convincing evidence;
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(d) the reasonableness of the action or forbearance;
(e) the extent to which the action or forbearance was foreseeable
by the promisor.
- In anticipation of a contract (Alaska D. Party)
- More general
- May just have a promise, reasonably relying
Ambiguity
- It’s not clear whether the one-year rule applies to the sale of goods
(that is, whether the UCC §2-201 displace the common law SoF or
whether the SoF supplements it)
- Thus it’s not clear:
- whether a sale of good contract that has a price below $500, but
can’t be performed within a year would be subject to the common
law statute;
- and if the price is $500 or more, whether the agreement would
have to satisfy the requirements of both the UCC 2-201 and
common law.
- It’s not clear if promissory estoppel can be used to enforce a contract for
the sale of goods that fails to comply with 2-201 (majority view is that
promissory estoppel can be used with UCC)
- Money doesn’t make something subject to the UCC
- Stock doesn’t count as a good
- Real property, services generally excluded
- Would a mobile home count? Most courts have held that a mobile home is a
good.
Listen to Beginning of 9/26/2013 Class
- How to apply SoF
V. The Meaning of the Agreement: Principles of Interpretation and the Parol Evidence
Rule
A. Principles of Interpretation
- Evidence could be unreliable (each party can claim an interpretation that favor
their own desires)
- Indefiniteness doctrine
- Gap-fillers
Theories of Interpretation
Subjective Theory
- Roffles (Pearless case), two ships (each had a different idea of
which Pearless ship would deliver the cargo)
- The court ruled that there was no contract
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Objective Theory
- Nothing to do with the mental state (words and conduct)
- Reasonable person interprets the actions of the parties
- Even if neither of the parties intended to be bound by such an
interpretation (this theory could lead to unjust results)
Modified Objective Approach
- Modern contract law has departed from the extreme objective
approach
- Evidence of intention is relevant, along with other interpretation
- If the parties agreed on the terms of the agreement, that’s all that
matters, it doesn’t matter what a reasonable person would think
- If one party has reason to know or does know the meaning of
the other, they’ll be bound by the other party’s meaning
- extrinsic evidence is admissible to determine this
Rest. §200
“Interpretation of a promise or agreement or a term thereof is the
ascertainment of its meaning.”
- Construction vs. Interpretation
Some provisions relevant to interpretation:
Rest. 201: whose meaning prevails
Rest. 202: rules to aid of interpretation
Rest. 203: standards of preference in interpretation
Rest. 204: supplying an omitted essential term
Rest. 205: Duty of good faith and fair dealing
Rest 206: Interpretation against the draftsman
Rest. 211: Standardized agreements
Course of Performance
Conduct by both parties while they carried out the contract in question.
Course of Dealing
Conduct between the two parties in past contracts.
Trade Usage
Industry or region
Rest. §201: Whose Meaning Prevails
(1) Where the parties have attached the SAME MEANING to a promise
or agreement or a term thereof, it is interpreted in accordance with that
meaning.
(2) Where the parties have attached DIFFERENT MEANINGS to a
promise or agreement or a term thereof, it is interpreted in accordance
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with the meaning attached by one of them if at the time the agreement was
made:
(a) that party DID NOT KNOW of any different meaning attached
by the other, and the other KNEW the meaning attached by the
first party; or
(b) the party had NO REASON TO KNOW of any different
meaning attached by the other, and the other HAD
REASON TO KNOW the meaning by the first party.
(3) Except as stated in this Section, neither party is bound by the meaning
attached by the other, even though the result may be a failure of mutual
assent.
1. Same meaning, enforce that meaning
2. Different meanings, if one party did know or had reason to know
the other party’s meaning, the other party’s meaning will control.
3. Neither party will be bound by the meaning attached by the other if
they did not know or have reason to know of the other party’s
meaning.
Rest. §202: Rules in Aid of Interpretation
(1) Words and other conduct are interpreted in light of all the
circumstances, and if the principal purpose of the parties is ascertainable it
is given great weight.
(2) A writing is interpreted as a whole, and all writings that are part of the
same transaction are interpreted together.
(3) Unless a different intention is manifested,
(a) Where language has a generally prevailing meaning, it is
interpreted in accordance with that meaning.
(b) Technical terms and words of art are given their technical
meaning when used in a transaction within their technical field.
(4) ...any course of performance accepted or acquiesced in without
objection is given great weight in the interpretation of the agreement.
(5) Wherever reasonable, the manifestations of intention of the parties to a
promise or agreement are interpreted as consistent with each other and
with any relevant course of performance, course of dealing, or usage of
trade.
Rest. §203: Standards of Preference in Interpretation
In the interpretation of a promise or agreement or a term thereof, the
following standards of preference are generally applicable:
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(a) an interpretation which gives a reasonable, lawful, and effective
meaning to all the terms is preferred...;
(b) [weight is given in the following order: express terms, course of
performance, course of dealing, usage of trade]
(c) specific terms and exact terms are given greater weight than general
language;
(d) separately negotiated or added terms are given greater weight than
standardized terms or other terms not separately negotiated.
Joyner v. Adams; Frigaliment v. BNS; C&J v. Allied
Adhesion Contract: One party has little choice to accept as-is or to reject certain
terms because of a disparity in bargaining power (i.e. insurance contracts)
1. Uses a standardized form (used many times with many different people)
2. Absence of choice other than to accept or reject the contract (take it or
leave it; cell phone provider, insurance)
3. Disparity in bargaining power
Doctrine of Reasonable Expectations (About Half of Jurisdictions)
Terms that go against the dickered terms/main terms are deemed
unenforceable because they are beyond the realm of reasonable
expectation. (blanket assent to the REASONABLE terms)
- Terms may be unambiguous, but they will not be enforced
Maxims of Interpretation
1. Reasonable, lawful, and effective meaning
2. An ambiguous term will be construed against the drafter of the contract
3. A term that has been negotiated between the parties...
B. Parol Evidence Rule (PER)
- Deals with the admissibility of evidence (not about contract formation or
enforceability)
Parol Evidence:
- refers to evidence of a term that one party claims is the final contract, but
does not appear in the final written agreement of the parties.
Fully Integrated: PER applies, extrinsic evidence cannot supplement or
contradict the written agreement.
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Partially Integrated: PER allows the writing to be supplemented by
extrinsic evidence, but not contradicted.
Rule of Interpretation
- PER is a rule of interpretation that can exclude evidence to prove
contract terms outside a writing.
- The PER comes into play only after the trial judge makes a preliminary
finding that the parties have put some or all of the final terms of
their agreement into writing.
- The main purposes of the PER are to respect the final expression of the
parties’ agreement when they reduce it to writing (and not allow the fact
finder to hear evidence that is suspect, unreliable, or irrelevant), and to
simplify the task of the courts in interpreting contracts by limiting the
evidence considered.
WHAT DOES THE PER APPLY TO?
1. ORAL or WRITTEN statements of terms allegedly agreed to PRIOR
TO the “final written contract but not incorporated into the final written
agreement; and
2. Evidence of ORAL agreement made CONTEMPORANEOUSLY
with the “final” written contract.
THE PER DOES NOT APPLY TO...
1. CONTEMPORANEOUS WRITTEN STATEMENTS. The court
may piece together the parties’ agreement from several contemporaneous
writings.
2. SUBSEQUENT STATEMENTS OR AGREEMENTS, ORAL OR
WRITTEN, are not affected by the PER at all. That is, the PER does not
apply to statements or agreements made after the contract has been
formed. They may be, and often are, admitted as evidence that some terms
the original agreement were later waived or modified.
Note
The PER also does not apply where the party introduces evidence to show
there was NO VALID AGREEMENT or to show something other than
the existence of terms outside the writing.
Partially Integrated v. Totally Integrated
“Partially integrated” writing: A writing that the parties intended to be
the final expression of at least one of the terms it contains, but did not
intend to be a final expression of all terms of their agreement.
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“Totally integrated” writing: A writing that the parties intended as the
final, complete and exclusive statement of all the terms of their agreement.
Rest. §216 (General Rule)
- A partially integrated writing may be supplemented by parol evidence of
“consistent additional terms” but may not be contradicted.
- A totally integrated writing may be neither contradicted nor
supplemented: the entire contract is reduced to the writing, and may not be
varied by parol evidence.
Determination of Whether a Term is “Contradictory” or “Consistent”
Rest. §216: A parol term does not “contradict” a term in writing so long as
it is a “consistent additional term”
- “might naturally be omitted from the writing”
- If the parties had really agreed to such a term, it is the kind of
term which “might naturally” have been left out when they finally
reduced their agreement to writing?
- Yes - consistent additional
- No - contradictory
- UCC §2-202, comment 3 suggests a similar (but more liberal) test: Oral
terms come in unless they would “certainly” have been included in the
writing had they been agreed to
of
Classical Approach (Minority)
- “Four Corners” test to determine integration
- The judge decides the parties’ intent to integrate their
writing purely on the bass of the “four corners” of the
written document, without recourse to any extrinsic
evidence. If the writing appears totally integrated, no
parol evidence is admissible to add to or contradict its
meaning.
- Classical courts are also likely to rely on the “plain meaning” of
words (a finding of lack of ambiguity on the face of the
writing) to bar use of extrinsic evidence to aid interpretation.
- A “merger clause” is conclusive or near conclusive evidence
complete integration.
Modern/Restatement (Majority)
- Rest. §209-217; UCC §2-202; Taylor; Nanakuli
37
- Judge will hear evidence out of the presence of the jury and
determine whether the evidence suggests that there was not a
sufficient intent for the document in question to be a fully
integrated writing. Merger clause is not conclusive.
- Most contemporary courts won’t require a preliminary
finding of facial ambiguity to admit evidence to interpret the
terms of contracts.
- Admit extrinsic evidence of “consistent additional terms” unless
clearly persuaded that parties intended to make a totally integrated
writing.
- Courts typically admit course of performance, course of
dealing, and trade usage evidence to supplement or explain the
writing (but not to contradict it).
- UCC §2-202: these may always be admitted to
explain or supplement unless carefully negated;
Nanakuli
- All the exceptions available in the classical approach context are
available here too.
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- Inclusion of “merger” clause is persuasive, but not conclusive
as to whether the parties intended the agreement to be totally
integrated.
Limitation/Exceptions
Condition
Evidence that the agreement was subject to a condition that
must happen before any contractual obligation arises
(“condition precedent”). Rest. §217
Collateral Agreement Rule
If the parol evidence is sufficiently distinct from the scope
of the integrated writing, it can be seen as intended as a
separate ancillary contract). See Rest. §216(2); UCC
§2-202 comment 3
Explain
Extrinsic evidence to explain the meaning of the written
terms (but classical courts first require finding the writing
is ambiguous on its face). Rest §214(c); Taylor.
- Silence is not ambiguous
Fraud, Duress, Mistake, Material Misrepresentation
Extrinsic evidence to show fraud, duress, mistake, material
misrepresentation and other bases for invalidating or
avoiding the contract. Rest. §214(d)-(e); but see Sherrod
regarding limit to the fraud exception (some courts include
promissory estoppel).
- Sherrod has a narrow view of the fraud exception
- Fraud evidence contradicts the writing
- Don’t sign something if you don’t agree
with what’s in it
- Split of authority
- Some courts (like dissent) believe that where all
the elements of fraud are met, the court should
admit parol evidence.
CLASSICAL
The judge scrutinizes the face of the lease, and decides
whether the term is ambiguous on its face. If yes, she’ll
then let in evidence to explain the ambiguity; if no, she
won’t even listen to the evidence.
MODERN
The judge will hear the witness’s answer, overt of the
presence of the jury. If on hearing the answer she decides it
helps explain the lease, she’ll overrule the objection and
allow the jury to listen too. She’ll also let in other
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explanatory evidence-course of performance, course of
dealing, trade usage.
Consistent Additional Term
- Can be interpreted very broadly
- Some courts go so far as to say that it is not “contradictory” if it
“cuts down” or “qualifies” the term (i.e. Nanakuli v. Shell Oil Co.)
VI. Supplementing the Agreement: Implied Terms, the Obligation of Good Faith, and
Warranties
A. Rationale for Implied Terms
- Implied contractual provisions
- Implied terms sometimes can be justified (the parties would have agreed to
them)
- Wood v. Lucy (Lady Duff Gordon)
- Implied a duty based on the parties intentions (influential precedent)
- Marketing Contract is a services contract (applies common law)
- An exclusive marketing agreement for which the only compensation for
the marketer is a share of the profits generated by them implies a duty of
reasonable effort.
- Looks heavily at the facts (vs. implied in law as in the UCC)
Common Law
- Implied by the facts (necessary to carry out the intention of the parties)
UCC
- Implied by the law (implied in fairness and in good-faith)
- The UCC implies a reasonable amount of time for termination
(merchant-dealer case Leibel)
- Parties are allowed to bargain out of this situation as long as it’s not
unconscionable (i.e. termination can be valid on the date of notice)
- Courts generally uphold decisions made by merchants (they don’t find it
unconscionable in these dealings between people with some business
experience)
UCC § 2-306(2)
“A lawful agreement by either the seller or the buyer for the exclusive dealing in
the kind of goods concerned imposes unless otherwise agreed an obligation by the
seller to use best efforts to supply the goods and by the buyer to use best efforts to
promote their sale.”
UCC §2-309
“(1) The time for shipment or delivery or any other action under a contract in this
Article or agreed upon shall be a reasonable time...
(3) Termination of a contract by one party except on the happening of an agreed
event requires that reasonable notification be received by the other party and an
40
agreement dispensing with notification is invalid if operation would be
unconscionable.”
B. The Implied Obligation of Good Faith
- One party to a contract claims to be acting in ways permitted or not expressly
forbidden
UCC §1-304
“Every contract or duty within [the UCC] imposes an obligation of good faith in
its performance and enforcement.”
Rest. §205
“Every contract imposes upon each party a duty of good faith and fair dealing in
its performance and its enforcement.”
Definitions of Good Faith
UCC §1-201(20)
“‘Good faith,’ ...means honesty in fact and the observance of reasonable
commercial standards of fair dealing.”
Comments, Rest. §205
A party performs in good faith if it acts with a “faithfulness to an agreed upon
common purpose and consistency with the justified expectations of the other
party.”
Other Definitions and Approaches
- “Fruits of the contract”
- Opposite of Bad Faith
Good Faith As the Opposite of Bad Faith
- Seller concealing a defect (Fully disclosing material facts)
- Contractor openly abusing power to coerce an increase in the contract price
(refraining from an abuse of bargaining power)
- Conscious lack of diligence in mitigating the other party’s damages (acting
diligently)
- Arbitrarily and capriciously exercising the power to terminate a contract (acting
with some reason)
- etc. (KCP p. 469)
Separate Cause of Action for Breach of Implied Duty of Good Faith?
- Comment to UCC §1-394: “...the doctrine of good faith merely directs a
court towards interpreting contracts within the commercial context in
which they are created, performed, and enforced, and does not create a
separate duty of fairness and reasonableness which can be independently
breached.”
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- Courts are divided in treatment of this
- Good faith has often been treated not so much as an independent source
of duty, but as a guide for construction of terms in an agreement (that
is, whether there is a breach of contract).
Seidenberg v. Summit Bank
- Parol Evidence Rule
- can’t bar evidence of good faith
- good faith is implied in every contract rather than by an express
term (a party must always act in good faith, a way of
understanding the contract)
Three Types of Situations for An Implied Term of Good Faith
1. When implication of a term is necessary to protect the parties‘
expectations (i.e. expectation that the contract would last until retirement)
2. When bad faith served as a pretext for the exercise of a contractual right
to terminate
3. When the contract expressly provides a party with discretion regarding
its performance
- There is a tension splitting courts between letting an implied covenant of good
faith limit express contract rights or not
Requirement Contracts
Buyer agrees to purchase all of a particular good or service it requires
from one seller.
Output Contract
Seller agrees to sell all its output of a particular good or service to one
buyer
- Requirement and Output contracts usually have no implied floor, but they do
have an implied ceiling
- If a target quantity is specified in an output or requirements contract, the parties
will be held to either producing or requiring an amount not disproportionate to
the stated estimate.
UCC §2-306(1)
“A term which measures the quantity by the output of the seller or the
requirements of the buyer means such actual output or requirements as may occur
in good faith, except that no quantity unreasonably disproportionate to any stated
estimate or in the absence of a stated estimate to any normal or otherwise
comparable prior output or requirements may be tendered or demanded.”
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GAS CO PROBLEM HANDOUT
Satisfaction of the Obligor as a Condition (Morin Building siding case)
Rest. §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.”
Two Approaches
Standard of Reasonableness (“objective”)
Often employed where “commercial quality, operative fitness, or
mechanical utility are in question.”
Standard of “Honest” Dissatisfaction (“subjective)
Often employed where “personal aesthetics or fancy” are at issue
C. Warranties
Caveat Emptor (let the buyer beware)
- seller bore no responsibility unless he gave an express warranty
- 1800s embraced caveat emptor
Implied Warranties
- imposed by law (not actually a part of the agreement)
- came at the turn of the century
UCC Warranties
2-313: Express warranties
2-314: Implied warrant of merchantability
2-315: Implied warranty of fitness for a particular purpose
UCC §2-313 (Express Warranties)
(1) the seller made a sufficiently factual promise about the qualities or
attributes of the goods which turned out not to be true
- Could be:
- an “affirmation of fact or promise made by the seller
which relates to the goods”
- “a description of the goods” made by the seller
- “a sample or model” shown to the buyer as representative
of the goods the buyer will receive under the contract
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- the seller does not have to use the word “warranty” or
“guarantee”
- Factual statement vs. “puffing” or opinion (“This car is great!”)
- statement must relate to the quality or attributes of the goods
(2) the factual promise was part of the “basis of the bargain”
- Three views:
1. buyer must have relied on the seller’s factual promise
2. means that the affirmations were made by the seller
sometime before the sale of the goods took place
3. intermediate approach: creates a presumption that can be
rebutted by the seller that the buyer did not rely on the
statements
(3) the failure of the good to live up to the representations of the seller
caused the buyer’s damage
UCC 2-314 (Implied Warranty of Merchantability)
(1) the seller of the good was a “merchant” with respect to the goods
sold
- available to both consumer and merchant buyers
(2) the goods sold by the seller were not “merchantable”
- “pass without objection in the trade”
- “fair average quality”
- “fit for ordinary purposes for which they are used”
- prior dealing
- can have an implied warranty if the seller had provided
higher quality goods in the past even if the goods are of
“fair average quality”
(3) the breach caused the buyer’s damage
UCC §2-315 (Implied Warranty of Fitness for a Particular Purpose)
- not limited to merchant sellers
- some court limit this to cases where the goods are used for unusual
purposes
44
(1) the buyer had an unusual or particular purpose in mind for the
goods
(2) the seller had reason to know of this particular purpose (usually
because the buyer has told the seller of this purpose)
(3) the seller has reason to know that the buyer is relying on the
seller’s skill or judgment to select or furnish goods that will meet the
buyers needs
(4) the buyer in fact relied on the seller’s skill or judgment in selecting
suitable goods
(5) the goods were not fit for the buyer’s particular purpose
UCC §2-316 (Disclaimer of Warranties)
- Seller can disclaim warranties (express or implied)
- express warranty overrides a conflicting disclaimer where both are
contained in a written document
- where a written contract disclaims warranties, but one has been made
orally, the court will often look to the Parol Evidence Rule to determine if
the warranty is admissible.
- some courts will allow the buyer to void the contract in this situation
because the warranty constituted some measure of fraud or bad faith
(situations which allow the buyer to submit such evidence under the UCC
Parol Evidence Rule)
General As to Both Implied Warranties
- All warranties can be disclaimed if the buyer is warned with
language such as “as is” or “with all faults” (typically require these
words to be conspicuous)
- If the seller allows the buyer to inspect the good before purchase
as much as the buyer wishes, there is no implied warranty as to any
flaw in the good that should be discovered by such inspection
Merchantability
- To disclaim the implied warranty of merchantability, the contract
must mention “merchantability” and, if in writing, the disclaimer
must be conspicuous
Fitness for a Particular Purpose
- can be excluded only in writing while conspicuous
- the word fitness need not be used (there is not usually such a
warranty in most circumstances, though)
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Common Law (i.e. a house)
- The burden is often placed on the most efficient loss avoider or the
lowest cost avoider
- most states have adopted an implied warranty of habitability/
skillful construction (can be disclaimed)
- Implied term is consistent with the express terms of the contract or
the reasonable expectations of the parties
VII. Avoiding Enforcement: Incapacity, Bargaining, Misconduct, Unconscionablility, and
Public Policy
A. Minority and Mental Incapacity
- Assumes the normal contract formation requirements are met
- One of the parties wants to void the obligations of that contract
- Used either as a defense or as a manner of rescinding a contract and
obtaining restitution for any benefit conferred
Restatement §14
- Unless a statute provides otherwise, a natural person has the capacity to
incur voidable contractual duties until the beginning of the day before the
persons 18th birthday.
- On reaching the age of majority, the minor must act within a reasonable
period of time to disaffirm the contract or she will be deemed to have
affirmed the contract (and be bound).
Voidability of Minors’ Contracts
The general rule is that contracts entered into by a minor are voidable at
the minor’s election before or within a reasonable period after reaching the
age of majority.
Infancy
General Rule: Contracts of minors (“infants”) are voidable and subject to
be disaffirmed by the minor either before or within a reasonable period
after attaining majority.
The traditional version of this rule allows the minor to disaffirm or avoid
the contract even if there has been full performance and the minor cannot
return what was received in the exchange. The minor returns only what the
minor still possesses and is not required to make restitution for the
diminution in value.
Modern Trend: Where the minor has not been overreached in any way,
and there has been no undue influence, and the contract is a fair and
reasonable one, and the minor has actually paid money on the purchase
46
price, and taken and used the article purchased, [the minor] ought not to be
permitted to recover the amount actually paid, without allowing the
vendor of the goods reasonable compensation for the use of, depreciation,
and willful or negligent damage to the article purchased, while in his
hands. (Dodson)
Liability for Necessaries
- Even under the traditional rule, the right of a minor to avoid a contract
has been subject to a limitation for the reasonable value of “necessaries.”
- The recovery for the adult is based on restitution rather than enforcement
of the contract.
- Necessaries include items one needs to live, such as food, clothing, and
shelter.
- Ignorance of the minor’s age is no defense to the minor’s disaffirmance
- But the minor’s ability to disaffirm may be restricted if the minor engages in
tortious conduct such as the misrepresentation of age or willful destruction of
goods.
Release Agreements and Settlements
- Courts are split on whether minors are able to disaffirm pre-injury
exculpatory agreements signed by the parent.
- Post-injury settlement agreements on behalf of minors will typically
involve the execution of a release to the minor’s claims. In most
jurisdictions, settlements by minors must be approved by a court and may
not be later disaffirmed.
Restatement §15 (Mental Incapacity)
(1) “A person incurs only voidable contractual duties by entering into a
transaction if by reason of mental illness or defect
(a) he is unable to understand in a reasonable manner the nature
and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the
transaction and the other party has reason to know of his condition.
(2) Where the contract is made on fair terms and the other party is
without knowledge of the mental illness or defect, the power of avoidance
under (1) terminates to the extent that the contract has been so performed
in whole or in part or the circumstances have so changed that avoidance
would be unjust. In such a case a court may grant relief as justice requires.
- The minor generally can disaffirm even if restoration cannot be made,
but the mentally incompetent person is required to make restoration to the
other party unless special circumstances are present.
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- In Hauer, the court found special circumstances in the purported lack of
good faith of the other party because it knew or had reason to know of
Hauer’s incompetence.
- In cases of incapacity because of intoxication, if the other party has
reason to know that the intoxicated party is not understanding what is
happening, the contract may be voided based on a finding of bad faith.
Restatement 16
A person incurs only voidable contractual duties by entering into a
transaction if the other party has reason to know that by reason of
intoxication
(a) he is unable to understand in a reasonable manner the nature
and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the
transaction.
B. Duress and Undue Influence
1. Duress
Two Kinds of Duress
- Duress under physical compulsion
- Duress by improper threat
- Duress has expanded (economic and other considerations)
Restatement §174 (Duress by Physical Compulsion)
- If a party enters into a contract solely because he or she has been
compelled to do so by the use of physical force, the contract is “void” (not
voidable)
- This means there is no contract and neither party can enforce its terms
- E.g., A says to B, “you had better sign this contract or I will shoot you,”
the contract B signs cannot be enforced by A or B. They have no legally
enforceable agreement.
Restatement §175 (Duress by Improper Threat)
- If a party enters into a contract because of an improper threat that
leaves the victim with no reasonable alternative but to assent to the
proposed deal, the contract is voidable by the victim.
(1) a wrongful or improper threat
(2) a lack of reasonable alternative, and
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- alternative sources
- threat involves a minor vexation is tolerated
(3) actual inducement
- Was the particular victim induced by the threat?
- consider age, background, relationship
- Voidable= means such contracts will be binding unless disaffirmed and
may be expressly or implicitly ratified by the purported victim.
- Hard bargaining has to be distinguished from improper threat/pressure
(exploitation)
- Not duress to offer a lower than market price when the party knows the
other party needs to sell quickly
- No reasonable alternative but to assent is key language
Improper Threat
Fair Terms (Rest. 176(1))
a. what is threatened (or the threat itself) is a crime or tort
b. what is threatened is criminal prosecution
c. what is threatened is the bad faith use of the civil process
d. the threat is a breach of the duty of good faith and fair
dealing with regard to the modification of an existing
contract.
Unfair Terms (Rest. 176(2))
a. the threatened act would harm the recipient and not
significantly benefit the party making the threat
b. prior dealing between the parties significantly increases
the effectiveness of the threat
c. the threatened action is a use of power for illegitimate
ends
- each example may be argued for the other category (fair/unfair)
Undue Influence (Rest. §177)
(1) Undue influence is unfair persuasion of a party who is under
the domination of the person exercising the persuasion or who by
virtue of the relation between them is justified in assuming that the
person will not act in a manner inconsistent with his welfare.
(2) If a party’s manifestation of assent is induced by undue
influence by the other party, the contract is voidable by the
victim...
Summary
49
1. Domination or a special relationship between the victim and
the other party
- the victim is under the domination of the other (perhaps
because the victim is weak, infirm, and/or aged)
- or the relationship makes the victim susceptible to
influence by the other, e.g., parent/child, lawyer/client,
clergyman/parishioner, physician/patient, nurse/elderly
patient, etc. (many courts don’t fit employee/employer
relationship in this category, but may for domination)
2. and improper persuasion of the victim by the “stronger”
party.
- common features of a contract entered into by unfair
persuasion are: an unfair exchange, unusual circumstances
(time or place), unavailability of independent advice given
to the victim, lack of time for reflection by victim, a high
degree of susceptibility to persuasion exhibited by the
victim.
C. Misrepresentation and Nondisclosure
- close to Tort law
- a victim of misrepresentation may have two choices: tort case for damages, or a
contract case to rescind the contract
- Recision
- either affirmative defense or cause of action
- return the parties to the point they were before the contract was made
- Tort victims
- Damages
- Punitive Damages (not available in most contract cases)
Fraud
The plaintiff must show that the defendant knowingly made one or more false
representations with the intent to deceive and defraud the plaintiff, that these
representations caused plaintiff to enter into the contract, and the plaintiff was
damaged as a result.
Misrepresentation Defined (Rest. §159)
A misrepresentation is an assertion that is not in accord with the facts.
= a factually incorrect representation made by one of the parties at the
time of contracting.
Rest. §164(1)
If a party’s manifestation of assent is induced by either a fraudulent or a
material misrepresentation by the other party upon which the recipient is
justified in relying, the contract is voidable by the recipient.
Fraudulent Misrepresentation (Rest. §162(1))
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A misrepresentation is fraudulent if the maker intends his assertion to induce a
party to manifest his assent and the maker
(a) knows or believes that the assertion is not in accord with the facts
(b) does not have the confidence that he states or implies in the truth of the
assertion
(c) knows that he does not have the basis that he states or implies for the
assertion
Rest. 162(2)
A misrepresentation is material if it would be likely to induce a reasonable
person to manifest his assent, or if the maker knows that it would be likely to
induce the recipient to do so.
- Would the misrepresentation substantially contribute to the decision to
enter the transaction?
- The importance of the misrepresented fact will often also bear upon the
question of justifiable inducement.
- Materiality is a factual determination
Justifiable Inducement
- The misrepresentation must have motivated the victim to enter the contract, or to
enter it on the terms that were agreed.
- If the victim would have entered the contract on those terms anyway had she
known the truth, or if the victim was not justified in relying on the
misrepresentation, she is not entitled to relief.
- Often courts blend objective and subjective considerations here - was the victim
in fact induced and would she have been had she acted reasonably.
- Some courts have considered whether the victim had an opportunity to verify the
trust of the representations in considering whether reliance was justified.
Opinions
- Opinion: expression of a belief, without certainty, as to the existence of a fact.
Typically, opinion deals with matters such as quality or value of property (Rest
§168(1)).
- Classical Rule: opinions/puffery should be expected and are not fraudulent.
Puffery is to be expected.
Liability for Opinions
- Rest 159 comment d: a statement opinion amounts to a misrepresentation of fact
if the person giving the opinion misrepresented his state of mind. (or if they didn’t
know of opposite facts. If you are a fiduciary or expert, then there may be
misrepresentation)
- Rest. §168(2): a statement of opinion amounts to an implied representation that
the person giving the opinion does not know any facts that would make the
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opinion false and that the person giving the opinion knows sufficient facts to be
able to render the opinion.
- Rest. §169: A statement of opinion may also be actionable if the one giving the
opinion (a) stands in a relationship of trust or confidence to the recipient (a
“fiduciary”) (b) is an expert on matters covered by the opinion, or (c) is an expert
on matters covered by the opinion, or (c) renders the opinion to one who, because
of age or other factors, is peculiarly susceptible to misrepresentation.
Non-Disclosure (Rest. §161)
A person’s non-disclosure of fact known to him is equivalent to an assertion that
the fact does not exist in the following cases only:
(a) where he knows that the disclosure of the fact is necessary to prevent
some previous assertion from being a misrepresentation or from being
fraudulent or material.
(b) where he knows that disclosure of the fact would correct a mistake of
the other party as to a basic assumption on which that party is making the
contract and if non-disclosure of the fact amounts to a failure to act in
good faith and in accordance with reasonable standards of fair
dealing.
- good faith and fair dealing is quite open-ended and fact-based, so
it depends on the circumstances of each case.
- 2 significant factors that may be relevant:
- whether the information should be treated as the property
of the party who possesses it (because he incurred cost and
effort) and
- whether the information is readily available on diligent
inquiry
- Tort liability is harder to achieve for non-disclosure (doesn’t
allow liability for non-disclosure as a breach of duty of good faith)
(c) where he knows that disclosure of the fact would correct a mistake of
the other party as to the contents or effect of a writing, evidencing or
embodying an agreement in whole or in part.
(d) where the other person is entitled to know the fact because of a relation
of trust and confidence between them.
When a Misrepresentation as to a Writing Justifies Reformation
(Rest. §166)
If a party’s manifestation of assent is induced by the other party’s
fraudulent misrepresentation as to the contents or effect of a writing
evidencing or embodying in whole or in part an agreement the court at the
52
request of the recipients may reform the writing to express the terms of the
agreement as asserted
(a) if the recipient was justified in relying on the misrepresentation
(b) except to the extent that rights of third parties such as good
faith purchasers for value will be unfairly affected
Concealment: deliberate conduct to hide a fact (like a false statement)
Non-disclosure: only fraudulent if the party had a duty to disclose
General Idea: Assumption (each is a free-agent, can use superior
information)
- not obliged to tell the seller that the property is
underpriced
- doesn’t have to tell a commodity seller that the cost is
going to go up soon
Parties do not have an absolute right to conceal
- Some facts cannot be kept secret
- Some facts (like the war ending in the Laidlaw tobacco
case) do not have to be disclosed
Hill v. Jones (termite damage)
- The Parol Evidence Rule has an exception for fraud
- Many courts have held that a disclaimer of specific facts at issue
will be upheld
D. Unconscionability
Duress: threat
Fraud: serious misrepresentation/material misrepresentation
Undue Influence: relationship
Unconscionability: pressure, “general doctrine” for cases that don’t fall within
the other doctrines (absence of meaningful choice + unreasonably favorable terms
= Unsconscionability)
1. A contract is not unconscionable merely because it is an adhesion
contract
- standard terms, economically powerful party
2. The doctrine is largely developed in consumer transactions, but it is also
applicable to commercial transactions
- harder for a commercial business to obtain relief
- business savvy and economic power by the party attempting to
claim relief are considered
- courts have battled with the issues of vagueness of concept
3. Unconscionability is largely discretionary
- decided by the judge, not the jury
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- Unconscionability (unlike the other doctrines) can largely only be
raised as a defense instead of as an action
UCC §2-302
(1) If the court as a matter of law finds the contract or any clause of the contract to
have been unconscionable at the time it was made the court may refuse to enforce
the contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable
clause as to avoid any unconscionable result.
- Unconscionable at the time of making
- Evidence can be submitted by both parties to aid the decision
(2) When it is claimed or appears to the court that the contract of any clause
thereof may be unconscionable the parties shall be afforded a reasonable
opportunity to present evidence as to its commercial setting, purpose and effect to
aid the court in making the determination.”
- Clause or whole contract could be unconscionable
Unconscionable Contract or Clause (UCC §2-302, Comment 1)
The basic test is whether, in the light of the general commercial background
and the commercial needs of the particular trade or case, the clauses involved
are so one-sided as to be unconscionable under the circumstances existing at the
time of the making of the contract...The principle is one of prevention of
oppression and unfair surprise...and not of disturbance of allocation of risks
because of superior bargaining power.
Basic Test
- general background of commercial needs
- terms are very one sided
- prevents oppression and unfair surprise
- does not disturb allocation of risk (superior bargaining power is
not enough)
are
Rest. 208
If a contract or term thereof is unconscionable at the time the contract is
made, a court may refuse to enforce the contract, or may enforce the
remainder of the contract without the unconscionable term, or may so limit
the application of any unconscionable term as to avoid any unconscionable
result.
Comment D
A bargain is not unconscionable merely because the parties to it
unequal in bargaining position, nor even because the inequality
results in an allocation of risks to the weaker party. But gross
inequality of bargaining power, together with terms
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unreasonably favorable to the stronger party, may confirm
indications that the transaction involved elements of deception or
compulsion, or may show that the weaker party had no meaningful
choice, no real alternative, or did not in fact assent or appear to
assent to the unfair terms
Procedural and Substantive Unconscionability
Courts generally require both procedural and substantive
unconscionability at the time the contract was entered into
- doesn’t have to be in equal measure (sliding scale)
- “both factors are always needed, but a powerful showing of one
of the elements may lessen the burden for the other element to be
proved”
Procedural Unconscionability (the circumstances/process of making
the contract)
- Oppression/unfair surprise
- outside the norms of business practices
- printed contract that’s not negotiated (often)
- lack of time to review the contract (high pressure or deceptive
sales techniques)
- small print/no sign that the term is included
- confusing/lack of labels and headers in a contract
- unequal bargaining power (sophistication/education of the
parties)
- “take it or leave it” basis
- lack of choice/no meaningful choice
- “knew she was on welfare”
Substantive Unconscionability
- terms that only apply to one party
- overly harsh term
- content, not delivery
- way more than the market price
- unfair terms
- motivation for the clause is to instill fear in the buyer
- high interest rates, harsh penalties, one-sided waiver
- terms that put the burden on one party
- one-sided term
Remedy for Uconscionability
- Court has wide discretion:
- it may hold the contract as a whole is unconscionable and refuse
to enforce it
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- it may enforce the basic bargain but change its terms to eliminate
the unconscionable aspects (e.g., sever the unconscionable term),
or alter the term to make it fair.
- Courts are careful in using the doctrine in the first place, and then if they
do apply the doctrine they tend to aim to interfere as little as possible with
the contract’s terms.
- Arbitration Clauses (popular area where this comes up)
- long history of invalidating arbitration clauses (change in past ten
years)
- ATT v. Concepcion (SC)
- held that a court couldn’t prevent enforcement of an
arbitration clause that disclaims the bringing of class action
E. Public Policy
- Even when a contract has been formed with the proper mutual assent and
consideration, no improper bargaining conduct, no issue of capacity, the subject
may break the law or so offend public policy that the court will refuse to enforce
it.
Two Areas Where Contracts Are Unenforceable Because of Public Policy
- Illegal Contracts (violates a statute or rule of common law)
- court won’t enforce an illegal contract or term, even if it was voluntarily
entered into (in pari delicto rule, where the parties are equally culpable)
- will refuse to grant restitution
- Contracts contrary to Public Policy
- Even if there is no rule of law that forbid the contract, it may harm the
public interest
- Discretionary power (very careful in applying)
- Don’t want to be seen as “policy-making” or opinion applying
Examples
- In a release, if you have a disclaimer for gross negligence, a court will
generally not enforce that disclaimer as contrary to public policy
- Covenant not to compete (non-compete)
- employment contracts/sale of business contracts
- covenants are not per-se invalid
- if they are too harsh or restricted, they are against public policy
- States have varying rules on this (California has favorable rules
for this, notes above)
- Surrogacy contracts
- controversial, not always enforced
- may be contrary to public policy
VIII. Justification for Nonperformance: Mistake, Changed Circumstances, and
Contractual Modifications
A. Mistake
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- UCC doesn’t really deal with mistake (fall back on common law)
- narrow doctrine
- An error of fact
- Rest. §151: A mistake is a belief that is not in accord with the facts.
- An error about some thing or event that had actually occurred or existed at the
time the contract was entered into and can be ascertained by objective evidence.
- Use the legal, not colloquial, meaning
- Not a mistake
- a misunderstanding about meaning is generally NOT a mistake of fact (it
is resolved by the process of interpretation)
- an incorrect prediction of future events is NOT a mistake
- An error in judgment does NO qualify as a mistake
- Unsure of artist hypo (mistake of judgment, not mistake, may be some
other claim)
- Usual remedy: rescission (occasionally reformation)
- only available where it materially alters the basis of the bargain
Mutual Mistake
Both parties are mistaken about a shared basic assumption upon which they base
their bargain
Rest. 152 (Both Parties)
(1) Where a mistake of both parties at the time a contract was made as
to a basic assumption on which the contract was made has a material
effect on the agreed exchange of performances, the contract is voidable by
the adversely affected party unless he bears the risk of the mistake under
the rules stated in §154
1. Where a MISTAKE of both parties at the time a contract was
made
- both parties shared a mistake (error of fact)
- the error must be made at the time of contracting
2. as to a BASIC ASSUMPTION on which the contract was
made
- fundamental to the parties’ intent and purpose that it is
reasonable to conclude they would not have made the
contract at all or not on those terms had they known the
truth
- looks at the parties’ motivation for entering into the
bargain (basis of the bargain)
3. has a MATERIAL effect on the agreed exchange of
performances
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- mistake has an objective impact on the balance of the
exchange. Sufficiently unbargained for windfall or
detriment?
- Equitable balancing; the court examines the effect of the
mistake on the parties to decide the fairness of enforcing
the contract despite the mistake
4. the contract is voidable by the adversely affected party
unless he BEARS THE RISK of mistake under §154
Rest. §154
(a) the risk is allocated to him by the agreement of the
parties OR
(b) he is aware, at the time the contract is made, that he
only has limited knowledge with respect to the facts to
which the mistake relates but treats his limited knowledge
as sufficient (conscious ignorance, conscious uncertainty)
OR
(c) the risk is allocated to him by the courts on the ground
that it is reasonable in the circumstances to do so
Clerical error, Scrivener’s error (i.e. leaving a zero off)
- normal remedy is reformation to conform to the agreement
Unilateral Mistake
One party has made a mistake about a basic assumption upon which she bases
her bargain
General Rule: there is no relief for a unilateral mistake (Restatement 503)
Exception: the other party who did not make a mistake will be put on
notice of the mistake (Williston)
Where Unilateral Mistake Makes a Contract Voidable (Rest. 153)
Where a mistake of one party at the time a contract was made as to a basic
assumption on which he made the contract has a material effect on the agreed
exchange of performances that is adverse to him, the contract is voidable by him
if he does not bear the risk of the mistake under the rule stated in §154 AND
(a) the effect of the mistake is such that enforcement of the contract would
be unconscionable OR
- Hardship of avoidance on the other party vs. hardship of
enforcement by the mistaken party
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(b) the other party had reason to know of the mistake or his fault caused
the mistake
(a and b are additional, it’s harder to show unilateral mistake)
- unconscionable in this context is NOT §208, simply “severe enough to cause
substantial loss)
- most common law unilateral mistake cases deal with construction bid issues and
clerical/mathematical errors
B. Changed Circumstances: Impossibility, Impracticability, and Frustration
- Usually involves changes in circumstances that occur between the making of the
contract and the time set for performance. Restitution for any benefit rendered
under the contract.
1. Impossibility
- earliest doctrine
- Taylor v. Caldwell (concert hall burning down)
- Prohibition by government action
2. Impracticability
- Mineral Park Land Co. v. Howard
- the rest of the gravel was beneath water level (would’ve cost 10-12 times
more)
Impracticability and Frustration UCC §2-615
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...not a breach of his duty under a contract for sale if the performance as
agreed has been made impracticable by the occurrence of a contingency
the non-occurrence of which was a basic assumption on which the
contract was made or by compliance in good faith with any applicable
foreign or domestic governmental regulation or order whether or not it
later proves to be invalid
Impracticability (Restatement §261)
Where, after a contract is made, a party’s performance is made
impracticable without his fault by the occurrence of an event the
non-occurrence of which was a basic assumption on which the
contract was made, his duty to render that performance is discharged,
unless the language or the circumstances indicate the contrary
Impracticability Summary
1. After the contract was made, an event occurred, the
non-occurrence of which was a BASIC ASSUMPTION of the
contract
2. The event renders the party’s performance IMPRACTICABLE
(unduly burdensome)
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3. The party seeking relief was NOT AT FAULT in causing the
occurrence
4. The party seeking relief MUST NOT HAVE BORNE THE
RISK of the event occurring (either under the language of the
contract or the surrounding circumstances)
Impracticability
Rest. §262: death or incapacity of person necessary for performance
Rest. §263: destruction, deterioration, or failure to come into existence of
thing necessary for performance
Rest. §264: prevention by governmental regulation or order
Frustration (Rest. §265)
Where, after a contract is made, a party’s principle purpose is
substantially frustrated without his fault by the occurrence of an event
the non-occurrence of which was a basic assumption on which the
contract was made, his remaining duties to render performance are
discharged, unless the language or the circumstances indicate the
contrary
Krell v. Henry
- Use of a room looking over the coronation parade (King
Edward VII)
- King Edward became ill (cancelled the parade)
- Renting the room was useless
- Excused from his duty of payment under the contract
- Performance wasn’t impossible or impracticable
UCC §2-615 captures frustration of purpose as well
- impracticability: event that makes a party’s performance impossible or unduly
burdensome (music hall burning down)
- frustration of purpose: event that makes a party’s performance pointless or
worthless to the other, frustrating the purpose of the contract
- Courts tend to reject excuses for nonperformance based on market conditions
- Some win on overwhelming increase with cost of performance (gravel case)
- this is a hard doctrine to win on
Problem 8-1 Is a Good Review Problem (KCP 716)
- Mel Frank Tool case (leasing a building to store chemicals)
- substantial frustration
- if any use consistent with the lease is available, it’s not substantial
enough for frustration
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- must be “virtually worthless” “utterly defeated”
- Force majeure clause
- clause designed to excuse the parties performance in the event there are forces
outside of their control and could not be avoided by reasonable care (acts of God,
strike, etc.)
- basically covers what we went over today
- can go further
- these are often written as boilerplate though, courts sometimes ignore
them or construe them against the drafter (if trying to be sweeping
exculpatory clauses)
C. Modification
- After a contract has been formed, the parties change the contract or one party
attempts to change the contract (often a consideration issue)
Performance of Legal Duty (Rest. §73)
Performance of a legal duty owed to a promisor which is neither doubtful nor the
subject of honest dispute is not consideration; but a similar performance is
consideration if it differs from what was required by the duty in a way which
reflects more than a pretense of a bargain.
- A promise which has the effect of modifying a contract must be
supported by consideration (pre-existing duty rule)
- courts accept small or modest alterations/additions as sufficient
consideration
- mutual release/rescission is an exception
Modification of Executory Contract (Rest. §89)
A promise modifying a duty under a contract not fully performed on either side is
binding
(a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contact was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material
change of position in reliance on the promise
Modification, Rescission, and Waiver (UCC §2-209)
(1) An agreement modifying a contract within this Article needs no
consideration to be binding.
- still have good faith, duress, etc.
(2) A signed agreement which excludes modification or rescission except by a
signed writing cannot be otherwise modified or rescinded, but except as between
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merchants such a requirement on a form supplied by the merchant must be
separately signed by the other party
(3) The requirements of the statute of frauds section of this Article (2-201) must
be satisfied if the contract as modified is within its provisions
(4) Although an attempt at modification or rescission does not satisfy the
requirements of subsection (2) or (3) it can operate as a waiver
- subject to a lot of debate and interpretation
- can operate as a waiver of rights
- giving up of an existing right by a person entitled to that right
- i.e. delivery by a certain date
- CAN WAIVE AN NO ORAL MODIFICATION CLAUSE
(CONFUSING)
(5) A party who has made a waiver affecting an executory portion of the contract
may retract the waiver by reasonable notification received by the other party that
strict performance will be required of any term waived, unless the retraction
would be unjust in view of a material change of position in reliance on the waiver.
HYPO: A buys a boat, $1,000 a month for 48 months to the boat
company, 6 months in A asks the boat company if it would take 700 a
month for the next 60 months, boat company orally agrees, for a year
accepts the lower payment, if the company later changes its mind and
demands that A goes back to making the $1,000 a month payments, it can
do that unless A proves that it relied
- there must be some protest that the modified sale agreement was not freely
entered into
- Notes 1-3 on 741-42
The Parol Evidence Rule does not exclude subsequent writings
- Parties may want to insert a no oral modification (NOM) clause
- sometimes parties want to avoid situations whether there was an
oral modification
- Common law application on NOM has been inconsistent
- some enforce, others take the position that the parties are always
free to alter it even orally if you can prove that you actually did so
- second view thinks most recent manifestation of assent should
govern
- UCC 2-209(2)
- not enforceable unless on separate form between merchants (see rule)
- Would have to be in signed writing, or otherwise unenforceable
- a modification is a contract in itself
- If the contract as modified falls within the statute of frauds, the modified
contract must satisfy the SoF
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- If it doesn’t fall within the statute, the original contract terms are binding OR
depending on what the modification is, there is a possibility that it could be
construed as a waiver.
- Rest. 149 does the same
HYPO: If you have an original contract for booking a stay for a resort
hotel within a year of making of the contract, original contract is not in the
SoF, if you modify so that the stay will not occur within a year after the
modification, the SoF applies to the modification
- UCC simply requires that the modification be in good faith (?)
PROBLEM 8-1
IX. Rights and Duties of Third Parties
- Generally, contractual rights and duties arise only between those in privity with each
other (the actual parties to a contract)
Assignment: when a party to an existing contract transfers to a third person her rights
under the contract, she has made an assignment (succeed to rights)
- Assignment is a PRESENT transfer of one’s rights under a contract
- Because an assignment is a present transfer, no consideration is required to
execute it - it could be effected through a contract with consideration between the
assignor and the assignee, or it could be a gratuitous transfer or other disposition
Combination
Often, an existing party will both assign and delegate. That is, she will both transfer her
rights to a third person, and appoint that person to perform her duties (Rest. §328; UCC
§2-210 are the same)
- Language of general assignment is interpreted to mean BOTH assignment of
rights and delegation of duties unless the circumstances indicate otherwise
- But sometimes there will be just one or the other
Gratuitous Assignments
- An assignment in which the assignor receives nothing of value in return.
- Gratuitous assignments are generally enforceable, just like ones given for value except
they are automatically revoked if the assignor...
- dies
- makes a subsequent assignment of the same right to a different person OR
- gives notice to either the assignee or the obligor that the assignment has been
revoked
- The assignor assigns to the assignee the performance due to the assignor from the
obligor
- Example: Contractor contracts to paint Owner’s house for $5,000. Contractor
then assigns to Bank the Contractor’s right to receive the $5,000 when due.
Contractor is the assignor, Bank is the assignee, and Owner is the obligor.
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- UCC Article 9 applies to certain assignments, and requires certain formalities, where a
party assigns his right to receive payment under a contract as security financing. (e.g.,
commercial financing of accounts receivable by assignment to bank, using the transfer of
rights to secure a loan) (other than that, there are no particular formalities needed for an
assignment of ordinary contract rights, but the transaction may be subject to the Statute of
Frauds)
Effect of An Assignment
- An assignment extinguishes the assignor’s right to performance from the obligor and
transfers it to the assignee.
- For such a transfer to occur, the right must be in existence, must be transferred
immediately, and must be a complete relinquishment of the right by the assignor in
favor of the assignee, so that the assignor retains no control over it and no power to
revoke it.
- This protects the obligor who must be able to rely on the fact that performance in favor
of the assignee will discharge her contractual obligation.
Notice and Obligor’s Duty
- Unless there is a term in the contract that requires it, the obligor’s consent is NOT
required, though she must be NOTIFIED of the assignment so she knows the person to
whom the performance is now due.
- The notice should clearly indicate what right has been assigned and to whom.
Either the assignor or the assignee may give notice, but if it comes from the
assignee, the obligor is entitled to adequate proof of the assignment.
- After receiving notice, the obligor is obliged to give the performance to the assignee and
if the obligor disregards the assignment and performs for the assignor, she incurs personal
liability to the assignee and will be obliged to either perform to them or pay damages.
- If the obligor pays the assignor after notice of assignment, he can’t defend against
liability to the assignee merely on the ground that the assignor unilaterally
countermanded his prior instruction to pay the assignee.
GENERAL RULE
The general rule is that unless a contract specifically prohibits a party from transferring
her rights under it, or the nature of the contract is such that the transfer would impair the
other party’s reasonable expectations or would offend public policy, a party has the
power to transfer contractual rights (Rest. §317(2); UCC §2-210(2))
Restrictions on Assignment
- The transfer of certain types of contract rights are contrary to the public interest, and
prohibited by statute or public policy (e.g., prejudgment tort claim itself)
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- Rights under the contract may not be assigned without specific authorization of the
contract, if the assignment would MATERIALLY CHANGE THE OBLIGOR’S
DUTY, materially increase the burden or risk imposed by the contract, materially impair
his chance of obtaining return performance, or materially reduce its value to him. (Rest
§317(2); UCC §2-210(2)).
Contractual Prohibitions on Assignment
Contractual restriction on assignment must be clearly expressed and will be narrowly
construed (Rest. §322; UCC §2-210(3))
- A “no assignment” clause may be construed as only prohibiting delegation of
duties unless it clearly manifests an intention to prohibit assignment (as well or
instead of delegation).
- Sometimes a court will interpret a “no assignment” clause to uphold an
assignment, but treat it as a breach of contract which would entitle the obligor to
any damages suffered as a result (usually none)
- Contracts may prohibit assignment without consent. Unless the contract makes
clear the party has complete discretion to refused, he is obliged to act reasonably
in refusing it (e.g., would need to show the assignment would materially affect his
contract rights)
Delegation: when an existing party appoints a third person to perform her duties under
the contract, she has made a delegation. (assume duties)
Delegation
- If a contract makes clear that delegation is not allowed, that intent will be given effect.
- Delegation is allowed unless otherwise agreed, unless contrary to public policy, or
unless the obligee has a substantial interest in having the obligor himself perform or
control the duty. (e.g., if the obligor has a particular attribute, skill or talent relevant to
performance) (Rest. §318(1), (2); UCC §2-210(1))
- Absent a clear novation, delegation does NOT relieve the party delegating any duty to
perform or any liability for breach. (UCC §2-210(1))
- Duty of performance under exclusive distributorship cannot be delegated to a direct
competitor without obligee’s consent (Sally Beauty Co. v. Nexus Products)
Effect of an assignment
- Football (passing right to someone else)
Restrictions on Assignments
- Public policy
- Material change
Delegation
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- If a contract makes clear that delegation is not allowed, that intent will be given effect.
- Delegation is allowed unless...
- Absent a clear novation, delegation does NOT relieve the party delegating any duty to
perform or for any liability for breach. UCC 2-210(1)
Assignment: passing a football
Delegation: catching a cold
- Can consent to “novation” (substitution and release)
X. Consequences for Nonperformance: Express Conditions, Material Breach, and
Anticipatory Repudiation
- Breach is “any non-performance” of a contractual duty at a time “when performance of
that duty is due” (Rest. §235(2))
- Performance is not due if for any reason nonperformance is “justified”
A. Express Conditions
Conditioned
- Happening of event is an express condition
- One or both of the parties will not have a duty arise to perform unless that
condition happens
- Parties will use conditions to allocate risk or to deal with risk
- Conditioned on the buyer getting financing
- Express conditions are narrowly interpreted
Condition Precedent (Rest. §224, 226)
- An act or event, other than the lapse of time, which, unless the condition is excused,
must occur before a duty to perform a promise in the agreement arises.
- A condition precedent may be express or implied
- an express condition is agreed to by the parties themselves
- an implied or constructive condition is imposed by the court to do justice
Express Condition (Rest. §237, cmt. d, 227)
- EXPRESS conditions must be LITERALLY performed and are not subject to the
doctrine of substantial performance as constructive conditions are.
- Ambiguous language will be interpreted as a promise or constructive condition rather
than an express condition. This interpretive preference is especially strong when a finding
of express condition would increase the risk of forfeiture by obligee (as by preparation or
performance) (has to be clear in writing that it’s an express condition)
Effects of the Non-Occurrence of a Condition (Rest. §225)
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- Performance of a duty subject to a condition cannot become due unless the condition
occurs or its non-occurrence is excused.
- Unless it has been excused, the non-occurrence of a condition discharges the duty when
the condition can no longer occur.
- Non-occurrence of a condition is not a breach by a party unless he is under a duty that
the condition occur.
Excuse of Conditions
- Bases on which a court may excuse a condition to avoid injustice:
- wrongful prevention
- waiver or estoppel
- to avoid forfeiture
- If grounds for excuse exist, the condition falls away and the contingent obligation
becomes absolute
- Language of condition (if, unless or until) clearly expresses a condition
- Because it’s an express condition, the intent is clear that they intend a condition
- condition will be enforced strictly
Excuse of a Condition to Avoid Forfeiture (Rest. §229)
- To the extent that the non-occurrence of a condition would cause disproportionate
forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence
was a material part of the agreed exchange.
- “Forfeiture” is used to refer to the denial of compensation that results when the obligee
loses its right to the agreed exchange after it has relied substantially, as by preparation or
performance on the expectation of that exchange. (Rest. §277, cmt. b)
KCP NOTES (786-800)
1. Language sufficient to create a express condition
- One or both parties is conditioned on some event
- Do the parties want this event to be condition?
- Is it the duty of one or both parties to fulfill the condition?
- These are drafting points
- Do we want to allow substantial performance to be okay?
- if not, make an express condition
- “of no further force and effect” is used often to clearly represent (not if, then
only)
2. Distinction between express conditions and promises; and “promissory condition”
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- Can an express condition also be a promise (both a condition and a promise promissory condition)
- failure of event to occur will treat the obligation as discharged
- the obligee can be subject to damages (in breach of their promise)
- HYPOS in the class 31 folder
3. Interpreting the language
4. Substantial performance doctrine in Jacob and Young
- Substantial performance does not apply to express conditions
- Doctrine of constructive conditions (constructively conditioned on substantial
performance of the other party’s obligations)
- one party’s duty of performance is constructively conditioned on
substantial performance of the other party’s obligations
5. Waiver
- Waiver (even if the plaintiff didn’t get the written consent, if they wanted to
waive that, they could waive it and still perform)
- A condition can be waived by the party who it is intended to benefit/protect
6. Effect of non-occurrence of condition
- express conditions (non-occurrence) may discharge the duties of both parties
- intended scope of the condition goes to the whole contract vs. to one party, then
the non-occurrence will discharge the duty/rights of both parties. (prime
landlord’s consent in this case)
7. Should there be a materiality requirement for enforcing express conditions?
- If the condition is technical and not material, courts will use waiver or avoidance
of forfeiture to get around the condition
8. Only if the condition waived wasn’t a material part of the performance
- Can still waive material conditions with either consideration or estoppel
9. Prevention of condition
- A condition is excused if the promisor wrongfully hinders or prevents the
condition from occurring
- If the plaintiff had actually gotten the consent from the landlord, and the
hindered on purpose because they wanted to get out of the deal, the court will
often excuse it.
- Prevention is the general obligation of good faith
B. Material Breach
Substantial Performance (Restatement §237, Jacob and Youngs case)
Except as stated in §240 (divisible performances), it is a condition of each party’s
remaining duties to render performances to be exchanged under an exchange of
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promises that there be no uncured material failure by the other party to render any
such performance due at an earlier time.
Substantial Performance & Doctrine of Constructive Conditions
The principle provides that each party’s duty of performance is implicitly
conditioned on there being no uncured material failure of performance by the
other party. Rest. §237
Minor deviations from the contract (“partial breach”) don’t amount to a failure of
a condition to the other party’s duty to perform - they just give rise to the other
party’s right to recover damages for that, but those damages may be negligible
because it was minor.
When is Performance “Substantial” (When is a Breach “Material”)?
Rest. §241
- extent to which the injured party will be deprived of the benefit which he
reasonably expected;
- extent to which injured party can be adequately compensated for part of
the benefit of which deprived;
- extent to which party failing to perform will suffer forfeiture;
- likelihood that the party failing to perform will cure his failure;
- extent to which behavior of the party failing to perform comports with
standards of good faith and fair dealing
- time is of the essence is not necessarily evidence of material breach,
must be paired with the circumstances
- divisibility/restitution are ways around substantial performacne
Divisible Performances (Rest. 240)
If the performances to be exchanged under an exchange of promises can be
apportioned into corresponding pairs of part performances so that the parts of
each pair are properly regarded as agreed equivalents, a party’s performance of
his part of such a pair has the same effect on the other’s duties to render
performance of the agreed equivalent as it would have if only that pair of
performances had been promised.
- Web designer hypo (completing one of five websites, gets 1/5 of price)
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Partial, Material and Total Breach
- A Partial Breach is a breach that is not significant; for example a short delay or
minor deficiency in payment absent other circumstances, would normally be
considered a partial breach.
- A Material Breach is a failure to perform a significant performance obligation,
for example, Sackett’s failure to tender the balance of the purchase price. The
other party may suspend their performance until the breach is cured.
- The existence of a material breach is necessary but not sufficient to finding a
total breach. A Total Breach is a material nonperformance that has not been cured
after the expiration of a reasonable time.
Total Breach
- A material breach which the breaching party fails to correct or cure within a
reasonable period of time.
contract.
continue to
- A total breach relieves the nonbreaching party from his duties under the
A partial breach does not discharge the nonbeaching party, who must
perform his obligations under the contract.
- Actual and future damages are available to the victim of a total breach; only
actual damages are available to the victim of a partial breach.
Steps of Analysis (Summary)
1. In determining whether the victim of a breach of contract still has to perform
her duties, first analyze whether the other party’s breach is material. Look to
Rest. §241 factors.
2. Once a breach is determined to be material, the next step is figuring out
whether the breach is total. Look at §241 and the 2 additional factors test in Rest.
242.
When is a breach “Material”? (Rest. 241)
When is a breach “Total”? (Rest. 242)
- and extent to which it reasonably appears to the injured party that delay may
prevent or hinder him in making reasonable substitute arrangements, and
- extent to which the agreement provides for performance without delay and
[whether] the circumstances, including the agreement, indicate that performance
or an offer to perform by that day is important.
Consequences of Being Wrong
- Treating a breach as material or total, where it is in fact partial, can lead to
liability on the part of the “nonbreaching” party for a material or total breach
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UCC Perfect Tender Rule (UCC §2-601)
- The doctrine of substantial performance is NOT applicable to a sale of goods
- The buyer is entitled to “perfect tender” of the goods ordered and has the right to
reject goods that fail to conform exactly to the contract.
- The doctrine of good faith applies to protect against a buyer’s rejection of goods
that is clearly pretextual-e.g., a rejection because of some minor nonconformity
because the buyer wants out of the deal.
- A buyer must act promptly to reject and follow proper procedure, otherwise it
will be deemed an acceptance of the goods.
Cure Under UCC Article 2 (UCC §2-508)
- The seller may give notice of intent to cure and to affect the cure by substituting
a conforming delivery before the delivery date under the contract.
- It would have to be by that date because, unlike common law, the perfect tender
rule gives the buyer the right to reject late delivery even if time of delivery is not
a material term.
- There is limited ability to cure after the delivery date has passed (UCC
§2-508(2))
- Videos 30 and 31 (conditions and material breach recaps)
C. Anticipatory Repudiation
- Advance refusal to perform
Anticipatory Repudiation (Rest. §250 & cmt. b; UCC §2-610)
- A repudiation is a clear and unequivocal statement by the obligor to the obligee
indicating that the obligor will commit a breach that would itself give the obligee a claim
for damages for total breach, or a voluntary affirmative act which renders the obligor
unable or apparently unable to perform without such a breach.
- It may occur between the time the contract is made and the time is due for its
performance; or after performance of the contract has begun, but before the due date of
the repudiated performance.
Elements of Anticipatory Repudiation
- The prospective action or inaction indicated by the obligor’s must be serious enough to
qualify as a material and total breach of the contract
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- The obligor’s statement or conduct must clearly and unequivocally indicate to the
reasonable obligee that the obligor intends to breach materially when the time for
performance arrives.
- The obligor’s statement or conduct in repudiating must have been voluntary.
Effect of Anticipatory Repudiation (Rest. §253, UCC §2-610)
- Where an obligor repudiates a duty before he has committed a breach by nonperformance 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.
- 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.
Responding to a Repudiation
When a repudiation occurs, the other party has a choice:
- She may accept the repudiation by giving notice that she is treating it as an
immediate breach. This entitles her to refuse to render her own performance, to
terminate the contract, and to sue for relief for total breach.
- She may delay responding to the repudiation to see if the repudiating party
retracts. One might even encourage the repudiating party by notifying them that
he has a specified time to retract, failing which the repudiation is accepted. If she
does this, she can still change her mind any time before retraction, and accept the
repudiation.
Dangers of Dealing with Possible Repudiation
If a party thinks the other party has made an anticipatory repudiation, she runs some
risks:
- If she responds by terminating, she takes the chance that the other party will
deny that he repudiated, and declare her termination to be a repudiation.
- If her response is to delay accepting the repudiation, she runs the risk that a
court will find she aggravated her damages by not terminating immediately and
mitigating her loss.
She may be able to handle this by calling for an assurance of performance (but even that
procedure can carry some risk)
Retraction of Repudiation (Rest. §256; UCC §2-611)
A repudiating party may not retract her repudiation “if notification of the retraction
comes to the attention of the injured party before he materially changes his position in
reliance on the repudiation or indicates to the other party that he considers the repudiation
to be final.”
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Right to Adequate Assurance of Performance (Rest. §251; UCC §2-609 (1) & (4))
- When reasonable grounds for insecurity arise with respect to the performance of either
party, the other may 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.
- UCC requires a demand be made in writing, but many courts do not strictly
enforce this. Restatement adopts a flexible approach.
- After receipt of a justified demand, failure to provide such assurance within a
reasonable time as is adequate under the circumstances is a repudiation of the contract.
- UCC says, “within a reasonable time not exceeding 30 days”; the
Restatement does not set a maximum
2-609 UCC authorizes reasonable grounds for insecurity
- question of fact
- buyer’s words or actions
- course of dealing or performance
- nature of the contract and the industry
- buyer had fallen behind in his account (adequate grounds)
- Unreliable rumors are not reasonable grounds
- can be verbal assurances/posting a bond
Reasonable Grounds for Insecurity
Companies difficulty or financial instability
- Unreliable or insignificant rumors are not enough
- Grounds couldn’t have been known before making the contract
- Posting of a bond could be a guarantee
XI. Remedies for Breach of Legally Enforceable Obligation
SUMMARY
- Difficulty in proving lost profits to a reasonable certainty = reliance damages fall-back
- Reliance damages are available to party claiming promissory estoppel
- Restitution is unlike reliance/expectancy (based on unjust enrichment)
- Full performance exception (if only payment of money is left, enforce payment of K
price)
- Modern view on breaching party’s recovery= recovery for any benefit conferred - damages for
breach
- Intentional variation will preclude restitution (“acted officiously”0
- Measure of restitution
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- payment of money/giving something (give it back)
- when the benefit conferred is a performance
- usually look at the reasonable market value for the benefit conferred
- quantum meruit (trying to get back the value of labor/services)
- how much the recipient’s wealth increased
- Specific performance (equitable remedy)
- court has a wide power of discretion
- only awarded if legal remedies (money) are insufficient
- real property, highly unique goods (one of a kind, can’t be found in the marketplace)
- court will not grant specific performance for service (Difficult to enforce)
- specific performance against an employer is often denied (difficult to enforce, money is
adequate)
- Injunction
- telling someone they have to do something (involuntary servitude, often not granted)
- negative injunction (telling people not to do something)
- opera singer case (Lumley)
- competitors (negative injunction often granted)
- won’t grant an injunction where money damages are adequate
- artists, athletes, media personalities (unique, money not enough)
- Rest. Illust. Courts consider exclusivity clauses/whether they are working for
competitor
- otherwise money may be enough? (1.25)
- Not all courts are willing to grant a negative injunction (no other way to make money)
- Reier (neg. injunction would have = injunction)
Liquidated Damages Provision
- Parties agree in advance to damage amount or calculation in event of damages
- eliminate the need for proof
- provide comp. for loss that would be unavailable
- limits damages
- no penal/punitive liquidated damages (if the amount is significantly larger than
necessary to compensate for lost)
- reasonableness measured at the time of contracting (1.28)
- Modern trend = reasonableness either at the time of contract formation
(anticipated losses) OR at the time of breach (actual harm) (some courts add duty
to mitigate)
- Rest. reflects the modern trend
- Either view = no punitive damages
- Parties can put caps on damages, can limit recovery for consequential damages, can limit type
of damages, can limit certain categories for damages
- enforceable unless they are unconscionable
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A. Expectation Damages: Principles and Limitations
Expectation = Profits lost
1. Foreseeability
2. Reasonable certainty
3. Causation
4. Duty to mitigate
1. Computing the value of the Plaintiff’s expectations
Purposes of Remedies (Rest. §344)
Remedies serve to protect one or more of these interests:
Expectancy: the promisee’s interest in having the benefit of his bargain by being put in
as good a position as he would have been in had the contract been performed.
- most common
- money damages (objective evidence of loss)
Reliance: the promisee’s interest in being reimbursed for loss caused by reliance on the
contract by being put in as good a position he would have been in had the contract not
been made, or
Restitution: the promisee’s interest in having restored to him any benefit that he has
conferred on the other party.
General Formula for Computing Expectation Damages (Rest. §347)
General measure of expectation damages = loss in value + other loss - cost avoided - loss
avoided
Loss in value: the difference in value between what should have been received
and the value of what, if anything, was received
Other loss: e.g., incidental and consequential damages
- incidental damages: expenses incurred by the injured party as a result of
the other party’s breach of a contract
- consequential damages: damages which do not derive directly from the
breach, but from the results of the breach; they are more indirect in nature
Cost avoided: any saving on expenditures the non-breaching party would have
otherwise incurred
Loss avoided: any loss avoided by salvaging or reallocating resources that
otherwise would have been devoted to performance of the contract
Other Computations
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Real Estate Contracts: Difference between contract price and the market price at
the time of the breach (contract price - market value at the date of breach)
- what the property actually sold for (unless they are “compelled”)
- expert can testify as to worth of property
- nonbreaching seller will only incur loss if the contract price was above
the market value
Construction contracts, breach by owner: the builder’s expected net profit on the
entire contract plus unreimbursed expenses at the time of the breach.
Breach in an employment contract (cost of replacement): difference between a
cost of replacement and a contract price
- Handicapped Children’s Case
- school didn’t get what they bargained for, even though it was a more
qualified teacher, they still get damages
We usually use the cost of completion or repair measure (general rule)
- 2 exceptions
- substantial performance in good faith, cost of redoing would be
unreasonable economic waste, market value is an okay measure of
damages
OR
- If the breach was incidental to the main purpose of the contract and
correcting the breach would be unreasonably costly
- can contract specifically for idiosyncratic performances
- American Standard (grading work case)
2. Restrictions on the Recovery of Expectation Damages: Foreseeability, Certainty,
an Causation
Hadley v. Baxandale (Delivery of Crank Shaft)
Damages for breach of contract are recoverable only if the damages arise naturally from
the breach (general or direct damages) OR are as such as to have been reasonably
supposed in contemplation of both parties at the time of contracting as the probable result
of the contract (consequential damages).
- direct = transportation cost for the crankshaft
- consequential = lost profits
Unforeeability and Related Limitations on Damages (Restatement §351)
(1) 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 contract was made
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(2) Loss may be foreseeable as a probable result of a breach because it follows from the
breach
(a) In the ordinary course of events, or
(b) as a result of special circumstances beyond the ordinary course of events, that
the party in breach had reason to know
(3) A court may limit damages or foreseeable loss by excluding recovery for loss of
profits, by allowing recovering only for loss incurred in reliance, or otherwise if it
concludes that in the circumstances justice so requires in order to avoid disproportionate
compensation.
- type of loss has to be foreseeable NOT the manner in which the loss occurs
- Loss has to be foreseeable as a probable result of the breach
Buyer’s Incidental and Consequential Damages (UCC §2-715)
(1) Incidental damages resulting from the seller’s breach include expenses reasonably
incurred in inspection, receipt, transportation and care and custody of goods rightfully
rejected, any commercially reasonable charges, expenses or commission in connection
with effecting cover and any other reasonable expenses incident to the delay or other
breach.
(2) Consequential damages resulting from the seller’s breach include:
(a) Any loss resulting from 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
(b) injury to person or property proximately resulting from any breach of warranty
Reasonable Certainty
“Damages are not recoverable for loss beyond an amount that the evidence permits to be
established with reasonable certainty” Rest. 352
The evidence must be sufficient to persuade the factfinder that the loss is more likely to
have occurred than not (preponderance of the evidence), and must give the factfinder
enough basis for calculating the money damages.
Causation
- A breaching party cannot be accountable for loss that was not caused by her breach.
There must be a link between the breach and the loss.
- Direct damages usually do not pose an issue of causation because there is a clear causal
link between the breach and the loss of the contractual bargain.
- Causation could be an issue concerning consequential damages - the plaintiff must
establish they were indeed a consequence of the breach.
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3. Restrictions on the Recovery of Expectation Damages: Mitigation of Damages
Basic Concept
The doctrine of “avoidable consequences” or the “duty to mitigate” refers to the idea that
the plaintiff may not recover for consequences of defendant’s breach that the plaintiff
herself could by reasonable action have avoided.
Mitigation of Damages (Restatement §350)
(1) Except as stated in subsection (2), damages are not recoverable for loss that the
injured party could have avoided without undue risk, burden or humiliation.
(2) The injured party is not precluded from recovery by the rule stated in subsection (1) to
the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Duty to mitigate only applies to jobs that are substantially similar to the job that was lost
- if another job is taken, they will lessen the damages
Effect of Other Income (Rest. §347, cmt e illustration 13)
A contracts to employ B for $10,000 to supervise the production of A’s crops. A breaks
the contract by firing B at the beginning of the season, and B, unable to find another job,
instead takes a job as a farm laborer for the entire season at $6,000. The $6,000 that he
made as a farm laborer is subtracted from the $10,000 loss of earnings in determining B’s
damages.”
Mitigating vs. Additional Contracts
- In order for the breaching party to obtain a deduction from its damage liability for
income received by the plaintiff from another contract, the breaching party must show
that the other contract was a mitigating contract.
- mitigating contract = a contract that the plaintiff was able to perform only
because the defendant’s breach freed the plaintiff from the obligation to perform
the original contract.
- If the court finds that the new contract is an additional contract instead, the plaintiff is
entitled to profit from both contracts and the defendant doesn’t get the benefit of a
deduction from its damage liability.
“Lost Volume” (Rest. §350, cmt d)
“The mere fact that an injured party can make arrangements for the disposition of the
goods or services that he was to supply under the contract does not necessarily mean that
by doing so he will avoid loss. If he would have entered into both transactions but for the
breach, he has ‘lost volume’ as a result of the breach. In that case, the second transaction
is not a ‘substitute’ for the first one.”
Nonrecoverable Damages
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- The following are commonly excluded from plaintiff’s damages for breach of contract:
- attorney’s fees
- damages for mental distress (and intangible, “noneconomic” injury)
- punitive damages
- In some instances, this means that recovery is actually below the level that true
expectation would require (e.g., attorneys fees). In other cases, it prevents bringing
plaintiff’s recovery above the net-expectation level (e.g., punitives).
Efficient Breach
- Efficient breach theory is the idea that a party should be allowed to breach a contract
and pay damages if doing so would be more economically efficient than performing. That
is, if the defendant makes enough gains by being able to breach that he can pay damages
to plaintiff and still come out ahead.
- It is “efficient” in that it makes the defendant better off without making the plaintiff
worse off (a “Pareto improvement).
- This line of analysis has been used to argue that the law should permit efficient breach
and that damages for economic loss is an efficient measure of damages and seres societal
interests.
- The Restatement and other critics are against the efficient breach theory because it
assumes a stable market and fails to consider litigation/negotiation costs
B. Alternatives to Expectation Damages: Reliance and Restitutionary Damages, Specific
Performance, and Agreed Remedies
1. Reliance Damages
- Reliance Recovery = reliance damages - net loss breaching party can prove
- Restatement limits recovery for reliance damages that exceed the contract price
(incidental reliance damages), but many courts do no put such limitations on the
recovery
Reliance Damages (Restatement §349)
As an alternative to the measure of damages stated in 347 [expectation], the injured party
has a right to damages based on his reliance interest, including expenditures made in
preparation for performance or in performance, less any loss that the party in breach can
prove with reasonable certainty if the injured party would have suffered if the contract
had been performed.
Limitations on Recovery of Reliance Damages (Restatement §352, comment a)
- expectation limitations apply to reliance damages
The requirement of reasonable certainty...excludes those elements of loss that cannot
be proved with reasonable certainty. The main impact of the requirement of certainty
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comes in connection with recovery for lost profits. Although the requirement of certainty
is distinct from that of foreseeability (§351), its impact is similar in this respect.
Although the requirement applies to damages based on the reliance as well as the
expectation interest, there is usually little difficulty in proving the amount that the
injured party has actually spent in reliance on the contract, even if it is impossible to
prove the amount of profit that he would have made. In such a case, he can recover
his loss based on his reliance interest instead of his expectation interest.
- equal opportunity to mitigate damages is not widely applied
Measuring Damages in Promissory Estoppel Actions
- A court has discretion to award expectation, reliance, or some other form of
remedy when the basis of recovery is promissory estoppel. The court limits the
damages as justice requires.
- Rest §90 seems to endorse this flexible approach; the comments and
illustrations may lack clarity regarding when expectancy damages should
be available.
Pre-Contractual Reliance Made by the Plaintiff
- General Rule: pre-contractual expenditures are not recoverable under reliance
- couldn’t have been made in reliance on the contract
- some argue that foreseeability of loss of those expenditures at the time of
contracting would allow recovery
Foregone Opportunity
- taken into consideration (gave up opportunities) are recoverable
2. Restitutionary Damages
Reasonable value of the performance undiminished by any loss which would have
been suffered after complete performance
Market Value Restitution
The measure of recovery for restitution is the reasonable value of the performance;
and recovery is undiminished by any loss which would have been incurred by
complete performance.
While the contract price may be evidence of reasonable value of the services, it does not
measure the value of the performance or limit recovery. Rather, the standard for
measuring the reasonable value of the services rendered is the amount for which such
services could have been purchased from one in the plaintiff’s position at the time and
place the services were rendered.
Restitutionary Damages (Rest. §374)
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On a breach by non-performance that gives rise to a claim for damages for total breach or
on a repudiation, 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, unless his duties
have already been fully performed and the breaching party’s only remaining duty is the
payment of money.
- Restitution is not allowed in cases of partial breach (Rest. 373)
2 Limitations on the Use of Restitution as an Alternative Remedy for Breach of
Contract
- The election to seek restitution may be made only when the defendant commits a
TOTAL breach of contract or repudiates. (Rest. §373(1))
- The “full performance” exception: if the plaintiff has completed her performance and
the only remaining duty owed by the defendant is the payment of a definite sum of
money, the plaintiff may not elect restitution; instead she is limited to expectation
damages. (Rest. §373(2))
Restitution When Contract is Voidable; Restitution in Cases of Impracticability,
Frustration, Non-Occurrence of Condition or Disclaimer by Beneficiary
Restatement 376
A party who has avoided a contract on the ground of lack of capacity, mistake,
misrepresentation, duress, undue influence or abuse of a fiduciary relation is
entitled to restitution for any benefit that he has conferred on the other party by
way of part performance or reliance.
Restatement §377
A party whose duty of performance does not arise or is discharged as a result of
impracticability of performance, frustration of purpose, non-occurrence of a
condition or disclaimer by a beneficiary is entitled to restitution for any benefit
that he has conferred on the other party by way of part performance or reliance.
Rest. §374 and UCC §2-718
(1) 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 light of the anticipated or actual
loss caused by the breach and the difficulties of proof of loss
Can a breaching party recover restitution damages?
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- intentional acts will preclude recovery (acting officiously, not in part
performance)
- see if damages from the breach are greater than recovery in restitution
Restitution is Measured
Lesser of:
1. Reasonable value of the services given
OR
2. Value of increase to recipient’s property (371)
3. Specific Performance
Specific Performance: Equitable Discretion
- The court has a wide power of discretion in determining whether or not to grant the
remedy (Rest. §357(1))
- Specific performance is an equitable remedy that the court will grant only if, on
balancing the equities between the parties, and taking into account social interests, the
justification of affording the plaintiff this relief outweighs its drawbacks.
Specific Performance: Inadequacy of Legal Remedy
- Specific performance is an equitable remedy that is generally only awarded if the legal
remedy damage or restitution is inadequate. (Rest. §359(1))
- The legal remedy is inadequate if the subject matter of the contract is unique - e.g., real
property, heirlooms, works of art, other one-of-a-kind objects, certain intangibles not
readily available on the market such as patents, closely held stock, etc. (See UCC §2716(1))
- Specific performance is available to both buyers and sellers
Factors (Rest. §§360, 364, 366)
- Adequacy of legal remedy
- difficulty of proving damages with reasonable certainty
- difficulty of getting suitable substitute with money damages
- likelihood that an award of damages could not be collected
- Difficulty of enforcement or supervision
- Subject matter of contract
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- Inequitable conduct (e.g., the contract was induced by mistake or by unfair practices,
“unclean hands”)
- Unfair contract terms
- Balance of equities and hardships
- Plaintiff’s return performance (if not already rendered, a court may condition its grant
on the plaintiff doing so)
Difficulty of Supervision
Courts will not order specific performance where “the character and magnitude of the
performance would impose on the court burdens in enforcement or supervision that are
disproportionate to the advantages gained from enforcement and to the harm to be
suffered from its denial (Rest. §366)
- E.g., courts rarely specifically enforce a contract to build or repair a structure
Employment and Personal Services Contracts
Employment and personal services contracts will NOT be specifically enforced against
the employee or service provider due to concerns about the difficulty of enforcement and
involuntary servitude (Rest. §367(1))
- Some courts may, however, enjoin an employee from working for another
employer based on an implied promise or express exclusivity clause, which is
sometimes characterized as indirect/”negative” enforcement (Lumley, note 2 KCP
1033-34)
- Courts will likely deny a request if the personal services are not special,
unique, unusual or of particular value (e.g., athletes, artists, media
personalities) (§367 cmt. c)
- BUT “A promise to render personal service exclusively for one employer
will not be enforced by an injunction against serving another if its
probable result will be to compel a performance involving personal
relations the enforced continuance of which is undesireable or will leave
the employee without other reasonable means of making a living.” (Rest.
367(2))
- Specific enforcement against an employer is normally denied because of the
difficulty of supervision, or because of the adequacy of money damages.
- Rest. 367 Illustrations
4. Agreed Remedies
- aka liquidated damages
- parties agree in advance what the remedy will be in breaching
Agreed Damages
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- A term in a contract under which the parties agree that in the event of a breach by one of
them, the breaching party will pay damages in a specified sum or in accordance with a
prescribed formula.
- Valid liquidated damages provisions have the effect of agreeing in advance what
damages will be due in the event of a breach.
- The contract can agree as to damages for breach of either party or for only one of them
(and if the liquidated damages clause covers breach by only one party, then a breach by
the other party will require proof of damages in the usual way.)
Specific Performance and Breach of Duty (Rest. §361)
Specific performance or an injunction may be granted to enforce a duty even though there
is a provision for liquidated damages for breach of that duty
Enforceability of Liquidated Damages Clauses
- If a party challenges a liquidated damages clause, the court will interpret it in context to
determine if it was a genuine attempt to settle damages in advance or if it was a penalty.
- A court WILL NOT ENFORCE it if it finds the provision to be a penalty; then the nonbreaching party will have to prove the damages the usual way.
- A penalty= not intended as a reasonable forecast of harm, but rather to punish
breach by imposing liability that goes beyond the actual loss likely to be suffered
by the non-breaching party.
- Courts balance the freedom of contract policy against the policy of confining contract
relief to economic compensation.
Restatement §356
- Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in light of the anticipated or actual loss caused by the
breach and the difficulties of proof.
- Are liquidated damages reasonable in light of the anticipated harm?
- Looks at difficulty of proving loss and whether it was a reasonable
forecast of harm at the time of contract. “The greater the difficulty of
either proving that loss has occurred or of establishing its amount with the
requisite certainty...the easier it is to show that the amount fixed is
reasonable. (Rest. 356, cmt. c)
- Or, are the liquidated damages reasonably close to the actual damages
suffered?
- This is a comparison of liquidated vs. actual damages. If the actual
damages cannot be shown with reasonable certainty, a comparison cannot
be done, and then the court will just have to focus on the above.
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- But “a term fixing unreasonably large liquidated damages is unenforceable on grounds
of public policy as a penalty”
- Many courts presume a liquidated damage clause is enforceable and put the burden of
proof on the party seeking to invalidate the provision (Barrie School)
- In order to be enforceable, a liquidated damages clause must be a reasonable estimate of
the harm. The traditional rule was that reasonableness was measured by the time of
contract formation. Rest. §356 is instead written as a disjunctive test (“or”) between the
reasonableness of anticipated and actual harm.
- Does this mean the clause will be upheld if reasonable at either time? The
modern trend and Rest. §356 suggest this, but it is not entirely clear and some
courts might strike down the clause if it is unreasonable at either time. Note 2
KCP 1048
Damage Limitation Provisions
- Parties may limit the relief that a party may claim in the event of breach
- Such a provision does not anticipate the amount of damages (and is thus NOT a
liquidation of damages), but rather limits the relief (e.g., precludes consequential
damages and confines liability to direct damages).
- Damage limitation provisions are enforceable unless they are unconscionable, or under
UCC §2-719 if it is clear that it badly undercompensates the victim or provides for a
remedy that is valueless. (Rest. §356, cmt. a; UCC §2-781, §2-719, cmt 1; note 9 KCP
1051-52)
- A limitation of remedy that grossly undercompensates the victim could be
substantively unconscionable. To be unconscionable, there would also have to be
some evidence of procedural unconscionability.
C. Buyers’ and Sellers’ Remedies Under the UCC
1. Buyers’ Remedies (Cover, Market Damages, Damages for Accepted Goods,
Specific Performance, Incidental and Consequential Damages)
2. Sellers’ Remedies (Resale Damages, Market Damages, Lost Profits, Seller’s
Action
for the Price, Seller’s Incidental and Consequential Damages)
Buyers
Perfect Tender Rule
- Buyer can cancel the contract if the seller fails to deliver, repudiates, or buyer doesn’t
accept because they are non-conforming goods
HYPO
- buys 7th edition, delivers 6th
- if done before delivery was scheduled, seller has time to cure
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- buyer gives notice of non-conformity
- “ship it back at our expense”
- buyer can’t cancel
Buyer
- Goods accepted or not accepted?
- Market or Cover? (if not accepted)
Buyers’ Remedies under the UCC (Handout)
I.
Buyers’ Remedies in General
a. Cancellation is available under UCC § 2-711(1) if the seller fails to deliver the goods, or
repudiates the contract (UCC §§ 2-610, 2-611), or if the buyer rightfully rejects or revokes
acceptance of the goods because they fail to conform to the contract.
b. Cancellation is different from “rescission.” Cancellation is termination of a contract for
breach and similar to a declaration of total breach under the common law (see Notes 1 and 2 on
pages 825-826), while rescission is termination of the contract for some other reason, such as
mistake, and seeks to return the parties to status quo ante.
c. A buyer who cancels the contract may recover “so much of the price as has been paid,”
plus damages, measured under either the section on “cover” (UCC § 2-712) or “market damages”
(UCC § 2-713), both of which are discussed below.
d. The buyer who accepts and retains goods notwithstanding a nonconformity in the
seller’s tender may be entitled to a remedy under UCC § 2-714 (damages for accepted goods).
e. The buyer who does not receive the goods and does not elect to cancel the contract may
pursue specific performance under UCC § 2-716.
II.
Acceptance, Rejection and Revocation of Acceptance
a. The right to cancel often turns on whether the buyer has rightfully and effectively
rejected the goods or rightfully revoked acceptance. UCC § 2-711(1).
1. Whether rejection is rightful or wrongful turns on the presence of grounds for
rejection. Determination of the buyer’s right to reject begins with the perfect tender rule
as discussed below.
2. If the buyer has proper grounds, the question remains whether the buyer takes the
proper steps to make an effective rejection. Section 2-602(1) simply provides that the
rejection must be made within a reasonable time and that notice must be given to the
seller. Under UCC § 1-205, reasonableness turns on the relevant “nature, purpose and
circumstances” of the action. The reasonable time to inspect and reject oranges, for
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example, is likely to be much shorter than the reasonable time to inspect a complicated
piece of machinery.
b. As a starting point, the buyer may reject the goods if they “fail in any respect to conform
to the contract.” UCC § 2-601. This is the “perfect tender” rule and stands in contrast with the
substantial performance rule of the common law. The perfect tender rule of UCC § 2-601 is
subject to a number of major exceptions.
1.
Under § 2-612, the perfect tender rule does not apply to installment contracts. If the
contract requires or allows for delivery of the goods in multiple installments, the buyer
may reject an installment only if the nonconformity substantially impairs the value of the
goods and it cannot be cured. Further, a buyer may cancel the whole installment contract
only when the nonconformity as to the installments substantially impairs the value of the
whole contract. Thus, installment contracts for the sale of goods utilize a substantial
performance rule similar to that in the common law.
2.
Even if the buyer rightfully rejects goods, the buyer is not entitled to cancel the
contract if the seller cures any nonconformity. UCC § 2-508 allows for cure if the seller
still has time to perform under the contract or the seller had reasonable grounds to believe
that the nonconforming tender would be accepted.
3.
More generally, the duty of good faith under UCC § 1-304 and common law
principles of interpretation may limit the ability to reject goods for truly minor or trivial
defects.
c. The buyer’s right to reject terminates if the buyer has accepted the goods. UCC § 2607(2). A buyer who has accepted the goods is liable for the contract price. UCC § 2-607(1).
However, the buyer does not lose the right to recover damages for breach even if the goods have
been accepted. UCC § 2-607(2). Acceptance of the goods can occur in three ways under UCC §
2-606.
1.
First, acceptance occurs when the buyer, after a reasonable opportunity to inspect the
goods (§ 2-513), “signifies” to the seller that the goods are conforming or that she will take
them despite any nonconformity. UCC § 2-606(1)(a). It is important to note that mere
possession or use of the goods by the buyer does not necessarily amount to acceptance
because the buyer is entitled to a reasonable opportunity to inspect the goods before
accepting.
2.
Second, the buyer will be deemed to have accepted the goods if she “fails to make an
effective rejection” as defined in § 2-602 after having had a reasonable opportunity to
inspect. UCC § 2-606(1)(b). Thus, if a buyer simply holds the goods and takes no other
definitive steps, the buyer will be deemed to have accepted the goods after the passage of a
reasonable time.
3.
Third, a buyer accepts goods if she does any act “inconsistent with the seller’s
ownership.” UCC § 2-606(1)(c). Altering or modifying the goods would be an example of
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an act inconsistent with the seller’s ownership.
d. After acceptance of the goods, the buyer could still cancel the contract if the buyer is
entitled to revoke acceptance. UCC § 2-608. The requirements for revocation of acceptance are
more stringent than for rejection. Among other requirements, the nonconformity must be
“substantial,” there must not be any change in the condition of the goods unless caused by their
own defects, and notice is required.
III. Damages, Specific Performance and Other Remedies
a. If the goods have been accepted, the buyer’s damages are measured under UCC § 2-714:
•
If the buyer retains goods despite nonconformity, the buyer must give notice of the
deficiency to the seller within a reasonable time to preserve the right to collect a
remedy.
•
The buyer may recover those damages that result “in the ordinary course of events from
the seller’s breach.” That is, the buyer may recover damages based on the loss suffered
by the buyer as a result of the deficiency in the goods.
•
More specifically, if the damages flow from a breach of warranty, UCC § 2-714(2)
establishes that the measure of damages is “the difference at the time and place of
acceptance between the value of the goods accepted and the value they would have had
if they had been as warranted, unless special circumstances show proximate damages
of a different amount.”
•
Incidental and consequential damages under UCC § 2-715 may also be recovered.
b. If the goods have not been accepted, (e.g., nondelivery, repudiation, rightful rejection, or
rightful revocation of acceptance), the buyer may elect to recover damages under either the
market value measure, UCC § 2-713, or the “cover” section, § 2-712. In either case the buyer is
also entitled to recover incidental and consequential damages under UCC § 2-715.
•
Cover: “(1) After a breach [by seller], the buyer may ‘cover’ by making in good faith
and without 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 between the cost of cover and the contract price
together with any incidental or consequential damages…, but less expenses saved in
consequence of the seller’s breach.” UCC § 2-712.
•
Market damages: If the buyer is not able to cover, chooses not to cover, or if the buyer
did not act reasonably in covering, the buyer may instead recover market damages
under UCC § 2-713: “the difference between the market price at the time when the
buyer learned of the breach and the contract price together with any incidental and
consequential damages…, but less expenses saved in consequence of the seller’s
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breach.”
•
Notes from the casebook: The UCC is unclear on whether a buyer who has covered
can elect to recover greater market damages, but commentators agree the buyer in this
situation should be limited to cover damages. The casebook also notes that
interpretational difficulties have arisen from the phrase “learned of the breach.” KCP
pages 944-45.
c. Specific Performance. UCC § 2-716 provides for specific performance when the goods
are “unique or in other proper circumstances.” As the casebook notes, if substitute goods are
readily available in the market (as they often are), a court is likely to deny specific performance.
KCP page 946.
d. Other: Incidental and Consequential Damages; Liquidated Damages
1. After a seller’s breach, the buyer can recover incidental and consequential damages
under UCC § 2-715, in addition to the other measures of damages discussed above.
Economic consequential damages are subject to the foreseeability test and to the
mitigation principle: “Consequential damages…include: (a) any loss resulting from
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.”
Damages for injury to person or property are also recoverable, and are not subject to the
foreseeability test: “(b) injury to person or property proximately resulting from any
breach of warranty.”
2. Regarding buyers and sellers, the UCC provides a similar rule as the Restatement
regarding liquidated damages. UCC § 2-718(1) provides: “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, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
A term fixing unreasonably large liquidated damages is void as a penalty.”
Summary of Sellers’ Remedies under the UCC
I.
Damages if the Goods Have Not Been Accepted by the Buyer.
a.
UCC § 2-703(f) allows the seller to cancel the contract (and not provide the goods) if the
buyer wrongfully rejects, wrongfully revokes acceptance, fails to make a payment that is due on
or before delivery, or repudiates. (Note that a mere failure to pay the price after delivery will not
give the seller the right to cancel, although the seller would have a cause of action under § 2-709
for the price.)
b.
In addition to cancellation, the seller may recover damages based on either the resale
section (UCC § 2-706) or the market price or lost profit damages section (UCC § 2-708).
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1. Seller’s Resale. UCC § 2-706. This section, which is the seller’s equivalent of the
buyer’s right to cover, allows the seller to resell the goods on the market and to recover the
difference between the resale price and the contract price. The seller must identify the
goods being resold as the same ones under the breached contract, give the buyer proper
notice, and the resale must be in good faith and in a commercially reasonable manner.
UCC § 2-706. The section allows the seller to proceed either by private or public sale.
UCC § 2-706(2), (3), (4). For private sales, the seller must give the buyer reasonable
notice of his intention to resell. UCC § 2-706(3). For public sales, the seller must give the
buyer reasonable notice of the time and place of the resale unless the goods are perishable
or may quickly decline in value. UCC § 2-706(4). Damages are not recoverable if the
seller engages in a “sham” resale to a friendly purchaser or affiliated entity.
2. Market Damages. UCC § 2-708(1). If the seller has not resold the goods or fails to
comply with the requirements of UCC § 2-706, he may recover the difference between the
contract price and the market price of the goods at the time and place at which delivery was
to have been tendered under the contract. This measure may be used, for example, when
the seller elects not to resell, or when the resell was not conducted reasonably (too low a
resale price). As the casebook notes on page 948, there can be some difficulty in
interpreting this section’s relationship with the resale section, § 2-706.
3. Lost Profit. UCC § 2-708(2) allows the seller to recover his profit if cover or market
damages are not adequate to put the seller in as good a position as performance would have
done. Sellers have been allowed to recover lost profit when the seller can show he is a
“lost volume seller,” when the seller can show he is a middleman who purchases goods for
resale and the buyer breaches before the middleman has acquired the goods, and when
there is no market for the goods involved (e.g., custom-made items). Courts are divided on
whether a seller can elect market damages if that measure would be greater than lost
profits. (The issue is discussed at KCP pages 948-49.)
II. Recovery of the Contract Price. Sometimes the buyer accepts conforming goods but
refuses to pay for them. If so, UCC § 2-709 allows a court to enforce the buyer’s obligation to
pay and for the seller to recover the contract price. An action for the price, the seller’s equivalent
of specific performance, is limited to three situations:
(1) the goods have been accepted;
(2) the goods have been lost or damaged within a commercially reasonable time after risk
of loss has passed to the buyer; or
(3) the seller is unable to sell the goods after reasonable efforts. If the seller is entitled to
recover the price, the goods must be turned over to the buyer. UCC § 2-709(2).
III. Other: Incidental and Consequential Damages; Liquidated Damages
1.
All of the above remedial sections also allow the seller to recover incidental damages
under UCC § 2-710.
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2.
Consequential damages are not specifically mentioned. Commentators argue that
courts should rely on common law principles via § 1-103(b) and allow sellers to recover
consequential damages in appropriate case. Courts are split on this issue.
3.
Right to recover liquidated damages is as discussed above (UCC § 2-718).
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