Baird/Bernstein - 2009 CONTRACTS OUTLINE: Holmes A promisor has one of two options at law: 1) Keep his promise or 2) Pay damages. Consequences of Making a Promise Legally Enforceable 1) Has a legally enforceable promise been formed and has it been breached? a. Answer is yes: i. Breached against party is entitled to a remedy. ii. WHAT KIND OF REMEDY? 2) Equitable Remedy: a. Specific performance: i. Would your client want SP if you can get it? 1. Where on the spectrum between painting a gorgeous portrait and 500 delivered washers is the promised performance? 2. What are the incentives for, if the person is ordered to do it, to do it properly? a. Lumley v. Wagner – did not want to ruin her reputation as an opera singer! So she would sing fine! However, there is the argument that she might have sung shittily out of spite. 3. Is there any other way that your client can get this stuff that does not involve litigation? 4. What type of information would you need to disclose to get expectation damages This might push you to seeking SP if you would need to disclose things you don’t want to be found out. ii. Ok, so your client DOES want it! CAN WE GET IT? 1. UNIQUENESS? Are the goods unique, in how easy or hard is it to give value to the promised performance? Can the party be over or undercompensated? a. It can be fixed with a value! NO SP i. Van Wagner v. S&M Industries Held that no S.P. where the value of the “unique qualities” of the thing/service in question could be: 1. Fixed with reasonable certainty. 2. AND 3. Without imposing an unacceptanly high risk of undercompensating the injured tenant. b. No fixed value! Possibly! i. Can expectation damages be estimated? Baird/Bernstein - 2009 1. Curtice Bros. v. Catts Very hard to estimate the damages from the lack of delivery of tomato crop; it could BANKRUPT THE BUSINESS! 2. Leaves factory HELPLESS BEFORE AN UNCERTAIN MARKET. 3. Where no ADEQUATE remedy at law exists (damages), specific performance may be granted. 2. Are money damages adequate? a. Can the damages be figured out in some way that is perfectly compensatory! (Curtice Bros. v. Catts) b. If no, then SP! iii. What type of contract is this? 1. PERSONAL SERVICES: a. Lumley v. Wagner - Court is VERY reluctant to order it. i. HOWEVER, NEGATIVE INJUNCTIONS - Therefore, you might want to seek a negative injunction (try to find one that will give the performer an incentive to then take on your job – like in Lumley v. Wagner) 2. NON-COMPETITION AGREEMENTS a. Will be looked at by the court with great scrutiny since there is a general judicial disfavor of such provisions. b. For these elements: i. Necessary to protect trade secrets ii. Customer lists iii. Good will of employer’s business iv. OR, employer is exposed to specific harm because of the unique nature of the employee’s services. c. COURT MAY DO THESE THINGS: i. Hold party to the agreement. ii. Declare unconscionable and refuse to honor the noncompetition clause in entirety. iii. Edit an excessive clause down to reasonableness. 1. Fullerton v. Torberg Even when those elements are met, the noncompetition agreement must be for a reasonable amount of time, and not excessive! (10 years too much, change to 3). 2. Court can LOWER the time of the agreement. 3. ARBITRATION CLAUSES: a. Arbiters can, and often do, impose specific performance verdicts. Baird/Bernstein - 2009 b. Courts are reluctant to reverse arbitrated decrees of specific performance. i. Garyson v. Iris Court affirms arbitration order that bankrupt D build a building for P. iv. When you seek SP, and you show that it is difficult to measure damages…if you lose the injunction/SP, then you are stuck in the position when going for expectation damages that YOU CANNOT VALUATE THEM! 1. This is a major consideration for whether or not you want to seek specific performance! 3) OK, no specific performance! 4) Right to collect some form of money damages! a. Liquidated damages provision? b. If yes. i. To be enforceable, a liquidated damages provision must satisfy either: 1. Looks like a genuine attempt to pre-estimate damages at an ex ante point in a context where damages would be difficult to measure a. Muldoon v. Lynch If it is determined that the clause is, in fact, a PENALTY, then it is not enforce able. This case puts emphasis of INTENT of the clause. i. BURDEN OF PROOF IS ON THE PARTY THAT BENEFITS FROM THE CLAUSE. 2. OR 3. You can show ex post that said liquidated damages provisions are close to being expectation! a. Yockey v. Thorn – When it’s REALLY hard to measure what the actual damages would be, the court will generally allow the liquidated damage provision granted that it is a reasonable ex ante estimation of damages in case of breach. b. RESTATEMENT 2nd OF CONTRACTS: i. §356 – Liquidated Damages only allowed in an “amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceanle on grounds of public policy.” c. UCC TEST: “One look or two?” i. FIRST LOOK – Was the provision reasonable at the time of the contracting? ii. BUT YOU CAN GO ON… iii. SECOND LOOK – Was the provision reasonable at the time of the breach? 4. GENERAL TEST: Baird/Bernstein - 2009 a. Samson Sales, Inc. v. Honeywell Inc. test: i. CLAUSE VALID WHEN: 1. Uncertain to the amount of the damages resulting from breach and difficulty of proof. 2. Contract as a whole is not unconscionable or unenforceable. 3. Contract consistent with the conclusion that it was the intention of the parties that the damages should be limited according to the clause. a. THEREFORE, BOTH PARTIES MUST REASONABLY FORESEE THAT THESE LIQUIDATED DAMAGES SHOULD BE INCLUDED IN K! b. In this case, the provision for $50.00 worth of damages was too low to possibly be desired by the P! c. If no: DAMAGES! DAMAGES: 1) EXPECTATION DAMAGES: a. PURPOSE: Damages designed to put the breached against party in the same position where she would have been had the contract been performed; i. Goal is to reach COMPENSATION (neither more or less) ii. HOW ARE THESE DAMAGES CALCULATED? 1. PERSONAL SERVICES: a. Hawkins v. McGee Difference in the value b/w hairy hand and the perfect hand he was promised! b. HOWEVER, Sullivan v. O’Conner – Court has skepticism of importing contractual relations into the doctor-patient relationship. Therefore, they award her reliance damages only (which are typically less than expectation damages). 2. BUILDINGS AND LAND: a. Louise Caroline Nursing Home v. Dix Dix fails to complete building of Nursing home. i. Plaintiff is awarded enough money from defendants so as to complete the repairs to the building MINUS any contract price not yet paid to D. Baird/Bernstein - 2009 1. COST OF REPAIR – CONTRACT PRICE NOT YET PAID. ii. THEREFORE, when cost to repair is less than the amount not paid, NO DAMAGES ARE AWARDED. 1. (cost of repairs = $2000) – (still owe D $3000) = no damages. 2. They are seen as already justly compensated! iii. Courts are very adverse to OVER-COMPENSATING PLAINTIFFs. b. Groves v. John Wunder Co. D rents land for $104,00, damages the land in breach of contract. To repair would cost $60’000, but value of land would only go from $0 (in current state) to $12’000 (if repaired). i. Defendants found liable to P for reasonable cost of doing what they promised ($60’000). ii. Resulted in further negotiations where John Wunder agree to just pay less money to Groves. c. HOWEVER, Peevyhouse v. Garland Coal & Mining Co. In a coal mining lease, when the remedial work is not done the damage should be the cost of performance BUT for instances where i. The difference b/w cost and added-value is disproportionate 1. $29’000 to repair to effect an added market value to the land of $300 TOO MUCH COMPENSATION! ii. AND iii. The remedial work is incidental to the main purpose of the lease. 1. Main purpose was strip-mining, repairs were remedial. 3. PROMISES TO DELIVER GOODS: a. IS there a lost volume seller here? b. YES; i. Neri v. Retail Marine Corp. – Guy is going to buy boat, it is made, but he defaults and does not purchase it. He sues for his money back. Retailer denies, arguing that lost profits and incidental damages (holding boat for longer than they would have) should be taken out of P’s award. P argues that since the boat was sold to a later buyer, no loss was suffered by seller. Baird/Bernstein - 2009 ii. UCC 2-708(2) – If standard damage measure is inadequate to put the seller in as good a position as performance would have because of the loss of a profitable sale, then seller’s damages shall instead be “the profit (including overhead) which the seller would have made from full performance of buyer.” 1. Allows for lost profits because seller essentially lost a sale. Though the boat will go to the Buyer B, he is still missing out on the profits to be gained from Buyer A. iii. Extremely Context specific Can’t be a one-of-a-kind good; only applies when goods are somewhat fungible! c. NO: d. Acme Mills v. Elevator i. Measure of damages in the difference b/w contract price and market price of the property at the time and place of delivery. ii. Plaintiff benefits by failure to deliver since the price he is paying has gone down. Replacement wheat will cost him less than he would have otherwise paid. Therefore NO DAMAGES. iii. Our goal is only to compensate, so we should look at contract-market differential to calculate damages. 1. HOWEVER! a. Missouri Furnace Co. v. Cochran Cochran breaches on contract to sell coal and P makes contract with another party at higher price, suing for difference between that higher price and the original contracting price. i. Damages are on the spot price of the contract made between P&D, so the difference between contract price and market price at time of delivery. ii. WHY? P did not HAVE to enter new K. iii. Further market fluctuations in future contracts do not impinge on previous contracts! Baird/Bernstein - 2009 b. Illinois Central R.R. v. Crail i. Wholesale market price or retail market price? ii. Context specific! Wholesale, because that would be compensatory! Loss suffered was the loss of wholesale price. b. LIMITS ON EXPECTATION DAMAGES: i. FORESEEABILITY: 1. Hadley v. Baxendale: a. ELEMENTS – Damages limited to: b. General Damages – Damages that flow from a given type of breach without regard to the particular circumstances of the victim. c. Consequential Damages – Above and beyond that are a result of buyer’s particular circumstances. Limited to: i. Harms that arise naturally; reasonably foreseeable to both parties. 1. Defendant had reason to foresee the damages as probable result of the breach. ii. AND/OR iii. Special circumstances that were specifically communicated b/w the parties: 1. HOW COMMUNICATED? 2. Globe Refining Co v. Landa Cotton Oil Co. Has to be some sense that consideration of the resulting liability became encompassed in the bargain. TACIT AGREEMENT! (fact that there was no discussion about transportation costs in K shows that liability for those costs was unforeseeable). 3. But we’re not looking for subjective intent…so where is the line where that meets objective fact? a. Victoria Laundry v. Newman IMPOSES REASONABLE MAN STANDARD ON THIS DOCTRINE! b. D should have foreseen, by trade of laundry-women, that the boiler was to be for their work and D should have realized without it, there would be lost profits. Baird/Bernstein - 2009 4. LIMITATION, where the cost of damages suffered by buyer far outweigh the cost of the performance by the seller, creates presumption that those damages were not foreseeable by the seller. (Lamkins v. International Harvester) iv. Walking the Line - Often, parties will want to keep their circumstances vague enough for them to keep the damages while at the same time being vague enough for the opposing person to not use them to up the price of the contract they are entering. ii. Certainty: 1. Damages can be recovered only if their amount is reasonably certain of computation. Damages that are not reasonably certain of computation are referred to as “speculative.” Where amount is not reasonably certain, P can recover only nominal damages. Divided into two categories based on the certainty with which profits can be speculated. 2. OFTEN IN RELATION TO LOST PROFITS: 3. New Businesses: a. IN THE PAST Lost profits were not allowed for new businesses because those profits are inherently speculative. b. NOWADAYS Case-by-case basis, and if lost profits can be determined with reasonable certainty - example, by comparison with similar local businesses – then they can be awarded. i. Mindgames, Inc. v. Wester Pub. Co. Posner denies lost profits because of their speculative nature. ii. Freund v. Washington Square Press, Inc. author denied recovery because it would have been for royalties, and sales of the book were too uncertain. iii. Fera v. Village Plaza, Inc. There was enough evidence to ascertain potential profits for a store that failed to open due to breach on D’s part. 1. Though there is a high burden of proof (here days and days of testimony), lost profits for new businesses may be awarded! 4. Existing Businesses a. Depends on the certainty which they can estimate the lost profits! b. Generally, profits from existing business are not treated as speculative and are recoverable since future profits can be estimated from past profits. Baird/Bernstein - 2009 i. HOWEVER, must still be ascertainable. ii. Chicago Coliseum Club v. Dempsey Profits are so dependant on circumstances that they are unascertainable. iii. Mitigation: 1. YOU ARE NOT PRECLUDED TO A RECOVERY IF YOU DID NOT MITIGATE, ONLY THE COMPONENT OF THE DAMAGE MEASURE THAT COULD HAVE BEEN AVOIDED THROUGH STEPS! 2. CONTRACTS FOR THE SALE OF GOODS: a. UCC §2-715(2) - if a seller fails to deliver, buyer has a right to cover (buy substituted goods and sue for damages). If the buyer fails to cover, she will be barred from recovering any consequential damages that could have been prevented through covering. b. UCC §2-704(2) – If buyer repudiates, seller cannot run up damages by incurring freight charges for packing, delivery and so forth. 3. EMPLOYMENT CONTRACTS: a. If an employer wrongfully terminates the employment, the employee is under a duty to mitigate by looking for a comparable job. b. Often opens the door to a judge’s subjective value judgments i. Parker v. 20th Century Fox: 1. MAJORITY: “working on a western is different from working in a feminist musical” 2. DISSENT: “NO, they are both movies and therefore the same kind of employment”) 4. CONSTRUCTION CONTRACTS: a. Rockingam County v. Luten Bridge Co. – A contractor is under a duty to not add to the owner’s damages by continuing to work after the owner breaches the contract. In particular, a contractor cannot recover for expenses in continuing construction after owner repudiates contract. b. No duty to take a replacement job! At the same time, if you take a replacement job, the profits from that are not subtracted from damages. c. IN TOTAL, expectation damages are very hard to get!! Even though they are the typical remedy! d. BUT NOT THE ONLY REMEDY! 2) Reliance Damages! Baird/Bernstein - 2009 a. PURPOSE To restore the victim to the position he would have occupied if the event or transaction had never occurred. i. Recover your detriments! ii. Only losses that you put into the contract in reliance on the other party’s performance! iii. POLICY -- Security Stove & Mfg. Co. v. American Ry. Express Co. – Reliance damages serve a particular goal of reimbursement which better suits the compensation goal! b. AWARDED WHEN: i. Expenses have been generated towards performance of a contract that was then breached. 1. Chicago Coliseum Club v. Dempsey Dempsey refuses to fight; damages allowed for all material expenses incurred a. AFTER SIGNING OF CONTRACT. i. Travel TO signing of contract not allowed. b. TOWARDS COMPLETION OF CONTRACT. c. HOWEVER, NOT amounts that were speculative or any expenses incurred AFTER BREACH. 2. LIMITATION When D can show that fulfillment of his promise would have resulted in a material detriment to the P, then that amount can be deducted from reliance damages. L. Albert & Son v. Armstrong Rubber Co. c. When the basis of the claim is not breach of contract, but an action of promissory estoppels Often reliance damages are the default remedy! i. Sullivan v. O’Connor – Reliance damages are lower than expectation measure and therefore better in medical cases where the court hesitates to impose hefty expectation damages upon the defendant.! ii. If you have the choice to sue on breach of contract versus promissory estoppels, then choose the former b/c expectation damages are often more! 3) RESTITUTION DAMAGES: a. PURPOSE: To prevent unjust enrichment by returning things to the status quo and taking away any benefits given to the defaulting party by the plaintiff. b. Unenforceable Contracts: i. Available to recover value of a benefit conferred on another where the benefit was conferred under a contract that is unenforceable because of the Statute of Frauds, doctrine of impossibility or other comparable excuses, such as mutual mistake. ii. Boone v. Coe P invited to live on farm by D in an unenforceable contract. P is not entitled to restitution because they merely sustained a loss, however if they conferred material benefit to D, that would be recoverable. Baird/Bernstein - 2009 c. Breach of Contract: i. Can usually bring a claim for either EXPECTATION DAMAGES or RESTITUTION IN QUASI-CONTRACT (QUANTUM MERUIT). ii. Measured by market value of the plaintiff’s performance rather than by actual enrichment of defendant. iii. Losing Contracts: 1. GENERAL RULE: P can bring suit for restitutionary damages where D is in material breach, even if contract is a losing one. a. Plaintiff has made a losing contract, where market value of goods or services to be provided to defendant was greater than contract price NO EXPECTATION DAMAGES! b. However, under quantum meruit, P can recover market value of goods or services that were provided; contract price does not set limit on the value of benefit conferred. c. United States v. Algernon Blain, Inc. -- Quantum meruit Allows promisee to recover the value of services he gave to D irrespective of whether he would have lost money on the contract and had been unable to recover in a suit on the contract for expectation damages. iv. EXCEPTION FOR FULL PERFORMANCE: 1. Where innocent party has fully performed innocent party is limited to the contract price for performance. 2. Oliver v. Campbell Once performance has been completed (trial over), the plaintiff is limited to only receive the contract price that has not yet been paid. v. WHEN PLAINTIFF IS IN BREACH: 1. Under modern law, breaching party can bring quantum meruit suit to recover benefits conferred to other party, subject to an offset for that party’s damages. 2. HOWEVER: a. Stark v. Parker Not allowed when P breaches. b. Britton v. Turner Allowed when P breaches! (minus damage done to D by breach) i. Vines v. Orchard Hills: Breaching party must establish that other party was UNJUSTLY enriched by showing: ii. Is there a benefit conferred on the other party? 1. If no, then NO DAMAGES. 2. If yes! THEN What were losses of the breached against party? iii. SO, amount is benefit conferred LESS the proven damages! Baird/Bernstein - 2009 PART TWO: IDENTIFYING THOSE PROMISES THAT ARE ENFORCEABLE 1) Start with a promise! 2) Is this promise supported by consideration? a. If so, and all other elements for legally enforceable contract are met, you should be able to recover expectation damages when there is a breach. b. STEP ONE OF INQUIRY: Is there e benefit to promisor or detriment to promisee? (Hamer v. Sidway) i. ELEMENTS: ii. Benefit to promisor. iii. OR iv. Detriment to promisee. 1. Congregation Kadimah Toras-Moshe v. DeLeo No Contract because neither of these existed! 2. Pitts v. McGraw-Edison Employee who retires and gives up information voluntarily did so on a voluntary basis and not as consideration a. NOTHING PROMISOR DID REQUIRED OR INDUCED PLAINTIFF INTO GIVING THE INFO! 3. In Re Bayshore Yacht & Tennis Club Condominium Ass’n A mere gratuitous promise of a future gift, lacking consideration, is unenforceable. v. NOT NOMINAL CONSIDERATION – When there is the recital of the bargain but no real bargain. 1. Fischer v. Union Trust Co. Where father goes through a sample exchange whereby his son gives dollar to daughter to give back to him. a. HOWEVER, nominal consideration WILL make OPTIONS and GUARANTIES enforceable if certain conditions are meant Mier v. Hadden. b. WHY? Serve commercial purposes…these are promises designed to facilitate or further a proposed bargain LIKELY TO BE RELIED UPON! c. WHY? Court in Fischer saw that they were manipulating form to make a GIFT look like a contract, and hated that! vi. RESTATEMENT §71: 1. To constitute consideration, a performance or a return promise must be bargained for through something sought by promisor in exchange for promise and is given by promisee in exchange, such as: a. An act other than a promise. b. A forbearance. i. Hamer v. SIdway – Giving up legal rights for a certain amount of time is valid forbearance. Baird/Bernstein - 2009 c. The creation, modification, or destruction of a legal relationship. vii. WHY CONSIDERATION? 1. Why not enforce gratuitous promises? a. Such promises are often made impulsively and w/o proper deliberation. i. Problem with the MANNER with which promise is made. ii. So this manner will be eliminated through a formal promise-making procedure/ceremony/etc. 2. FUNCTION OF FORM: a. Evidence: i. Provides evidence to the purport of the contract! b. Cautionary: i. Check against inconsiderate action. ii. Induces the circumspective mind of the one pledging his future. c. Channeling function: i. Simple and external test of enforceability. viii. PAST CONSIDERATION: 1. TRADITIONAL RULE Mills v. Wyman – A promise based on moral or past consideration is simply a donative promise and is therefore unenforceable. a. EXCEPTIONS: b. Debt barred by statute of limitations, followed by promise to pay. c. Debt barred by bankruptcy + promise to pay. 2. MODERN RULE: Sometimes enforceable if: a. The promise is based on a MATERIAL BENEFIT that was previously conferred by the promisee upon the promisor b. AND c. The benefit gave rise to an obligation – even if only moral – to make compensation. i. Webb v. McGowin – Webb saves the life of McGowin but sustains serious injuries as a result. McGowin promises to pay Webb bimonthly stipend is binding because of material benefit conferred. d. HOWEVER, Harrington v. Taylor – Similar promise arises when someone saves another from injury and is hurt in the process, but FOLLOWS TRADITIONAL RULE! i. MODERN RULE STILL NOT ACCEPTED IN ALL JURISDICTIONS! e. Restatement §86: Baird/Bernstein - 2009 i. 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. 1. What does this mean? a. If a GIFT not binding! b. If the value is disproportionate to the benefit Not binding! c. STEP TWO: Consider context and look at relative values of things exchanged! i. (not saying what you do with the relative values) ii. According to Hamer and Batsakis No requirement that value given by one party be commensurate with the value given by the other! d. STEP THREE: Formality! i. Fischer v. Union Trust Co. Is party trying to use formality to make a gift into a contract? 3) Was there a bargain? a. Section 71 and 81 of the Restatement. PROMISES WITHOUT CONSIDERATION: 1) Promissory Estoppel: a. FORMER RULE – Reliance was irrelevant; a donative promise was unenforceable even if it was relied upon. i. Kirksey v. Kirksey Guy invites brother’s widow onto his land, she relies on his services for awhile until he kicks her off the land. No recovery for her reliance expenses. b. MODERN RULE – Promise will be legally enforceable when: i. ELEMENTS: ii. Promise will be legally enforceable when iii. Induces reliance by the promisee. iv. In a manner that the promisor should reasonably have expected. 1. Ricketts v. Scothorn Grandad intended that grandaughter should give up her occupation in exchange for money from him…but more importantly he contemplated such action on her part as a reasonable and probable consequence of his gift. c. RESTATEMENT §90: i. ELEMENTS: ii. There is a promise. iii. Promisor has reasonable belief that the promise will induce action or forbearance on the part of the promisee. 1. First National Bank of Logansport v. Logan Manufacturing Co.--> Bank should have reasonably expected promisees to rely on their promise to Baird/Bernstein - 2009 extend more money to them; evidence they had ACTUAL knowledge of reliance. iv. Promisee IS induced into such action or forbearance. 1. First National Bank of Logansport v. Logan Manufacturing Co.--> They DID rely on the promise for more money in putting the first loan to work! v. ONLY ALLOWED IF injustice can be avoided ONLY by enforcement of the promise. 1. First National Bank of Logansport v. Logan Manufacturing Co. It would be unjust for the bank to recoup the $100,000 originally loaned without imposing on it the responsibility for the actions of its lending officer. 2. Drennan v. Star Paving Co. - Between subcontractor who made an erroneous bid and the general contractor who reasonably relies on it, the loss resulting from the mistake should fall on the party that caused it. vi. ALSO – SOMETIMES, NO NEED FOR THERE TO BE AN OFFICIAL PROMISE 1. Hoffman v. Red Owl Stores, Inc. Court awarded reliance damages even though the parties had not entered into a preliminary written agreement or even begun performance, but one party had nevertheless prepared to perform. a. Restatement § 90 “does not impose the requirement that the promise giving rise to the cause of action must be so comprehensive in scope as to meet the requirements of an offer that would ripen into a contract if accepted by promissee.” i. Does not require there to even be a finalized promise made! b. This doctrine often applied by courts where party constantly dangles the prospect of a final contract before plaintiff, knowing or having reason to know that P would rely on the prospect. i. Implies a bad faith element! d. CAUTION – Courts are reluctant to uphold promissory estoppel in the context of an employment contract. i. Goldstick v. ICM Realty “Employment at will…remains the dominant type of employment relationship in this country, and would be seriously undermined if employees could use the doctrine of promissory estoppel to make alleged oral contracts enforceable.” 1. Reliance is TOO EASILY SHOWN IN THIS SETTING! e. As consideration? i. Some authorities treat promissory estoppel as simply a type of consideration. Baird/Bernstein - 2009 ii. Allegheny College v. Nat’l Chautauqua County Bank The court held that the moment P accepted the $1,000, there was an assumption of a duty. That duty to perpetuate the name of Mary was sufficient to render the subscription enforceable within the rules that define consideration for a promise regarding charitable subscriptions. Baird/Bernstein - 2009 SPRING QUARTER – BAIRD WHEN (AND HOW) PROMISES BECOME LEGALLY ENFORCEABLE: 1) PRECONTRACTUAL LIABILITY: a. OLD VIEW: i. Some cases have allowed an offeror to revoke a firm offer notwithstanding the offeree’s reliance. 1. James Baird Co. v. Gimbel Bros. Where D made a bid to provide linoleum to general contractor, retracted, and then offer was accepted, Judge Hand says that an offer of exchange is revocable up until acceptance and therefore, no damages. b. MODERN VIEW = PROMISSORY ESTOPPEL: i. A firm offer is irrevocable: 1. Offeror should have reasonably foreseen that the offer would induce reliance by the offeree prior to acceptance 2. AND 3. Such reliance occurs. a. Drennan v. Star Paving Co. Guy submits bid including estimate from subcontractor, who, when bid winner goes to get accept revokes. Traynor finds promissory estoppel. 2) THE “MEETING OF THE MINDS” a. GENERAL RULE: A contract is created by words or conduct (“expressions”) by the parties, and these impressions should be given the interpretation that a reasonable person standing in the addressee’s shoes would put upon it, rather than the subjective ACTUAL intent of the addressor. b. EXCEPTION: If both parties subjectively attach different, equally reasonable, interpretations to their expressions, no contract is formed. i. Raffles v. Wichelhaus – Where contract is formed regarding shipments from a ship named Peerless, there being two ships of that name and each party thinking of a different one, then the difference in their subjective thoughts about the term in the contract voided the contract entirely. ii. LIMITATION – Both readings must be EQUALLY REASONABLE! 1. Embry v. Hargadine-McKittrick Dry Goods Co. Employee’s interpretation of events is MORE REASONABLE than employer’s, therefore COURT FINDS FOR HIM! a. QUESTION: “For a third-party observer, which reading of the events would seem more reasonable?” iii. ALSO – CAN BE A REASONABLE PERSON IN PARTY’S SHOES: 1. Flower City Painting Contractors, Inc. v. Gumina Constr. Debate between general and sub-contractors about whether the word UNITS meant painting exteriors or exteriors+interiors. a. COMMERCIAL CUSTOM = Interior + Exterior b. COMMON USAGE = Exterior only. c. Judge found that since painters were neophytes, they could reasonably believe in the common usage while the Baird/Bernstein - 2009 experienced general contract could reasonably believe the trade usage. i. IF PAINTER WAS EXPERIENCED LIKELY HELD THAT IT WOULD BE MORE REASONABLE TO GO BY TRADE USAGE! NEOPHYTE EXCEPTION! iv. Principle rests on an assumption of EQUAL FAULT: 1. Dickey v. Hurd Where there is mutual mistake, and one party subsequently learns of the other’s erroneous understanding of the terms of the contract, then that party has a legal duty to inform that other party of his own understanding of the terms. 3) OFFERS: a. When is a communication to be regarded as an offer and when is it to be taken merely as an invitation to engage in bargaining and negotiation? i. Very dependent on the surrounding circumstances of the case! ii. Can be explicit: “I hereby offer you Blackacre in exchange for $40000.” iii. WATCH OUT! SOMETIMES NOT! SOMETIMES MERELY AN INVITATION TO NEGOTIATE! iv. Moulton v. Kershaw Seller mails out circular to multiple parties saying they can offer salt at a certain price. 1. NOT AN OFFER BECAUSE: 2. Too uncertain The original letter did not mention how much salt they had, and therefore would throw a large amount of uncertainty into the contract which would make it difficult to enforce. a. CHANCE FOR UNREASONABLE ACCEPTANCE! 4) ACCEPTANCES: a. WHEN DO THEY TAKE EFFECT? b. FIRST YOU MUST DETERMINE WHETHER THE PROMISE WAS UNILATERAL OR BILATERAL! i. Davis v. Jacoby – When it is ambiguous as to whether a promise is unilateral or bilateral, there is a presumption at law that the contract was BILATERAL! 1. WHY? A “bilateral contract immediately and fully protects both parties…” c. UNILATERAL CONTRACTS An offer that is to be accepted by performance of an act. i. WHAT CONSTITUTES ACCEPTANCE? 1. Performance of the requested act before revocation. 1) Carlill v. Carbolic Smoke Ball Co. Offer was continuous and never revoked, and since addressed to “any party” then notice of acceptance comes with the notice of completion of the act. a. RULE: So if offeror receives notice of completion of act by offeree before revocation, then it becomes binding. 2) Cobaugh v. Klick-Lewis, Inc. Where offer left up after tournament is performed by golfer, that is still binding. Baird/Bernstein - 2009 a. RULE: “It is the manifested intent of the offeror and not his subjective intent which determines the persons having the power to accept the offer.” i. Lefkowitz v. Great Minneapolis Surplus Store Ad was for a deal “first come, first served.” Guy gets there early, but store refuses to give him a deal because it was supposed to be for women…court awards him damages. b. IF GOLFER REASONABLY BELIEVED THAT OFFER WAS DIRECTED TO HIM, THEN IT IS BINDING. ii. REVOCABILITY: 1. OLD RULE A offer for a unilateral contract was revocable until the offeree had completed performance of the act specified in the offer. Therefore, revocable EVEN WHEN OFFEREE HAD BEGUN PERFORMANCE! a. Brooklyn Bridge Problem – I offer you a hundred dollars to cross the Brooklyn Bridge, and I can take that offer back even when you are 2 feet from completing the task. b. Petterson v. Pattberg – Man was able to revoke even while the person coming to pay him was at his door handing the money out. 2. MODERN RULE An offer for a unilateral contract cannot be revoked once performance has begun, unless performance is not completed within a reasonable time. a. Restatement Second §45 – “(1) Where an offer invites an offeree to accept by rendering a 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.” b. Brackenbury v. Hodgkin Once performance had begun, offeror was not allowed to revoke her promise to leave her farm to her daughter and son-in-law if they would care for her during life. d. BILATERAL CONTRACTS Made binding as soon as the offeree FORMALLY ACCEPTS. i. Mail-Box Rule: Acceptance is valid as soon as it is dropped in the mailbox, not upon receipt by offeror. 1. Morrison v. Thoelke Offeror calls to revoke after offeree mails off their acceptance but before offeror receives it. Court finds that the offer had BECOME BINDING! 2. Restatement §63(1) Acceptance completed “as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror.” Baird/Bernstein - 2009 3. WHY? a. Encourages contracting by parties at a distance from each other by making the offeree just as secure as if the contract were made face-to-face. i. HOWEVER what about offeror, who doesn’t know if he is bound yet? b. Creates a contract at the earliest possible moment. 4. REQUIREMENTS: a. Timely Dispatch: i. If no time specified for acceptance offeree must accept within a reasonable time. ii. Specfied Time in Offer Starts ticking when the offer is received. (Caldwell v. Cline Stating that words have no existence until they are received by offeree) b. Proper Manner: i. Reasonable care. ii. Acceptable medium of communication. 5. EXCEPTION Restatement Second § 63(2) “An acceptance under an option contract is not operative until received by the offeror.” e. TERMINATING THE POWER OF ACCEPTANCE: i. Restatement §36 Power of acceptance terminated by: 1. Rejection or counter-offer by offeree 2. Lapse of time 3. Revocation by the offeror. 4. Death or incapacity of offeror or offeree. a. Jordan v. Dobbins “Such being the nature of a guaranty (where it is revocable anytime before being acted on)…the death of the guarantor operates as a revocation of it.” 5) LIMITED AND INDEFINITE PROMISES: a. Implied Promises: i. Contract is valid when, although a party does not seem to have made a promise by plain language of their expression, a promise nevertheless is implied (in fact or in law) from the party’s words or actions. 1. In such cases, the implied promise serves as consideration! ii. TYPE – “To use reasonable or best efforts.” 1. Wood v. Lucy, Lad Duff-Gordon: a. Designer promises to give Retailer an exclusive right to market designer’s services and products, but retailer does not explicitly promise to market those services and products. b. Cardozo held that Retailer could enforce a contract of this sort on the ground that Retailer had made an implied promise to use Baird/Bernstein - 2009 REASONABLE EFFORTS to market Designer’s services and products. c. UCC §2-306(2) ONLY FOR SALE OF GOODS. i. Provides that unless the parties agree otherwise, a lawful agreement for exclusive dealing in goods imposes an obligation “by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.” b. OUTPUT CONTRACTS: i. DEFINITION – Seller agrees to sell all of his output of a commodity to the buyer, and the buyer agrees to buy that amount from the seller. ii. RULE: Governed by UCC 2-306. 1. If seller in an output contract wants to produce ANY of the commodity during the term of the contract, he must sell it all to the buiyer. iii. LIMITATION - Feld v. Henry S. Levy & Sons, Inc. UCC §2-306 contains a good faith exception, whereby the seller can stop performance so long as he does so in good faith (ex. Threat of bankruptcy if production continued). 1. GOOD FAITH DOES NOT MEAN SIMPLY LOSING PROFITS! 2. EXCEPTION – Corenswet, Inc. v. Amana Refrigeration, Inc. UCC DOES not take precedence over the EXPRESS TERMS of the contract; does not overwrite clause about stopping production “for any time, any reason on 10 days notice.” c. INDEFINITE CONTRACT: i. RULE: An apparent bargain will NOT be enforced if it is found to be too indefinite. ii. WHAT MAKES A BARGAIN INDEFINITE? 1. Its terms are so incomplete or uncertain that they show that the parties did not regard themselves as having completed a contract. 2. OR 3. It is so indefinite that a court cannot determine its material terms with reasonable certainty or fashion an appropriate remedy for breach. a. Sun Printing & Publishing Ass’n v. Remington Paper & Power Co., Inc. For a contract to be enforceable, the terms need to be determinable by a third-party! If not able to do this (meaning the court), then NO CONTRACT i. Terms need to be determined outside of parties’ mere wishes, intentions or desires! If not, there is no contract! ii. The Contract in question did not stipulate the times that payment would be fixed, so the Court could not fix damages (market price of the Canadian Export Co. during those specified periods). Baird/Bernstein - 2009 b. Restatement Second §33(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. iii. UCC Gap-Fillers Provide designated terms that govern if there is a certain type of gap, or by providing how a certain kind of gap should be filled. 1. Price Reasonable price at the time of delivery. 2. Place of Delivery Delivery at the seller’s place of business (or where the goods known to be in another place are located) 3. Time for shipment or delivery shipment or delivery within a reasonable time. 4. Time and Place For Payment Due at the time and place where the buyer is to receive the goods. a. Southwest Eng’g Co. v. Martin Tractor Co. Even though the contract failed to include agreement on the terms of payment, it did not defeat an otherwise valid agreement because this gapfiller could supply the omitted terms. 5. Duration of Contract Requiring Successive Performances Contract is valid for a reasonable time (but the parites may terminate the contract at any time unless otherwise agreed). iv. PRELIMINARY AGREEMENTS: 1. WE NEED TO FIGURE OUT: a. Did the parties intend to be bound? i. Empro Mfg. Co. v. Ball-Co Mfg. Co., Inc. “Parties may decide for themselves whether the results of preliminary negotiations bind them…but they do this through their words.” b. If so, to what extent? 2. TYPES: a. Agreement Contemplating Formalization Where parties have reached agreement on the issues they considered to require negotiation, but have expressed intention to formalize the agreement as evidentiary memorial…court views as BINDING. i. Empro Mfg. Co. v. Ball-Co Mfg. Co., Inc. “If the full agreement showed that the formal contract was to be nothing but a memorial of an agreement already reached, the letter of intent would be enforceable.” b. Agreement Contemplating Further Good Faith Negotiations Letter of Intent or Commitment. i. Sometimes seen as not binding (Empro Mfg. Co. v. BallCo Mfg., Co.) 1. WHEN, according to Empro? Baird/Bernstein - 2009 a. When one party makes it clear that they are free to walk away from the deal, that privilege is also given to the other side. b. When it is made clear that either party assumes that it can negotiate terms in addition to, or different from, those in the letter of intent. c. IN ADDITION – No reliance! ii. ENFORCEABLE EXCEPTIONS: 1. Express Preliminary Agreements to Negotiate in Good Faith This is enforceable. 2. Implied agreement to negotiate in good faith. a. REQUIREMENTS – Prevents party from… b. 1 - Renouncing agreed upon terms of a deal without trying to negotiate the unresolved terms. c. 2 - Abandoning the negotiations without having made good faith effort to consummate them. d. 3 - Insisting on terms that are either inconsistent with or do not carry out the intent of those terms that have been agreed upon, IDENTIFYING THE BARGAIN IN A COURT OF LAW: 1) THE PAROL EVIDENCE RULE: a. PROBLEM: Often, although an agreement has been put into writing, one partry will claim there was ALSO an EARLIER oral or written agreement that was not included in the writing, but was intended to be part of the contract. Admissibility of alleged additional agreement turns on this rule… b. RULE: Parol evidence will not be admitted to vary, add to, or contradict a written contract that constitutes an integration. i. Leaves open what constitutes parol evidence and what constituts integration. c. WHAT IS PAROL EVIDENCE? i. Any evidence of an alleged earlier oral or written agreement that is within the scope of the writing. ii. NOT ALLOWED IF IT IS INCONSISTENT WITH THE WRITTEN AGREEMENT. (Hatley. V. Stafford). d. HOW DO WE DETERMINE IF CONTRACT IS FULLY INTEGRATED OR NOT? Baird/Bernstein - 2009 i. OLD VIEW: A writing would be treated as an integration if taken as a whole and on its face the writing appears to be an instrument that completely expressed the parties’ agreement. 1. Intent as a matter of form – was writing a complete instrument? 2. Mitchill v. Lath Since the agreement deals with almost all material elements of the property being sold, on its face the writing is a completely integrated contract and the side deal was not included and cannot be brought as parol evidence. ii. MODERN VIEW: Today, many or most courts follow a competing test whereby a writing is deemed to be an integration only if the parties actually INTENDED it to be an integration. 1. Hatley v. Stafford “The court should presume that the writing was intended to be a complete integration, at least when the writing is complete on its face, and should admit evidence of consistent additional terms only if there is substantial evidence that the parties did not intend the writing to embody the agreement.” a. Court will consider ANY relevant evidence to determine parties’ intent (Masterson v. Sine). 2. Hatley v. Stafford “The fact that a writing exists does not bring the rule into play if the parties do not intend the writing to embody their final agreement.” 3. EXCEPTION TO THE PAROL EVIDENCE RULE – “NATURALLY OMITTED TERMS” a. ALLOWED ONLY IF: i. The side agreement does not conflict with the written lease? 1. If oral term contradicts writing then NOT admissible! ii. The term concerns a subject that similarly situated parties would not ordinarily be expected to include in the written agreement. 1. If it should NATURALLY have been in the agreement NOT ADMISSIBLE. 2. What evidence court should look for to determine if it naturally should have been in the agreement? a. Nature of parties – neophytes or sophisticated businessmen? b. Relative bargaining Strengths. c. Length of the written contract. d. Whether they employed lawyers. e. EXCEPTIONS TO THE RULE: Baird/Bernstein - 2009 i. SEPARATE CONSIDERATION Parol evidence if the written integration and alleged parol agreement are each supported by separate consideration. ii. NATURALLY OMITTED TERMS (see above section on integration!) iii. LACK OF CONSIDERATION PArol evidence is always admissible to show a lack of consideration. iv. EVIDENCE TO EXPLAIN OR INTERPRET TERMS OF WRITTEN AGREEMENT Rule does not bar admission of extrinsic evidence to show what the parties meant by the words used in their written agreement. 1. RATIONALE Such evidence explains the written agreement rather than adding to, varying, or contradicting the written agreement. a. WWW Associates Inc. v. Giancontieri “An analysis that begins with consideration of extrinsic evidence of what the parties meant, instead of looking first to what they said and reaching extrinsic evidence only when required to do so because of some identified ambiguity, unnecessarily denigrates the contract and unsettles the law.” 2. “PLAIN MEANING” APPROACH: a. RULE: b. IF: i. There is no ambiguity in a written contract on its face, 1. OBJECTIVE STANDARD: Federal Dep. Ins. Corp v. WR Grace & Co. “Language in a contract is not rendered ambiguous simply because the parties do not agree upon its meaning.” ii. And iii. No special meaning attached to the words of a written contract by custom or usage, 1. SEE BELOW ON THIS. c. THEN: i. Terms of the contract are to be interpreted only according to their plain meaning ii. Extrinsic evidence is inadmissible either to: 1. interpret the contract 2. Or 3. To establish that the contract is ambiguous so that extrinsic evidence should be admitted to clarify its meaning. d. TRADITIONAL APPROACH: i. WWW Associates Inc. v. Giancontieri Because contract on its face is unambiguous, court refuses to allow parol evidence that would change the contract. Baird/Bernstein - 2009 1. “By ignoring the plain language of the contract, plaintiff effectively rewrites the bargain that was struck.” e. ALTERNATE (modern, gaining ground) APPROACH: i. Increasing tendency to be more liberal and allow extrinsic evidence to show what the parties intended by their words without regard to “plain meaning.” ii. P.G.&E. Co. v. GW Thomas Drayage and Rigging Co. NEW TEST: 1. If reading the contract shows two (or more) possible readings of the words 2. Then Judge must allow extrinsic evidence that would prove one of those two possible meanings. 3. COURSE OF PERFORMANCE, DEALING, AND USAGE: a. RULE: Extrinsic evidence is admissible to show any special meanings attached to words used in the written agreement deriving from course of performance, dealing or usage. b. APPROACH: Courts are becoming increasingly liberal in admitting such evidence, even if it contradicts implications to be drawn from the writing. i. Columbia Nitrogen Corp. v. Royster Co. “UCC 2-202 expressly allows evidence of course of dealing or usage of trade to explain or supplement terms intended by the parties as a final expression of their agreement.” 1. TEST: “Can the proffered evidence of course of dealing and trade usage reasonably be construed as consistent with the express terms of the agreement?” ii. TEST (as per Frigaliment Importing Co. v. B.N.S. International Sales Company). 1. Was particular commercial usage known to both parties? 2. Was the usage so general and universal that knowledge on D’s part can be inferred? CONTRACTS WITHOUT BARGAINING: 1) ACCEPTANCE THROUGH COUNTEROFFER? a. So an offer is made, and you reply with a counteroffer. Is this a valid for of acceptance? b. RULE: c. A counteroffer terminates the offeree’s power of acceptance i. Livingstone v. Evans “The plaintiff’s counteroffer [was]…in law a rejection of the defendants’ offer which freed them [defendants] from it.” Baird/Bernstein - 2009 d. But original offer can be revived by the original offeror. i. Livingstone v. Evans Offer effectively terminated by offeree, yet revived by offeror (“his statement that he could not reduce the price strikes me as having but one meaning, namely, that he was still standing by it and, therefore, still open to accept it”). e. CAREFUL: Power of acceptance is NOT terminated by an inquiry concerning the offer or by a request for different terms! i. TEST: Would a reasonable person in the offeror’s shoes think that the communication from offeree was itself an offer that could be accepted? 2) OTHER CONDITIONAL OR QUALIFIED ACCEPTANCES: a. GENERALLY: Conditional or qualified acceptances generally terminate the offeree’s power of acceptance (same rationale as counteroffers). b. EXCEPTIONS: i. ACCEPTION COUPLE D WITH REQUEST valid. ii. “GRUMBLING” ACCEPTANCE Acceptnace accompanied with expression of dissatisfaction is valid as long as not actual dissent. 3) EXCHANGE OF BOILER-PLATE, WRITTEN DOCUMENTS FOR OFFER AND ACCEPTANCE: a. ADDITIONAL TERMS: i. UCC §2-207(2) Additional terms contained in the acceptance are to be construed as proposals for additions to the contract. 1. EXCEPTION, if parties are both MERCHANTS, these proposed additional terms become part of the contract. 2. UNLESS: a. Offer expressly limits acceptance to the terms of the offer. b. The additional terms would materially alter the contract. c. Offeror either notifies the offeree within a reasonable time that he objects to the additional terms or has already notified offeree of objection. b. DIFFERENT TERMS: i. Courts have struggled to decide what effects should be given to different terms in the acceptance due to the fact that 2-207(2) is limited only to additional terms. ii. THREE VIEWS: 1. Knockout Rule: a. MAJORITY RULE. b. Different terms do not become part of the agreement, but they negate those terms in the offer from which they differ. c. Richardson v. Union Carbide Indus. Gases, Inc.” NJ adopts the knockout rule. i. WHY? Other rules would result in any offeror ALWAYS prevailing on its terms solely because it sent first form Baird/Bernstein - 2009 not desirable result “particularly when the parties have not negotiated for the challenged clause.” 2. MINORITY – Different terms are treated as additional terms. a. Different terms will most likely drop out anyway because they “materially alter the contract.” 3. MINORITY – First-Shot Rule a. Differing terms in acceptance always drop out b. This means that the offeror’s stipulations are always controlling. 4) SILENCE AS ACCEPTANCE: a. GENERAL RULE: Silence of an offeree does not constitute acceptance. (McGlone v. Lacey). i. RATIONALE To prevent an offeror from placing an offeree involuntarily in a situation where offeree must either take an affirmative action to reject the offer or else become liable on a contract. b. EXCEPTIONS: i. OFFEREE LEADS OFFEROR TO BELIEVE THAT SILENCE WILL CONSTITUTE ACCEPTANCE: 1. Hobbs v. Massasoit Whip Co. Silence constitutes acceptance where the offeree, by her own prior words or conduct, gave the offeror reason to interpret her silence as an acceptance. a. ELEMENTS: b. Silence. c. Retention of stuff for an UNREASONABLE time. d. Previous business relationship allowed P reasonable assumption of acceptance through silence. ii. UNJUST ENRICHMENT AS IMPLIED CONTRACT: 1. Liability may be imposed on a person who receives a benefit from another, even in the absenmce of a promise to pay for benefit. 2. ELEMENTS: a. He has conferred a benefit to the defendant. b. He conferred the benefit with the expectation that he would be paid its value. i. MUST BE REASONABLE: ii. Martin v. Little, Brown & Co. “A promise to pay for services can only ne implied when they rendered in such circumstances as authorized the party performing to entertain a reasonable expectation of their payment by party benefited.” 1. WHERE CIRCUMSTANCES EVIDENCE THAT ONE’S WORK HAS BEEN VOLUNTARILY GIVEN, NO INFERMENT OF INTENTION TO PAY. c. The defendant knew or had reason to know of the plaintiff’s expectation. i. Martin v. Little, Brown & Co. “Appellant’s letter did not suggest that he intended to be paid.” Baird/Bernstein - 2009 d. IN ADDITION – May be able to get RESTITUTION DAMAGES IF defendant would be unjustly enriched if her were allowed to retain the benefit without paying its value. 5) THE PROBLEM OF SHRINK-WRAP PROVISIONS: a. 7th CIRCUIT VIEW: b. ProCD, Inc. v. Zeidenberg They are VALID AND ENFORCEABLE! i. Offeror is the master of the offer and can therefore choose what constitutes acceptance. ii. In this case, that means clicking the agreement to terms and conditions. iii. PURCHASER HAD OPPORTUNITY TO INSPECT, AND RETURN THE PRODUCT IF HE DID NOT LIKE THE TERMS. c. Hill v. Gateway Similar case: offeror as “master of the offer” can determine what constitutes acceptance, here that being retention of product for more than 30 days. i. “If (terms inside the box) constitute the parties’ contract because the Hills had an opportunity to return the computer after reading them, then all must be enforced.” ii. “By keeping the computer beyond 30 days, the Hills accepted Gateway’s offer, including the arbitration clause.” iii. NOTE HOW IMPORTANT THE RETURNABILITY IS HERE! GIVES OFFEREE CHANCE TO REJECT OFFER! d. ALTERNATIVE VIEW: i. Klocek v. Gateway NOT VALID! 1. Standard terms are not communicated at the time of sale and are therefore ADDITIONAL OR DIFFERENT TERMS. 2. “Because plaintiff was not a merchant, additional or different terms contained in the Standard Terms did not become part of the parties’ agreement unless plaintiff expressly agreed to them.” MISTAKE AND EXCUSE: 1) NONDISCLOSURE: a. GENERAL RULE: Party who proposes a contract does not have an obligation to affirmatively disclose facts concerning subject matter of the contract. i. Laidlaw v. Organ No duty to disclose that war had ended, thus likely affecting tobacco prices. b. EXCEPTIONS: Disclosure required under CONSTRUCTIVE FRAUD Doctrine. i. Fiduciary Relationships. ii. Relationships of trust of confidence. 1. Jackson v. Seymour Businessman buys land from invalid sister, which is worth a lot more, COURT FINDS CONTRACT VOIDED FOR FRAUD! 2. ELEMENTS: a. Confidential relationship between the parties. b. “Gross inadequacy of the price.” 3. “Where inadequacy of price is such as to shock the conscience, equity is alert to seize upon the slightest circumstance indicative of fraud, either actual or constructive.” iii. Differences in Bargaining Positions: Baird/Bernstein - 2009 1. Disclosure may be required where a material fact is known to one party by virtue of his special position and could not be readily determined by the other party in the exercise of normal diligence. iv. Posner – “Good Faith” In Dealing With Already Signed Contracts 1. Market Street Associates Ltd. Partnership v. Frey Once you have a contract with a company, you are in a cooperative relationship (and the distrust that makes negotiating parties scrupulously read contracts vanishes) and therefore have a duty to disclose any relevant terms that they might not know about. a. If MSA thought that Frey was AWARE OF THE PROVISION, then acted in Good faith and no duty to disclose! b. If MSA thought Frey was NOT AWARE OF THE PROVISION, then DUTY TO DISCLOSE! 2) MUTUAL MISTAKE: a. Mistaken assumption shared by both parties as to the conditions of the outside world. b. OLD TEST: i. Did mistake concern the “substance” or “identity” of the contract’s subject matter (in which case the contract would be voidable) or only its accidents or collateral attributes (contract would NOT be voidable). ii. Sherwood v. Walker Walker contracted to sell Sherwood a cow that both parties believed was barren. Walker discovered cow was pregnant and refused to sell. Contract was rescinded due to mutual mistake in SUBSTANCE (cow was a breeding cow rather than a meat cow). iii. Beachbomber Coins, Inc. v. Walker When bargain is based on a mutually shared belief regarding an “essential fact’ that turns out to be wrong, then MUTUAL MISTAKE. c. MODERN RULE: i. Where parties enter into a contract under mutual mistake concerning a basic assumption of fact on which the contract was made, the contract is voidable by the adversely affected party if: 1. Mistake has a material effect on the agreed exchange 2. AND 3. Adversely affected party did not bear risk that assumption was mistaken. a. Beachcomber Coins, Inc. v. Walker This applies only when there is some uncertainty regarding whether or not the fact may be mistaken. i. If NO UNCERTAINTY MUTUAL MISTAKE DEFENSE IS VALID! 3) CHANGED CIRCUMSTANCES JUSTIFYING NONPERFORMANCE: a. RULE: Performance of a contract will normally be excused if the performance has been made impracticable by the occurrence of an event whose nonoccurrence was a basic assumption on which the contract was made. (Taylor v. Caldwell). i. UNLESS Adversely affected party has explicitly or implicitly assumed the risk that the contingency might occur. 1. Lincoln Welding Works v. Ramirez Where agreement says that plaintiff bears the risk of loss to its work until formal acceptance, that clause is accepted by the court. Baird/Bernstein - 2009 b. LIMITATION- Destruction of a construction work in process. i. Carroll v. Bowerstock Contractor allowed to recover on all the work put in that conferred a benefit on the defendant. 1. TEST: You can recover for work that “would have inured to [defendant’s] benefit as contemplated by the contract if the fire had not occurred.” a. Recover for the removal of the old floor. b. Recover for installation of support structures. c. Completed floor was not finished – no recovery. c. FRUSTRATION: i. ELEMENTS: Performance may be excused under the doctrine of frustration, where: 1. The PURPOSE or VALUE of the contract has been destroyed 2. By a supervening event that was NOT REASONABLY FORESEEABLE at the time contract was entered into. 3. Krell v. Henry Guy rents rooms to watch coronation parade, but performance was excused by the cancellation of the procession because the whole value of the contract had been destroyed by cancellation of the coronation. POLICING THE BARGAIN 1) DURESS AND COERCIVE RENEGOTIATIONS: a. AN EXCEPTION: Levine v. Blumenthal Renegotiation made invalid because of “lack of consideration” for new promise. i. Baird - This case is simply wrongly decided: the renegotiation was helpful for BOTH parties in that leasor was receiving more than market value for space at the time and leasee was getting their space and able to keep their business. b. COERCIVE NEGOTATIONS Alaska Packers - Contract invalid because they meant to do what they were originally contracted to do, and provided no consideration for this. c. DURESS RULE A contract is voidable on the ground of duress where consent was induced by wrongful threats. i. ECONOMIC DURESS – Valid defense to the enforcement of a contract where: ii. ELEMENTS: 1. One party commits or threatens to commit wrongful act (including breach) that would place the other in a position that would seriously threaten his property of finances unless other party enters into contract. 2. NO ADEQUATE means are available to avoid or prevent the threatened loss other than entering into the contract. a. Alaska Packers’ Association v. Domenico Alaska Packers would not have been able to get other fishermen in time for the season. i. When a party “by taking advantage of the necessities of his adversary, he obtains a promise for more, the law will regard it as nudum pactum, and will not lend its process to aid in the wrong.” Baird/Bernstein - 2009 b. Austin Instruments, Inc. v. Loral Corp. Found duress because it was shown that Loral “could not have obtained the items in question from other sources in time to meet its commitment to the Navy under the first contract.” i. ELEMENTS: ii. CAN JUSTIFY NON-PERFORMANCE OF RENEGOTIATED CONTRACT WHEN: iii. Immediate possession of needful goods is threatened…or threat of breach. iv. AND v. Impossible to obtain goods from another source 1. Loral exhausted its list of “approved vendors” and since they were working with high-grade military hardware, it would be unreasonable to require Loral to go with untested and unfamiliar or disliked vendors. vi. AND vii. Action for breach of contract would not be adequate. 1. Loral would still have to obtain gears elsewhere…with consequences that they would have missed government delivery schedule. viii. AND ix. Found by court that free will has been deprived! 2) UNCONSCIONABILITY: a. Unconscionable contracts are unenforceable. b. ELEMENTS: i. PROCEDURAL - Absence of meaningful choice on the part of one of the parties 1. Adhesion Contracts – Where parties occupy unequal bargaining positions, and the party in the inferior position is forced to adhere to the terms of the other’s printed form on a “take it or leave it” basis rather than having terms dickered out. a. Henningsen v. Bloomfield Motors Consumer at mercy of car companies if he wants to own a car, since they control all of the market + he buys it only from a dealer who has no negotiating power over warranty exculpation clauses. 2. Party’s lack of knowledge of provisions in contract: a. Williams v. Walker-Thomas Furniture Co. When party of inferior bargaining power “signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms.” ii. AND iii. SUBSTANTIVE - Contract terms are UNREASONABLY favorable to one party. 1. Henningsen v. Bloomfield Motors, Inc. Terms must be so extreme as to appear unconscionable according to mores and business practices of the time and place! Baird/Bernstein - 2009 2. LIMITATION – Brower v. Gateway 2000, Inc. Where only parts of a contract are substantively unconscionable, those specific parts may be deemed unenforceable and unconscionable a. THIS CASE Though arbitration clause was generally acceptable, they needed to find a different arbiter because the one chosen was too unreasonably favorable to Gateway. CONDITIONS: 1) A condition is “an event, not certain to occur, which must occur, unless its nonoccurence is excused, before performance under a contract becomes due.” Restatement, Contracts 2d §224 2) EXPRESS CONDITIONS: a. Explicit contractual provision which provides that either: i. A described event or state of the world must occur before a party has a duty to perform. 1. Condition Precedent – a condition under which some state of affairs must occur before a party has a duty to render performance. 2. Kingston v. Preston Servant must pay a certain amount of security before promisor has duty to give the business over to him. ii. OR iii. If a described event or state of the world occurs or fails to occur, a party will be released from a duty to perform. 1. Condition subsequent – A condition under which occurrence or nonoccurrence of a state of affairs extinguishes or terminates a duty to perform that previously had arisen. b. IMPORTANT WHILE PROMISE IMPLIES THAT BREACH = DAMAGES, WITH CONDITIONS, BREACH = RELIEVES YOU OF LEGAL DUTY. c. How do you determine whether it is a promise or condition? i. RULE: Depends on parties’ intent as evidenced through the words of the contract. 1. Kingston v. Preston “The dependence or interdependence of covenants was to be collected from the evident sense and meaning of the parties.” a. HERE, “the essence of the agreement was, that the D should not trust to the personal security of the plaintiff, but, before he delivered up his stock and business, should have good security for the payment of the money.” ii. What if parties’ intent is unclear? 1. WORDS USED: a. Words such as “provided,” “if” and “when” usually indicate that an express condition rather than a promise was intended. 2. IN CASE OF DOUBT, CONSTRUE PROVISIONS AS PROMISES: a. Price v. Van Lint “where a contract contains mutual promises to pay money or perform some other act and the time for performance for one party is to, or may, arrive before the time Baird/Bernstein - 2009 for performance by the other, the latter promise is an independent obligation.” b. Restatement 2d §234(1) “Where all or part of performances to be exchanged under an exchange of promises CAN BE rendered simultaneously, they are to that extent due dimultaneously UNLESS THE LANGUAGE OF THE CIRCUMSTANCES indicate the contrary.” c. Howard v. Federal Crop Ins. Corp Since doubt, seen as promise and not condition. (therefore, FCIC can sue for damages for any damage suffered by breach). 3. CANONS OF CONSTRUCTION: a. Expressio Unious – Howard v. Federal Crop Ins. Corp Use of the term “condition precedent” in one provision means that the lack of that term in another is telling. d. Party benefitting from the occurrence of something has the BURDEN OF PROOF OF SHOWING THAT THE EVENT HAS HAPPENED. (Gray v. Gardner) i. Gray v. Gardner Party (holding condition subsequent) getting out of legal duty through the occurrence of an event must have burden of showing that the event happened. e. EXCUSE OF CONDITIONS: i. A condition will be excused if the party favored by the condition wrongfully prevents or hinders the fulfillment of the condition. 1. Wrongful = The other party would not have reasonably anticipated the type of prevention or hindrance that occurred. 2. Termination of a business Whether closing down the business constitutes a wrongful prevention depends on the tytpe of contract involved. a. Good faith required for closing ofbusiness! b. Feld v. Henry S. Levy & Sons, Inc. UCC §2-306 contains a good faith exception, whereby the seller can stop performance so long as he does so in good faith (ex. Threat of bankruptcy if production continued). ii. Impossibility If unforeseen event renders compliance with a specific condition impossible, then that condition is simply rendered unenforceable. 1. Semmes v. Hartford Ins. Co. Duty to file claim within 12 months of accident is rendered impossible by the Civil War, so therefore that clause is simply rendered void. 3) DOCTRINE OF SUBSTANTIAL PERFORMANCE: a. WHAT? i. This allows a party to bring suit on a contract as a plaintiff for expectation damages even though he has breached the contract by not rendering a perfect performance. b. HOW? i. A determination of substantial performance is a question of fact to be governed by the circumstances of each case. ii. Plante v. Jacobs TEST: 1. Did the performance meet the ESSENTIAL PURPOSE of the contract? a. FACTORS TO CONSIDER: Baird/Bernstein - 2009 b. Extent of the contracted-for-benefits that innocent party has received. c. Extent to which damages will be adequate compensation for breach. d. Extent to which forfeiture will occur if the doctrine is not applied. e. Extent to which the breach was wrongful or in bad faith. c. APPLICATION: i. Construction Contracts 1. This doctrine has been applied primarily to cases where an owner does not pay because of faulty work. 2. WHY? Unjust to allow an owner to retain the value of a building free of charge just because the contractor made some small deviation from agreed specifications. ii. NOT APPLIED IN SALE OF GOODS - Perfect Tender Rule – UCC §2-601 1. Substantial performance is insufficient for a seller of goods 2. Seller must make a tender of goods that conform “perfectly,” rather than merely substantially, to the contract specifications in order to put the buyer under the obligation to take and pay for the goods. a. Printing Center of Texas Inc. v. Supermind Pub. Co. Buyer has right to reject goods in good faith if they fail to conform to either the express or implied terms of the contract. i. SELLER HAS DUTY TO SHOW BAD FAITH ON PART OF BUYER. ii. Includes both expressed and implied specifications here the seller knew books were for sale to the public, so “it was implied in the contract that the books be commercially acceptable and appealing to the public.” d. DAMAGES: i. PARTY IN BREACH If party has substantially performed, they can enforce the contract and sue for expectation damages. 1. HOWEVER, other party is entitled to an off-set for damage resulting from the fact that the performance was not perfect (Plante v. Jacobs). 2. HOW MEASURED? a. Cost of Completion: i. Most cases Amount it would cost to repair the deficiency in the performance or to make the work conform to the contract. b. Diminution in Value: i. Measure of damages will be the amount by which the deficiency in the performance diminishes the value of the performance when: 1. ELEMENTS: 2. Repair or reconstruction would involved “substantial economic waste.” 3. OR 4. Cost-of-completion damages would be disproportionate to the end to be served. Baird/Bernstein - 2009 a. Jacob & Youngs, Inc. v. Kent Where cost to replace pipes would be $200’000 and the pipes and the material difference between pipes is minimal, THEN ONLY THE DIMINUTION IN VALUE CAUSED BY DIFFERENCE IN PIPES can be awarded. b. Plante v. Jacobs – No recovery for misplaced wall because it would be disproportionately costly to replace it. CONTRACTUAL RELATIONSHIPS AND THE RIGHTS OF THIRD PARTIES: 1) THIRD PARTY BENEFICIARIES: a. Huh? Can a person who was not a party to the bargain and who gave no consideration enforce the contract if he had been benefited by the contract’s performance? b. MODERN RULE: Third-party beneficiary may sue and recover in appropriate cases. i. Seaver v. Ransom “The court in that leading case attempted to adopt the general doctrine that any third person for whose direct benefit a contract was intended could sue on it.” c. TEST: Third Party Must be Either a Donee Beneficiary or a Creditor Beneficiary i. The restatement dubs these categories “intended beneficiaries” and “incidental beneficiaries.” ii. RATIONALE If we’re looking at “what the parties would have wanted,” it is likely that the parties would have only wanted one cause of action against him and they would thereby limit the beneficiaries who can bring action. iii. Creditor Beneficiary (Intended Beneficiary): 1. Restatement 2d 302(1)(a) – “The performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary.” 2. A third party can enforce the contract if the promisee’s primary intent was to discharge an obligation he owed to the third party. a. Lawrence v. Fox – Holly makes contract with Fox whereby Holly loans Fox $300 dollars today as long as he pays $300 to Lawrence the next day, as Holly owes Lawrence that money. 3. RATIONALE: Prevents unjust enrichment and excessive litigation (Holly would sue Fox, and would then be sued by Lawrence). 4. Must there be an actual obligation owed to third party? a. GENERAL RULE: A third-party beneficiary is a creditor beneficiary if the promisee, in making bargain with promisor, intended to satisfy an obligation she BELIEVED she owed to third-party beneficiary (whether or not she actually owed an obligation.” b. It is sufficient if there is a supposed or asserted obligation owing to third party (Hamill v. Maryland Casualty Co.). iv. Donee Beneficiariy (Intentional Beneficiaries): 1. Restatement 2d 302(1)(b) – “The circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.” Baird/Bernstein - 2009 2. TWO TYPES: 3. Intent to Confer a Gift: a. If the promisee’s primary intent in contracting is to confer a gift on the beneficiary. i. Seaver v. Ransom Niece is a proper third-party beneficiary because her aunt made the contract in hopes that the house be conferred as a gift to her niece. 4. Intent to Confer a Right to Performance: a. If the promisee intended to confer on the beneficiary a right against promisor to some performance, other than a gift. v. NOT ABLE TO ENFORCE – Incidental Beneficiary 1. Restatement 2d. 302(2) – “An incidental beneficiary is a beneficiary who is not an intended beneficiary.” 2. A third party who would be benefited by the performance of a contract, but who is neither a creditor nor donee beneficiary. 3. CANNOT BRING SUIT UNDER THE CONTRACT! 4. Eee… d. What if Bruce does a really bad job of mowing lawn? i. You can sue Douglas for breach of contract! The fact that Douglas promised to mow the lawn does not mean that you’re off the hook if performance does not take place. e. What if Douglas promises to mow my lawn? He delegates to Bruce who gets right to collect money from me, and then Douglass runs off to Rio de Janeiro! i. I can either sue Baird or sue his brother! 2) Assignment of Rights and Delegation of Duties: a. Assignment of Rights: i. RULES: 1. GENERAL RULE: All contract rights are assignable. a. EXCEPTIONS: A right may not be assigned if an assignment would “materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance or materially reduce it’s value to him. i. Rights whose assignment would materially change the obligor’s duty. 1. Personal service contracts – Where the effect would be to require the obligor to perform PERSONAL SERVICES TO ASSIGNEE! a. If my right is for you to mow my lawn, I can’t assign that right to someone else so that you would then have to mow HIS lawn! b. Personal service = Whether the performance so involves the personality or personal characteristics of the obligor that it would be unfair to require onligor to render performance to third person! Baird/Bernstein - 2009 2. Output contracts are generally not assignable – assignee might have far different output or dar different requirements than A, the assignment could materially change duty of B. ii. Rights whose assignment would materially increase the burden or risk of the obligor: 1. Insurance policies – the right to be insured is not assignable. a. You might be able to assign the BENEFITS of the policy though! 2. Credit where personal credit is involved, substitution of debtors may materially increase obligor’s risk. a. Evan agrees to loan to Holly, so Holly cannot assign that loan to Cheryl. Cheryl might be more liable to not pay me back than Holly. iii. Assignment that would materially change contract terms: 1. Assignments do not change the TERMS of a contract! 2. Evan agrees to deliver box of cookies to Holly at Holly’s house. Holly assigns right to that box of cookies to Lucy. Evan is NOT OBLIGED TO DELIVER COOKIES TO LUCY’S HOUSE; the contract terms remain the same and Lucy may pick up the cookies at Holly’s house! ii. REQUIREMENTS FOR EFFECTIVE ASSIGNMENT: 1. Any manifested intention by a party to a contract to make a PRESENT transfer of rights under the contract to another person will constitute an assignment. a. TEST: Did the language manifest an intent by the assignor to divest himself completely and immediately of the right in question and transfer the right to the assignee? iii. Future Rights: 1. Under existing contract Generally held to be assignable. 2. Continuing business relationship Some courts at common law allow assignment of right to payments that are expected to arise out of a continuing business relationship. 3. Future contract At CL, rights under a future contract or a future business relationship are NOT assignable. Assignment is a transfer, and you cannot transfer something you do not have! iv. Contractual Provisions Prohibiting Assignment: 1. TRADITIONAL VIEW: a. At common law, such a provision is valid though not favored. b. Prohibitions on assignments are construed as promissory in nature: Baird/Bernstein - 2009 i. Therefore, assignor can still assign the right and the right would be valid as between the obligor and the assignee, but the obligor could then SUE THE ASSIGNOR FOR BREACH OF CONTRACT! 1. Unless special injuries, obligor could generally get only nominal damages! c. HOWEVER – if the prohibition is in the form of a CONDITION, then that is completely valid! 2. RESTATEMENT APPROACH: a. Adopts rules of construction against such provisions. b. Contractual provisions that prohibit assignment of “the contract” is to be construed to bar only the delegation by the assignor of her duties or conditions, not an assignment of right sunder contract. c. Contract terms prohibiting assignment of “rights under the contract” – i. Gives the obligor a right to damages in the event of a prohibited assignment, but NOT to render assignment ineffective. ii. Not to forbid the assignment of a right to damages for breach of the whole contract to the assignment of a right arising out of the assignor’s due performance of entire obligation. iii. To be for the benefit of the obligor, and not prevent assignee from acquiring rights against assignor, nor to prevent obligor from rendering performance to the assignee as if there were no such prohibition. v. RIGHTS OF ASSIGNEE AND OBLIGOR: 1. Assignee: a. Assignee can enforce her rights by direct action against obligor. b. Once obligor has knowledge of the assignment, he must render performance to or pay the assignee. i. If he does so to the assignor, at own risk. 2. Defenses available to obligor against assignee: a. Defenses that arise out of either a problem with the contract or from the contract itself. vi. Multiple and competing Assignees: 1. Under Comon law, if prior assignment is revocable, a subsequent assignment revokes the prior assignment, and subsequent assignee therefore prevails over prior. 2. “New York Rule” First in time prevails. b. DELEGATION OF DUTIES: i. GENERAL RULE: Any contractual duty can be delegated unless the obligee has a substantial interest in having the original obligor perform the duty personally. 1. Except where performance by a delegee would vary materiall from the performance promised by obligor, a contractual duty may be performed by a delegee without constituting a breach of contract. Baird/Bernstein - 2009 2. PERSONAL SERVICES IF contract requires performance by, for example, a portrait painter, author or tracher than that right cannot be delegated without obliges consent. a. HOWEVER – Macke v. Pizza – More “fungible” services such as ditch-digging, house construction, etc. can be delegated if “the quality of the performance remains materially the same.” ii. Contractual restrictions? 1. Provisions that limit either party’s right to delegate duties are normally enforced. Such provisions evidence the parties’ intent aht the services involved are personal, so that performance by anther would not constitute the bargaind-for consideration. a. Restrictions on delegation DO NOT CLASH WITH POLICY OF FREE ALIENABILITY! iii. Effect of valid delegation of duties: 1. Obligee can enforce against the delegor and the delegee! a. Delegation places the primary responsibility to perform on the delegee. b. Delegor becomes SECONDARILY LIABLE – as surety – for performance of the duty. 2. UCC – A delegation of performance entitles the oblige to demand assurances of performance form the delegee! TORTS AND CONTRACTS, TOGETHER AT LAST! 1) INDUCEMENT OF BREACH OF CONTRACT a. PRIMA FACIE CASE: b. Defendant’s interference with existing contract i. Not limited to servants/masters ii. Lumley v. Gye Expanded the role from only master/servant to ANY TYPE OF VALID CONTRACT! 1. Opera singer was induced to sing at another opera house instead of the one she contracted to sing at iii. EVEN TERMINABLE AT-WILL CONTRACTS! 1. It is the interference with THE RELATIONSHIP that is the bad thing, and not the contract itself! iv. Exception, illegal contracts. c. Intent: i. Defendant must have been aware of the existing contract and that she intended to cause the interference. ii. MORE NEEDED IN CASES WHERE THE INTERFERENCE IS WITH COMMERCIAL RELATIONS LESS THAN CONTRACTUAL: 1. This includes prospective economic advantage! 2. Della Penna v. Toyota “a plaintiff seeking to recover for alleged interference with prospective economic relations has the burden of pleading and proving that the defendant’s interference was wrongful ‘by some measure beyond the fact of the interference itself.’” Baird/Bernstein - 2009 d. Causation i. Actual and proximate. e. Special Damages i. Actual damages ii. Consequential damages iii. Mental suffering iv. Damage to reputation. v. Punitive. f. What about hired CONSULTANTS? i. JD Edwards & Co. v. Podany Consultants generally have the right to give advice that would induce an interference with a constract. 1. LIMITATIONS: a. The advice must be limited to such that is given within the scope of the engagement. b. The advice must be done in good faith i. Cannot use the job to hurt others out of animosity or for own personal benefit.