Contracts Outline: Fall 2012, Linzer
I. Has a K Been Formed and is it Supported by Consideration?
1.
Mutual Assent- For a contract to be formed, the parties must reach “mutual assent.” That is they must both intent to
contract, and they must agree on at least the main terms of the deal
a.
Essential to form a K: Mutual assent of the parties is essential to the formation of a contract and must be gathered
by the language employed by them
i. Conduct: If his words or acts, judged by a reasonable standard manifest and intention to agree to the matter in
question, that agreement is established
b.
Intention to be Bound: Objective Theory
i. Objective theory: R2K §17 – in determining whether the parties have reached mutual assent, what matters is
not what each party subjectively intended. Instead, a party’s intentions are measured by what a reasonable
person in the position of the other party would have thought the first party intended, based on the first party’s
actions and statements.
1.
Majority view: implies duty to read K
2.
Feldman v. Google (did not read click wrap, that is no an excuse to breach the K)
ii. Ray v. William Eurice Bros- (P entered in to an agreement with D to build his new home. D did not review P
attached plan. D claims it would have been unreasonable to build a house under those conditions.)
1.
Rule: The only intent that is essential is an intent to say the words and acts which constitute their
manifestation of assent. This stresses the objective theory
c.
Subjective Theory: Linzer does not like the subjective “meeting of the minds”
i. No K unless the parties’ subjective intent coincided on the creation and terms of the relationship
1.
Minority view: do both parties intent to enter in to a K
ii. Less dependable because it is unreliable to rely on self serving testimony of actual intent
d.
Contemporary Approach: Drifts towards the center of the two. Sometimes evidence of a party’s subjective
understanding could provide an alternative explanation of the meaning of words or actions.
i. Still rooted in the objective standard but willing to consider subjective evidence of mutual assent
e.
Agreement to Agree: The parties have reached common ground on a number of matters but have left one or more
terms for future agreement
i. Under a formal contract contemplated, each party may regard himself as
1.
Not bound: They may argue that pencil must be put to paper before anyone is bound. Free to walk
away (Walker v. Keith)
a.
“Where essential terms such as price are not contained in an option contract and no
standards are included whereby it may be judicially determined, no contract exists”
2.
Fully bound: An arbitrator could decide the issue in the event of a disagreement. Some way could
be devised to mechanically solve open provisions (3rd party or an objective standard to fill the gaps)
a.
The agreement could be drafted with a formula for deciding the future provision (i.e.
Market price of a home in River Oaks on March 2015)
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3.
Obligated to bargain in good faith
ii. Corbin’s View- as long as the parties know that there is an essential term not yet agreed on then no K
iii. Letter of Intent- an agreement to bargain in good faith- not clear if you are bound by them
1.
It could mean there is no deal at all
2.
That this is so routine that the paper is a formality that the deal is absolute done now
3.
We made the basic deal w/ provisions built in
4.
Look at the context of the LOI to determine whether or not the parties meant to be bound
iv. Biggest question is are they enforceable?
1.
Sometimes you do not want to it to be enforceable- put on paper to memorialize it
2.
You can write whether or not it is legally enforceable but they agree that will to bargain
a.
3.
If they can not agree in good faith then it is not enforceable
Walker v. Keith (Keith leased a small lot from Walker for a 10 year period for $100 a month.
Option for an additional 10 year term under same terms and conditions w/ rental fixed at
“comparative business conditions.” Chancellor fixed the rate at $125 a month)
a.
Rule: To be enforceable and valid, a contract to enter into a future covenant must specific
all material and essential terms and leave nothing to be agreed upon as a result of future
negotiations.
4.
R2K §33 if there are a ton of material terms missing then it is probably just preliminary
negotiations
2. Was a Valid Offer Made?
a.
Offer An offer is a manifestation of intent to be contractually bound upon acceptance by another party. An offer
creates in the offeree the power to form a contract by an appropriate acceptance. RK2 § 24
b.
Requirements: It must provide material terms with sufficient definiteness and certainty for courts to be able to figure
out what the K is about (R2K § 33)
i. The offer normally needs to be addressed to a particular person
ii. Subject matter, time for performance, and price may be required, but also may be filled in by the court based
on trade custom, past dealings, and course of performance
c.
Validity of particular kinds of offers:
i. If offeree knows or should have known the offer was made in jest then no K
ii. Soliciting a bid is considered preliminary negotiations and not a K
iii. Most ads are not considered offers to sell- they are an offer to bargain
1.
However if specific words or particular number of units then it is an offer
2.
Lonergan v. Scolnick (From an ad in a newspaper by D- P and D began correspondence on a 40
acres of land. D warned that if P did not act fast it would be sold. D sold the land to a third party,
which prompted P to sue for specific performance and or damages)
3.
Izadi v. Machado (P attempted by a Ford from D. Small print made the ad misleading)
a.
Rule: Objective approach to ads
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iv. Auctions – an item that is put up for auction usually not an offer but a solicitation of offers from the audience.
So unless the sale is expressly said to be /out reserve, the auctioneer may w/draw the goods form the sale even
after the start of bidding UCC 2-328(3)
v. Price Quotes- price quote is an invitation to offer not an offer to form a binding K
1.
E.C Styberg Engineering v. Eaton Corp (P sells brakes to D- P wanted 30k and D wanted to pay
13k- court said price quote is an invitation to offer not an offer to form a binding K)
d.
Bilateral Contract: both sides make a promise
i. Usually the production of a negotiation process of offer and acceptance
e.
Unilateral Contract: one side promises while the other acts on the promise
i. Offeror is not bound unless and until he has received the performance he sought
ii. Classical view- the offer can be revoked at any time before the offer is completed by the offeree
1.
Logic is- if B can quit the act when ever, why can’t A stop the act when ever
2.
Petterson v. Pattberg (1928)- act requested to be done, a consideration of the offered promise, was
payment in full of the reduced principal of the debt prior to the due date thereof
a.
Rule: An offer to enter into a unilateral contract may be revoked at any time prior to the
performance of the requested act. (Not current law under R2K)
iii. Modern view- part performance may bar the offeror from revoking the offer if the offeree has started
performance
1.
Cook v. Coldwell Banker (1998)- Defendant orally conveyed a bonus program which was based
on a percentage of commission earned. Defendant stated awards would be given out at banquet in
March and that you had to be there to get it. Before the March banquet Plaintiff leaved for a
competitor and defendant refused to pay- which prompted a law suit for breach of bonus contract.
a.
Rule: An offeror may not revoke an offer where the offeree has made substantial
performance. Part performance or tender may thus furnish consideration for the subsidiary
promises.
iv. Consideration: a unilateral K lacks consideration, but when the promise is performed, consideration is
supplied, and the K is enforceable to the extent preformed
f.
Irrevocable Offers- usually an offer is revocable at will of the offeror. However, there are some exceptions:
i. 1. Option Contract: Option Contracts R2K §87: An offer is binding as an option K when
1.
in writing and signed by the offeror and
2.
recites purported consideration
a.
Common law states offeree has to give consideration to enter in to option contract.
Example: for $10 offeror will hold the offer open for a week.
3.
Modern (restatement) approach states a signed option contract that recites the payment of
consideration will be irrevocable
ii. Firm offers under the UCC: UCC is even more liberal in some cases: it allows formation of an irrevocable
offer even if no recital of payment of consideration is made
1.
By 2-205 an offer is irrevocable if:
a.
Is by a merchant;
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2.
g.
b.
Is in a signed writing and
c.
Explicit assurance that the offer will be held open
No offer can be made irrevocable for any longer than three months
When the Offer is Effective
i. Receipt of offer - An offer is not valid until received by the offeree or his agent. R2K § 68
ii. Duration of offer
1.
If the offer has a stated time within which the acceptance must be made, any attempted acceptance
after the expiration of that time will fail and will merely constitute a counter-offer by the offeree.
2.
If no specific time is stated within which the offeree must accept, it is assumed that the offeror
intended to keep the offer open for a reasonable period of time, to be determined based on the
nature of the proposed contract, trade usage, prior dealings and other circumstances of which the
offeree knows or should know.
3.
Generally, the time for accepting an offer begins to run from the time it is received by the offeree.
If there was a delay in delivery of the offer of which the offeree is aware, the usual inference is that
the time runs from the date on which the offeree would have received the offer under ordinary
circumstances.
4.
Generally, courts hold that in telephonic or face-to-face communications in which an offer is
made, the offer lapses when the conversation
h.
The UCC in re to Offer and Acceptance:
i. For the most part the same rules apply to common law transactions and for the sale of goods
1.
Article 2 has very few specific provisions that cover off under acceptance principles, therefore most
are resolved by common law
2.
However it is more flexible in regards to business practices
a.
3.
Ex. Battle of Forms
Was there Acceptance?- Acceptance of an offer is a manifestation of assent to the terms therof made by the offeree in a
manner invited or required by the offer
a.
Who may accept: an offer may be accepted only by the person whom the offeror intended to create the power of
acceptance for- offeree must know about the offer
b.
Method of acceptance: the offeror can decide how the offer will be accepted “master of his offer”
i. When method not specified: If method is not specified the method must be by any reasonable manner
ii. Acceptance through promise or performance: If the offer does not make clear whether acceptance is to
occur through a promise or performance then the offeree can accept by either method
1.
Shipping goods- the seller can accept by a) promising to ship goods or b) actually shipping goods
iii. Generally an offer can not be accepted through silence
1.
Exceptions:
a.
If offeree has reason to understand that silence will constitute acceptance and offeree
subjectively intends to be bound
b.
When an offeree silently receives the benefit of services
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c.
Prior course of dealing may make it reasonable for silent acceptance- R2K § 69
d.
Sale of goods under 2-201: if a party does not object to the terms then they assent to the
terms
iv. Acceptance by dominion- when the offeree receives goods and keeps them this is generally an acceptance
v. Acceptance of a Unilateral K
1.
Classic Rule: The only way to accept a unilateral K is through complete performance. Petterson v.
Pattberg and Brooklyn Bridge Hypothetical
a.
Modern Rule: Creation of an Option K through Part Performance R2K §45
i. Modern law allows the creation of an irrevocable Option K where the Offeree
begins the invited performance
ii. Must be completed within a reasonable amount of time
2.
Creation of an Option K through Reliance R2K §87
a.
An offer which the offeree should reasonably expect to induce action or forbearance of a
substantial character on the part of the offeree before acceptance which does induce such
action or forbearance is binding as an option K to the extent necessary to avoid injustice
c.
Acceptance is Effective when Sent (mailbox rule) (R2K §63)
i. Except for Option Ks: Effective when received
ii. Except where offer explicitly states that acceptance is valid only upon receipt
iii. If Misaddressed: If received in same time as if properly dispatched, then valid when sent, if after, then valid
upon receipt
iv. If lost by Mail Carrier: Still valid when sent!
v. If both an acceptance and rejection sent the rule depends on what is dispatched first:
1.
Rejection sent first- acceptance will be effective if the offeror receives it before he receives
rejection
2.
d.
Acceptance sent first- is effective upon dispatch
Acceptance Varying From Offer
i. Common Law: “mirror image rule”
1.
The offeree’s response operates as an acceptance only if it is the precise mirror image of the offer
a.
If response conflicts with original offer it creates a counter offer
i. If Offeree accepts the counteroffer they are assenting to the terms included within
the counter offer even if they do not match up with their offer – Princess Cruises v.
General Electric
b.
ii.
Modern courts stray away from this unless the difference materially alters the K
Battle of the forms (UCC 2-207) UCC rejects the mirror image rule
1.
(1) any expression of acceptance or written confirmation will act as an acceptance even though
states terms that are additional or different
a.
No contract if expressly made conditional on assent to additional or different terms
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b.
Purported acceptance contains additional/different terms form the offer, and also states
something like, “this acceptance of you offer is effective only if you agree to all of the
terms listed on the reverse side of this form,” there is no contract formed
2.
(2) material alterations to contracts exist if they result in surprise or hardship
a.
Paul Gottlieb v. Alps South (P sells fabric to D to use for prosthetics- relationship sourslimitation of liability clause did not material alter the K- P failed to show it would result in
surprise or hardship)
3.
Additional term in acceptance – where the offeree’s response contains an additional term, the
consequences depend on whether both parties are merchants.
a.
At least one party not merchant – if one party is not a merchant, the additional term
does not prevent the offeree’s response from giving rise to a contract, but the additional
term becomes part of the contract only if the offeror explicitly assents to it. Governed by
common law if neither party is a merchant.
b.
Both merchants – if both parties are merchants, then the additional term automatically
becomes part of the contract, as a general rule. However,
i. Materiality – the addition will not becomes part of the contract if it is one which
materially alters the contract. Ex. Disclaimer of warranty
ii. Objection – If the offeror objects to having the additional term become part of the
contract it wont.
iii. Brown Machine v. Hercules (indemnification clause materially altered a K)
iii. Conflicting terms in documents – if an issue is covered one way in the offer doc and another conflicting way
in the acceptance, most courts apply the knock out rule. That is, the conflicting clauses “knock each other out”
of the contract, so that neither enters the contract. Instead, a UCC gap-filler provision is used if one is relevant,
otherwise, common law
iv. Last shot rule - Buyer sends out P.O. with terms A + X, sellers send back acknowledgement saying A+Y, this
acts as a counter-offer. A party impliedly assents to and thereby accepts a counter-offer by conduct indicating
lack of objection to it. Tended to favor Sellers over Buyers b/c Sellers normally “fire the last shot” (send the
last form).
1.
Usually on the back of these is the boilerplate that has tons of new terms and conditions that re in
favor of the seller
a.
Usually no body looks at these and will be made part of the deal unless they violate 2207(2)
v. Double knock out rule- there is no K in this case
1.
2-207(3): But sometimes they preform and conduct may show recognized K
a.
the terms consists of what the parties agree on (time, quantity, delivery, things that agree
on boiler plate)
2.
The default rules of the UCC will cover in the gaps (problem is UCC is seen as pro buyer)
3.
Conflicting terms: Princess case- “not liable for damages”= “liable for damages”- under UCC these
will knock each other out
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a.
e.
Go back to the original things they have agreed upon: comment six of 2-207
Duration of the Power of Acceptance To become valid if must be effective while the power of acceptance is still in
effect- Ways to terminate power of acceptance:
i. Rejection of offer (only valid if made before acceptance)
1.
exceptions- a) offeror indicates that the offer still stands despite the rejection or b) the offeree states
“not now accepting- wish to consider in future”
ii.
Counter-offer
1.
same exceptions as above
2.
Distinguish counter-offer from exploration
3.
Normile v. Miller (1985)- P made offer on D'. D D made a counter offer to P containing changes in
contract. P was under the impression that they had first option on the property and that no one
could offer while they had a counter offer to decide on. Soon after P Segal signed an offer to
purchase with similar terms to the aforementioned counter offer
a.
Rule: A conditional acceptance to an offer rejects the original offer. If it is accepted then
the offeror assents to the new terms not the original offers terms. Also, once a counteroffer
has been revoked you can not have power to accept original offer.
iii.
Lapse of time
1.
Offeror can set a time limit for acceptance, if no end of a reasonable time
2.
If bargaining face to face/phone the power of acceptance continues only during that conversation
(unless contrary intent)
iv. Death or incapacity terminates power of acceptance
v. Revocation
1.
Offeror is free to revoke his offer at any time before it is accepted
a.
A revocation does not become effective until it is received by the offeree (if revocation
letter is lost then it never becomes effective)- direct revocation
2.
If offeror behaves in a way inconsistent w/ an intention to enter the contract and offeree learns
about it then the offer has been revoked- indirect revocation
vi. 5. Death or incapacity- must occur before acceptance. If death or incapacity occurs after acceptance the K
will be enforced on the estate/ incapable person.
f.
Late Acceptance
i. the communication may qualify as a counter-offer;
ii. the offeror may waive the lateness and honor the acceptance;
iii. if the acceptance is nevertheless sent within a reasonable time, albeit after the offer's stated expiration, the
acceptance is valid and results in the formation of a contract if the offeror does not reject it within a reasonable
time
g.
Indefiniteness: Generally no contract will be found if the terms of the parties’ agreement are unduly indefinite
i. Missing Term: If the court believes that the parties intended to contract and if the court believes that it can
supply a reasonable value for a missing term they will generally do so
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1.
UCC 2-204- expressly allows court to fill in terms for price, place for delivery, time for shipment,
time for payment, etc., as long as the parties intended to make a contract
a.
Jannusch v. Naffziger (P sold D a concession stand business and D tried to return it- D/
trial court said no meeting of minds due to open terms but under UCC this is ok because
the essential terms were agreed upon)
b.
2.
Next level test taking- 2-301, 2-308, 2-503, 2-309, 2-310, 2-312 are all gap fillers
Non-UCC- most modern courts follow the “supply the missing term on a reasonable basis” if the
parties have shown intent to create a binding contract
3.
In a rare case a court might find an agreement void for indefiniteness
ii. Implied obligation of good faith/ fair dealings (UCC 1-304)
1.
“honesty in fact and the observance of reasonable commercial standards of fair dealing”
a.
A party is required to behave in a way that is consistent w/ the other party’s reasonable
expectations about the the contract will work
iii. Agreement to Agree (Linzer does not like this term)
1.
Court will generally supply a missing term if the parties intentionally leave that term to be agreed
upon later and then they don’t agree on term
2.
They are agreeing to bargain.
3.
Classical Contract said as long as there is mutual assent that there is another term to be agreed
upon, there is no K. (K to make a K is not a K).
iv. Misunderstandings
1.
General rule- a misunderstanding about what they are agreeing to may prevent them from having a
meeting of the minds and thus no contract
2.
No contract will be formed if:
a.
Parties each have a different subjective belief about a term of the contract
b.
Term is a material one
c.
Neither party knows, or has reason to, of the misunderstanding
i. If on party knows or should know of a different understanding the contract will be
in terms of the innocent one
3.
Offeree does not understand the offer
a.
Offeree is negligent- if offeree’s failure to read or understand the offer is due to his own
negligence, he is bound by the terms of the contract as stated in offer
i. Unless the terms invoke the doctrines of fraud or unconsciousability
b.
Misrepresentation- if offeree’s misunderstanding is due to the offeror’s
misrepresentation of the terms, and the offeror knows this, the contract will be applied on
terms understood by offeree
4.
Objective Theory: The objective theory of mutual assent can still apply there
a.
Lucy v. Zehmer- offer was made jokingly but the offeree was in earnest and under the obj.
test had no reason to believe the offeror was not
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i. Compared to the PepsiCo Case where the court asserted the offer should have been
seen as a joke
4. Electronic Contracting
a.
Policy: Vast majority of modern contracts involve parties w/ radically unequal bargaining power
i. The contracts consist of standard forms and involve little, if any, negotiations
ii. The contracts are often formed through electronic transactions rather than person to person communications
iii. The standard terms must be fair and reasonable, the court has discretion in this matter
1.
b.
Usually must be stated in clear, conspicuous and intelligible terms
Shrinkwrap Terms: purchaser orders a product by various means then the product is received it is wrapped in
plastic
i. Use of the product constitutes the purchaser’s agreement w/ those terms that are listed w/ the package
ii. If dissatisfied the purchaser can return in a reasonable time period (if not they agree to terms)
1.
Must expressly say that if sending it backs rejects terms and conditions
a.
DeFontes v. Dell (never made clear that they can reject the TC by returning- options must
be readily apparent to the consumer to be enforceable)
c.
Clickwrap Terms: before completing the purchase of the product, the purchaser must scroll through the sellers terms
of sale and click on “I agree” button
i. If they refuse to do so they can not complete the sale
ii. Feldman v. Google (failure to read the click wrap agreement does not make the K unenforceable for P)
iii. Most cases have upheld click wrap and it’s probably the best way to get- Linzer does not like it (not very
protective)
1.
d.
Linzer: It does not really matter because people do not read it
Browsewrap Terms: typically involves information made available by internet providers of their websites
i. Terms of use say “by using the site the user agrees to providers terms of use”
ii. Weakest of the three, can be upheld if the terms are conspicuous
iii. Hines v. Overstock.com (P never assented to the $30 restocking fee that was found at the bottom of the
website- user has to know the terms are there)
e.
Electronic Contracting: In these three situations the purchaser places an order- this is not an offer
i. The offer occurs when the vendor ships the product w/ the terms of sale included
1.
Vendor is the master of the offer- if it states that purchaser accepts the offer by retaining the
product beyond the period of time set forth the purchaser is bound by the vendors terms if he does
not return in time frame
2.
This is fuzzy and up to debate- it is not black and white
ii. Relevant statutes are UETA and E-Sign
1.
Goal is to make sure regular laws of K are applied to electronic transactions
5. Is there Valid Consideration?
a.
Consideration is a bargained for exchange of performances or promises R2K §71
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i. A gain or advantage of POR is not a requirement for consideration R2K §79
ii. Forms of Consideration: Act, forbearance, or the creation, modification, or destruction of a legal right
iii. May be given to the parties or to a third party
iv. Pennsy Supply Inc. V. American Ash Recycling Corp. Consideration is bargained-for even if “free”
b.
Adequacy of Consideration R2K §79: Courts generally do not look into the adequacy of consideration Batsakis v.
Demotis
i. Minimum Acts are generally sufficient consideration (“a mere peppercorn will do”)
ii. Nominal and Sham Consideration: Disproportionate values between benefit and detriment may indicate that
there is no bargain at all, but rather the “exchange” is merely a pretense for a gift
1.
Whether or not consideration is valid turns on whether it was bargained for
2.
Nominal- where the consideration is so small that it is nominal (court may conclude from a factual
matter there is no real bargain present)
a.
Extreme disparity in value between what promisee gives up and receives may suggest that
there is not in fact a bargain or that it was an unfair bargain
3.
Sham- R2K §71- a mere pretense of bargain does not suffice as where there is a false recital of
consideration or where the purported consideration is nominal
c.
Mutuality of Obligation Required – Both parties must make promise that somehow bind them
i. Illusory Promises: “I’ll do this when I decide to” “promise to buy or not to buy” are not valid promises
because it lacks binding consideration R2K §77
ii. Alternative Promises are valid as long as each alternative alone would be valid consideration
iii. Implied Promise: Promises to act on POR’s own “best efforts” performed in “good faith”, are a sufficient
detriment to constitute valid consideration
d.
Promises to make gifts: generally unenforceable b/c lacks bargain element
i. Existence of condition (of acceptance) does not necessarily make consideration because the conditions were
not bargained for
1.
Some courts have held charitable donations, as a matter of public policy the courts try to enforce
the promises
2.
King v. Trustees of Boston University (There was consideration because the University went
through the steps of indexing, taking care of and making the papers available to researchers- this
went beyond a mere promise to use the gift as instructed by the donor)
ii. Even if the person promising to make a gift requires the promisee to meet certain conditions in order to receive
the gift it may not mean consideration
1.
Kirksey v. Kirksey (A man told his deceased brother’s wife “if you come see me, I will give you a
place to stay The court found that the man’s offer was hardly a promise and rather a “mere
gratuity,” thus being unenforceable)
a.
This is like the example where a man says if you go to the store you may purchase a coat
on my account there. The mere fact that she has to walk to the store cannot be constituted
as consideration- NOT BARGANING FOR THE WALK!
e.
Occurrence of condition is of benefit to promisor will meet the bargain element
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i. Hamer v. Sidway (Uncle Story promised to pay $5K to Lil’ Willie if he would refrain from liquor, tobacco,
swearing, or playing cards or billiards for money until his 21 st birthday. Nephew refrained, Uncle said ok.
Story died 12 years later without paying William. William had assigned his right to the money to Hamer, and
Uncle Story’s Executor, Sidway refused to pay. There was consideration.)
1.
This is a detriment to the Lil’ Willie b/c it was his “legal privilege (right)” to do these things,
and he chose not to do them. He was constricted from his freedom of action. This is a benefit
to Uncle Story because he wanted Lil’ Willie to do this.
f.
Altruistic pleasure is not sufficient: the fact that one who promises to make a gift expects to derive altruistic
pleasure, or love and affection, from making the gift is not sufficient to constitute a bargain
i. Dougherty v. Salt (1919)- Dougherty was eight years old when his aunt gave him a promissory note for
$3000. The note included the words “value received” and she told him “you have always done for me, and I
have signed this note for you.” P brought suit against Salt, the executrix of his aunt’s estate for payment on
the note
1.
g.
Rule: past acts and mere recitation of consideration does not actually constitute consideration
Past Consideration- past consideration is generally no consideration since it was not bargained for
i. Plowman v. Indian Refining Co. (1937) Plaintiffs, Plowman and seventeen others similarly situated or their
estates, worked for Defendant Indian Refining Co., for many years. Defendant offered to pay Plaintiffs onehalf of the wages currently being earned. Plaintiffs remained on the payroll, receiving the offered money, but
did not render any services other than coming to the office for their remittance. Defendant had to end program
and Plaintiff brought suit.
1.
Reasoning: Past or executed consideration is a self contradictory term because consideration is
something given in exchange for a promise or in reliance upon the promise. Something which has
been delivered before the promise is executed cannot be consideration
ii. Williston’s Tramp: “if you go around the corner to the clothing shop there, you may purchase an overcoat on
my credit.”
1.
The walk is merely a necessary condition to get to the store.
2.
He is not bargaining w/ the tramp to walk to the store. It’s not like a bargain, a walk across the
bridge.
iii. Father/Daughter Tiffany’s Ring: What about an estranged father who tells his daughter to be at Tiffany’s at
a set time so he could buy her a ring and reneges when she arrives?
1.
The travel to get there may be more than a necessary condition of his buying her the ring. He may
have used the offer to get her there, so benefit/detriment may be present.
h.
Pre-Existing Duty Rule- if a party does or promises to do what he is already legally obligated to do or forebears to
something he is not legally entitled to do this is not a detriment
i. Modifying a contract for the sole benefit of one will be unenforceable for lack of consideration
1.
Restatement: There is an exception where the modification is fair and equitable in circumstances
not anticipated by the parties (ex. of painting the bridge)
ii. Extra Duties: If there is a slight detriment then there will be consideration
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iii. UCC: For contracts for the sale of goods, the UCC abolishes the preexisting duty rule. Section 2-209(1)
provides that "an agreement modifying a contract … needs no consideration to be binding." But there must be
good faith, and any no-oral-modification clause must be complied with.
i.
Option Contract and Consideration- the offeror’s power of revocation may be bargained away in exchange for
return consideration
i. Purported option contract w/ out consideration is merely a continuing offer that may be revoked anytime
before acceptance and will be terminated by rejection or counter-offer (Normile v. Miller)
ii. Option contracts will often cite nominal consideration such as $10 or $1
1.
Cases generally hold that even a very small amount of money can serve as effective consideration
to make an option contract
2.
Some courts have allowed for a promise for consideration at a later time
3.
Offeree in an option contract may give services or some other form of consideration instead of the
payment of money
iii. R2K s87(1)(a) shows you don’t actually make exchange of consideration- it says of an offer made in signed
writing is binding if it proposes an exchange on fair terms within a reasonable time and recites a purport
consideration for its making
1.
j.
Modern formality- akin to contracts under seal from Normile
Right to Terminate: Must give consideration
i. Party with right to terminate at any time has given no consideration
ii. Duty to give “reasonable notice” may be valid consideration in itself
iii. UCC §2-309: Requires reasonable notice to terminate a K prematurely
k.
Settlement of Claims (accord/satisfaction): If parties agree to modify a debtor’s amount owed and the debtor pays
the newly agreed to amount, then it discharges the debt. If debtor fails to pay the newly agreed to amount, then
creditor may sue on the original K amount
6. Promissory Estoppel
a.
Definition: Promises which foreseeably induce reliance on the part of the promisee will often be enforceable w/out
consideration- “safety valve for the subject of consideration”
i. R2K § 90 - A (1) promise which the promisor should reasonably expect to induce action or forbearance on the
apart of the promisee or a third person and (2) which does induce such action or forbearance is binding if (3)
injustice can be avoided only by enforcement of the promise.
1.
Actual reliance: The promisee must justifiability rely on the promise.
a.
2.
Two questions- did the promise induce the reliance and was the reliance justified?
Foreseeable reliance: The promisee’s reliance must also have been reasonably foreseeable to the
promisor
ii. Harvey v. Dow (P relied on her parents words and actions that she would eventually get title to their land and
took steps to ensure that- the K was enforced through PE since there was no consideration)
iii. Express Promise- the promise does not have to be express
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1.
Pop’s Cones v. Resorts Int. Hotel (P reliance for a ice cream stand- never expressly made- deal
pulled out under them and they were able to recover)
b.
Four prong test for PE (Aceves v. US Bank- bank convinced P to not file for Ch.11 they would help her, she relied
on this promise but then they did not help her)
i. promise has to be clear and unambiguous
ii. reliance by the party to whom the promise is made
iii. reliance must be reasonable and foreseeable
iv. the party asserting the estopped must be injured by reliance.
c.
Amount of recovery: Where P.E. is used, the damages awarded are generally limited to those necessary to "prevent
injustice."
i. Usually P receives reliance damages, rather than the greater expectation measure. In other words, P is placed
in the position he would have been in had the promise never been made.
ii. Example: If A promises B a franchise, and B quits his job in reliance, the court will probably award B the value
of the lost job, not the greater sum equaling profits that B would have made from the franchise.
d.
Possible applications
i. Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the
promisee relies on the gift to his detriment.
1.
Kirskey v. Kirskey (P moves to D’s land and abandoned property- court says the offer to live on the
land by D was mere gratuity and no consideration- Dissent makes the modern argument of reliance100 years before R2K § 90)
a.
Classic “Williston’s Tramp” scenario. He could not get her gift, if she did not come see
him; so it was a condition.
ii. Charitable subscriptions: A written promise to make a charitable contribution will generally be binding
without consideration, under the P.E. doctrine. Here, the doctrine is watered down: usually the charity does not
need to show detrimental reliance. (But oral promises to make charitable contributions usually will not be
enforceable unless the charity relies on the promise to its detriment.)
1.
King v. Trustees of Boston University
a.
Rule: If the person receiving a gift assumes a duty purported by the donor then that is
probably sufficient consideration to make the promise enforceable. A valid contract must
have either consideration or reliance.
2.
R2K §90(2) – Charitable subscriptions should be binding without proof that the action
induced action or forbearance.
a.
Most courts reject this notion
iii. Gratuitous bailments and agencies: If a person promises to take care of another’s property (a "gratuitous
bailment") or promises to carry out an act as another person’s agent (gratuitous agency), the promisor may be
held liable under P.E. if he does not perform at all. (However, courts are hesitant to apply P.E. to promises to
procure insurance for another.)
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iv. Offers by sub-contractors: Where a sub-contractor makes a bid to a general contractor, and the latter uses
the bid in computing his own master bid on the job, the P.E. doctrine is often used to make the sub-bid
temporarily irrevocable.
1.
Drennan v. Star Paving (P relied on D’s bid and was awarded the job- then D realized there was a
mistake- REASONABLE reliance on P’s part)
v. Promise of job/ Pension: If an employer promises an at-will job to an employee, and then revokes the
promise before the employee shows up for work, P.E. may apply.
1.
Katz v. Danny Dare, Inc. – (retiring was a detriment)
vi. Negotiations in good faith: A person who negotiates with another may be found to have a duty to bargain in
good faith; if bad faith is found, the court may use P.E. to furnish a remedy.
1.
Promises of franchise: The use of P.E. to protect negotiating parties is especially likely where the
promise is a promise by a national corporation to award a franchise to the other party. (Example: P,
a national company that runs a fast food chain, promises B a franchise. B quits his job and
undergoes expensive training in the restaurant business. If A then refuses to award the franchise, a
court might use P.E. to enforce the promise, at least to the extent of reimbursing B for his lost job
and training expenses.)
e.
PE cannot be asserted to compel an offeror to perform where the offer is not meant to become a binding contract
until consideration has been received- not binding anymore
i. James Baird v. Gimbel Bros (D make a mistake in their bids- P used the mistaken price for his bid- P did not
receive the correction till after his bid was made- P accepted D’s mistaken bid two days after receiving D’s
offer to withdraw- no PE for P)
ii. May not apply to employment-at-will because it is not guaranteed you will
7.
Restitution- When a benefit has been conferred on a recipient under circumstances in which it is unfair to permit him to
retain it without pay, cause of action for unjust enrichment is available to the person who conferred the benefit
a.
Action for unjust enrichment:
i. Plaintiff conferred a benefit on Defendant,
ii. Defendant has knowledge of the benefit,
iii. the benefit has been accepted or retained by Defendant, and
iv. under the circumstances it would be inequitable for Defendant to retain the benefit without paying for it.
b.
Basis of Liability:
i. person who has been unjustly enriched at the expense of another is required to make restitution to the other.
ii. Watts v. Watts (quasi married couple- P worked for D and gave a benefit for D- the split and she wants
restitution for the benefit that she gave D- court says D may have been unjustly enriched)
c.
Absence of a Promise:
i. One party has received benefit from another, but has made no promise to pay for that benefit.
1.
Credit Bureau Enterprises, Inc. v. Pelo – (P hospitalized and refused to sign release form and
finally did but said under duress- he received benefit and the court says he had to pay up since he
was mentally impaired his objections were irrelevant)
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ii. If done w/ out knowledge or consent- restitution lies when:
1.
he acted unofficiously and w/ intent to charge therefor and
2.
the things or services were necessary to prevent the other form suffering serious bodily harm or
pain and
3.
the person supplying them had no reason to know that the other would not consent to receiving
them, if mentally competent, and
4.
d.
it was impossible for the other to give consent- extreme youth or mental impairment
Promissory Restitution:
i. Recipient makes a promise to pay for the services, AFTER the services are received.
1.
No classical consideration b/c there is no past consideration.
a.
Mills v. Wyman (P takes care of D’s son- after son died D promise to pay P- failed- P
brings suit for compensation- denied- no consideration)
2.
Webb v. McGowin (P saves D’s life and D promises to pay P for the rest of his life- D dies and
payment stops- P brings suit against estate- D has to pay because saving the life was an
enrichment- minority rule)
e.
Quasi-K- a K implied in law
i. Because on person benefited from another the law created a fictional K
ii. Generally if someone does something without being asked the they will usually not be able to recover
1.
You were not unjustly enriched because you did not ask for it
iii. By conduct you can create an understanding that the relationship between the two could create an enforceable
K
1.
Kid always mows a yard for $20- family goes out of town
a.
It would be unjust for a promisee not to be able to recover form a promise by the promisor
that the promisee relied on
f.
Family and Professional Differences
i. What should you get-black letter only applies to professional services
1.
Maybe the expenses you put in- Linzer
2.
Linzer disagrees that it should be limited to professionals
3.
Did you do it w/ an intent to be paid?
ii. Professional: We presume that a professional that did it w/ a intent to be paid
1.
If you have no intent to be paid then you probably will not get paid
iii. Family: What about if you did not know there was money?
1.
Ex. a kid takes care for their aging parents
a.
Will probably not be able to recover if they just drive up on the weekends and do ordinary
things
b.
However, if they keep their job and move in etc.. then they probably can recover
iv. Services provided
1.
When a claimant under s28 seeks restitution in respect of services, the measure of recovery is value
of the services rendered, not their traceable product
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2.
Usually when a family members provides a service for another family member it is seen to be
gratuitous
a.
If non family members then they are presumed to be for compensation
b.
This presumption can be overcome- courts differ on how so there is no set standard
g. A subcontractor must prove two thing to recover in a quasi contract w/ an owner
i. subcontractor had exhausted all remedies against the GC and still remained unpaid and
ii. the owner had not given consideration to any person for the improvise furnished by the subcontractor.
iii. Commerce Partnership v. Equity (P did not get paid by not get paid from D because D did not pay general
contractor)
h.
Restitution Damages:
i. Fair market value of goods or services delivered
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II. Is there a legal reason why the agreement should not be enforced?
1.
Statute of Frauds- Contracts that fall w/in the statute of frauds are unenforceable unless in writing- purpose is to prevent
fraud by requiring that certain categories of K be reduced to writing- R2K § 131-134
a.
Requirements: Must be in writing and signed by the party to be sued
i. More than one document may be linked together either expressly or impliedly by the subject matter to satisfy
SoF
1.
Crabtree v. Elizabeth Arden (memo and payroll cards for employment were added together to
show the full K)
b.
Six categories that fall under Statue of Frauds
i. Executor-administrator provision
1.
Contract of an executor or administrator to answer for a duty of his decedent
2.
Executor personally orally guarantees creditors so that they will not sue the estate, but since it is
not in writing it is not enforceable.
3.
Linzer: has to be in writing because you are not legally obligated to do this- you are doing it to be
helpful, easy to be abused.
ii. Suretyship- “Good exam question”
1.
Contract to answer for the debt of another- a third party standing besides somebody
a.
Creditor: Applies only to promises made to creditors, not the debtor
b.
Collateral Promise: Must be collateral to another’s promise to pay, not the primary
purpose.
c.
Main purpose rule – if the promisor’s chief purpose in making his promise of suretyship
is to further his own interest, his promise does Not fall w/in the S of F- R2K s116
d.
Ex. Bailments puts up your bail and you pay a fee. If you don’t show up bondsmen has to
go to court and then demand the money back from driver. Suretyship is not an insurance
policy.
i. Damages are the amount that the surety is out
iii. Marriage
1.
Contract made upon consideration of marriage
2.
Ex. If A says to B, if you promise to marry me, ill give you my beach house and B says Ok and no
document is sign; if A changes his mind, B cannot sue to enforce either promise to marry or for
beach house b/c the consideration for both was for the marriage taking place.
iv. Land Contract
1.
Interest: Includes sale of land, leases (typically, more than 1 year), easements (more than 1 year),
fixtures, liens, minerals (if to be severed by buyer), mortgages, etc.
a.
Minerals: If K concerns growing crops, cutting timber, etc., then sale of goods under
UCC §2-107.
b.
2.
Contract to Build: Not covered under SOF.
Exception: Part Performance for an Oral K for Sale of Land.
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a.
Seller: Seller conveying can recover purchase price.
b.
R2K §129 (Buyer’s Detrimental Reliance): Allows specific performance (not monetary
damages for breach) if buyer relies in at least two ways:
i. Payment;
ii. Taking possession; and/or
iii. Making valuable improvements.
v. One year Provision
1.
Contract that cannot be performed w/in one year from its making
a.
Really Important Note: It is not the length of actual performance that is crucial, but the
time between making the K and the end of performance
2.
Impossibility – one year provision applies only if complete performance is impossible w/in one
year after the making of the contract. Fact that performance w/in one year is highly unlikely is not
enough.
3.
c.
Lifetime employment – Not w/ in SOF because someone could die at anytime
UCC and the Statute of Frauds
i. Under the UCC 2-201, a contract for the sale of goods for a price of $500 or more must be in writing
1.
Courts are very loose on what constitutes writing, enforcement will be possible on the basis of
fragmentary notations of terms, so long as the court is persuaded that the writing does indicate a
contract for sale has been made
a.
No price? That is ok. Use published price list or market price
i. There are a lot of ways to figure a price
2.
Buffaloe v. Hart (K for sell of barns- UCC- D did not sign check so the SoF fraud was not methowever part performance was met so SoF does not apply)
ii. NOTE- the six exceptions above fall under the statute for UCC as well
d.
Exceptions to Statute of Fraud:
i. Specially manufactured goods – no writing is required if the goods are to be specially manufactured for the
buyer, are not suitable for sale to others, and the seller has made “either a substantial beginning of their
manufacture or commitments for their procurement” Sec. 2-201(3)(a)
ii. Partial Performance- Beaver v. Brumlow (P and D had verbal agreement to sell land- P made improvements
on the land, spent time, etc…K is not barred since there was partial performance)
iii. Merchant Confirmation Exception: Goods accepted or paid for – no writing is required w/ respect to goods
for which payment has been made and accepted or which have been received and accepted
iv. Promissory Estoppel may override SoF
1.
Alaska Democratic Party v. Rice (P and D entered into an oral K for employment- P accepted and
left current job- D breaches- P is able to recover under PE even though the K should be barred by
Sof)
2.
Note- Some courts still refuse to use it at all other courts will use it conservatively to prevent
“unjust and unconsciousable injury and loss”
e.
A contract barred by SF is unenforceable not void
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i. Void means it was never there, that is not the case w/ a SF K
ii. This is important because if void there can be no further cause of action for anything but if it is unenforceable
there may be cause of actions
f.
1.
Ex. Tort of interference w/ K
2.
Ex. Contract w/ a minor, minor says he does not have to preform- this makes it voidable not void
Test Tip: When SoF is used as a defense for enforcement of a promise, ask:
i. Is the K at issue on of the types to which the SoF applies (need a signed memorandum to be enforced) if no,
then no SoF
ii. If yes, is the SoF satisfied? (is it signed by the Defendant). If yes, then the statute presents no bar to
enforcement and the case my proceed in normal fashion.
iii. If not signed, are there other factors in the case such as performance or reliance by the P which might invoke
an exception to the statutory bar?
2.
g.
If you don’t get out on statute of frauds you can try to get out w/ parol evidence rule
h.
E-Sign and UETA give the effect of an electronic signature
Duress: Ks induced by a wrongful threat or action, voidable and rescindable as long as not affirmed. (a subjective test)
a.
Elements of Duress
i. An improper or wrongful threat
ii. Lack of a reasonable alternative
iii. Actual inducement of manifestation of assent by threat
b.
Physical Duress: Easy to spot; Makes K void- §174
c.
Economic Duress: Hard to prove; Taking advantage of another’s economic needs is generally not a defense.
i. Totem Marine. v. Alyeska Pipeline Services (P sues over settlement agreement signed under economic duressD w/ held payments of a debt w/ knowledge of P’s bad economic state- P had no choice but to accept reduced
settlement or face bankruptcy)
ii. Economic duress exists where
3.
1.
One party involuntary accepts the conditions of the other party,
2.
Circumstances permitted no alternative, and
3.
Such circumstances were the result of coercive acts of the other party
Undue Influence: Improper use of power or trust in a way that deprives a person of free will and substitutes another’s
objective. Free will, but misbehavior of person of trust; “Constructive fraud”; Voidable by the victim.
a.
Restatement
i. R2K §177(1) (Defined): (Undue Influence is) Unfair persuasion of a party who is under domination of
person exercising persuasion or of a person by their relation is justifiably assumed to be acting not inconsistent
the person’s welfare.
ii. R2K §177(3) (Third party): If undue influence by third-party, K voidable unless other party, in good faith
and without reason to know of undue influence, gives value or relies materially.
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b.
Odorizzi v. Bloomfield School District (homosexual school teacher who was basically forced to resign under undue
influence).
c.
Undue Influence Factors: Multi-factor test,
i. Discussion of the transaction at unusual or inappropriate time;
ii. Consummation of transaction in unusual place;
iii. Insistent demand that business be finished at once;
iv. Extreme emphasis on untoward consequences of delay;
v. Use of multiple persuaders by dominant side against a single servient party;
vi. Absence of third-party advisers to servant party; or
vii. Statements that there is no time to consult financial or legal advisors.
4.
Incapacity: Most of the main cases involve lack of capacity due to age
a.
Most states have the age of a capacity as 18 years old (one day before you don’t have capacity, one day after you
have capacity)
b.
You can disavow the contract if you lack capacity, you can do it anytime while you are under 18 and then for a
reasonable amount of time (No bright line but usually 3 months is acceptable- if not you ratify it)
i. It is only the person w/ out capacity who can void the contact
1.
c.
Ex. 17 year old buys car and wrecks it. Is the car dealer screwed for the payment of the car?
a.
The courts are split on how to handle a situation like this
b.
One view- dealer should have known and there are plenty ways of protecting themselves
Mental capacity
i. If declared mentally incompetent then the K is rendered void
ii. Some cases show where it was obvious that the person was mentally incompetent and therefore the offeror
should not have entered in to a deal w/ them
5.
Misrepresentation: A misrepresentation is (1) an assertion that is not in accord with the facts. R2K §159. Or (2) an
intended or an action intended or known to be likely to prevent another from learning a fact. R2K §160
a.
Elements of Misrepresentation:
i. Misrepresentation of Fact – opinions do not qualify as misrepresentations
1.
General opinions such as “this car is great” will very rarely be misrepresentations, but modern
courts have erred on the side of fact rather than opinion. – ex: “this car is mechanically perfect”
may qualify as a misrepresentation. Specificity seems to be the key here.
2.
Exceptions: where opinions are actionable as misrepresentations
a.
Fiduciary relationships (corporation and shareholders)
b.
Where the person making the statements holds himself out as an expert (jeweler, “this
stone, in my opinion, is worth > $1000”)
ii. Justifiable Reliance – party asserting misrepresentation must show that he relied on the misrepresentation infact and that his reliance was justifiable.
21
1.
However, some courts have held that the reliance does not have to be justifiable or “reasonable”
where the misrepresentation was intentional
b.
Where Misrepresentation makes K VOID R2K §163
i. When Misrepresentation is as to the essential terms of a proposed contract
ii. Induces manifestation of assent
c.
Where Misrepresentation makes K VOIDABLE R2K §164
i. Misrepresentation is induced by fraudulent or material misrepresentation, but not of an essential term
ii. Fraudulent Misrepresentation justifies reformation R2K §166
iii. Innocent misrepresentation can make a K voidable if material and justifiably relied on
iv. Vendor/Sellers
1.
A seller has an affirmative duty to disclose material facts which adversely affect the value of the
property.
2.
Modern view: A vendor has an affirmative duty to disclose material facts when disclosure:
a.
Is necessary to prevent a previous assertion form being a misrepresentation or form being
fraudulent or material
b.
Would correct a mistake of the other party as to a basic assumption on which that party is
making the K and if nondisclosure amounts to a failure to act in good faith and in
accordance to the reasonable standards of fair dealing
c.
Would correct a mistake of the other party as to the contents or effect of a writing
d.
The other person is entitled to know the facts because of relationship of trust or
confidence between them
3.
Hill v. Jones (D had a duty to tell P that the home had termites in it- D knew that it would effect
the value of the home so the termites were a material fact)
6.
Fraud: In order to rescind an agreement on the basis of fraud, a party must show misrepresentation, knowledge of falsity,
intent to induce reliance, justifiable reliance, and resulting damages. – Fraud requires an intent to deceive
a.
§164(1) a contract is voidable for either fraudulent or material misrepresentation
b.
Actual Fraud involves conscious misrepresentation, or concealment, or non-disclosure of a material fact which
induces the innocent party to enter in to a K
c.
Constructive fraud arises on a breach of duty by one in a confidential or fiduciary relationship to another which
induces justifiable reliance by the latter to his prejudice
d.
Elements of Fraud (Syester v. Banta- lonely dancer- all elements must be met)
i. that the defendants made one or more representations claimed by plaintiff,
ii. that said statements, or one or more of them, were false,
iii. that said false statements or representations were as to material matters with reference to the entering into the
contract,
iv. that the defendants knew the said representations, or one or more of them, were false,
v. that said representations were made with intent to deceive and defraud the plaintiff
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vi. that the plaintiff believed and relied upon said false representations and would not have entered into the
contract, except for believing and relying upon said misrepresentations, and
vii. that the plaintiff was damaged in some amount through relying on said
representations.
e.
Fraud in the execution §166
i. Fraud is an exception to the general rule that a party is held to their signature. Where the party’s signature is
procured through fraud, the defrauded party is not held to the agreement.
1.
One can not be bound to a K if they entered the K because of fraud
2.
Park 100 Investors v. Kartes (P was fraudulently induced to sign a personal guarantee for a leasehe was not held to signature)
f.
Defense of Fraud- PUFFERY!
i. Policy- However, some less educated people may not know it was puffery so this may be unfair standard
ii. However, did not work against Old Lady Dancer (extreme case though)
7.
Unconscionability: Allows for avoidance or reformation of a K if, at the time of making the K, the contract or a term of the
K unjustifiably gave an excessive advantage to one party and the party has taken advantage of the first party’s dependence,
economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skills, or if there is a
lack of meaningful choice
a.
Scope: Originally only Sale of goods, but courts have applied to all types of Ks.
i. UCC§2-302: Court as matter of law may find a K or a clause unconscionable and refuse enforcement, enforce
without unconscionable clause, or limit application of a clause to avoid unconscionable result.
ii. R2K §208 (Unconscionable K or Term): Almost identical to §2-302.
b.
Procedural Unconscionability – where one party inserts a term the other does not agree to and does not notice
i. Lack of Meaningful Choice: e.g., Adhesion K (“Take it or leave it”) for necessary good.
1.
Disparate Bargaining Power
2.
Overwhelming Power by one Party
3.
Williams v. Walker-Thomas Furniture (cross collateralization/ pro rata where if P defaulted on
payment the store could repo all furniture EVER bought- could not pay off till you pay everything
off- Court remands to see if this is unconscionable)
ii. Unreasonably Favor One Party: Unfair risk-shifting, such as (Note: not always unconscionable):
1.
Confession of Judgment clause – allows a party to make a judgment against them
2.
Disclaimer of warranty
3.
Add-on Clause: Subjecting all property purchased from seller to repossession if newly
iii. Defect in Bargaining Process: Quasi-fraud, duress, high pressure sales tactics, misrepresentation, etc.
iv. Unfair Surprise: adhesion K, small print, terms not conspicuous or explained, boilerplate that is
inconspicuous or incomprehensible to average person
v. Exculpatory Clause: Release party from liability for intentional wrongful acts is unconscionable; release
from negligent acts may be unconscionable if inconspicuous, but generally not for hazardous activities, e.g.,
skiing.
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c.
Substantive Unconscionability – (what the deal says)–Unconscionability resulting from actual terms that unduly
harsh, commercially unreasonable, and grossly unfair given the circumstances
i. Oppressive Terms
1.
In re Checking Account Overdraft Litigation (banks did not in good faith use overdraft policiesthey construed it to get the most money out of customers as possible)
ii. Grossly Unfair Price.
iii. Use of Unconscionability Doctrine
1.
Defensive Use: Some courts say only used as affirmative defense when sued for breach. You can
not use it to get out of a K.
2.
Offensive (minority): Few courts say P can sue and find allow damages or restitution after a
finding of unconscionability.
d.
Note- Most courts have held that both procedural and substantive unconscionability must be present on a “sliding
scale” so that if more of one element present, less may be required of the other.
i. Higgins v. Superior Court of LA (Extreme Homemaker Over Case- arbitration agreement was unconscionable
because procedural- kids didn’t get counsel basically, parents told them just to sign- substantive because
adhesion K)
e.
Another note- not really needed if fraud is met, use as an alternative theory for fraud
8. Public Policy and Restrictive Covenants
a.
In cases involving professionals, public policy concerns may outweigh any protectable interest the parties may have.
Courts have been willing to enforce reasonable covenants that do not arise from professionals
i. covenant usually has to have a geographic region and a specified amount of time
b.
A restriction is unreasonable and not enforceable if
i. the restraint is greater than necessary to protect the employer’s legitimate interest or
ii. if that interest is outweighed by the hardship of the employee and the likely injury to the public.
1.
Valley Medical Specialist v. Farber (P and D enter in to restrictive covenant- duration was 3 yearstoo long, area was 5 miles – to wide given the circumstances of patients- and was way too broad)
c.
Look for affecting third parties
d.
R2K §179 recognizes a number of categories of K which my be unenforceable on the grounds of public policy
i. R.R v. MH (surrogacy agreement was unenforceable because it was against the adoption statute)
e.
R2K 178: When a Term is Unenforceable on Grounds of Public Policy
i. (1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation
provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances
by a public policy against the enforcement of such terms
ii. (2) In weighing the interest in the enforcement of a term, account is taken of
1.
(a) the parties’ justified expectations
2.
(b) any forfeiture that would result if enforcement were denied, and
3.
(c) any special public interest in the enforcement of the particular term
iii. (3) In weighing a public policy against enforcement of a term, account is taken of
24
f.
1.
(a) the strength of that policy as manifested by legislation or judicial decision
2.
(b) the likelihood that a refusal to enforce the term will further that policy
3.
(c) the seriousness of any misconduct involved and the extent to which it was deliberate, and
4.
(d) the directness of the connection between that misconduct and the term
“Illegality”: although the process of contract formation is untainted, a contract may still be unenforceable because
the contract itself either violates or runs directly contrary to some public policy [the term “illegality” is a
misnomer because in many situations the contract itself is not illegal] Generally illegal contracts:
i. Gambling or wagering contracts
ii. Lending contracts that violate usury statutes
iii. Contracts to perform services where the provider lacks a required license or permit
25
26
III. What are the Terms of the Contract?
1.
Principles of Interpretation – The process by which a court gives meaning to the contractual language when the parties
attach material different meaning to the language
a.
Three Views
i. Subjectivist View: If parties materially different meanings to contractual language, no K was formed
ii. Objectivist View (Williston): Words should be interpreted in accordance with standard of a reasonable person
familiar with the circumstances
iii. Modern Theory: (Corbin) Whose meaning controls the interpretation of the K? What did that party mean?
1.
Did one party know or have reason to know what the other party intended K to mean? If so the K is
binding on those terms per mutually aware of understanding. R2K §201(2)
2.
If in the highly unusual circumstance that both parties attach different meanings, but neither party
knew or had reason to know the meaning of the other, THEN there is no K. – Mutual Mistake.
R2K § 20
3.
b.
ONLY FOCUS ON THIS– NOT ENOUGH ROOM TO DISCUSS OUTDATED METHODS
General Application
i. Ambiguous term will be construed against the draftsman
ii. Innocent Party- Courts must enforce a K according to an innocent parties meaning
1.
Applies when party A knows what the term means but B does not- it will be by the definition of
what party B thinks it means
a.
Joyner v. Adams (parties disagree what “completed development” of subdivisions meannot clear if D knew in this case remanded to find out)
iii. Custom can show that parties intended for a contract term to have particular meaning UCC 2-208
1.
“course of performance” – how the parties have interpreted the term during the life of the present
contract
2.
“course of dealing” – how the parties have interpreted the same term in prior contracts between
them
a.
Ask- Does the history of dealing between the parties shed light on their interpretation of
the disputed term?
3.
“trade usage” – how the term has been interpreted within a particular industry (Frigaliment v.
B.N.S.)
a.
UCC-1-303(c): Any practice or method of dealing having such regularity of observance in
a place, vocation or trade as to justify an expectation that it will be observed w/ respect to
the transaction in question.
4.
Note- Will be implied in the K if they are so prevalent that the parties would have intended to
incorporate them (Nanakuli v. Shell)
iv. Reasonable Expectation Doctrine – Consumers who enter into adhesion Ks are not bound to unknown terms
which are beyond the range of reasonable expectation and which eliminate the dominant purpose of the
transaction thru bizarre or oppressive terms.
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1.
C & J Fertilizer, Inc. v. Allied Mutual Insurance Co. (burglary policy in insurance K did not
cover the specific type of burglary- this violated P’s reasonable expectation)
v. Terms Omitted from the Contract
1.
The courts may supply a reasonable term in a situation where the contract is silent – ex: good faith;
vi. Walker v. Keith (rent case- super vague how rent would be determined and the court did no enforce the K- if
they would have given specifics then the court may have determined the price)
c.
Ambiguous Terms
i. Two Kinds of Ambiguity
1.
Patent, or intrinsic (within the writing)
2.
Latent, or extrinsic (ambiguity derived not from words alone but from circumstances)
ii. Judge determines whether or not a term is ambiguous or unambiguous based upon three possible approaches:
1.
“four corners” rule – very strict- no evidence allowed outside of the contract
2.
“plain meaning” rule – when determining whether a term is ambiguous the court will hear
evidence about the “context” or circumstances surrounding the agreement, but will not hear
evidence about parties’ preliminary negotiations.
3.
“liberal” rule – evidence of prior negotiations permissible in determining whether a term is
ambiguous
a.
Weakens the parol evidence rule – if a litigant can use the parties pre-contract
statements to prove that “the contract doesn’t mean what it seems to mean”
iii. Interpretation of Ambiguous Terms
1.
Construed against the drafter (contra proferentum)
2.
All terms will be interpreted, where possible, so they have reasonable, lawful and effective
meaning. R2K §203(a)
3.
“Primary Purpose” rule – if primary purpose can be ascertained, that purpose is given great weight
in determining the meaning of ambiguous terms. R2K §202(1)
d.
Unambiguous Terms
i. If the judge deems a term unambiguous then he will determine its meaning and dictate the term’s meaning to
the jury.
e.
Maxims for Contract Interpretation
i. When meaning of language is in doubt a court should choose an interpretation of that is reasonable and in
accord w/ public policy
ii. Noscitur a socciis—A word is affected by its immediate context.
iii. Ejusdem generis—A general term joined with a specific one will be deemed to include only things that are
like the specific one. Ex., S contracts to sell B his farm together with the “cattle, hogs, and other animals.”
This would probably not include S’s dog but would include his sheep.
iv. Exprssio unius exclusio alterius—If one or more specific items are listed, without any more general or
inclusive terms, other items although similar in kind are excluded. Ex. S contracts to sell B his farm together
with “the cattle and hogs on the farm.” This would exclude the sheep and S’s house dog.
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v. Ut magis valeat quam pereat—An interpretation that makes a contract valid is preferred to one that makes it
invalid.
vi. Omnia praesumuntur contra proferentem— holds that contractual ambiguity should be resolved against the
party who drafted the agreement
vii. Interpret contract as a whole—Terms should not be isolated from the whole contract. They should be
interpreted together as a whole.
viii. Purpose of the Parties —This should prevail, but should be used with caution. If the purpose of the parties is
obscure, the court will be forced to a plain meaning interpretation.
ix. Specific provision is exception to a general one—If two provisions of a contract are inconsistent with each
other and if one is general enough to include the specific situation to which the other is confined, the specific
provision will be deemed to qualify the more general one, that is, to state an exception to it.
x. Handwritten or typed provisions control printed provisions.
xi. Public interest preferred in interpreting a contract.
2.
Parol Evidence Rule- Evidence, possibly consisting of oral evidence, letters of negotiation, memoranda and preliminary
drafts of the document executed prior to the K. R2K §§209-218
a.
PER: “Integration” – Interpretations of the final expression
i. Partial Integration – When the document is not intended by the parties to include all details of the agreement
but it is intended to be final
1.
How the Parol Evidence Rule Applies to Partial Integration:
a.
No evidence of prior agreements or negotiations (oral or written) may be admitted if this
evidence would contradict a term of the writing
b.
Unintergraded party may be supplemented by such extrinsic evidence, that is it may
explain an ambiguity or vagueness
ii. Complete Integration - When the document is intended by the parties to include all the details of their
agreement
1.
How the Parol Evidence Rule Applies to Total Integration:
a.
No evidence of prior agreements or negotiations (oral or written) may be admitted which
would either contradict or add to the writing
b.
Ks of Adhesion cannot be total integration
iii. Thompson v. Libby (D refused to accept P’s logs because of breach of oral warranty- this evidence was
inadmissible since it was made after K and it would contradict the K- Linzer: rigid ex. of PER)
b.
Merger clause: Most contracts contain a "merger" clause, i.e., a clause stating that the writing constitutes the sole
agreement between the parties.
i. The presence of such a clause makes it more likely that the court will find the writing to have been intended as
a total integration (in which case not even consistent additional prior oral or written terms may be shown)
c.
U.C.C. Parol Evidence Rule: §2-202
i. When a writing is a final expression of the parties’ agreement (an “integration”), it may not be contradictedwhether a total or partial integration
29
ii. A final writing may, however, be “explained or supplemented” by:
1.
Evidence of course of dealing, trade usage, or course of performance, see interpretation, supra. Or
by;
2.
Evidence of “consistent additional terms” when agreement is a partial integration
iii. Trade Usage and Course of Dealing
1.
Trade usage or course of dealing may be used to explain or supplement the express terms of a
written contract.
2.
A trade usage will be binding on a person who is either a member of the trade or is a person who
knows or should know of the trade usage.
3.
d.
Nanakuli Paving v. Shell Oil (price protection- PER does not bar TU and CoD)
CISG takes a modified objective approach to interpretation
i. Focuses on what the parties knew or had reason to know abut each other’s intent
ii. Permits use of extrinsic evidence in arriving at that interpretation (consistent w/ R2K §201)
e.
Parol Evidence Rule does not cover:
i. Subsequent Oral Agreement- the parol evidence rule does not bar admission of evidence of oral agreements
made after the writing.
1.
That is, a written contract may always be modified after its execution, by an oral agreement.
2.
"No oral modifications" clause: However, if the written document contains a "no oral
modification" clause, that clause will usually be enforced by the court, unless the court finds that
the defendant waived the benefits of that clause.
ii. Interpretation- The parol evidence rule does not bar admission of evidence about the meaning the parties
intended to give to particular contract terms.
1.
The party who is construing a word in a narrow sense has the burden to establish meaning
2.
Figaliment v. BNS (what is chicken? - can use PER to determine the meaning of a word)
iii. Evidence to Show: § 214
1.
That a writing is or is not an integration
2.
That an integration is complete or partial
3.
Product of illegality, fraud, duress, mistake, or lack of consideration R2K §214(d)
a.
However, a party cannot base a claim of fraud upon the very type of a representation that
is disclaimed in writing
i. Sherrod v. Morrison-Knudsen- (had a merger clause- P argues that D fraudulent
said 25k yards when it was not- PER banned because contradicted merger clause)
4.
that effectiveness of agreement was subject to oral condition precedent. - R2K §217
a.
This exception will not apply if there is a merger clause
b.
Evidence introduced to establish a collateral agreement between the parties
5.
Trade usage or course of dealing under the UCCC
6.
Good Faith- court must allow PER in determining whether there was a breach of good fiath
a.
Seidenberg v. Summit Bank (P gets hired by D after selling business but D never had
intention to use them)
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iv. Contemporaneous writing: If an ancillary writing is signed at the same time a formal document is signed, the
ancillary document is treated as part of the writing, and will not be subject to the parol evidence rule.
f.
Where Parol Evidence Rule Applies
i. When parties try and use letters/ emails/ or other documents that were made before the final written agreement
to prove that issues or terms have been discussed and that the parties intended to be bound to them
ii. The parol evidence rule applies to oral agreements and discussions that occur prior to a signing of an
integration
g.
Roles of the Judge and Jury
i. Preliminary determinations made by judge: Nearly all courts hold that the judge, not the jury, decides: (1)
whether the writing was intended as an integration; (2) if so, whether the integration is "partial" or "total"; and
(3) whether particular evidence would supplement the terms of a complete integration.
h.
Conflicting views: Courts disagree about how the judge should make these decisions.
i. Four corners rule- judge decides whether there is an integration, and whether it is total or partial, by looking
solely at the document
1.
Danger here is that what appears plain and clear to one judge my not be so plain to another
2.
Uninformed by context may not reflect the intent of the parties
3.
Argues that the other method does exactly what the parol evidence rule is used to prevent
4.
This approach gives parties the inventive to negotiate written agreements carefully and it reduces
the cost of litigation
5.
Thompson v. Libby
ii. Corbin View- questions are to be answered by looking at all available evidence, including testimony, to
determine the actual intention of the parties.
1.
Can’t determine if parol evidence rule applies unless you determine the intent of the parties in an
agreement
2.
You can not contradict the meaning of the word till you know the meaning of the word
3.
Taylor v. State Farm Mutual Automobile insurance (D did not settle a claim within P’s policy
limit- Court adopts Corbin’s view)
iii. 3. Current Status: It is not resolved but the recent trend is towards the restrictive view, however Linzer
agrees w/ Corbin (of course he does)
i.
Policy Issues with Parol Evidence Rule
i. Arguments For:
1.
Preference for agreements in writing b/c memories are bad
2.
Rule is black and white and comforting in that what is in the agreement is settled and that is all that
matters.
3.
It has its sister on plain meaning; reliance in words; final agreement governs.
ii. Arguments Against:
1.
Presupposes an integrated agreement.
2.
PER bars oral as well as written evidence, so the argument that memories are bad goes out the
window b/c written agreements prior to the written agreement have nothing to do with memories.
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3.
Words don’t have a settled meaning or don’t have just one meaning; so the final agreement should
govern, but other stuff should be used to find out what that final agreement means.
3. Supplementing the Agreement: Implied Terms and the Obligation of Good-Faith
a.
Implied in Fact- any term that the court finds to be implicit in the parties’ words or conduct even though not literally
expressed by them in an implied term
i. Wood v. Lucy, Lady Duff- Gordon (K did not say anything about P doing anything but the court said that a
promise to use reasonable efforts should be implied in the K given the circumstances of their deal- Cardozo
said w/ out this implied term the K would have been pointless to make- use common sense)
b.
Implied in Law- any term that the court does not find in the parties’ agreement, even as broadly viewed, but that the
court holds should be implied by law
i. Made a part of that agreement by operation of the rules of law rather than by the agreement of the parties
themselves
c.
Gap Filling provisions of Article 2: What the parties would’ve agreed to if they had sat down and thought about it. (i.e.
Wood v. Lucy and “reasonable time” provision.)
i. As a matter of law will be implied in K for sale of goods unless otherwise agreed by the parties
1.
§§2-308 (place of deliver), 2-310 (time of payment), 2-509 (risk of loss), 2-513 (buyer’s right of
inspection)
d.
Reasonable Notice- where reasonable notice of termination for a K is not given a cause of action may exist
i. Reasonable notice does not relate to the method of giving notice, but to the circumstances under which the
notice is given and the extent of advanced warning of termination that the notification gives
1.
Circumstances may be parties’ present or prior agreements and by industry standards
ii. Where there is a relationship of manufacturer-supplier and dealer-distributor, reasonable notice of intent to
terminate an ongoing verbal agreement is required under the UCC § 2-309
1.
Reasons: Distributor’s need to sell of its reaming inventory, recoup reasonable initial or continuing
investments, close out product lines and minimize losses
2.
Leibel v. Raynor (D cancels distributorship w/ P- reasonable notice of termination was needed for
reasons listed above)
iii. A reasonable duration will be implied in franchise agreements where a dealer has made substantial
investments in reliance or agreement
e.
Default Rules: Useful rules b/c custom rules take time and are expensive. Not just “gap-fillers”, they are there so lawyers
can use them; they are “off-the-peg” contract terms. (“C Drive”)
f.
Implied Obligation of Good Faith
i. Duty of Good Faith or Fair Dealing: One of the most important implied terms; thought not to be a default
rule. Every K has a duty of good faith and fair dealing.
1.
A court must allow parol evidence in determining whether a breach of the covenant of good faith
has occurred (Seidenberg v. Summit Bank- P sells D business and is hired by D- D never intended
to use them)
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ii. R2K §205 :Every contract imposes upon each party a duty of good faith and fair fealing in its performance
and its enforcement.
iii. UCC §1-201(b)(20) good faith means “honesty in fact and the observance of reasonable commercial standards
of fair dealings”
iv. A claim under the implied warranty of good faith and fair dealing is not negated merely because the claimant
had equal bargaining power, had engaged counsel, or was not financially vulnerable when negotiating the
agreement. (Seidenberg- both parties were sharp businessmen- not a bar for recovery)
1.
These are factors which the trier of fact may consider in weighing the sufficiency of plaintiffs’
claim but they are not the only factors.
2.
Bad faith must be distinguished from sharp commercial practice and this is best left up to the judge
and jury
v. Discretionary Power- when a K confers one party a discretionary power affecting the rights of the other party
an implied covenant of good faith requires to exercise that discretion in good faith in accordance w/ fair
dealings
1.
Locke v. Warner Bros, Inc. (Eastwood gets P hired w/ D in a settlement- D had no intentions to
use her as a director)
g.
Satisfaction and Good Faith
i. Reasonable person standard is employed when the K involves commercial quality, operative fitness or
mechanical utility. The standard of good faith is employed when the K involves personal aesthetics or fancy
1.
R2K §228 states if practicable….satisfaction occurs when a reasonable person in the position of
the obligor would be satisfied
2.
Morin Building v. Baystone Construction (D hired P to erect aluminum walls- D did not like the
way they looked - D’s rejection was unreasonable)
ii. Generally a clause that says to the absolute satisfaction of owner will not be applied because of the unlimited
power it will grant the obligor
1.
If it is a third party determining satisfaction it might be applicable since they do not have a selfish
interest in the matter
2.
Subjective standard of honest satisfaction
iii. Look for a condition
h.
At-Will Employment: You can be fired at any time (no protection), but you can also leave at any time.
i. There is no implied duty of good faith and fair dealing with respect to employment at-will contracts, except
where the termination threatens clear public policy
1.
Donahue v. FedEx (P whistleblower is fired by D- P was under no legal obligation to whistle
blow- the matter dealt w/ employee handbook)
ii. When good faith may be breached
1.
Deprivation of compensation that appeared to have already been earned before termination
2.
May apply w/ regard to the manner in which an at will employee is terminated
a.
3.
A promised evaluation must have good faith
Goes against public policy
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a.
Can’t fire if you whistle blow on something you are obligated to report or if you fail to
commit a crime
4.
i.
Promissory estoppel may prevent at will termination
Requirement/ Output K- UCC § 2-306(1)
i. Must meet test of fairness and good faith
ii. No quantity unreasonable disproportionate to any stated estimate or absence of a stated estimate, to any normal
or otherwise comparable prior output or requirements
4. Modification
a.
Consideration- Courts generally require that a modification be supported by new consideration on both sides- even if it is
nominal
b.
Pre-Existing Duty- Merely promising to perform an existing obligation will not serve as valid consideration for
additional return compensation from the other party
i. New consideration for a modification serves as a safe guard against coercive behavior
1.
Fisherman should have said the nets are defective therefore they are entitled to an increase- this
would meet the consideration element
ii. Alaska Packers v. Domenico (Fisherman were to be paid $50 for season during fishing season they demanded
$100- D agreed but at the end of the season paid them $50- court says this was ok because the fisherman were
doing what they were already obligated to do- can’t modify w/ out consideration)
c.
Statute of Frauds
i. SoF will not bar an oral contract modification where one party reasonably relied upon the modification and
where the oral agreement did not materially alter the terms of the original agreement.
1.
Brookside Farms v. Mama Rizzo (P relied on D to change a no oral modification clause)
ii. UCC 2-209 says for oral modification clauses to be enforceable they must be changed in writing
d.
Exceptions
i. UCC § 2-209 says a modification needs no consideration to be binding (must be in writing though)
ii. Duress- Modifications will be voidable if they are made under duress.
1.
Usually the party who does not want the modification has to make clear that they are doing so
under protest- tries to eliminate secret intentions
2.
Kelsey Hayes v. Galtaco Redlaw (D tires to charge a higher price for brake part- P had no choice
but to accept the charge or it would hurt their relationship w/ Ford and Chrysler- court says
modification unenforceable because of duress)
iii. Bad Faith- modifications will be voidable if they were done in bad faith
iv. Notice- You should try to give notice that you are protesting but it is a thin line
1.
If you accept the deal but say that you are protesting and may sue then the other party will not
make the deal with you and the harm can come
5.
Waiver- consideration is generally required for a waiver of a condition
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6.
Warranties- basically a guarantee, not based on the law of negligence
a.
Express Warranties-An express warranty for an item will exist where a (1) seller makes an affirmation of fact or
promise to the buyer which (2) becomes part of the basis of the bargain. Also a description must conform to actual item.
i. It is a guarantee if it does not meet the guarantee, no matter what, the P can recover. (Ex. Say a car that can go
50 mph, it is the fastest car in the world but it cannot go 50mph, even if it can go 49.9 mph it breached the
warranty)
ii. UCC § 2-313 creates express warranties
1.
Can be provided in several ways:
a.
Making a representation about the goods, giving a description, or displaying a sample or
model
i. Bayliner Marine Corp v. Crow (brochure was not an express warrant because the
model in the brochure was different than the one purchased)
b.
2.
b.
Mere opinions or puffery do not constitute express warranties.
No reliance on a such statements need to be shown to weave them into the fabric of the agreement
Disclaimers of warranties
i. UCC § 2-316 a disclaimer of an express warranty is inoperative if the disclaimer cannot be construed as
consistent w/ terms in the K that would create the express warranty
1.
c.
PER may be used
Implied Warranties- not based on actual agreement of the parties but were instead imposed by law on the seller
i. Implied Warranty of Merchantability (UCC § 2-314) - impliedly warrants to the buyer that the goods are of
good quality and are fit for the ordinary purposes for which they are used
1.
Three Part Test:
a.
Pass without objection in the trade or,
b.
Are fit for the ordinary purposes of which such goods are used and
i. Bayliner (boat meets this)
c.
Seller was a merchant
ii. Implied Warranty of Fitness for a Particular Purpose (UCC § 2-315 )- created when buyer relies on the
seller’s skill or judgment to select suitable goods and the seller has reason to know of the reliance
1.
Breach of this warranty does not require a showing that the goods are defective- merely it means
they are not meant for their particular purpose (must not be one other than the ordinary use of the
goods)
a.
Ex. of Linzer buying a pro skateboard- seller did not sell for particular purpose
b.
Bayliner (did not breach this warranty because it could be used as a fishing boat- seller
had no reason to know of buyers expectation of 30mph for fishing distance)
2.
Not limited to merchants
iii. Implied Warranty of Habitability in Residential Leases- generally a landlord must:
1.
Follow house codes, make all repairs necessary; keep it safe and clean; good working electrical,
plumbing, sanitary, heat; clean up garbage, rubbish and ashes; supply running water and reasonable
heat
35
iv. Implied Warranties of Quality in New Home Sales- majority has recognized this
1.
Warranty imposes a contractual liability to build new homes with skillful performance and quality.
a.
Common law rule of Caveat Emptor (buyer beware) may not be invoked in the context of
new home construction.
b.
Some states have enacted legislation for this
i. Courts are divided if it applies to commercial properties
2.
Builder-Vendor holds themselves out expressly or impliedly as having the expertise necessary to
construct a livable dwelling
a.
Caceci v. DiCanio Construction (D build P a new home on terrible foundation and floor
started caving in- breached warranty)
3.
This can be disclaimed or modified but it must be clear, unambiguous and reflect both parties
intention
v. Disclaimers of Implied Warranties
1.
UCC § 216(2)-(3) for a merchant to disclaim a warranty is must be conspicuous
36
37
IV. Was the K Performed?
1.
Conditions- A condition is an event, not certain to occur, which must occur, unless its nonoccurrence is excused, before
performance under a K becomes due R2K § 224
a.
Basics of Conditions
i. The parties agree that a particular promised performance or set of performances will not become due until and
unless a particular uncertain event occurs
ii. Generally it makes no difference if a condition is express, implied or construed
iii. Party can waive a condition that is for their benefit only
iv. If discretion/satisfaction is involved, the obligee must use reason, best efforts and honesty
b.
Express Conditions- language of the K, on its face, articulates the intent to make performance content on the event- Ex.
“on condition that”, “provided that”, “if”
i. Strict Enforcement- condition must be fulfilled exactly as stated and cannot be satisfied by substantial
compliance
1.
Substantial performance is not available to excuse the failure to perform an express condition
precedent as required by contract.
2.
Freedom of K- parties clearly chose the language so court should enforce it
3.
Oppenhimer v. Oppehniem (express condition to have sublease signed- this was not met and the K
was not enforced- also no substantial perfomance)
ii. Look at satisfaction, supra, if the promisee hinges on satsifaction
c.
Implied (in fact) Conditions- contextual evidence may support the inference that the parties intended a performance to
be conditional
i. Interpret the words used by the parties in light of the circumstances surrounding their K
ii. No legal difference between express and implied condition
1.
However, courts may be more flexible in enforcement since it was not expressly made however
strict enforcement is generally needed (tries to avoid harsh results- court has more leeway)
d.
Constructive Conditions- no evidence that the parties actually agreed to the condition
i. Court will imply it as a matter of law if the circumstances and nature of the K compel the conclusion that if the
parties had addressed the issue they reasonably would have intended the condition to be a part of the K
ii. Flexible Enforcement- standard of strict compliance does not apply because the parties have not clearly
indicated, by express language, that they intended the condition to be strictly enforced
iii. Doctrine of Substantial Compliance- may be invoked
1.
If action would be a serious violation of the K then rescission will be allowed but if it is trivial the
court will not permit rescission
e.
Performance of Condition
i. One Party Performance- If a condition intended to relate only to the performance of one of the parties, that
party can choose to performance despite the nonoccurrence and may fully enforce the K against the other
ii. Condition Relates to the Whole- a nonoccurrence discharges the rights of both parties to demand
performance and neither can unilaterally waive it
38
f.
Pure Conditions and Promissory Conditions
i. Promissory Condition- a term that is not only a condition but is both a condition and a promise that the
condition will occur
1.
Nonfulfillment of a promissory condition has the combined effect of entitling the other party both
to withhold performance and seek a remedy for breach
ii. Pure Condition- is intended when a party has no power to influence the happening of the event
1.
Difference between the two:
a.
Pure condition the performance obligation falls away and there is no basis for claiming
breach if condition is not met
b.
Promissory condition- if not fulfilled the party whose performance was contingent on it is
entitled both to withhold counter performance and to seek a remedy for breach
g.
Time Sequence:
i. When a K provides for counter-performance in exchange for each other and the K does not prescribe a
sequences of performances the general presumption is that if the performances are capable of being rendered
simultaneously they are due at the same time
h.
Forfeiture- general principle under which the court may exercise its discretion to decline full enforcement of one party’s
legal rights where doing so would have disproportionately harsh impact on the other party- doctrine is used sparingly
i. Inequitable conduct of the beneficiary of the condition may preclude his assertion of the nonfulfillment or the
impact of the condition may be so harsh that is enforcement is unjust
ii. Condition maybe excused if there is bad faith or any wrongful action buy a party
iii. Most useful w/ express conditions and unambiguous conditions (not really needed if court could be flexible)
R2K § 229
iv. JNA Realty v. Cross Bay Chelsea (D was not aware of six-month notice provision for lease. D made
substantial improvements to the property and P would suffer no prejudice if the notice was waived- court says
for equity this was a mistake it D would suffer a forfeiture if enforced)
i.
Terms
i. Obligor- party whose performance is conditioned- the one whose performance obligation is at issue
ii. Obligee- the one to whom the performance obligation is owed and the one who is presumably attempting to
enforce it
2.
Breach of a K- failing for whatever reason, to honor a promise of performance when that performance falls due R2K §
235(2)
a.
Four Questions to Establish a Breach of K
i. Determine existence and content of the contractual terms to ascertain the exact nature and extend of the
promise that was made (use interpretation)
ii. Establish the date that the promised performance fell due (breach of K or improper performance cannot occur
until the time arises for the party’s duty to render)
iii. Decide if the performance complied w/ the promise- any shortfall is a breach
iv. Decide severity of the breach- total? Partial? Material?
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b.
Summary of Actions for Promisee
i. Total breach: Promisee may- withhold performance, terminate the K, claim full damages for breach
ii. Breach is Material/ not total- Promisee may- suspend performance, await cure, claim compensation for any
loss suffered
iii. Not material/Substantial performance- Promisee may- claim compensation for any loss suffered
c.
Material Breach- breach is material if the failure or deficiency in performance is so central to the K that it substantially
impairs its value and deeply disappoints the reasonable expectations of the promise
i. No fix standard have to look at context of contractual language and nonperformance
ii. Material if it so badly defeats the promisee’s expectations that they are entitled to terminate the K and sue for
relief for loss
d.
Total Breach- R2K § 242
i. A breach of a K that is both material and incurable entitling the victim to rescind the K and claim full
expectation relief
1.
Total breach relieves the nonbreaching party from the duties under the K and can recover damages
for non performance and future damages
e.
Partial- trivial breach
i. A party has substantially performed, the deficiency in performance is a partial breach
ii. Not a material breach because yet because there is still time to cure (deficiency may be rectified)- it may be
serious enough to give right of termination but not just yet
1.
If not cured it becomes a total breach
iii. The measure of damages for a trivial and innocent omission is not the cost of replacement but the difference in
value
1.
Jacob & Young v. Kent (different type of pipe- cost a lot to change out the pipe so P got the
difference in value between the pipes- which was nothing)
iv. Curable material breach is treated as partial because promisor can prevent total breach
1.
Curing must be within a reasonable amount of time
2.
Promisee cannot immediately sue for damages for breach or terminate the K BUT they may be able
to suspend performance until the condition is cured
3.
f.
W/ sale of goods this falls under UCC 2-508
Substantial Performance- nevertheless a breach (partial), however it is a non material breach- R2K § 237 (does not
apply to sale of goods, see Perfect Tender)
i. A party who substantially performs is entitled to return performance under the K- subject to an offset for
damages caused by the partial breach
ii. Gives no basis of termination
iii. Other party is not entitled to withhold any return performance that is due but has the right to claim damage for
the breach
1.
Usually the amount of damages is cost to place the promisee in the position he would have been in
had the performance been in compliance w/ the K
2.
However, if no difference in value the promisee will not recover
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3.
g.
Willful transgressor will not be entitled to recover under the substantial performance doctrine
Anticipatory Repudiation- occurs when a party breaches in advance of performance
i. Repudiate obligation in anticipation by clear words or actions that they will breach when performance falls
due
1.
Codified by UCC §§ 2-609 - 612
2.
Must be a clear, unequivocal and voluntary repudiation by one of the parties and provided that the
threatened action or failure to act would be a material and total breach
a.
Truman Flatt Sons v. Schupf (the P’s letter to the D seeking to modify the price term in
the contract was not a clear and unequivocal repudiation. P’s offer and found that it did
not amount to repudiation because the offer did not clearly threaten nonperformance)
ii. Repudiation of a contract is justified only where the breaching party’s breach constituted a total or material
breach, not merely a partial breach.
1.
Sackett v. Spindler (Defendant was justified in repudiating because the Plaintiff’s behavior gave
rise to uncertainty that he would fulfill his obligations and the evidence was sufficient to infer that
the Plaintiff never intended to remit the payment as required by the contract)
iii. Promisee’s Response- when one of the parties clearly repudiates a material promise in advance, the other may
treat this as a breach immediately and seek relief of breach w/ out delay
1.
Two Responses Possible for Promisee
a.
Accept (don’t say this on exam) repudiation by treating it as immediate breach
i. Entitles them to refuse to render her own performance, terminate the K and to
sue for relief for total breach
ii. Risk is that the other party may argue they did not repudiate and then the promisee
may be sued for breach
b.
Delay response- they may even take affirmative steps to encourage reaction of the
repudiation by notifying the promisor that he has specified time to recant
iv. Promisor’s Response
1.
Promisor has the ability to retract a repudiation because by definition it is a prospective breach that
occurs before the due date
a.
Recant is not absolute- promisor’s ability to recant is lost as soon as the promisee notifies
the promisor that the repudiation has been accepted- cannot take it back once action has
been taken on it
h.
Adequate Assurance § 2-609 - may occur when one party has reasonable grounds for insecurity can demand adequate
assurance of due performance from the other party
i. Failure to give such assurance constitutes an anticipatory repudiation of the K (this would turn the table and
you have to be careful)
1.
Similar concept in R2K § 251
ii. Hornell Brewing Co. v. Spry (beverage supplier K gone awry- P had more than enough reason to demand
assurance- Spry was a sham)
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iii. Grounds for insecurity may be:
1.
Buyer’s growing debt, failure to respond, failure to discuss debt, failure to perform important
obligations, failure to deal w/ defects, deliveries are late
2.
Sometimes it may not have to do w/ the parties action- market conditions may provide reasonable
ground for insecurity
3.
Even rumors may be grounds- the other side would have to show that the rumors would be false (if
unreliable they are not grounds- fact for jury)
iv. Adequate assurance
i.
1.
May range from a mere verbal guarantee to the posting of a bond
2.
Demanding party must wait a reasonable time not to exceed 30 days
Perfect Tender Rule UCC § 2-601- the slightest mistake makes it not a perfect tender
i. If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may
1.
(a) reject the whole; (mitigated by right to cure under § 2-508) or
2.
(b) accept the whole; or
3.
(c) accept any commercial unit or units and reject the rest.
ii. Inspection and rejection must be in a reasonable time frame
j.
Installment K’s do not fall under Perfect Tender Rule
i. Allows buyer to reject any installment that has a nonconformity that substantially impairs its value and
cannot be cured
ii. If cure is possible and permissible, the buyer may not reject the installment if the seller gives adequate
assurance of the cure
iii. See: UCC § 2-612
k.
Revocation of Acceptance in Whole or in Part- § 2-608
i. (1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially
impairs its value to him if he has accepted it
1.
(a) on the reasonable assumption that its non-conformity would be cured and it has not been
seasonably cured; or
2.
(b) without discovery of such non-conformity if his acceptance was reasonably induced either by
the difficulty of discovery before acceptance or by the seller's assurances.
ii. (2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have
discovered the ground for it and before any substantial change in condition of the goods which is not caused
by their own defects. It is not effective until the buyer notifies the seller of it.
42
43
V. Is there an Excuse or Reason for Non-Performance?
1.
Mistake – a belief that is not in accord w/ the facts- justification for non performance
a.
Mutual mistake – both parties have the same mistaken belief
i. Three requirements for avoidance- case by case basis given the circumstances
1.
Basic assumption – mistake must concern a basic assumption on which the contract was made
(what you think you are getting out of the K)
2.
Material effect – must have a material effect on the agreed exchange of performance
3.
Risk – the adversely affected party (the one seeking to avoid the contract) must not be the one on
whom the contract has implicitly imposed the risk of the mistake.
ii. Lenawee County Board of Health v. Messerly (P buys home as is and failed to do a thorough inspectionproperty had defective sewage- P could not rescind the K)
b.
Unilateral mistake – only one party has the mistaken belief
i. For avoidance
c.
1.
Must show all three above, plus
2.
Unconscionability, OR
3.
Reason to know – the other party had a reason to know of the mistake
R2K § 153- permits avoidance of a K for mistake of one party when
i. The mistake be such that enforcement of the K would be unconscionable
1.
Severe hardship of substantial loss
2.
Wil-Fred v. Metro Sanitary (P a contractor tried to rescind deal once a error in subcontractors math
was discovered- enforcement of the K would have ruined subcontractor- court said it would be
unconscionable due to substantial hardship to enforce the K- All D would have lost was what they
should not have received in the first place- math mistake)
ii. The other party either have reason to know of or be responsible for causing the mistake
2.
Impossibility- Impracticability- Frustration of Purpose – justification for non performance
a.
Court’s Option- Only two choices in reality if one of these is met- either make the party perform or relieve them from
performance
i. Minority View - you may be able to reform the K (Alcoa decision is one of the few to do this)
b.
Impossibility: It is impossible to complete my side of the bargain (objective and subjective impossibility)
i. Three main types
1.
Destruction of the subject matter (essential to the performance of the contract)
2.
Failure of the agreed upon means of performance
3.
Death or incapacity of a party
ii. R2K §263: Destruction, Deterioration or Failure to Come into Existence of a Thing necessary for
Performance.
iii. R2K §262: Death of Incapacity of Person Necessary for Performance.
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iv. Valid Defense- defense not only when performance is impossible but also when supervening circumstances
make performance impossible
1.
Taylor v. Caldwell (K to use a music hall but the music hall burnt down- w/ out fault- impossible to
perform the k)

Impracticability- R2K §261 – Even though performance clearly is not literally impossible {not even subjectively} it
was sufficiently different from what the parties had both contemplated at the time of contracting Usually seller’s
remedy
v. No Impracticability when:
1.
Market shifts, increased cost, natural disaster or war are usually not grounds for relief
2.
261 comment d- impracticably is more than a mere change in degree of difficulty due to increased
wages, prices or cost, etc…. well beyond the normal range (fixed price is intended to cover these
things)
3.
Karl Wendt Farm v. International Harvester (market conditions and shit in economic was not a
basic assumption for which a superseding event could lead D to breach the K)
vi. Disadvantaged Party Must Show (can apply to frustration)
1.
Substantial reduction of the value of the K
2.
Nonoccurrence was a basic assumption of the K
3.
Without the parties fault
4.
Party seeking relief does not bear the risk of that occurrence of the event either under the language
or surrounding circumstances of the K
c.
Frustration of Purpose (§§ 265-66) It is not impossible to complete my side of the bargain, but the purpose for which I
needed it has lost all value to me, the purpose has been frustrated.
i. Case law actually applying the doctrine is sparse
ii. § 265 Requires three factors:
1.
Purpose frustrated by the supervening event must have been the principal purpose the party making
the K
2.
Frustration must be so severe that it is not fairly to regarded as within the risk assumed under the K
3.
Frustration must have been a basic assumption
iii. Distinguish from impossibility
1.
Not claiming that you Can’t perform, but claiming that it makes no sense for you to perform, bc
what you will get in return does not have the value you expected at the time you entered into the
contract
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46
VI. What are the Consequences for Non-Performance?
1. Basics of Remedies
a.
Three Protected Interests (R2K § 344)
i. Expectation
1.
To put the promisee in as good a position as he would have been in had the contract been
performed. Benefit of the bargain to the injured party’s reasonable expectation.
2.
Sometimes this involves specific performance, but this is not typical. Specific performance not
very efficient for the courts and is usually only ordered in cases where compensation is
“inadequate,” such as in land sales, since each parcel of land in considered unique and
therefore not susceptible to substitution.
3.
This is the favored remedy.
4.
Williston thinks you should get expectation damages even if the basis of the bargain is PE.
a.
Think Johnny and the Car. Williston thinks you should get $1,000 for the car even
if you pad $500 on the car.
ii. Reliance
1.
To put the promisee in as good a position as he would have been in had the contract
never been made; reimburses the party for loss caused by reliance on the contract.
2.
Example: Building a barn to house animals you were contracted to buy.
3.
Hard to prove reliance, that is why expectation damages are preferred- Fuller
iii. Restitution
1.
To protect the promisee’s interest in having restored to him any benefit he has conferred
upon the other party.
b.
2.
Disgorgement may be a way to get the promisee his benefit back
3.
Example: A down payment.
Efficient Breach- Linzer does not think this is a good thing “fairness and justice are more important”
i. Efficient breach hypothesis: A promisor will exercise an “option” to breach and pay expectation
damages instead of performing when it is in her economic interest to do so.
1.
Efficient breach is one reason for contracts to avoid punitive damages. “Hard bargaining,
‘efficient’ breaches, and reasonable settlements of good faith disputes are all acceptable, even
desirable, in our economic system.
2.
Based on a notion that there is nothing immoral about breaching a K, but Lizer thinks this is
not necessarily so
ii. Look for impracticability, impossibility or frustration of purpose- this may be a better way out of
the K for the breaching party
iii. If a court is against efficient breach one tool they have is to compel specific performance on the
breaching party so that they perform their contractual duty. Linzer agrees w/ this and thinks money
damages are a diluted substitute
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iv. IF there is a breach, the non breaching property may have a property right in whatever the breaching
party earns from breaching the K
v. Handicapped Children’s Board v. Lukaszewski (D left job for a better once, has to pay full
compensation of loss of the benefit Linzer thinks this is the only good efficient breach in the book)
c.
Farnsworth Formula (also R2K § 37)- Damages = P’s Loss in value + other loss – cost avoided – loss avoided
i. Loss in value- the Contract Price: the difference between the value to the injured party of the
performance that should have been received and the value to that party of what, if anything, actually
was received. Basically, K price minus amount received
ii. Other loss
1.
Incidental: additional costs incurred after the breach in a reasonable attempt to avoid loss,
even if attempt is unsuccessful
a.
May includes such expenses as the transaction cost of taking action to mitigate the
effects of the breach and/or entering into a substitute transaction
2.
Consequential: harm to property, business, person in other transactions that were dependent on
this K or any other type of loss or injury caused by breach
iii.
Cost avoided- what you would have paid out either for the contract, or for supplies to make a product,
if employees are under contract they are not cost avoided- still have to pay them, etc.
iv. Loss avoided- Money you get from selling to someone else, ex. $30,000 of goods but only worth
$15,000 resell your loss avoided would be $15,000
1.
Linzer uses the term salvage
2.
Always have to mitigate this!
v. Note- this works extremely well in construction K’s and most types of K
2.
Expectation Damages- goal of remedy is to cure that disappointment of breach by giving the victim of the breach
exactly what was promised and justifiably expected under the K- get the benefit of their bargain
a.
Basics of Expectation Damages:
i. Does not take in to account any non economic injuries
b.
Specific Performance- most obvious way the court could give P his benefit of the bargain
i. Generally not used. Only if award of damages would be inadequate. At discretion of judge. General
exception only made for land (unique). Sometimes used in cases of gross unfairness.
ii. UCC 2-716 and Specific Performance:
1.
(1) Specific performance may be decreed where the goods are unique or in other proper
circumstances.
2.
(2) The decree for specific performance may include such terms and conditions as to payment
of the price, damages, or other relief as the court may deem just.
3.
(3) The buyer has a right to replevin for goods identified to the contract if after reasonable
effort he is unable to effect cover for such goods or the circumstances reasonably indicate that
such effort will be unavailing…
iii. Note: Specific performance easier under the UCC than the common law
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c.
Expectation Relief- a monetary award will approximate the result
i. Sometimes it will be impossible to find a substitute transaction in which case courts may award
damages in full consideration of the bargained for exchange
ii. Ex. P and D agree for voice lessons for $1,500. D breaches and P has to get lesson or $1,800- her
damages would be $300 in this case
iii. Crabby’s v. Hamilton (P and D enter in to K for land/restaurant- measure of damages is difference
between K price and FMV price when sale should have been completed)
d.
UCC Buyer’s Remedies: 4 options (see UCC 2-711):
i. Cover (UCC 2-712): codifies this by expressing the buyer’s damages as the difference between the
cover (repurchase) price and the K price. Basically cover your tail by rebuying something similar.
1.
2.
Requirements:
a.
Good faith
b.
Without unreasonable delay
c.
Reasonable purchase
d.
Substitution
Damages = cost of cover – contract price + incidental and consequential damages under 2-715
– expenses saved in consequence of breach
3.
Comment 2: Immaterial that the method of cover was not the cheapest or most effective. Just
has to be reasonable.
4.
Comment 3: No requirement of covering. Can use 2-713 instead..
ii. Damages Based on Market Value (UCC 2-713):
1.
If the market price is lower than Contract Price: Seller entitled to difference between Contract
price and Market Price
2.
If the market price is higher than Contract price the Buyer is entitled to Contract Price –
Market Price
3.
Comment 5: If you cover, cannot use 2-713.
iii. Damages for accepted (defective) goods (UCC 2-714):
1.
2.
Requirements:
a.
Acceptance
b.
Notification under 2-607
Damages = difference in value of goods at the time and place of acceptance and goods as
warranted + incidental and consequential damages under 2-715
iv. Specific performance (UCC 2-716)
v. Note- Generally Buyer can always recover incidental and consequential damages on top of these four
above
e.
UCC Seller’s Remedies
i. Resale (UCC 2-706): damages is the diff b/t the K price and the lower resale price.
1.
Requirements:
a.
Good faith
49
2.
b.
Commercially reasonable manner
c.
Notification under the rest of 2-706
Damages = K price – resell price + incidental damages under 2-710 – expenses saved in
consequence of breach
ii. Market Damages (UCC 2-708(1)):
1.
Damages = market price and time and place of tender – unpaid contract price + incidental
damages under 2-710 – expenses saved in consequence of breach
iii. Lost-volume sellers (UCC 2-708(2)):
1.
Lost volume seller: Getting second sale does not make them whole. You have to be able to
make the extra sale and that sale has to be profitable. Not lost volume if you only have one of
that particular product. Would you have made both sales? Has to be part of your regular
inventory. Have to prove someone would have bought that exact product.
2.
Damages = profit (including reasonable overhead) + incidental damages under 2-710 + costs
reasonably incurred – credit for resale
3.
708(2) also available if you stop building a customized item and can’t resell. K price- cost of
production
iv. Action for the price (UCC 2-709):
1.
If buyer has accepted the goods, seller can recover the price (1)(a)
2.
Recover price if goods are lost or damaged after the risk of their loss has passed to the buyer
(1)(b)
3.
Goods identified to the contract that the seller is unable to resell after a reasonable effort or
circumstanced indicating that such effort will be unavailing. Basically force the goods on to
the buyer.
v. Note- can generally cover consequential and incidental damages on top of any other damage above
f.
Construction Contracts: Expectation = Profit + Unreimbursed expenditures
g.
For the Sale of Land:
i. Sellers: Contract Price – Market Value
ii. Buyers: Contract Price – Difference in Market Values
iii. Incidental and Consequential Damages may be permitted, but must:
1.
Be reasonably foreseeable
2.
Speculative damages are prohibited (damages must be proven with reasonable certainty
3. Limitations on Expectation Damages- Foreseeability, Mitigation and Certainty
a.
Foreseeability- Breach must be cause in fact and the damages must be foreseeable Damages can not be
speculative. Two types, direct damages (arising directly from not getting what you bargained for form the K)
and consequential damages (supra)
i. Two part test:
1.
Damages arose naturally, i.e., according to the usual course of things, from the breach of
contract itself; or
50
2.
Damages may be reasonably supposed to have been in contemplation of the parties, at the time
they made the contract, as the probable result of the breach of it.
ii. Hadley v. Baxendale (Mill owners not allowed to recover lost profits when slow shipment of a mill part
forced them to shut down operations for longer than anticipated. The owners had not communicated the
particular circumstances to the shipper, so the shipper had no reason to expect to be liable for lost
profits)
iii. UCC § 2-715(b) states damages in the terms of foreseeability of the loss at the time of the K not time of
the breach
1.
Only matters if it is foreseeable; does not matter in which the loss occurs
2.
Focus on foreseeability of breaching party
3.
Objective approach
4.
Foreseeable as a probable breach of the K
iv. Lost profits are recoverable so long as they are:
b.
1.
foreseeable when the contract was made;
2.
they directly or proximately result from the breach and
3.
they are capable of accurate estimation.
4.
Florafax v. GTE Market (breach of telecommunication K- loses profits from breach)
Mitigate- The injured party has a duty to mitigate damages. Failure to mitigate does not preclude recovery, but
it does reduce damages by the amount that could have reasonably been avoided. R2K § 350(b)
i. Avoidable Consequences- P may not recover for those injurious consequences of the defendant’s
breach that the P could by reasonable action have avoided
ii. Rockingham County v. Luten Bridge (Bridge builder was told not to continue construction due to
public opposition, and continued to build until completion. Builder was denied extra damages resulting
from the continuation of construction.)
iii. Employer’s Breach | Comparable Work - Generally only a need to mitigate w/ alternative work that
is comparable to the position lost, you do not have to get job if not comparable
1.
If another position is taken that is not comparable the income will still offset w/ expected
income- courts are split on this but Linzer thinks that you should not have to offset if the job is
not comparable
2.
If there is a question of humiliation or security then you may not have to retake your job if
offered back to you
3.
Maness v. Colins (Employment K breached- failure to mitigate did not bar the P because there
were no comparable jobs available)
4.
Ex. Party A offers job for 100k a year to B but then breaches. B mitigates and accepts job for
50k a year. The expectation damage would be 50k.
a.
However, if B does not mitigate and 50k was a reasonable offer and therefore he
should have taken it, what else he does would be the difference of the 50k
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iv. Employee’s Breach – When the employee breaches, the employer may recover whatever it costs to
replace the employee. However, if employer has to pay extra for the substitute, breaching employee
must pay if the substitution was reasonable. (Much like cover in sales of goods.)
1.
Hire A for 50k a year, he reneges so you have to hire B for 70k a year- A will have to pay 20k
a.
2.
A prohibitory injunction may be placed on A if the situation calls for it
Employer may be able to sue for direct damages and consequential damages
v. Lost Volume- The duty to mitigate damages does not apply to lost volume sellers. UCC § 2-708
1.
Basically when a P could have done another job at the same time they can still recover from
the D
2.
To be a lost volume seller, P must prove:
a.
That its possessed the capacity to make an additional sale
b.
That it would be been profitable for it to make an additional sale
c.
That it probably would have made the additional sale regardless of buyer’s breach
3.
Policy Linzer thinks this screws independent workers who can only do one job at a time
4.
Jetz Service v. Salina Properties (laundry case- they had sufficient resources to make sells
after the breach)
vi. UCC:
1.
Under UCC 2-704(2) a manufacturer may proceed to completion upon the buyer’s
repudiation instead of salvaging, as long as it is “in the exercise of reasonable commercial
judgment for the purposes of avoiding loss and of effective realization. Seller may then base
recovery on the goods as completed.
2.
UCC gives buyers and sellers the option to arrange a substitute transaction (2-706, 2-712) or to
do nothing and accept market damages (2-708, 2-713). If the injured party fails to take
affirmative action and find a substitute transaction, the damages are based on the
difference between the contract price and the market price at which it could have
arranged a hypothetical substitute transaction.
3.
Avoidance only relates to consequential damages (see UCC 2-715(2)).
4.
Cannot recover for lost profits of refusing to cover. Consequential damages have to be
foreseeable and not avoidable.
c.
Damages must be proved with reasonable certainty, though not with mathematical certainty.
i. Problematic in showing damages to reputation, etc.
ii. Lost profits can generally be recovered as long as you can prove with certainty. This is harder for new
businesses.
4.
Reliance Damages- In the event of a breach of contract, damages for expenses incurred in reliance on the contract are
recoverable, less any loss that would have resulted if the contract had been performed. R2K § 349
a.
Even if expectation damages would in theory be recoverable they may not be probable w/ reasonable certainty
i. In this case the P fallback provision will usually be to seek recovery for reliance damages
ii. Generally reliance damages are thought of as out of pocket expenses
52
1.
However this may extend to gains the P would have had he they not relied on the promises by
the D (think quitting a job because of reliance)
2.
Wartzman v. Hightower Productions (Woody Hightower case- anticipated profits were
speculative so they got reliance damages)
iii. Essential Reliance: You can not get more than what you would for expectation damages- basically if
the cost of completing the K is more than the K price you lose.
1.
Ex. K for 100k, it is breached and you had spent 130k to perform the K. You can only recover
the 100k in expectation damages and not the 130k in reliance.
2.
P cannot escape the consequences of a bad bargain by falling back on reliance interest
iv. Incidental Reliance: Part of the process, but not part of the process of completing the K
1.
Ex. Sell store for 20k and buy 100k worth of stock. K is breached and you have to sell the
stock for 50k. You will be able to recover 50k.
2.
b.
Linzer- you could probably call this consequential damages
Limitations- foreseeability, mitigation and certainty, with a few additions:
i. If it can be shown that the full performance would have resulted in a net loss- no recovery
ii. Equal opportunity exception if both P and D had an opportunity to mitigate
1.
Pay may be able to recover if he did not mitigate in this situation
iii. Certainty – π can only recover reliance damages that can be proved and calculated to a reasonable
certainty § 349
iv. Causation – π can only recover reliance damages when he can show that the damages are incurred as a
result of the breach
v. Mitigation – π cannot recover reliance damages that would have been reasonably avoided
vi. Look! Important- Parties cannot recover for reliance costs incurred before the K was made
c.
Promissory Estoppel and Reliance Damages- as the use of PE has become more widespread some question
whether expectation damages are just since originally. Courts are split
i. View 1- Expectation damages and lost profits should usually be denied in PE and reliance damages are
preferred
1.
Walzer v. Toyota (P thought he was approved of dealership, only got out of pocket expenses)
ii. View 2 – majority is that remedies for PE should be flexible
1.
d.
5.
Remedies may include- expectation, reliance, or restitution
Specific performance- usually land K
Restitution Damages- R2K §§ 373-77, allows a nonbreaching party to elect recovery of restitutionary rather than
expectation damages for breach of the K (benefit conferred on the other party by part performance)
a.
If performance obligations have been discharged- either or both parties may be entitled to restitutionary relief
i. §§ 375- SOF, 376- K is voidable (mistake, capacity, undue influence, etc..), 377 (impract., imposs.,
FofP)
ii. However, courts are hesitant to do this. Look at the facts and make a reasonable argument.
b.
When a P elects restitution as a remedy for breach of K by the D
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i. Measure of recovery is the reasonable value of the performance
ii. Recovery is undiminished by any loss which would have been incurred by complete performance
iii. Followed by a majority of the courts
c.
A subcontractor may recover in quantum meruit for the value of labor and equipment furnished, regardless
of whether he would be entitled to recover for suit on the contract
i. The measure of recovery from quantum meruit is the reasonable value of performance, which is
determined by the amount for which such services could have been purchased
ii. US, Coastal Steel v. Algeron (sub justifiably breached a K due to lack of payment and recovered lost of
labor and equipment furnished)
d.
Breaching Parties Remedies
i. A breaching party is entitled to restitution in excess of the loss caused by the breach.
ii. Old rule prohibited a defaulting party on a K from recovering- R1K excluded defaulting purchaser
from recovering
1.
Policy- Weakness was it failed to recognized that non breaching party should not obtain a
windfall from the breach
iii. Modern Rule- party who committed a beach should be entitled to recover “any benefit…in excess of
the loss that he has caused by his own breach” – R2K § 374(1).
e.
1.
Supported also in UCC § 2-718- right of restitution on behalf of breaching party
2.
Recovery should be limited to the lesser of either
a.
value of the benefit conferred or
b.
the defendant’s increase in wealth
Disgorgement- the act of giving up something (such as profits illegally obtained) on demand or by legal
compulsion Restatement (Third) of Restitution
i. Courts may uses this to prevent unjust enrichment from a breach of K- usually only in bad faith breach
or wanton and willful breach
ii. Maybe used w/ an opportunistic breach but the question is when is there an opportunistic breach
iii. Strong moral argument against efficient breach
f.
Limitations
i. If nonbreaching party has fully performed obligation under the K and the breaching party’s only
remaining duty of performance is the payment of money
1.
The non breaching party may not elect a restitutionary recovery but is limited to expectation
damages
g.
Note 1- Most scholars think this is a bad thing, however most courts agree
h.
Note 2- Keep in mind this is not based on K
i. Ventura v. Titan (there was nothing in the K about the intellectual property but he was still able to
recover since the D was unjustly enriched- there is a right to publicity)
6.
Other Damage Rules
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a.
American Rule- attorneys’ fees are not recoverable in an action for breach of contract. The caveat to the rule is
that attorneys’ fees may be recoverable in an international contract, when dealing with a party whose laws would
allow it to recover.
i.
Additionally, when a party breaches in bad faith, and causes another party to go additional lengths,
including litigation, that party may be liable for attorneys’ fees.
1.
In Texas if you win a K case (among others) you can get other reasonable atty fees
a.
2.
b.
The D does not get their side paid if they win
Zapata v. Hearthside Baking (cookie bad faith breach- gives grounds for attorney fees)
Tort remedies are not available in breach of contract actions.
i. Exception to this rule is when the breaching party breaches an additional or special duty, or acts with
intent and malice.- generally it needs to be really clear, usually the tort is obvious
ii. Emotional distress—can recover if bodily harm is a result or if emotional distress is particularly
likely consequence of the breach
1.
Erlich v. Menezes (dream house- no ED in this specific case)
iii. No punitive damages because the aim is to expectation or reliance interest not damage interests
1.
7.
This would give more than the benefit of the bargain
Specific Performance- An equitable remedy, only conferred when other remedies at law are unjust or inadequate, where
the court orders the breaching party to perform as specified in the K.
a.
Specific relief will not be denied merely because the parties have left some matters of their agreement or
i. Left some issues to be agreed on in the future, particularly when the parties have agreed on all material
terms and other equitable factors
ii. R2K § 362, comment b
b.
Land K- American courts will routinely grant specific performance to purchasers of real estate. Land is unique.
i. R2K § 360, comment e – indicates that specific performance has traditionally been given to both buyers
and sellers
ii. Exception- Building K for buildings are unlikely to get SP because of difficulties of supervision and
construction services can be readily be purchased on the market w/ money damages received
c.
Factors R2K §360
i. Difficult to prove damages with reasonable certainty
ii. Difficult to procure a substitute performance by means of money awarded as damages
iii. The likelihood that an award of damages could not be collected
iv. The K was the product of mistake or unfair practices
v. Specific performance would cause unreasonable hardship or loss to the party in breach
vi. Possible impact on 3rd parties
d.
Specific Performance under the UCC
i. Buyer- § 2-716 declares that SP may be decreed for a buyer where the goods are unique or in other
proper circumstances
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ii. Seller- § 2-709(1)(b) allows goods to be forced on the buyer and the price obtained when the goods are
not reasonable subject to resale to others
e.
Liquidated Damages– Where parties stipulate in the K what the damages will be in the event of a breach
i. To be Enforceable, Liquidation Damage Clauses Must:
1.
Be Reasonable – relative to the anticipated or actual loss from breach
a.
Traditional View: Reasonable at the time of contracting
b.
If P’s damages are much less or much more than what was reasonable at the time of
Contracting, the liquidated damages clause remains enforceable (as long as it is not
viewed as punitive from the time of formation)
c.
Modern View: Must be reasonable, either (1) at the time of formation, or (2) in light
of the actual damages which have occurred R2K §356(1
2.
Not be Punitive (from the time the liquidated damage provision is drawn) – if the courts
consider the liquidated damages provision is high enough to be considered a penalty then
unenforceable on grounds of public policy
ii. Where Liquidated Damage Clauses are viewed skeptically:
1.
If actual loss is much less than liquidated amount
2.
If liquidated amount is computed without reference to time remaining under the K (if damages
are the same if K is broken on either the first or last year of a 30 yr. lease)
3.
Damage computation keyed to gross revenues or gross profits
4.
Also if liquidated damages are very low, it's viewed as an exculpatory clause much like a
contract of adhesion limiting liability.
iii. Liquidated Damages under the U.C.C. §2-718(1) – Damages for breach by either party may be
liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or
actual harm caused by the breach, and difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large damages is
void as a penalty
f.
Exceptions
i. Possibility that K was made in mistake/unfair practices or w/ unclean hands
ii. SP may lead to unreasonable hardship or loss if enforced
iii. May have an impact on a third party
iv. A promise to render personal series will not be specifically enforced R2K § 367(1)
1.
Policy and practicality reasons
a.
Undesirability of forcing parties to continue in a relationship that has soured
b.
Involuntary servitude (violates Thirteenth Amendment- Linzer thinks this is a week
argument)
2.
However, courts have been willing to grant negative enforcement by way of injunction that
prohibits a breaching party from performing for anyone other than the non breaching party
a.
Usually only granted for services are not easily replaceable or unique (artists, athlete,
etc…)
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v. Anti trust acts (Sherman anti trust act) prevents restraint of trade
1.
Covenant not to compete must be limited to time and place
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