THE MEANING OF AGREEMENT

PRINCIPLES OF INTERPRETATION [1-6]

Three basic approaches to interpretationo Subjective approach

Courts look at contract and evidence and try to figure out what was in the heads of the contracting parties

what the contracting parties thought the contract or a particular term o in the contract meant

parallel approach to the subjective meeting of the minds Rationale

Supports highest order for the contractual regime…one can exercise his private autonomy

Peerless case Both parties were thinking about different ships, and because

the parties never agreed to this fundamental term there was no agreement and therefore no contract.

Primary criticisms of the subjective approach Often does not let contracts to be enforced If we look at what the parties were thinking, we ignore the fact

that words have accepted meanings in normal usage (in general custom, certain industries)

o Objective approach Judge considers what a reasonable person would have thought at that

time of entrance into a contract Fundamental problem of objective interpretation

Judge’s determination of the outcome as judged under the reasonable man concept may differ from the conception of the contract by either party

Court would look at what the industry standard is for defining a contested term

o Modified objective approach The theory that appears in the Restatement Court looks at both subjective intent of the parties and also what the

hypothetical reasonable person would think

Restatement (modified objective approach)

201. Whose meaning prevails.

(1) where the parties have attached the same meaning to a promise or agreement or a term thereof; it is interpreted in accordance with the meaning.

-however, this may be confusing for third parties

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(2) where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party

-outside evidence is key in determining the other party’s subjective stance(3) except as stated in this Section, neither party is bound by the meaning attached to the other, even though the result may be a failure of mutual assent

-in essence, this is the old subjective rule

Maxims of interpretation (not in order; not controlling…selective usage) If one party indeed does or should know what the other party is thinking…that

will be the construction that we will use, otherwise:o (1) interpretation that makes the contract reasonable, legal should be admitted

203o (2) the meaning of a word in a series is affected by others in the same series;

or a word may be affected by its immediate contexto (3) a general terms joined with a specific one will be deemed to include only

things that are like (of the same genus as) the specific one i.e. “cattle, hogs, and other animals”

o other animals probably would not include the house dogo (4) if one or more specific items are listed, without any more general or

inclusive terms, other items although similar in kind are excluded i.e. “cattle and hogs on the farm”

o sheep not includedo (5) an interpretation that makes the contract valid is preferred to one that

makes it invalido (6) contra preferentum

construe language against the draftero the drafter must be known ANDo the drafter must have greater bargaining power

o (7) interpret the contract as a wholeo (8) the principle apparent purpose of the parties is given great weight in

determining the meaning to be given to manifestations of intention or to any part thereof

almost always employed to one party’s benefit and one’s party’s determent

o (9) specific rule is more important than the general rule this and 10 are most consistently employed and most difficult to

rebut specific term is construed as an exception to the more general term

o (10) handwritten or typed provisions control printed provisions

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more recent and more reliable expression of intentionso (11) public interest preferred

Joyner v. Adams P wants to sue D because he has not put up a building on the last lot.

o P argued that buildings had to be on each lot P entered objective evidence to this account

I.e. memorandao D argued that lots only had to be ready for construction

D entered claims regarding the meaning of the terms in common usageo Court recognized that there was no meeting of the minds and remanded to

determine whether or not D knew or should have known P’s meaning or vice versa

o IA court on contra preferentum rule Usually applied where there is a disparity in bargaining power

o Not the case here Also, this case shows that it is not always clear who

drafted the contract…parties were passing paper back and forth

Frigaliment v. B.N.S. Issue: What is a chicken? Process of court in deciding outcome (in order)

Language of the contract When in doubt, read the contract Some people are concerned if you overly rely on contract language or

trade usage you give the advantage to one party over the other Preliminary negotiations between the parties

Parol evidence rule makes it significant whether we look at written agreement or things that came before or after that agreement

Trade usage Trade usage, course of dealing, course of performance

Think of these three things together Evidence that we use to prove trade usage is extrinsic to the

parties thoughts Objective interpretation

Trade usage v. course of dealing, course of performance CofD…if we look at how these two parties have done business

in the past, are parties using these terms accordingly CofP…if we look at how these two have done business in the

past, are they performing in a way similar to that Legal standards

Government standards/regulations

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Less effective in this particular case because the contract does not explicitly say that they are relying on definitions from the certain agency

It is one thing to reference a regulation and another to incorporate it into the contract

Reasonable construction should be preferred over one that is unreasonable

It is not unreasonable on its face to say that the market price determines the reasonableness of the term

Sometimes people draw up contracts knowing that they will lose money

What approach to interpretation is the court using? Modified objective approach

Subjective intent coincides with the objective meaning Court is looking at subjective intent with the objective meaning to the

extent that they can find one D had no reason to know of P’s meaning. But, P should have reason to know of D’s

meaning. 201 Outcome is not that important, analysis is Could you make the argument that there was no “meeting of the minds,” and

thus no contract? It is possible

Patent and intrinsic ambiguityo Patent ambiguity

Misunderstanding in contract stemming from the words alone Misunderstanding created without extrinsic evidence and within the

four cornerso Latent ambiguity

Misunderstanding in contract not apparent from the words alone (at least not in their common meanings)

Misunderstanding created by extrinsic evidence and outside of the plain meaning/four corners

Adhesion contracto Little choiceo Standard forms

C.J. Fertilizer, Inc. v. Allie Mutual

Sometimes there is a maxim that we are going to interpret the contract against the drafter…only when we are dealing with a contract of adhesion (look for imbalance of power and absence of dickered terms)

P’s basis for their argument that the policy should cover them hereo This is a contract of adhesion

Elements of an adhesion contract

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(1) Standardized formo Lengthy, boilerplate

(2) Significant imbalance of powero Somewhat different from contra preferentiumo Make certain assumptions because the drafter is the

powerful one (3) Not actually dickering/negotiating

o There will be no editing, acceptance will be on the contract as is

o The fact that there are blanks on the form does not mean there is dickering, it just means that there were filling in the blanks

Terms are ultimately take it or leave it Just because it a standard form does not mean it is a

contract of adhesiono Because it is an adhesion contract it permits the court to subject it to the

doctrine of reasonable expectations Court will interpret the non-dickered terms in accordance with

the reasonable expectations of the non-drafting party Interpretation will be made even if the express language of the

contract contradicts those expectations Almost the antithesis of the objective approach

Guideposts of interpretation (now 211)o Is the term bizarre or oppressive?

Is the term oppressive here? P…P payed for coverage, didn’t get coverage…seems pretty

oppressive D…term was clear; no deception…does not seem oppressive

o More objective interpretation Decision of CJ: application of a doctrine of reasonable expectations due to the

contract of adhesion led the court to rule in favor of the plaintiff Restatement 211. Standardized Agreements.

o (a) Expect as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writings as an integrated agreement with respect to the terms included in the writing

o (b) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing

o (c) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement

PAROL EVIDENCE [6-18]

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PER in a nutshello Parol, not Paroleo Exclusionary ruleo Does NOT necessarily bar use of PE to assist in determining the meaning

of the parties agreemento PER can bar the introduction of evidence (of prior or contemporaneous

communications) intended to add to or contradict a written agreement Purpose

o Provides certainty for the partieso Prevents the introduction of unreliable evidenceo Deters attempt to rewrite agreements with hindsight

Whereo UCC: 2-202; 1-205o R: 209, 210, 213, 214, 215, 216

Gist of PER: when the parties to a contract have mutually agreed to incorporate (or “integrate”) a final version of their entire agreement in writing, neither party will be permitted to contradict or supplement that written agreement with “extrinsic” evidence (written or oral) of prior agreements or negotiations between them. When the writing is intended to be final only with respect to a part of their agreement, the writing may not be contradicted, but it may be supplemented by extrinsic evidence.

Basic function of PER: the rule does not define what evidence is affirmatively admissible, it only operates to exclude evidence – evidence that would otherwise be admissible as rationally probative of some fact at issue

o If PER applies it has the effect of preventing one party from introducing into court extrinsic (or “collateral”) evidence of matters not contained in the written agreement between the parties (hence, “extrinsic” to it), where evidence is offered to supplement or contradict the written agreement

o if PER does not apply (either because the parties have not executed such a written agreement or because the offered evidence comes within some exception to that rule), then admission of the evidence will turn on the body of rules that collectively make up the law of evidence

Thompson v. Libby Court held that the written agreement appeared to be a complete expression of the

whole agreement of the parties as to the sale and purchase of the logs, solemnly executed by both parties. Furthermore, there was nothing to indicate that the writing was a mere informal and incomplete memorandum. Therefore, the court held that the lower court erred in admitting parol evidence of a warranty, and therefore the order refusing a new trial must be reversed.

This court holds that the only way you can determine if a contract is complete is by looking at the contract itself

o Other courts hold that it is okay to consider extrinsic evidenceo Many Js hold that it is okay to use parol evidence to determine whether

the integration is complete 214

Meaning of integration

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o The parol evidence rule only applies to integrated agreements You need a FINAL, WRITTEN AGREEMENT

You can meet SOF with writing, but that writing does not have to be final

o If the parties intend a document to represent the final expression of their agreement, the document is said to be integrated

o Integrated Agreements PER applies only to integrated agreements An integrated agreements is a writing or writing constituting a final

expression of one or more terms of an agreement 209(1); 2-202

o Complete integration 210(1) A writing that is intended to be a final and exclusive expression of the

agreement of the parties PER…no evidence of prior or contemporaneous

communication (oral or written) may be admitted if this evidence would either contradict or add to the writing

o Partial integration 210(2) A writing that is intended to be final but not exclusive because it

deals with some but not all aspects of a transaction between the parties PER…no evidence of prior or contemporaneous

communication (oral or written) may be admitted if this evidence would contradict a term of the writing

o Therefore, PER does not bar evidence of supplemental terms when the integration is only partial

o The correct application of PER thus requires that the court first determine whether the writing in question is intended to be a final expression of the parties agreement, and if so, whether it is a complete or partial statement of the contract terms.

PER…evidence of prior agreement may never be admitted to contradict an integrated writing and may not even supplement an integration that is intended to be complete

Determining integrationo Merger clause

Many writing contain a merger clause, i.e. a clause indicating that the writing constitutes the sole agreement between the parties. Such a clause will conclusively establish that the document is a total integration, unless the document is obviously incomplete, or the merger clause was included as the result of fraud or mistake, or there is some other reason to set aside the contract (fraud, mistake, and other fact that show the contract to be void or voidable, are never barred by the parol evidence rule)

E.g., Entire Agreement. This document constitutes the entire agreement of the parties and there are no representations,

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warranties, or agreements other than those contained in this document.

As a general rule, a merger clause should seal the dealo Times when it would not prevail

Adhesion contractso If no merger clause…

Williston approach Question of integration must be determined from the “four

corners” of the writing without resort to extrinsic evidence Objective Four corners

o Must appear integrated in its face Corbin approach

A finding of integration should always depend on the actual intent of the parties and a court should determine (in camera, in jury cases) whether the agreement was integrated 214

More subjective approach Consider all circumstances

o Writing cannot prove its own completeness 210, comment b

In this approach, even if there is a merger clause, it will not necessarily be solely determinative of the issue of integration 216, comment e

Trends among courts favor the Corbin-Restatement approach to determining integration

Exceptions to PERo Exceptions to PER are so numerous and collectively so broad that the parol

evidence rule has become – even more than the statute of frauds – a rule that can be understand only in light of its exceptions

o (1) PER does not apply to evidence offered to explain the meaning (an ambiguity) of the agreement

if found to be a partial integration, the writing may not be contradicted by extrinsic evidence 213, comment b; UCC 2-202

it may, however, be supplemented by additional consistent terms

if the writing is a complete integration, then not only may it not be contradicted, it may not even be supplemented 213(2), comment c; 2-202(b)

whatever the degree of integration, however – partial, complete or not at all – a written agreement may always be explained by extrinsic evidence 214(c)

patent ambiguity: obvious on its face latent ambiguity: misunderstanding in a contract that obvious from the

words alone

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o (2) PER does not apply to agreements, whether oral or written, made after the execution of the writing

PER only applies to communications that are prior or contemporaneous to the agreement; PER does not apply to communications subsequent to the agreement

Evidence of agreement made after the contract was madeo (3) PER does not apply to evidence offered to show that effectiveness of

the agreement was subject to an oral condition precedent 217 if parties sign a writing that does not include a condition that was

orally agreed to, almost all courts allow proof of this condition despite PER

oral evidence is permissible to show that the agreement would not take effect unless some specified event occurred

i.e. your contract is subject to the condition that you will pass the baro (4) PER does not apply to evidence offered to show that the agreement is

invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake, illegality, lack of consideration, or no mutual assent 214

some courts would limit fraud cases to cases of fraud in execution most courts, however, will extend the fraud exception also to instances

of fraud in the inducement – misrepresentations of fact that induces (cannot be simply mistaken) the other party to enter into the contract

as yet a further limitation, some courts will prohibit the introduction of PER to support a claim of fraud in the inducement if the alleged misrepresentation directly contradicts a term in the writing

o (5) PER does not apply to evidence that is offered to establish a right to an “equitable” remedy such as “reformation” of the contract 214(e)

if one party can establish that a part of the agreement was inadvertently omitted from the writing due to some mistake (perhaps the error of a “scrivener,” a secretary, or even a computer printer), that party may seek judicial reformation of the agreement – a court order declaring that the mistakenly omitted provision will be treated in law as part of the agreement.

Generally, however, a writing may be reformed in this fashion only if it is show by clear and convincing evidence that the parties really did intent their written agreement to contain the term in question

o (6) PER does not apply to evidence introduced to establish a “collateral” agreement between the parties

an agreement will not be regarded as fully integrated if the parties have made a consistent additional agreement which is either agreed to for separate consideration or is such a term as in the circumstances might naturally be omitted from the writing 216

UCC: consistent additional terms should be excluded under 2-202(b) only where the court concludes that if such terms had actually been agreed upon they would certainly have been included in the document 2-202, Comment 3

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A collateral agreement is a separate contract between the parties It is a bargain that stands alone…offer, acceptance, or

considerationo The existence or absence of consideration is often

extremely telling in this regard Supplemental agreements outside the bargain at hand are considered

collateral and evidence of these agreements are not excluded by PER For an agreement to be considered collateral it must have its own

consideration…this is usually established by another, separate exchange of money

Taylor v. State Farm Mutual Automobile Insurance Co. Court is hesitant to endorse, without explanation, the often repeated and usually over-

simplified construct that ambiguity must exist before parol evidence is admissibleo The danger is that what appears plain and clear to one judge may not be

so plain to another (as in this case), and the judge’s decision, uninformed by context, may not reflect the intent of the parties

Court holds that the better rule is that the judge first considers the offered evidence and, if he or she finds that the contract language is “reasonably susceptible” to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties.

o Whether contract language is reasonably susceptible to more than one interpretation so that extrinsic evidence is admissible is a question of law for the court

Thompson court used four corners approach to determine PER, while Taylor court used a more subjective approach to determine PER

o Thompson dealt with supplementation and Taylor dealt with interpretation Broad view of this case

o Fairness appears to be an important consideration here in terms of giving Taylor an just opportunity

o However, there are high transactional costs associated with the flexibility assumed by the court

While all courts will allow use of extrinsic evidence to interpret a contract with a patent or facial ambiguity, the point of difference is that plain meaning/four corners adherents will not allow use of extrinsic evidence to uncover a latent ambiguity. By contract, the modern approach allows use of extrinsic evidence if the disputed language is “reasonably susceptible” to the different meanings advanced by the parties. In making the determination of whether the language is susceptible of more than one meaning, the court will consider at least preliminarily the extrinsic evidence and need not find the agreement to be patently ambiguous.

Sherrod, Inc. v. Morrison-Knudsen Co. Court affirmed dismissal of sub-contractor’s (P) claim based solely on MT’s

PER. The Rule provides that a written agreement supersedes all oral

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negotiations which preceded or accompanied the execution of the instrument. Furthermore, MT law provides that the terms of a written agreement cannot be proven by evidence other than what is contained in the written document.

o Court is taking a classical, extremely conservative approach to PER Not even in light of possible fraud

o Broad viewpoint Look how harshly PER can be applied

PER, as typically stated, recognizes a general exception for fraud 214(d) Consistent with the dissent in Sherrod, a number of courts take the view that not even

the combination of a merger clause and a specific disclaimer can shield a party from a claim of fraud

o On the other hand, many courts agree with the majority in Sherrod that a party cannot base a claim of fraud upon the very type of representation that is disclaimed in the writing

PER and PEo There are a handful of cases that appear to hold that PER does not bar a

showing of extrinsic evidence that P detrimentally relied on promises or assurances nor contained in an integrated written contract, for the purpose of applying the PE principle

o Most cases, however, have rejected the use of PE to the PERo It seems, therefore, the Professor Farnsworth was right in his observation

that the earlier movement toward protecting reliance at the expense of formal requirements has not continued, and if anything may have reversed itself

TRADE USAGE, COURSE OF PERFORMANCE, AND COURSE OF DEALING

Three sources of meaning for contract interpretation in the UCCo (1) course of performance

the way parties have conducted themselves in performing the particular contract at hand

the idea is that the parties’ own actions in performing the contract supply evidence as to what they intended the contract terms to mean

one instance does not constitute performance how many actually does is unclear though

o (2) course of dealing “a sequence of previous conduct between the parties to a particular

transaction which is to be regarded as establishing a common basis of understanding for interpreting their expressions in conduct.” 1-205(1)

also a pattern of performance between the two parties to the contract, but it refers to how they have acted with respect to past contracts, not with respect to the contract in question

what has happened over the course of the relationship between these two parties

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thus, if a particular term had been used in previous contracts between the same parties, and had been interpreted by them in a certain manner, this interpretation would be admissible to show how the term should be interpreted in the current contract

o (3) usage of trade “any practice or method of dealing having such regularity of

observance in a place, vocation or trade so as to justify an expectation that it will be observed with respect to the transaction in question.” 1-205(2)

Thus, the meaning attached to a particular terms in a certain region, or in a certain industry, would be admissible

a usage of trade need not be well know, let alone universal. It only needs to be regular enough that parties expect it to be observed

Effect on PERo COD, COP, and UOT may all be introduced to help interpret the meaning of a

writing even if it is a complete integration.o Customs that are “carefully negated”:

The writing may however, bar introduction of COD, COP, and UOT if these sources are “carefully negated” in the writing

A simple merger clause will not do it Allowable to add or subtract from the agreement

o C, C, T are admissible not only to help interpret a particular phrase, but also actually to add or subtract terms to or from the contract. Thus, PER states that these sources may not only explain but supplement a writing, even a complete integration.

o Contradiction of express terms under the UCC Express term that contradicts CD, CP, and TU, then the express

language should prevail Chipping away at express term

o However, some courts have gone to great lengths in order to find that a particular custom or usage merely “supplemented,” and did not “contradict,” an express contractual term. One way courts do this is to hold that the custom or usage merely removes part of the express term, rather than negating that express term completely. So long a the custom or usage does not wholly swallow up the express term, the court may find that the two can be reasonably construed to co-exist.

o Keep in mind the usage of agreement in the UCC (as shown by Nanakuli)

Prioritieso In a particular case, it may happen that C, C, and/or T are inconsistent with

one another. As we noted above, the Code resolves this problem by stating that the most specific pattern controls. Thus an express contractual provision controls over a course of performance, which controls over a course of dealing, which controls over a trade usage. 1-205

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Hierarchy: actual terms, actual dealings, prior dealings, trade usage Intended to reflect reliability and credibility of parties

Nanakuli Paving & Rock Co. v. Shell Oil Co.

Holding: for N. The price increase by S, effective on one day’s notice, did indeed match the express price term in the written contract (“Posted Price at time of delivery”) But the custom of “price protection,” adequately proven by N to be a trade usage in the local asphalt industry, can be construed consistently with this express price term. This is because the price protection trade usage “forms a broad and important exception to the express term, but does not swallow it entirely,” and exceptions will be allowed if they don’t totally negate the express term. Therefore, a reasonable jury could have found that the price protection, as a trade usage, was incorporated into the written agreement. (By contrast, a trade usage that N was to set the price would be a “total negation” of the express term, and would therefore have to be rejected in favor of the express term.)

o Course of performance Two instances in past where S protected price for N (during oil

embargoes)o Jury finds the course of performance and trade usage to favor N

The appellate court allows for supplementation of price protection term

Does price protection contradict price term? No, because by using the term “agreement”…the court

shows that this evidence is not contradictoryo “Agreement”: “the bargain of the parties in fact as

found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act.” 1-201(3)

SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD FAITH, AND WARRANTIES

RATIONALE OF IMPLIED TERMS [18-22]

Why would there be well established practices including implied terms? Or, why would parties regularly enter into contracts without including certain terms?

o If courts are going to add the terms in anyway, it is a waste of time and money (transaction costs)

o Some terms are so obviouso There are gap fillers when dealing in the sale of goods

Why imply terms?o Parties would have agreedo To save bargaining (transaction) costs

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o Public policy reasons Downsides of implied terms

o We sometimes get litigation costs over the inclusion of the implied terms This could have been avoided if these terms were negotiation to begin

with Default Rules

o If parties probably would have agreed to the term, they probably thought about it, but didn’t waste their term writing it in

o Untailored default rules Implied duties of good faith Untailored terms

E.g. provided warranties under the UCCo Penalty default rules

Imposed as a matter of law regardless of what the parties intended as a matter of fairness and public policy

Party may not have wanted this But still, they are reasonably common

o Some default rules allow for parties to negotiate around the issue that it being made aware, some simply put forth the implied term

UCCo Trying to lower contract costso Courts are quick to plug in default implied termso Sometimes you see strange results

One gap UCC won’t fill is quantity (they will fill in price though) Implied terms

o Terms implied in fact: those that are implicit in the parties words or conduct even though not literally expressed by them

o Terms implied in law (focus of this chapter)…distinction between the two is blurry nevertheless

A term that the court does not find in the parties’ agreement, even as broadly viewed, but that the court holds

Made a part of that agreement by operation of the rule of law rather than by the agreement of the parties themselves

Sometimes a term will be implied in law because a statute so provides; sometimes because common law precedents dictate, or because the court concludes that in the particular case its implication is appropriate

Court may supply termo When the offer and acceptance are not completely definite as to all the

essential terms, the modern tendency is for the courts to supply the missing terms in many situations, at least if it is apparent that the parties wanted to bind themselves

UCC gap-fillers 2-305(1)…reasonable price 2-308…a place for delivery 2-309(1)…a time for shipment or delivery 2-310(a)…a time for payment

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2-509…risk of loss 2-513…buyer’s right of inspection some gap-fillers may be regarded as mandatory, some may not

be UCC’s system of implied terms has been justified on ground

not only of fairness but also of economic efficiencyo Less costly for parties if they are only terms that they

would voluntarily choose for themselves Implied terms may replace standardized forms

o It would be extremely inefficient for parties to bargain over situations that are not likely to occur

Relationship to interpretationo Interpretation is merely the art of construing what the parties actually meant

by the words they used; when the court supplies missing terms, it is almost always dealing with questions that the parties never even thought of, and consequently did not address in the contract. Since courts have traditionally not liked to admit that they are “making a contract for the parties,” they often disguise this process by stating that they are merely interpreting the parties’ intent.

Relationship to PERo The court is free to supply a “reasonable” omitted term even if the contract is

a completely integrated one (i.e. one to which, under PER, not even consistent additional terms can be added). In this situation, evidence of the parties’ prior negotiations or oral agreements may be given as evidence of what is “reasonable,” but may NOT be given for the purpose of supplying the omitted term itself. In other words, it is the court’s judgment as to reasonableness, not he parties’ prior negotiations, that determines whether the missing term is to be added.

Restatement ruleo “when the parties to a bargain sufficiently defined to be a contract have not

agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.” 204

Duty of good faith o One of the terms most frequently supplied by the courts

Wood v. Lucy, Lady Duff-Gordon

D had an exclusive contract with P as her agent to promote/use her name on merchandize. P allowed someone else to use her brand.

Court is saying that there was an implied promise that P would use reasonable efforts to generate revenue and thus profits

o Any rational party on reading these terms would have assumed or literally expected them to be included in the contract

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An implied obligation to use reasonable efforts will prevent a somewhat indefinite promise from being illusory.

Led to the formulation of 2-306 o 2-306(2): A lawful agreement by either the seller or the buyer for exclusive

dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

Leibel v. Raynor Manufacturing Co.

P had an exclusive, oral contract with D in the sale and service of goods (UCC applies). D suddenly terminated contract and left P with great costs (investments and inventory) as he had relied on this contract.

Court held that reasonable notification is required in order to terminate an on-going oral agreement for the sale of goods in a relationship of manufacturer-supplier and dealer-distributor or franchisee.

P does not dispute the fact that the agreement was terminable at will, but he contends, and the law so holds, that the appellee was required to give reasonable notification of intent to terminate the contract. What length of time constitutes reasonable notice is a question of material fact which remains to be decided. We cannot say that the written notice given in this case was “reasonable” as a matter of law.

o 2-309(2): where the contract provides for successive performances is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party

if you have this ongoing indefinite relationship, the assumption is that it will continue to be ongoing

however, any party can end this relationship at willo 2-309(3): Termination of a contract by one party except on the happening of

an agreed event [except on the happening of an agreed upon event] requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable

reasonable notification 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

standards for reasonable noticeo (1) reasonable time would allow for the injured party to

find a substitute agreemento (2) reasonable time may also interpret it as enough time

to recoup their losseso (3) reasonable time may also interpret it as enough time

to sell off their inventories Unlike Leibel, most modern commercial contracts will specify events

of termination with express termination provisions. If parties are silent, then the default rule for reasonable

notification of termination is implied

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Parties can defeat this implication of a reasonable notification of termination by writing in express termination provisions

BUT Agreement dispensing with notification would be invalid if it is unconscionable

o Unconscionable…shocks the conscience Often times it deals with a significant absence

of notice

IMPLIED OBLIGATION OF GOOD FAITH [23-32]

UCCo UCC declares an implied obligation of good faith for all transactionso Every contract or duty within this Act imposes an obligation of good faith

in its performance of enforcement 2-103 Basic principle that runs throughout the entire Act Discourages sharp practices and practices to deceive

Restatemento Every contract imposes upon each party a duty of good faith and fair

dealing in its performance and enforcement 205 Describing what has perceived as what the evolution of the law is

today Definitions

o Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage

o An honest intention to abstain from taking any unconscientious advantage of another, even through the technicalities of law, together with an absence of all information, notice, or benefit or belief of acts which render the transaction unconscientious.

o Good faith means honesty in fact in the conduct or transaction concerned 1-201(20)

o An absence of good faith may occur when one party attempts to deprive another of its fruits of the contract

Is “honesty in fact” (Good faith) subjective or objective?o Good faith…subjective?

An individual’s good faith is a concept of his own mind and inner spirit, and therefore, may not conclusively be determined by his protestations alone…

o Good faith 2-103 in the case of a merchant means honest in fact and the observance of

reasonable commercial standards of fair dealing in that trade good faith and bad faith are all in context

o we’re looking at good faith as a tool to supplement the express terms of the agreement

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Seidenberg v. Summit Bank

Brokers (Ps) assert claims for bad faith on the part of bank (D). They claim that the circumstances demonstrate that Summit never had any intention to perform to begin with and that Summit from the start never was committed to developing the business with Ps, but rather simply wanted to acquire the business and seek out their own broker to run it or grow it. In 12/99, Summit terminated Ps from their positions. Dismissal reversed and case remanded.

The implied covenant of good faith and fair dealing has been applied in three general ways, each largely unaffected by PER

o (1) the covenant permits the inclusion of terms and conditions which have not been expressly set forth in the written contract

these implied terms will often enable “business efficacy” when the contract does not provide a term necessary to fulfill the

parties’ expectationso (2) the covenant has been utilized to allow redress for bad faith performance

of an agreement even when D has not breached any express term when bad faith served as a pretext for the exercise of a contractual

right to terminationo (3) the covenant has been held, to permit inquiry into a party’s exercise of

discretion expressly granted by a contract’s terms when the contract expressly provides a party with discretion regarding

its performance PER is not impacted by the implication of a covenant of good faith because the

obligation to act in good faith and fair dealing is, by its very nature, “implied.” The prohibition on PER to alter or vary a written contract relies, in the present context, only to the creation of the contract. Because the covenant of good faith and fair dealing is implied by the operation of law, the view that PER somehow inhibits the P’s claim is erroneous.

Requirements and Output Contractso Nature of the bargains

Indefinite quantity contract Exclusive relationship

Output Buyer is obligated to buy all the Seller’s goods

o You can buy other Seller’s good as long as you fulfill your contract with the Seller and buy all his goods

o These allow for assurance that a certain amount of good will be bought

Requirement Seller is obligated to sell the Buyer as many goods as he needs

o You can sell excess goods to other Buyers as long as you fulfill your contract with the Buyer

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o These types of contracts cut costs of renegotiation Validity of these types of contracts is questioned

The UCC attempts in 2-306 to assist in the enforcement of requirements and output contracts by focusing on the general requirement of good faith and stressing the likelihood that the parties themselves may have furnished an estimate against which performance may be measured

Morin Building Products Co. v. Baystone Construction, Inc.

“lest this conclusion be thought to strike at the foundations of freedom of contract, we repeat that if it appeared from the language or the circumstances of the contract that the parties really intended GM to have the right to reject Morin’s work for failure to satisfy the private aesthetic taste of GM’s rep, the rejection would have been proper even if unreasonable. But the contract is ambiguous because of the qualifications with which the terms “artistic effect” and “decision as to acceptability” are hedged about, and the circumstances suggest that the parties probably did not intend to subject Morin’s right to aesthetic whim.”

228 declares that the objective test should be preferred when it is “practicable” to determine whether a reasonable person in the position of the obligor would be satisfied.” 228, Comment a indicates that the subjective standard should be used only where “the agreement leaves no doubt that it is only honest dissatisfaction that is meant and no more.”

o So the reasonable person standard is employed when the contract involves commercial quality, operative fitness, or mechanical utility which other knowledgeable persons can judge…The standard of good faith is employed when the contract involves personal aesthetics or fancy

Locke v. Warner Bros., Inc.

P was given a yearly salary and a “pay or play” directing deal with D. She was unaware that this deal with provided to appease Eastwood, who agreed to reimburse D for their payments to P. P alleges bad faith on the grounds that D never intended to actually work with her. SJ for D.

P had testimony from two witnesses each saying that D never planned to make a movie with P. Merely because D paid P the guaranteed compensation under the contact does not establish good faith by D. If D acted in bad faith and systematically rejected P’s work and refused to work with her, regardless of the merits of her work, such conduct is not beyond the reach of the law. Reversed for P.

WARRANTIES [32-37]

UCC Express warranties 2-313

o does not require that the seller have the intent to create an express warranty

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o the most common application of this section is the written or oral express warranty given by the seller or manufacturer of a consumer product, concerning the quality or nature of the goods.

o In sum, a seller will be found to make an express warranty if she makes an explicit promise that the goods will have certain qualities. Such a warranty can take the form of:

(1) an affirmation of fact or promise (representation of the goods); here, there is a need to distinguish between a type of factual

representation about the quality of the goods that may give rise to an express warranty and “mere puffery” or sales talk that will not serve as a basis for a binding commitment

(2) a description of the goods; or (3) a displayed sample or model

o Reliance on express disclaimer not neededo Disclaimers of express warranties 2-316(1)

Not quite as hard to disclaim A disclaimer of an express warranty is inoperative if the disclaimer

cannot be construed as “consistent” with terms in the contract that would create the express warranty

Since express warranties may be created orally or by one of several writings, the existence of an express warranty may turn on the application of the parol evidence rule

Indeed, 2-316 states that express warranties are subject to 2-202 (PER)

Some courts, however, have found grounds to permit evidence of express warranties despite the PER

Implied warranty of merchantability 2-314o Not stated or put in writing…read into the situationo under this warranty a “MERCHANT” (2-104…dealing in those goods or

having particular knowledge about those goods) who regularly sells goods of a particular kind impliedly warrants to the buyer that the goods are of good quality and are fit for the ordinary purposes (2-314(2)(c)) for which they are used.

Other criteria To be merchantable, goods must also “pass without objection

in the trade under the contract description” (2-314(2)(b)). Furthermore, they must be “fit for the ordinary purposes for which such goods are used” (2-314(2)(c)); “run, within the variations permitted by the agreement, of even kind, quality, and quantity within each unit and among all units involved” (2-314(2)(d)), be “adequately contained, packaged, and labeled as the agreement may require” (2-314(2)(e)), and “conform to the promises or affirmations of fact made on the container or label if any” (2-314(2)(f)).

Implied warranty of fitness for a particular purpose 2-315o Merchant is not required

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o Not stated or put in writing…read into the situationo this warranty differs from the implied warranty of merchantability in several

respects: not limited to merchants the warranty is created only when the buyer relies on the seller’s skill

or judgment to select suitable goods and the seller has reason to know of this reliance

further, the breach of warranty does not require a showing that the goods are defective in any way – merely that the goods are not fit for the buyer’s particular purpose

most courts also hold that the buyer’s particular purpose must be one other than the ordinary use of the goods

o Conditions (1) that the seller had reason to know the buyer’s purpose; (2) that the seller had reason to know that the buyer was relying on the

seller’s skill or judgment to furnish suitable goods; and (3) that the buyer did in fact rely on the seller’s skill or judgment

there must be some type of disparity in knowledge Disclaimers and implied warranties

o Very difficult to disclaim implied warrantieso Disclaimers of implied warranties of merchantability

The language must mention merchantability and in the case of a writing must be conspicuous 2-316(2)

o Disclaimer for implied warranty of fitness Must be in a conspicuous writing and will be effective if it states that

“there are no warranties which extend beyond the description of the face hereof” 2-316(2)

Thus, the disclaiming language for the fitness warranty can be less specific than that required for the implied warranty of merchantability, but it must be in a writing

o Moreover, additional methods of excluding implied warranties are found in 2-316(3)(a), probably the most common of which is the “as is” or “without fault” disclaimer

Do less sophisticated parties recognize “as is” as disclaiming them from the implied warranty?

o 2-316(3), unlike 2-316(2), does not include a conspicuousness requirement, but most courts agree that one should be implied to carry out the section’s purpose of avoiding surprise to buyers

o 2-316(3)(b): implied warranty waived if buyer inspected or refused to expect and the defect was one he would have found

o 2-316(3)(c): an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade

o notably, some states have enacted nonuniform versions of 2-316, making all disclaimers of the implied warranty of merchantability ineffective in consumer transactions.

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Bayliner Marine Corp. v. Crow

P bought boat thinking that it went a lot faster than it did. P needed to speed so that he could adequately partake in the offshore fishing for which he bought the boat. Speed in the manual mentioned 30 mph, but was referring to another model and explicitly said that the data was intended for comparative purposes only. Also, P claims to rely on a brochure assuring that the boat will deliver the kind of performance that will get one to the prime offshore fishing grounds.

P’s claim for a breach of express warranty…failedo 2-313 Analysis

(1)(a) things that are discussed at the time here, describes a different boat

(1)(b) brochure here, is just a commendation

(1)(c) samples on the showroom floor this argument may become stronger if P gets a test drive however, this argument may be lost when P puts all that weight

on the boat P’s claim for implied warranty of merchantability

o Court held that there was no evidence from which the trial court could conclude that the boat generally was not merchantable as an offshore fishing boat.

D proved that there was no evidence of a standard of merchantability in the offshore fishing boat trade and also that there was no evidence suggesting that a significant portion of the boat-buying public would object to purchasing an offshore fishing boat with this particular speed capability

Also, the evidence suggests that P used the boat for offshore fishing regardless, so it must have been well-suited enough to do so

P’s claim for implied warranty of fitness for a particular purposeo to establish an implied warranty of fitness for a particular purpose, the buyer

must prove as a threshold matter that he made known to the seller the particular purpose for which the goods were required

o the court held that the record did not support a conclusion that P informed the sales representative (not D’s sales rep.) of this precise requirement and thus concluded that the evidence fails to support a ruling that D breached an implied warranty of fitness for a particular purpose

Caceci v. Di Canio Construction Corp.

D built house for P. D provided a one year warranty for P. Four years down the road, a dip in the kitchen floor emerged. Builder tried to make repairs twice, but failed to

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do so successfully. Ps go to somebody else and completely redo the foundation because they learned it was built on unstable, biodegradable matters.

Court held that there is an implied term in the express contract between the builder-vendor and purchases that the house to be constructed would be done in a skillful manner free from material defects.

o The builder-seller’s knowledge of the defect, however relevant in a fraud claim, is not decisive under this implied contractual warranty theory

o Further, the contract’s standard merger clause is of no legal effect in these circumstances of an implied warranty with respect to latent defects.

o To harmonize the legal inconsistency and to soften the harsh effect of the caveat emptor doctrine, many jurisdictions recognized an implied warranty of skilful construction in connection with the sale of newly constructed houses.

AVOIDING ENFORCEMENT: INCAPACITY, BARGAINING MISCONDUCT, AND UNCONSCIONABILITY

Incapacity, bargaining misconduct, unconscionability Incapacity

o Some people just don’t have what it takes to be held to their bargainso Parties genuinely cannot understand the consequences of entering this

contractual relationship Bargaining misconduct

o The focus is on the behavior of the contractorso Process by which the contract was made was unfair to one of the partieso Three situations: duress, undue influence, and misrepresentation

Unconscionabilityo Focus is on the contract itself….shocks the conscienceo Looking at the contract and discerning whether the term is so unfair that the

contract should not be enforced Where are we…broad picture

o Contract…interpretation…avoidance of the bargain These are situations in which the law allows a party to escape a contractual

relationship

MINORITY AND MENTAL INCAPACITY [38-43]

Minors (Infants) and The Mentally Incompetento Restriction justified on the ground that they did not have the judgment to

protect themselves in the marketplace

Dodson v. Shrader

P, a 16 year old, buys a truck from D. D thought P was 18 or 19. P drives breaking down truck for 9 months until it blows up. Also, the car is hit while left on P’s front lawn.

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The contract is not void. The contract is voidable, in that one of the parties has the right to make the contract void.

o In a void contract neither party can enforce it, but in a voidable contract one party has the option to get out but the same party that has the option typically can enforce the contract against the other party.

Infant can only enter into voidable contracts before they are 18. 14o Infant is someone under 18 14o Here, we are essentially throwing the mutuality of obligation contract out the

windowo Rationale:

We are attempting to protect minors from being exploiting by crafty adults.

o this doctrine is supposed to be used as a shield as opposed to a sword Court stated that the rule to be followed in reference to a contract of a minor, to be

where the minor has not been overreached in any way, and there has been no undue influence, and the contract is fair and reasonable one, and the minor has actually paid money on the purchase price, and taken and used the article purchased, that he ought not be permitted to recover the amount actually paid, without allowing the vendor of the goods reasonable compensation for the use of, depreciation, and will or negligent damage to the article purchased, while in his hands.

o Modified use rule Reasonable compensation on the part of the minor so long as the

businessman did not overreach, etc.

Dodson has departed from the traditional rule, but unlike other courts has not gone as far as to require minors to pay for the value of all benefits received

As a general rule, the full purchase price is either going to be reduced by the extent of the benefit derived by the buyer or the depreciation of the product while in the buyer’s possession

o Benefit rule…focus on buyer Does not take the seller into account at all In Dodson, we could look at the mileage, etc.

o Use rule…focus on seller Trying to make the seller whole In Dodson, we look at…original price – depreciation of the property

Liability for “necessaries” and tortuous conducto Even under the traditional rule, the right of a minor to avoid a contract has

been subject to an important limitation: the minor is liable for the reasonable value of “necessaries.”

The recovery for the adult is allowed in these cases, however, is based on restitution rather than enforcement of the contract

Necessaries usually have been limited to items that one needs to live, such as food, clothing, and shelter

Ratification after reaching majority

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o Even if a minors enters into a contract that does not involve necessaries, the contract is not void but only “voidable” at the election of the minor 14

o Once the minor reaches the age of majority, she has the power to affirm or ratify the contract, in which event the minor is bound

Moreover, on reaching the age of majority the minor must act within a reasonable period of time to disaffirm the contract or she will be deemed to have affirmed the transaction.

Reasonable period of time usually not too long Reasonable period of time may be shortened if there is tortuous

conduct, etc….look above Statutory limits on the minority doctrine

o Legislative reduction of the age of majority from 21 to 18 in many states has curtailed the amount of litigation involving minors’ contracts

o Other statutory provisions may also apply to validate specific types of contracts made by a minor

i.e. checking accounts

Hauer v. Union State Bank of Wautoma

At one point, P was previously declared incompetent in a judicial proceeding because of a brain injury. P once had a court-appointed guardian. Eilbes (who is judgment proof) gets P to invest, and in essence gets P to cosign on a note for which he was liable. Eilbes makes some promises in exchanges. P needs this money to live on. Eilbes goes through with the exchange.

Court recognizes that an incompetent person’s transactions are voidable – the incompetent has power to void the contract entirely – and that there exists a cause of action to rescind a contract or conveyance based upon the lack of mental competency at the time of transaction

o Therefore, P properly stated a cause of action to void the loan contract Here, the TEST for determining competency is whether the person involved had

sufficient mental ability to know what he or she was doing AND also the nature and consequences of the transaction

o one must know their actions and the consequences of these actions traditional cognitive standard

15(1)…qualified volitional testo A mentally ill or defective individual lacks capacity if (1) he doesn’t

understand (in a reasonable manner) the contract and its consequences, OR (2) if he understands, and the other person knows he is unable to act (i.e. may not have had the energy to continue fighting the pain) in a reasonable manner

P’s incompetency is a question for the juryo If the contract is made on (1) fair terms and (2) the other party has no

reason to know of the incompetency, the contract ceases to be voidable where performance in whole or in part changes the situation such that parties cannot be restored to their previous positions. If, on the other

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hand, the other party knew of the incompetency or took unfair advantage of the incompetent, consideration dissipated without benefit to the incompetent need not be restored. 15(2)

Knowledge of incompetency is considered on the basis of what was known or ought to have been known by the other party

the minor generally can disaffirm even if restoration cannot be made, but the mentally incompetent person is required to make restoration unless special circumstances special circumstances are present 15(2), comment

14…infants; 16...intoxicated persons

o a contract is voidable if a party has reason to know that because of intoxication the other person is unable to either understand the transaction or act in a reasonable manner

Minors…more objective standard Mental Incompetent…more subjective standard

DURESS AND UNDUE INFLUENCE [43-47]

Duress v. Undue influenceo Duress

Isn’t like the original duress…historically entailed some kind of actual or threatened physical harm

We have since moved from the physical into the economico Undue influence

Some kind of proper persuasion Almost exclusively where the individual doing the persuading had

a confidential relationship or a relationship or trust with the subservient person

o This 2 theories have evolved dramatically over time

DURESS

Totem Marin Tug & Barge, Inc. v. Alyeska Pipeline Service Co. Totem (P) was set to ship items to Alyeska (D). Many impediments, including some

ultimately caused by D, delayed P. P ended up having to negotiate a contract for far less than it should have had to because they had to pay back creditors. P argues to rescind the contract on grounds of economic duress. SJ for D.

Court held that P produced enough evidence to withstand SJ. P alleged that D deliberately withheld payment of an acknowledged debt knowing that P had no choice but to accept an inadequate sum in settlement of that debt; that P was faced with impeding bankruptcy; that P was unable to meet its pressing debts other than by accepting the immediate cash payment offered by D; and that through necessity, P thus involuntarily accepted an inadequate settlement offer from D and executed a release of all claims under the contract.

Test for duress here (Totem factors)….one party must show:

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o (1) that the one party involuntarily accepted the terms of another (free will concept)

court is much more concerned with free will than the Restatement is

o (2) circumstances permitted no other alternative, ando (3) such circumstances were the result of coercive acts of another person

Restatement on duresso 175(1)…If a party’s manifestation of assent is induced by an improper threat

by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim

a wrongful or improper threat 176o could be criminally, tortuously wrong

however, need not be illegal it may just need to be morally wrong

o it could be a threat to breach a contract or to withhold payment of an admitted debt

o threat of criminal prosecution even if allegations are factually accurate

o making a threat in bad faith to use the civil processo a threat that is a breach good faith and fair dealing

under the contractual termso A threat is improper if the threat was not on fair terms

and, 176(2) The threatened act would harm the recipient and

would not significantly benefit the party making the threat

The effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or

What is threatened is otherwise a use of power for illegitimate ends

o 175(2)…if a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction

A contract is void if made under coercion involving a physical threat 174o However, it is presently more common to plead economic duress because

contracts made under economic duress, rather than physical compulsion, are deemed voidable rather than void. Thus, such contracts will be binding unless disaffirmed and may be expressly or implicitly ratified by the purported victim.

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UNDUE INFLUENCE

Odorizzi v. Bloomfield School District

P, a school teacher, accused of homosexual activity. Superintendent and principle came over while P was still in a state of mental and emotional distress from the jailing, lack of sleep, questioning, etc. and were able to get him to resign on grounds that this would not become publicized and he will thus be able to get another job. P had no time to consult an attorney. P was not convicted of the crime and wished to get his job back, but was not allowed. P moved to rescind his resignation on grounds that it was signed under undue influence.

P’s claims that he would not have resigned except for these circumstances: the representatives of the school board undertook to achieve their objective by overpersuasion and imposition to secure P’s signature but not his consent to his resignation through a high-pressure carrot-and-stick technique – under which they assured P they were trying to assist him, he should rely on their advice, there wasn’t time to consult an attorney, if he didn’t resign at once the school district would suspend and dismiss him from his position and publicize the proceedings, but if he did resign the incident wouldn’t jeopardize his chance of securing a teaching post elsewhere.

o Two aspects of undue influence (1) excessive pressure on part of the dominant party

undue influenceo elements associated with overpersuasion:o (1) discussion of the transaction at an unusual or

inappropriate time; (2) consummation of the transaction in an unusual place; (3) insistent demand that the business be finished at once; (4) extreme emphasis on untoward consequences of delay; (5) the use of multiple persuaders by the dominant side against a single servient party; (6) absence of third-party advisers to the servient party; (7) statements that there is no time to consult financial advisers to the servient party

(2) total or lesser weakness of the servient party undue susceptibility

o total weakness of the mind…leaves a person entirely without understanding

o lesser weakness…destroys the capacity of a person to make a contract even though he is not totally incapacitated

what matters is whether or not they were trying to substitute their will for his by taking advantage of his weakened state.

Under influence

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o Unfair persuasion of a party is who under the domination of the person exercising the persuasion of who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare 177(1)

You expect that the person you are dealing with is acting in your best interest (i.e. they will not throw you under the bus)

UNFAIR PERSUASION + DOMINATIONAL RELATIONSHIP

If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim 177(2)

if a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value or relies materially on the transaction 177(3)

There mere fact that the parties have a close relationship, or that some influence is exerted will not necessarily prove undue influence, but it may act as a significant factor in doing so

MISREPRESENTATION AND NONDISCLOSURE [47-55]

Here, we are looking for a misrepresentation or nondisclosure of critical material facts

Contract Actiono Seeks rescission (i.e. get out of the contract)o May require P to return the property sold in a sales case (P may not want to/be

able to do so)o Punitive damages rarely awarded

Syester v. Banta P, a lonely and elderly widow, brought action against D, a dance studio, alleging

fraud and misrepresentation for nearly $30,000 worth of dance instruction she bought from D. P sought damages and rescission of a previous release she signed which dismissed an earlier law suit against D.

o In order to rescind the release, the court notes that one must prove that there was fraud in inducing the release

Difference with 164(1)o A party may rescind a contract for a material misrepresentation even if the

misrepresentation was not made with fraudulent intent Contract voidable for either fraudulent or material misrepresentation

upon which the recipient was justified in relying 164(1) Elements of fraud (meet all)

o (1) that the Ds made one or more of the representations claimed by Po (2) that said statements, or one or more of them, were falseo (3) that said false statements or representations were as to material matters

with reference to the entering into the lesson contracts

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o (4) that the Ds knew the said representations, or one or more of them, were false

o (5) that said representations were made with intent to deceive and defraud the P

o (6) that the P believed and relied upon said false representations and would not have entered into the lesson contracts, except for believing and relying upon said misrepresentations

o (7) that the P was damaged in some amount through relying on said representations

out of pocket ruleo difference between what P paid and the value of the lessons received

benefit of the bargain ruleo looking down the road…assessing damages on if in fact P received the

benefit of the bargain (do you get what was assured in the bargain)…deals with expectation

Fraudulent or material misrepresentationo A contract is voidable if a party’s manifestation of assent is induced by

either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying 164(1)

Consider the difference between a fraudulent and material misrepresentation

o Fraudulent also includes an assertion made as true but without knowledge or confidence by the maker whether it is true or false, and thus may include statements that are made recklessly or negligently 162(1)(b) and (c)

Fraudulent also includes when one knows or believes that the assertion is not accord with the facts 162(a)

o a contract may be subject to rescission because of an innocent but material misrepresentation

o A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to the do so 162(2)

Misrepresentation based on false opinion or predictiono an opinion is an expression of a belief, without certainty, as to the existence

of a fact 168(1) typically opinions deal with matters of quality or value of property if it is reasonable to do so, the recipient of an assertion of a person’s

opinion as to facts not disclosed and not otherwise knows to the recipient may properly interpret it as an assertion 168(2)

(a) that the facts known to that person are not incompatible with his opinion, or

(b) that he knows facts sufficient to justify him in forming ito a statement of opinion amounts to a misrepresentation of fact if the person

giving the opinion misrepresented his state of mind (i.e. stated that he held a certain opinion when he in fact did not) 159, comment d

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o a statement of opinion may also be actionable if the one giving the opinion (a) stands in a relationship of trust or confidence to the recipient (a “fiduciary relationship”), (b) is an expert on matters covered by the opinion, or (c) renders the opinion to one who, because of age or other factors, is peculiarly susceptible to misrepresentation 169

Puffingo Inflated language used in praiseo Often employed by way of advertisements, interested laudation or

commendationo you can puff all you want if you do not know the statements you are making

are untrue, when you start making untrue statements that is when the law no longer protects you 168

Hill v. Jones P s argued that Ds made misrepresentation concerning termite damage in the

residence they sold them and had failed to disclose to them the existence of the damages and history of termite infestation in the residence.

The modern view is that vendor has an affirmative duty to disclose material facts when: 161

o (a) disclosure is necessary to prevent a previous assertion from being misrepresentation or from being fraudulent or material;

o (b) disclosure would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if nondisclosure amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing

o (c) disclosure would correct a mistake of the other party as to the content or effect of a writing, evidencing or embodying an agreement in whole or in part

o (d) the other person is entitled to know the fact because of a relationship of trust and confidence between them

RULE: where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer

o Was the termite problem material? A matter is material if it is one to which a reasonable person

would attach importance in determining his choice of action in the transaction in question

Whether termite problem is material is a question for the jury

The classical view was that a party to a business transaction could not avoid the transaction because of a nondisclosure of material information by the other party. Reflecting the ethic of individualism, courts required a party or by making an adequate investigation before entering into a transaction.

o Standards of fair dealing are view much differently today then they were in the past

Modern approach to disclosure

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o if part of the truth is told, but another portion is not, so as to create an overall misleading impression, this may constitute misrepresentation 159

o If the party has taken positive action to conceal the truth, this will be actionable even though it is not verbal 160

o If the party knows that disclosure of a fact is need to prevent some previous assertion from being misleading, and doesn’t disclose it, this will be actionable 161(a)

o If one party knows that the other is making a mistake as to a basic assumption, the former’s failure to correct that misunderstanding will constitute a misrepresentation if the non-disclosure amounts to a “failure to act in good faith” or to act “in accordance with reasonable standards of fair dealing”

if the parties have some kind of fidicuary relationship, so that one believes the other is looking out for his interests, there will be a duty to disclose the material facts 161(d)

o when a fiduciary relationship exists, not only does this duty of disclosure apply, but the law also imposes additional obligation on the fiduciary: the terms of the transaction must be fair and must be fully explained to the other (173). Moreover, the fiduciary has the burden of proving compliance with her legal obligations by clear and convincing evidence.

o A legal or trust-based relationship is often fiduciary in nature. But, friendships do not automatically create fiduciary relationships.

Economic analysis of nondisclosureo Courts should draw a distinction between information that has been casually

acquired and information obtained through deliberate and costly investigation

o Disclosure of deliberately acquired information should not be required, he contends, because it is socially desirable to give parties an incentive to acquire information

o Casually acquired information does not reflect an investment of resources Disclosure of such information should be required when the holder

knows that the other party is without such information, because disclosure is the least costly method of reducing mistaken contracts

o In sum, we should not be punishing diligent people for being good businesspeople and lazy people for being lazy businesspeople

Park 100 Investors, Inc. v. Karteses

As D was rushing off to his daughter’s wedding rehearsal dinner, P ran down D to tell him that his company could not move into their building until they signed the “lease papers.” D called his attorney to confirm the approval of the lease papers and the attorney confirmed. P’s representative stood silent upon hearing this. However, the document that Ds unknowingly signed was in fact a personal guaranty of the lease merely entitled “Lease Agreement,” but actually a guarantee.

Elements of fraud under IN law (need all elements)

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o (1) a material misrepresentation of past or existing fact by the party to be charged. Which

we fundamentally changed the parties of the outcome liabilities were changed from corporate entity to D personally

this matters, it is a life changero (2) was false,

“lease papers” weren’t lease paperso (3) was made with the knowledge or in reckless ignorance of the falsity,

P knew or should have known the papers weren’t lease paperso (4) was relied upon by the complaining party, and

P signed what he thought were the previously discussed paperso (5) proximately caused the complaining party injury

had they not signed this paper, they would not be here today

Juxtaposition with Rayo Misrepresentation seems clear, more intentional in Park 100o Also, Karteses are calling and exercising more care in Park 100o There still seems to be some kind of objective manifestation of mutual assent,

but fraud or something along those lines can void the contract In both Syester and Hill, the party alleging fraud presumably understood the terms of

the written contracts that they signed but alleged that they were fraudulently induced to enter the agreements by false statements or material nondisclosures. The Karteses, however, alleged that they were misled regarding the content of the document that they executed or signed.

As to the latter type of fraud, R 66 provides:o If a party’s manifestation of assent is induced by the other party’s

fraudulent misrepresentation as to the contents or effect of a writing evidencing or embodying in whole or in part an agreement, the court at the request of the recipient may reform the writing to express the terms of the agreement as asserted,

(a) if the recipient was justified in relying on the misrepresentation, and

(b) except to the extent that rights of third parties such as good faith purchasers for value will be affected.

UNCONSCIONABILITY [55-60]

DOES IT SHOCK THE CONSCIENCE?

2-302. Unconscionable Contract or Clause (1) if the court as a matter of law finds the contract or any clause of the contract to

have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause as to avoid any unconscionable result.

(2) when it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to

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present evidence as to its commercial setting, purpose and effect the court in making the determination

o the UCC drafted this section for situations in which an industry standard may shock the conscience of the jury, but is not in actuality unconscionable

208. Unconscionable contract or term.

If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

Williams v. Walker-Thomas Furniture Co.

D, a welfare mother with seven children, has made a number of purchases from P on credit. Each purchase was made under an installment contract containing a complicated cross-collateral agreement, by which any payment made by D is credit pro-rata against all purchases ever made by D. The effect of this is to give P a continuing right to repossess all the purchases until D has reduced her total balance to $0. D’s last purchase is a stereo set for $515, bringing her total purchase from P to $1,800. After paying back over $1,400 of this amount, D falls into default, and P seeks to repossess not only the stereo but all the other goods that she has bought from him.

This court held that where the element of unconscionability is present at the time the contract is made, the contract should not be enforced

Held, the case must be remanded to the trial court, because the cross-collateral clause may well be unconscionable.

o Possible evidence of unconscionability Procedural…

Ps do not have access to other sources for the goods terms may be buried

Substantive Could the cross-collateral agreement be unconscionable?

o Issues concerned whether unconscionability should be applied to an “add-on” clause, a part of the contract that consumers are unlikely to read or understand

o “Unconscionablity has generally been recognized to included an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party … In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power.

Sounds like Odorizzi, but that case is more concerned with the process of contract making…undue influence

Procedural and substantive unconscionability

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o Procedural unconscionability may refer to either lack of choice by one party or some defect in the bargaining process (such as quasi-fraud or quasi-duress) and substantive unconscionability relates to the fairness of the terms of the resulting bargain.

o unconscionability has both a procedural and a substantive element, the formed focusing on “oppression” or “surprise” due to the unequal bargaining power, the latter on “overly harsh” or “one sided” results

o the prevailing view is that procedural and substantive unconscionability must BOTH be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. But they need not be present in the same degree. The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.

Assessment of unconscionability is done with in the context Assessment of unconscionability is a matter of law for the judge to decide

o As a general rule, it is assumed that the jury will be overly sympathetico We are looking for some level of objectivity in s subjective situation

The question of unconscionability is a legal issue to be decided by the court, rather than the trier of fact, but only after providing the parties an opportunity to present evidence relevant to the disputed provision. 2-302

2-302 and 208 further provide that unconscionability is to be judged as of the time the contract is made

Higgins v. Superior Court of Los Angeles County

P’s parents recently died after being on reality show and P became guardian for his younger siblings and they moved in with another family (Leomitis).

Court found procedural unconscionabilityo Ps were vulnerable because they were young and just lost parentso Arbitration provision not highlighted

It lacked a “bilateral” nature More of a contract of adhesion, take-or-leave it

Court found a greater amount of substantive unconscionabilityo Contract was structured so as to allow Ds, but not Ps, to compel arbitrationo The court found that the harsh, one-sided nature of the arbitration provision,

combined with the elements of procedural unconscionability earlier discussed, leads us to conclude that the arbitration provision is unconscionable and, therefore, unenforceable. Accordingly, it was error for the trial court to have granted the petition to compel arbitration

Judgment for P. Ds cannot compel arbitration.

JUSTIFICATION FOR NONPERFORMANCE: MISTAKE, CHANGED CIRCUMSTANCES, AND CONTRACTUAL MODIFICATIONS

These are more ways allowing parties to get out of their contractual obligations

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Here, the parties expectations have not been fulfilled This is, in a sense, a regime for allocating risk when parties are not satisfied with their

bargains

MISTAKE [60-64]

Lenawee County Board of Health v. Messerly

Ps purchased apartment complex from Ds with a defective sewage system. Ds did not know of faulty sewage system as it was installed many owners prior. State ordered an injunction on human inhabitation until sewage system was fixed.

o This is a case of mistake of fact rather than a mistake of judgment Mistake of fact…objective Mistake of judgment…subjective We need to watch for different levels of knowledge

Here, the court ruled in favor the Ds because while there is no express assumption in the contract by either party of the risk of the property becoming uninhabitable, there was indeed some agreed allocation of the risk to the vendees by the incorporation of an “as is” clause into the contract: “Purchaser has examined this property and agrees to accept same in its present condition. There are no other or additional written or oral understandings.”

Thus, the parties assigned the risk of loss to the Ps, and the court thus must hold in favor of the Ds. 154

However, in cases of mistake by two equally innocent parties, the court must use its discretion to decipher which party will suffer from the misapprehension that both parties shared.

o This mutual (bilateral) mistake concerns the defective septic tank’s existence prior to the completion of the contract

The court suggests that if the mistake goes to the very essence of the bargain then we are going to rescind, but if the mistake goes to the quality of the bargain that we are NOT going to rescind

o Because something is of less value does not call for rescissiono Because something does not turn out to be what was bargained for, we would

call for rescission The court is saying that this mistake is one of essence, and thus if not for the “as

is” clause would probably allow for the rescission of the contracto This court’s interpretation shows the extension of the mistake doctrine

This is not a clear, universal rule Court suggests that a rule such as this is not worth following as a

bright-line, but instead on a case-by-case basis

151. Mistake Defined.o a mistake is a belief that is not in accord with the facts.

152. When Mistake of Both Parties Makes a Contract Voidable.o (1) Where a mistake of both parties at the time a contract was made as to a (i)

basic assumption on which the contract was made has a (ii) material effect on

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the agreed exchange of performances, the contract is voidable by the adversely affected party (iii) UNLESS he bears the risk of the mistake under the rule stated in 154

o (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

154. When a Party bears the Risk of a Mistake.o A party bears the risk of a mistake when

(a) the risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the contract is made, that he has only

limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

(c) the risk allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Concerning property cases, if the defect is hidden under ground and not perceivable to the public (such as the septic tank described above) will cut in favor or the purchaser

o Whereas, if the defect is public knowledge, this will cut against the purchaser

Wil-Fred’s Inc. v. Metropolitan Sanitary District

P, a general contractor, placed a bid on a contract offered by D. P then attempted to withdraw its bid when it realized that it was based on a significant error entered by the sub performing on of the tasks. A clause in the proposal form presented by D stated that any bidding party may not receive their $100,000 deposit back if they choose to withdraw their bid.

o This unilateral mistake (one party doesn’t know the facts v. both parties do not know the facts [bilateral mistake]) is one in which P misjudged not the quantity but the means of excavation

In IL the conditions generally required for rescission are (evidence of these conditions must be clear and positive):

o (1) That the mistake relate to a material feature of the contract why is the $150,000 material?

More than 10% of the bid is significant hit to the company’s profits

This much money would force P to lose their bonding capacity and thus not be able to lock in any more jobs

Impending bankruptcy o (2) That it occurred notwithstanding the exercise of reasonable care

The question is: did P exercise reasonable care? P’s past dealings with the sub makes it reasonable for the Ps to

have relied on their bid This reasonableness is sure unless Ps had notice that the sub

would provide such an inaccurate estimate

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o (3) That it is of such grave consequence that enforcement of the contract would be unconscionable, and

at the end of the day the sub cannot absorb the costs P will then have to go get another sub and suffer even greater losses

o (4) That the other party can be placed in status quo the Ds were not seriously injured Ds will simply award to the next lowest bidder

Yet, was the original position having a below market bargain or was the original position that Ds are out looking for bidders?

Rescission of contract and return of security deposit affirmed The mistake was one mixed of “mistake of fact” and “mistake of judgment”

o If the there was a misunderstanding in judgment it was derived in part because of D’s mistaken advertisement regarding the project

153. When Mistake of One Party Makes a Contract Voidable.o Where a mistake of one party at the time a contact was made as to a basic

assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in 154, and

(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or

(b) the other party had reason to know of the mistake or his fault caused the mistake

it is often said that rescission in these kinds of case will be permitted for “clerical errors” or other “mistakes of fact,” but not for “mistakes in judgment.”

o However, more recent cases have been less disposed to insist on the rigidity of the fact-judgment distinction and more inclined to concentrate on the strength of proof that a genuine and identifiable mistake was made (rather than merely a poor prediction as to how profitable the contract would turn out to be)

157. Effect of Fault of Party Seeking Relief.o A mistaken party’s fault in failing to know or discover the facts before making

the contract does not bar him from avoidance or reformation under he rules stated in this Chapter, unless his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

CHANGED CIRCUMSTANCES: IMPOSSIBILITY, IMPRACTIBILITY, AND FRUSTRATION [64-72]

Impossibility o If the court conclude that performance of the contract has been rendered

impossible by events occurring after the contract was performed, the court will generally discharge both parties

o Common cases Transaction of a unique good; when parties are dealing with the

advancement of the state of technical arts

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o the true impossibility defense comes when a party thinks that they can do something when it turns out that they are in fact not able to

Impracticabilityo Modern courts generally equate extreme impracticability with impossibility.

In other words, if due to changed circumstances, performance would be infeasible from a commercial viewpoint, the promisor may be excused just as he would be if performance were literally impossible

breaching party is saying that it makes no economic sense for them to perform the contract

o in terms of the legal doctrine, impracticability/impossibility distinction is not critical

however, IMPRAC is based more on performance and IMPOSS is based more on ability

Frustration of purposeo Where a party’s purpose in entering into the contract is destroyed by

supervening events, most courts will discharge him from performing. This is the doctrine of frustration of purpose.

o It is not always so easy to agree what the essence is, but in a true FRUS case you should be able to tell what it is

o the basic purpose/economic justification of the contract has been frustrated There is a good deal of overlap between these three doctrines and mistake

o Key difference in this category…some circumstance has changed since the contract has entered into

as opposed to a mistake case where the erroneous belief exists at the making of a contract

261. Discharge by Supervening Impracticability Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate to the contrary

basic assumption…the continuation of existing market conditions and of the financial situation of one of the parties are ordinarily NOT such assumption, so that mere market shifts or financial inability do not usually effect discharge under the rule stated in this Section.

262. Death or Incapacity of Person Necessary for Performance.263. Destruction, Deterioration or Failure to Come into Existence of Thing Necessary for Performance.264. Prevention by Governmental Regulation or Order.

265. Discharge by Supervening Frustration Where, after a contract is made, a party’s principal purpose is substantially frustrated

without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render

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performance are discharged, unless the language or the circumstances indicate to the contrary.

271. Impractibility as Excuse for Non-Occurrence of a Condition272. Relief Including Restitution.

UCC

2-613. Casualty to Identified Goods.2-615. Excuse by Failure of Presupposed Conditions.

Except to the extent that a seller may have assumed a greater obligation and subject to 2-614:

o (a) Delay in delivery or non-delivery in whole or in part by a seller that complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid

o (b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at its option include regular customers not then under contract as well as its own requirements for further manufacture. The seller may so allocate in any manner that is fair and reasonable.

o (c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Karl Wendt Farm Equipment Co. v. International Harvester Co.-K (P) and IH (D) entered into a contract stating P as a dealer in MI of goods made by D. P only sells D’s goods. Years later, there was a dramatic recession in the farm equipment market and IH had substantial losses. IH, therefore, sold its farm equipment division to a competitor, CT. Unfortunately, CT already had its own dealers in MI and P was not offered a franchise. P filed an action alleging breach of D’s Dealer Agreement. The trial court allowed IH’s defense of impractibility. -Court held that the downturn in the farm equipment market and IH’s decision to go out of business to avoid grave losses does not excuse its unilateral termination of its dealership agreements due to impracticability

-They did not terminate in accordance with the contract, and did not pay the damages associated with this termination -There were other viable, albeit less valuable, alternatives

265o where, after a contract is made, a party’s principle purpose is substantially

frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his

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remaining duties to render performance are discharged, unless the language of the circumstances indicate the contrary

IH argues that the principle purpose was mutual profitability This purpose is substantially frustrated because the market is

down basic assumption is that market conditions would continue to play

out…the court is not buying this the court cannot make the precedent that contractual

relationships rests on the economic status of either party Groseth factors for determining frustration of purpose

o (1) principal purpose the object must be so completely the basis of the contract that, as both

parties understand, without it the transaction would make little sense. Necessitating an inquiry into the principal purpose of the contract and

a finding that the frustrating even destroys the primary basis of the contract

o (2) frustration must be substantial the frustration must be so severe that it is not fairly to be regarded as

within the risks that he assumed under the contract not just less profitable, leading to a loss, unattractive, or

economically burdensomeo (3) frustrating event must have been a basic assumption of the contract

same as the analysis under the defense of impracticability

Foreseeability o We must look at whether the parties could or should have seen that this basic

assumption that everyone is relying on may not play out o It would be absurd to be able to walk away from a contract when something

happened that the parties should have seen coming and bargained/dickered a solution to this in advance

Courts are less apt to rescind in these situations Economic analysis of impractibility

o In the absence of a contractual provision, the risk should be assigned to the party who is in the best position to prevent the event from occurring, or if prevention is not possible, to minimize its consequences at the lowest cost, typically by purchasing insurance.

o We are interested in the best risk bearer because that party is often the party that can best avoid the risk through proactive action or insurance

o We do not want to allocate risks based on wealth, but allocate risks so that parties have incentive to prevent bad things from happening or being prepared to brace for bad things when they occur (risk allocation)

o Foreseeability The Restatement takes the position that a defense such as mistake,

impractibility, or frustration of purpose should be decided by the court as

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a question of law, rather than being submitted to a jury for a finding of fact.

Mel Frank Tool & Supply, Inc. v. Di-Chem Co.

Key difference:o The supervening circumstances is a governmental intervention

The tenant is not relieved from the obligation to pay rent if there is a serviceable use still available consistent with the use provision in the lease. The fact that the use is less valuable or less profitable or even unprofitable doe not mean the tenant’s use has been substantially frustrated.

o Distinction from Messerly case Purpose was to rent to humans, could not legally rent to humans…

frustration substantialo Here

Purpose was to store chemicals, could not legally store hazardous chemicals…frustration, etc. not substantial

However, courts are generally more lenient to parties who’s purposes may have changed after a government intervention

Court are generally much more willing to grant relief when the event on which the claim of impracticability or frustration rests is some form of supervening governmental action rather than cases in which the event is war, natural disaster, or market change.

o See 2-615; 264 A supervening events caused by one of the parties is not a supervening event and

does not allow for that party’s recovery

MODIFICATION [72-78]

Historically and legally, the consideration that supported the original agreement cannot support the supplemental agreement

89. Modification of Executory Contract.

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or (c) to the extent that justice requires enforcement in view of the material

change of position in reliance on the promise

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73. Performance of a Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than pretense of a bargain.

2-209. Modification; Rescission and Waiver.

(1) An agreement modifying a contract within this Article needs no consideration to be binding

(2) An agreement in a signed record which excludes modification or rescission except by a signed record may not be otherwise modified or rescinded, but except as between merchant such as a requirement in a form supplied by the merchant must be signed separately.

(3) The requirements of 2-201must be satisfied if the contract as modified is within its provisions

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3), it may operate as a waiver

(5) A party that has made a waiver affecting an executory portion of a contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver

Alaska Packers’ Association v. Domenico

Parties entered into an agreement that D would work for APA. They were to paid $50-$60 each plus 2 cents for every red salmon that they caught. When workers arrived in AK, they demanded to each be paid $180 instead. The superintendent responded that he had no authority to change the contract and pay them more. But, since the work needed to be done, and no other workers were available to hire, it was agreed that they would be paid the $1000. When D returned to SF from AK, APA refused to pay the increase they had been promised.

The court held that when a party merely does what he has already obligated himself to do, he cannot demand an additional compensation therefore; and although, by taking advantage of the necessities of his adversary, he obtains a promise for more, the law will regard it as nudum pactum, and will not lend its process to aid in the wrong.

Merely promising to perform an existing obligation will not serve as valid consideration for additional return compensation from the other party

o Pre-existing duty rule However, there are a number of exceptions to this requirement for new consideration

o “unforeseen circumstances”

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a promise of modification is binding if “fair and equitable in view of circumstances not anticipated by the parties when the contract was made” 89

the concept may be applicable even if the unforeseen circumstances would not fully qualify for excuse based on the impracticability doctrine

o “reliance” reliance on a promised modification is another basis for enforcing a

modifying agreement despite the absence of fresh consideration89(c)

o “mutual release” many courts hold that new contracts can be upheld when they are

products of mutual rescission, followed by a new and valid contract 89, comment b points out that such a rationale is “fictitious”

when the “rescission” and new contract are simultaneous

Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp. P entered into a requirements contract for the purchase of castings with D. The

contract was for a 3 year term and it included fixed price terms. D then began to suffer financial difficulties and made an offer to its customers that it would keep operating in exchange for a price increase of 30%. P was not able to find an alternative source of castings so it accepted D’s offer, although it protested that this offer amounted to a breach of contract. D’s other customers did find alternative supplies of castings. Therefore, D offered P an additional 30% increase exchange for its remaining in operation solely for P’s benefit. Again, P felt it had no choice but to accept (“over the barrel”), as it sill had not found a reasonable alternate source for castings. P also feared that if it did not accept, it would cause its major client, Ford, to stop production and destroy P’s business reputation. P sued for breach of contract, asking for a declaratory judgment releasing it from paying the increased prices. D moved for SJ, contending that the price modification invalidated the previous contract.

Court held that there was sufficient evidence to conclude that P made the contract modification under economic duress, and thus denied the SJ motion because when a subsequent contract or modification is made under economic duress it is invalid

Modification without consideration under Article 2o UCC 2-209, which states that a modification “needs no consideration to be

binding” The obligation of good faith under the UCC serves as a bar to

“extortion” of a modifying agreement “without legitimate commercial reason.” 2-209, comment 2

2-209(1) does not preclude application of the duress doctrine to sales of goods cases, and observes that modern formulations of the duress doctrine no longer require the presence of an “illegal” threat

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Ties of good faith bind not only the party seeking to enforce a modification but also the one who would resist it

o Some courts have held that the party agreeing to an assertedly coerced modification has a good faith duty to make plain that it is acting UNDER PROTEST so that the other party will not be deceived as to its intention eventually to resist enforcement or seek redress

Thinking about modificationso Historically, had to have new consideration

UCC says no consideration is neededo There is an incentive to the party to agree to the agreement with the intention

of suing later However, the corollary to this is the protestation provides notice

o do not forget about the pre-existing duty change calling for modification occurred after he contract was made mistake occurs at the formation of the contract

RIGHTS AND DUTIES OF THIRD PARTIES

third partyo shorthand for someone who is not the two main parties to the contract

here, we are injecting more potential Ps and Ds into the equation who are not the original P or D

you can assign rights and delegate dutieso there is a difference here

RIGHTS OF THIRD PARTIES AS CONTRACT BENEFICIARIES [78-84]

Here, we are talking more about the assignment of rights

302. Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a

promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

o (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

creditor beneficiaryo (b) the circumstances indicate that the promisee intends to give the

beneficiary the benefit of the promised performance (2) an incidental beneficiary is a beneficiary who is not an intended beneficiary

o an incidental beneficiary is not protected under law

Vogan v. Hayes Appraisal Associates, Inc.-Defendant was hired by MidAmerica Savings Bank (MidAmerica) to monitor the progress of construction for a new home for the Plaintiffs, Mr. and Mrs. Vogan. When the contractor defaulted on his contract, and construction expenses overran the agreed-

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upon price, Plaintiffs brought suit against Defendant for negligent monitoring of the funds, as they were the third party beneficiaries of Defendant’s agreement with MidAmerica. This court determined that the primary question in a third-party beneficiary

case is whether the contract manifests an intent to benefit a third-partyo However, this intent need not be to benefit a third party directly

Tredrea standard: (1) A third party who is not a promisee and who gave no consideration has an

enforceable right by reason of a contract made by two otherso Here, Vs made no promise and gave no consideration

(2) if the promised performance will be of pecuniary benefit to the third party and

o Here, The promised performance was that H would gave the bank progress

reports on the state of the construction Pecuniary benefit may have been the protection of V’s loan

(3) the contract is so expressed as to give the promisor reason to know that such benefit is contemplated by the promisee as one of the motivating causes of his making the contract

o Here, Vs were relying on H, but do they have the right to rely on H and even more to the have the right to legally enforce that reliance

o The argument against V is that the bank is concerned about their money and the only way to identify the property to H was to give the location/owner

The court held that these facts would permit the jury to find that the propose HA’s reports on the progress of the work was to assist the bank in disbursing all funds on deposit that were intended for application to the V’s home construction. Consequently, although the initial $170,000 construction loan might have been disbursed prior to the faulty completion estimate, the erroneous reporting of the project’s completion in March 1990 caused the bank to disburse other funds of the Vs that would have been retained had the report been accurate

Held, for Vs

Whose intent determines standing?o (1) Some courts have held that both the promisor and the promisee must

intend to give the third party rights under the contract Restatement 302(1)

o (2) Other courts have concluded that the intention of the promisee controls Lawerence Vogan

o (3) Finally, a number of decisions hold that the promisor must know or at least have reason to know of he promisee’s intent to benefit the third party, even if he promisor has no particular desire to confer a benefit on or create an obligation to the third person

311. Variation of a Duty to a Beneficiary.

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Unless the contract prohibits modification by the promisor and promisee, 311 permits variation of the rights of the intended beneficiaries until the third party does one of three things: manifests assent at the invitation of the promisor or promisee, materially changes position in justifiable reliance on the promise, or brings suit on the promise

Zigas v. Superior Court

Petitioners are tenants of an apartment building, which was financed with a federal insured mortgage in excess of $5 million, pursuant to the National Housing Act and the regulations promulgated thereafter. Petitioners allege that their landlords were required under their contract with HUD to file a maximum rent schedule with HUD and to refrain from charging more than those rents without the prior approval of the Sec. of HUD. Petitioners further allege that real parties are, and have been, charging rent in excess of the maximums set out in the rental schedule; the complaint avers that real parties have collected excessive rents and fees in an amount exceeding $2 million.

o Interesting factual twist here: the government is involvedo As to standing, the court held that the case falls under Shell, that is to say,

appellants were direct beneficiaries of the contract and have standing, and not, as in Martinez, incidental beneficiaries without standing

There was an intent upon the part of the government in executing the agreement with real parties, to secure the return of any rents exacted in excess of the rent schedule

It is not the government from whom the money was exacted; it was taken from the tenants. Therefore, it should be returned to he tenants.

Appellants are entitled to maintain a third party beneficiary action against the real parties

313. Government Contracts.(1) The rules stated in this Chapter apply to contracts with a government or governmental agency except to the extent that application would contravene the policy of the law authorizing the contract or prescribing remedies for its breach(2) In particular, a promisor who contracts with a government or governmental agency to do an act for or render a service to the public is not subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform UNLESS

(a) the terms of the promise provide for such liability; or(b) the promisee is subject to liability to the member of the public for the damages and a direct action against the promisor is consistent with the terms of the contract and with the policy of the law authorizing the contract and prescribing remedies for is breach

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Whether or not you are an intended beneficiary is determined between whether you are member of a target group (intended beneficiary) or a member of the general public (non-beneficiary)

ASSIGNMENT AND DELEGATION OF CONTRACTUAL RIGHTS AND DUTIES [84-94]

Here, we are talking about the transfer/conveyance of rights or duties that have arise under contract to other parties

o A classic delegation of duties are situations involving a subcontractor Delegation

o Empowers someone else to perform on the assignor’s behalf Unless the language indicates otherwise, the contract is to contain both the

assignment of rights and delegation of duties 328(1)

§ 317. Assignment of a Right.

 (1) An assignment of a right is a manifestation of the assignor's intention to transfer it by virtue of which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance.(2) A contractual right can be assigned unless

(a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or(b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or(c) assignment is validly precluded by contract.

§ 318 Delegation of Performance of Duty

 (1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise.(2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised.(3) Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor

§ 321 Assignment of Future Rights§ 322 Contractual Prohibition of Assignment§ 326 Partial Assignment§ 328 Interpretation of Words of Assignment; Effect of Acceptance of Assignment

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§ 328 Interpretation of Words of Assignment; Effect of Acceptance of Assignment

 (1) Unless the language or the circumstances indicate the contrary, as in an assignment for security, an assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of the assignor's rights and a delegation of his unperformed duties under the contract.(2) Unless the language or the circumstances indicate the contrary, the acceptance by an assignee of such an assignment operates as a promise to the assignor to perform the assignor's unperformed duties, and the obligor of the assigned rights is an intended beneficiary of the promise.

Caveat:  The Institute expresses no opinion as to whether the rule stated in Subsection (2) applies to an assignment by a purchaser of his rights under a contract for the sale of land

Because of 328(1), it is sometimes easier in these situations to use transferee and transferor as opposed to assignor, etc.

§ 336 Defenses Against an AssigneeUCC 2-210. Delegation of Performance; Assignment of Rights.

A contract right [as opposed to duty] (i.e. the ability to require the other party either to perform or pay damages) can today be “assigned.” 317(2). Such an assignment at once creates in the assignee a new right, while at the same time extinguishing the corresponding right previously held by the assignor. 317(1). The assignment of a right is thus in practical effect a transfer in the true sense: It results in the moving of something form one person to another, just as does the passing of a football or a baton.

o 2 things needed for an assignment to be effective (1) the owner of the right must have a present intention to transfer the

right in consideration (2) the owner of the right must take some measures to manifest this

transfer to a third partyo you can assign rights unilaterally, but you can only revoke that

assignment bilaterally The transferring of a contractual duty, however, is quite another matter. in many

cases, a person who is subject to a duty of performance may properly “delegate” that duty, that is, may satisfy it by employing other to perform it for her. 318(1). (This is particularly true of a corporation, whose every performance must obviously be through agents of some kind.) Such delegation of performance is not always permissible, however whether it is will depend in a given case on the degree to which individual performance was called for by the contract that created the duty in question. 318(2). In any event, the mere procuring of a substitute to render performance – even in a case where such delegation of performance is proper – does not itself extinguish the duty of performance created by the contract. The person originally bound to perform will remain subject to that duty (unless released by

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the obligee) until the performance is actually rendered. 318(3). Do you see why this should be so? The essential difference between assignment and delegation lies here, in its effect on the original party. If assigning a right is like passing a football, then delegating a duty resembles more the communication of a catchy tune or a bad cold: Passing it on is not the same as getting rid of it.

Analysis in assignment/duty cases:o (1) you must ascertain the nature of what has been done (or attempted)

Was it an assignment of rights? A delegation of duties? Both?o (2) you must test its validity against the terms of the contract itself and also

against any other applicable rules of law.

Herzog v. Irace

-DH notifies I of this assignment. J then settles the personal injury case for $20,000, which is held in escrow by I. J tells I that he, J, will pay DH directly, and that I should not pay DH. I pays the 20k to J and to Js’ other creditors, paying nothing to DH. After J refuses to pay DH, DH sues I for the amount of the surgery bill.-Held, for DH. “Once the obligor [here, I] has notice of the assignment, the fund is ‘from that time forward impressed with a trust’ …. [It] must be held by him not for the original creditor, the assignor [J], but for the substituted creditor, the assignee [DH].” If the obligor does pay the assignor, he does so at his peril because the assignee may then recover from the obligor. Thus here, I must pay DH the amount of DH’s claim (though I can, of course, sue J for the amount of DH’s recovery against I).

Ordinary rights, including future rights, are freely assignable unless the assignment would materially change the duty of the obligor, materially increase the burden or risk imposed upon the obligor by his contract, impair the obligor’s chance of obtaining return performance, or materially reduce the value of the return performance to the obligor, and unless the law restricts the assignability of the specific right involved. 317(2)(a).

Contractual prohibitions on assignmento UCC and R allow assigment of some contractual rights even in the face of

contract language expressly providing otherwise 2-210(2)

in some cases the right to payment of money can always be assigned even though the contract may attempt to prohibit such transfer

while 317(2) suggests that contract terms may preclude assignment, 322 modifies that limitation…under 322 a “no assignment” clause will be first construed only to prohibit delegation of duties, and, alternatively, will be read to constitute a promise not to assign rights that might lead to damages for breach but will not render the assignment ineffective

The 322 preference for interpreting a non-assignment clause would be applied “unless a different intention is manifested,” suggesting that

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some language might be strong enough to actually prohibit assignment of rights

Key thing that we are looking for in an assignment: the owner of a right must manifest the intention to make a present transfer, and the owner must manifest this intention to the assignee or some third party

o No magic wordso Once the assignment becomes effective, the assignor’s right to performance

becomes ineffective and the assignee’s right becomes enforceable o When the right gets assigned it is gone

BUT, when a duty gets delegated, the duty of the delegator does not disappear

The delegator is still fully responsible for the fulfillment of that duty

Sally Beauty Co., Inc. v. Nexxus Products Co.

Delegation case Nexus enters into a contract with Best under which B becomes the exclusive

distributor of N’s hair care products for TX. Best implicitly (by operation of the UCC’s provisions on exclusive distributorship) agrees the use its “best efforts,” to distribute N products as widely as possible in TX. B is later acquired by and merged into SB, a wholly-owned subsidiary of one of N’s biggest competitors, Alberto-Culver. N, upset at having its exclusive distributorship fall into the hands of a competitor, refuses to continue the distributorship, on the grounds that the merger was an impermissible delegation. SB sues N for breach.

Held, for N. “The duty of performance under an exclusive distributorship may not be delegated to a competitor in the market place – or the wholly-owned subsidiary of a competitor – without the obligee’s consent.” N was entitled to have B’s “best efforts,” and it was reasonable for N to think that having those efforts rendered by N’s direct competitor was “a different thing than what it had bargained for.” Therefore, the delegation ran afoul of 2-210(1), under which an unconsented-to-delegation is not allowed if the other party has “a substantial interest in having his original promisor perform or control the acts required by the contract.”

General language of assignment will include both assignment of rights and duties unless the circumstances indicate otherwise

o See 328 and 2-210(5) Delegation of personal service obligations

o Where a contract imposes on an individual the duty of personal service, that duty is almost always regarded as inherently undelegable, unless the other party assents

See 2-210(1); 318(2) Effect of clause requiring consent to delegation

o While it is difficult to prohibit assignment of rights, 322(1) and 2-210(4) reflect the general view that courts are likely to enforce a clause prohibiting delegation of duty

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Effect of delegation or assignment on rights and duties of the partieso In those situations that involve a permissible delegation of duty, the obligee

generally has rights against the original obligor and the delegate. The original obligor remains liable to the obligee until the performance is rendered by the delegate, unless the obligee agrees to release the original obligor (referred to as “novation”), but evidence of novation must be clear.

o if the transaction involves an assignment of rights rather than a delegation of duties, generally the assignee “stands in the shoes” of the assignor. Thus, the assignee will be subject to any claims or defense of the obligor that arise out of the contact assigned. 336(1).

CONSEQUENCES OF NONPERFORMANCE: EXPRESS CONDITIONS, MATERIAL BREACH, AND ANTICIPATORY REPUDIATION

the condition precedent is the breach of a contract (and obviously the contract itself) most contracts are bilateral contracts

o thus, when one party breaches it begs the question what the other party has to do

we need to think about one party’s right to damages and the other’s duty to continuing performing

breacheso total/material

then, nonbreaching party is entitled to withhold its performanceo partial

then, nonbreaching party is not always justified in withholding performance

you have the right, under the CL and UCC, to demand assurances if you think that a contract will be breached

repudiation anticipatory repudiation is the same under the R

EXPRESS CONDITIONS [95-102]

This chapter is so hard because the law of express and constructive conditions Constructive conditions are perquisites implemented by the court in order to

allow the party to reach a just result Express conditions amount to the language of the contract

o The antithesis of the constructive conditiono The parties have explicitly agreed that one party or both parties have

duties when a specific event takes place Condition may be in one party’s control, both parties’ control, or

no parties’ control Obligor

o Actor who is obligated to perform a condition Obligee

o the person that the obligor is obligated to

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Oppenheimer & Co. V. Oppenheim, Appel, Dixon & Co.

-Parties entered into a letter agreement setting forth certain conditions precedent to the formation and existence of a sublease between them.  The agreement provided that there would be no sublease between the parties “unless and until” P delivered to D the prime landlord’s written consent to certain “tenant work” on or before a specified deadline.  If the condition did not occur, the sublease would be null and void.  P provided only oral notice on the specified date.  Therefore substantial performance does not apply to this case.

-A condition precedent is “an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises.”-for the purposes of the R, condition is concerning in the context of situations in which both parties are already bound to the contract

-distinction-law of offer/acceptance…formation stages-law of conditions….performance stages

Conditions can be express or implied.  Express conditions are those agreed to and imposed by the parties themselves.  Implied or constructive conditions are those “imposed by the law to do justice.”  Express conditions must be literally performed, whereas constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial compliance is sufficient.  When doubtful, and the language is not clear, a court will interpret language as a promise or constructive condition rather than an express condition. Given the language of the first “condition”, it is obvious that it is an actual

condition give the language.  This court sees no justifiable basis for applying the doctrine of substantial performance to the facts of this case. 

Interpretation as a means of reducing the risk of forfeiture cannot be employed if “the occurrence of the event as a condition is expressed in unmistakable language.

Nonetheless, the nonoccurrence of the condition may yet be excused by waiver, breach, or forfeiture. 229 posits that “to the extent that the non-occurrence of that condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange

o Forfeiture The denial of compensation that results when the obligee loses [its]

rights to the agreed exchange after [it] has relied substantially, as by preparation or performance on the expectation of that exchange.” 229, comment b

Language sufficient to create an express conditiono “if”, “unless and until”, “if A does this, then B will do that”o “of no further force and effect”, “neither party shall have any rights or

obligations to the other.”

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The doctrine of “constructive conditions,” which addresses the question of whether performance by one party is in effect an implied condition to the other party’s duty of performance. The rule of “substantial performance” generally has no application to cases like Opp, where the court is considering the effect of what is clearly an “express condition” spelled out in the parties’ contract.

o Substantial performance is not an argument that you can use to get around express conditions

o We will have strict compliance when one of the protecting parties has taken the time or caution to protect themselves from a particular condition

Economics have been taken into account even before the K was formed

o What are the other types of argument when you cannot use substantial performance

Forfeiture Waiver

If provision of clause is for my benefit I can waive it, but if you put it in the protect yourself you cannot waive it

As expressed in 84(1), a waiver is effective without either consideration or reliance, but only if the condition waived was not either a material part of the performance that the obligor was to receive in exchange for material part of the risk assumed

similar to the concept of waiver is the doctrine of “prevention,” which states that a condition is excused if the promisor wrongfully hinders or prevents the condition from occurring

Unjust enrichment (extra-contractual argument)

224. Condition Defined 225. Effects of the Non-occurrence of a Condition 226. How an Event May Be Made a Condition 227. Standards of Preference with Regard to Conditions. 228. Satisfaction of the Obligor as a Condition 229. Excuse of a Condition to Avoid Forfeiture

J.N.A. Realty v. Cross Bay Chelsea J commenced this proceeding to recover possession of the premises claiming that the

lease has expired.  The lease grants the tenant an option to renew and although the notice was sent, it was not sent within the time prescribed in the lease.

Yes, the tenant will suffer a forfeiture because of the investments made on the property. And Tenant is entitled to equitable relief.

As a general rule, condition are enforceable But, courts have created over time the ability for parties to evade a condition if it will

cause them a forfeiture

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o Elements of forfeiture here (1) party seeking to avoid the condition must show that there is going

to be a forfeiture here, the court seems to rule the cases turns on this element

(2) failure of party suffering forfeiture to comply with the condition is mere venial inattention

no bad faith they did not knowingly fail to give notice often comes down to the credibility of witnesses

(3) other party (usually LL) would not be prejudiced here, the court sends this back will end up being a straight up finding of fact LL might be prejudiced if he cannot find a lessee willing to pay

as mucho This would have to be done after the 6 month window

LL might also be prejudiced if he is already bound to another party

R on forfeiture 229o To the extent that the non-occurrence of a condition would cause

disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the exchange

Differences in court’s test No mention of negligence distinction Court is not focused on whether or not the condition is material

o R is treating technical conditions differently from material conditions

MATERIAL BREACH [103-110]

three theme for this chapter:o perfect tender

anything other than a perfect tender may be considered a breach contracts are all-or-nothing situations

o cureo substantial performance

what’s close enough as a matter of law, and when does close enough get the job done

expectations are higher with regards to the perfect tender rule in a situation involving goods rather than those involving services

goods contracts v. construction contractso construction contracts improve real property

if you’re not happy with it, its market value is nothing unless the land is sold along with whatever improvement was made

o if you’re not happy with a good, it still has value as a good in the marketplace that can be sold by the seller

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the courts are trying to insulate companies from loss when the value of the work is not transferrable/cannot be commoditized

Jacob & Youngs v. Kent

Reading pipe case. Wrong brand pipes used (happened due to mistake, not intentional), but they were of same quality, etc., just not the brand that owner wanted and that was in the agreement (so it was a breach of K). To fix this, builder would have to tear down a lot work, and start all over again. (Substantial performance here, so owner still had to pay for the work). Cardozo determined the measure of damages for using the wrong pipe should be calculated by the “difference in value.” The difference in value was the difference in market value between homes with Reading pipe and homes with another pipe, which was $0 (it is not measured by the cost of ripping out the old pipes to install the Reading pipes).

o When the defect is insignificant, the court will find that there was substantial performance and excuses were the same except for the brand name. Measure of damages is not the cost to rip out the old pipe and install the new, but the difference in value which in this case is zero dollars.

The key issue here is at what point is the non-breaching party excused from his performance

Three types of breacheso Total breach

Immediately excuses the other party from performance and they can sue for damages

Promises are reciprocalo Material breach

The non-breaching party’s duty to perform is suspended it may be saved and brought back

o Partial breach Non-breaching party is not excused from performance

Non-breaching party must make good on his promise, but he or she can recoup her loses and be made whole by suing for damages

Condition breached is venial When arguing for a total or material breach, you are in essence arguing for a

“constructive condition” that will make the promises independent and thus allow the non-breaching party to get out of performing

2-106(2)o Goods or conduct including any party of a performance are “conforming” or

conform to the contract when they are in accordance with the obligations under the contract

2-508. Cure by Seller of Improper Tender or Delivery; Replacemento (1) where any tender or delivery by the seller is rejected because non-

conforming and the time for performance has not yet expired, the seller may

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seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery

o (2) where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have further reasonable time substitute a conforming tender

this section seeks to avoid injustice to the seller by reason of a surprise rejection by the buyer. However, the seller is not protected unless he had “reasonable grounds to believe” that the tender would be acceptable.

typically with supplies, you cure something through replacement A willful breach does not automatically bar recovery, but the motive of the

breaching party is a factor to be considered in determining whether performance was substantial 241(e)

o However, Cardozo in J & Y stated that “willful transgression” will not be entitled to recover under the substantial performance doctrine

If breach is intentional, the a “diminution in value” will not be applied and the cost of completion will serve as damages

Other grounds for recoveryo If the contractor has not substantially performed, there are other options

Restitution Contractor can recover for reasonable value of his services If the contract is “divisible,” a court may allow recovery for

the portions that have been completedo Doctrine of divisibility 240

Two requirements: (1) Contract must be possible to

apportion the performances of the parties into corresponding pairs of part performances(2) It must be proper to treat these corresponding pairs as “agreed equivalents.”

234. Order of Performances 2-507. Effect of Seller’s Tender; Delivery on Condition 2-508. Cure by Seller of Improper Tender or Delivery; Replacement 2-511. Tender of Payment by Buyer; Payment by Check. 235. Effect of Performance as Discharge and of Non-Performance as Breach

o (1) Full performance of a duty under a contract discharges the dutyo (2) When performance of a duty under a contract is due any non-performance

is a breach

Sackett v. Spindler

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Spindler (seller-defendant) operated a newspaper which he also owned. Sackett (buyer-plaintiff) agreed to spend $85,000 on over 6,000 of the newspaper's stocks and to pay off the balance in three installments to Spindler. Sackett paid the first two on time per the agreement, but had a great deal of difficulty paying the third. Spindler worked with him for two months to try and get him to pay the last installment, but finally informed him that he was in breach of the contract and he would not sell the stock. Sackett then sued Spindler claiming that there was no actionable breach on which Spindler could refuse him the stock.

o A material breach is considered a total breach and it allows for the non-breaching party to remove themselves from the contract.

Sackett was allowed to discontinue the contract and thus did not owe Sackett anything. The last payment was essential to the contract and Sackett's failure to honor it allowed Spindler to remove himself from the deal. The court held that he worked with Sackett in good faith for longer than he needed to and earned the right to repudiate the contract. A material breach is a total breach and a total breach comes with the right of the non-breaching party to remove themselves from the contract. The court held that if Spindler was not carrying out his end of the bargain, Sackett had no reason as the non-breaching party to repudiate the contract and find a more serious purchaser of his stock.

o Breach…unjustified or unexcused failure to perform all or any part of the contract

o Court notes that whether a breach is total or partial depends upon its materiality. In determining the materiality of a failure to fully perform a promise the following factors are to be considered:…do not need all factors

(1) the extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated; (2) the extent to which the injured party may be adequately compensated in damages for lack of complete performance; (3) the extent to which the party failing to perform had already performed or made preparations for performance; (4) the greater or less hardship on the party failing to perform in terminating the contract; (5) the willful, negligent, or innocent behavior of the party failing to perform; and (6) the greater or less uncertainty that the party failing to perform will perform the remainder of the contract

o total breach…the point at which the seller is entirely released from his obligations so that he can sell to someone else without being liable for doing so

The term total breach does not mean that a party has breached all of her obligations under the contract. A breach is total if the breach is sufficiently serious to justify discharging the non-breaching party from her obligations to perform the contract. 242 identifies various factors to guide courts in making this determination. The distinction between total and partial breach is significant in two ways: It determines the effect of the breach on the performance obligations of the nonbreaching party; it also affects the measurement of that party’s damages. First, a total breach relieves or “discharges” the nonbreaching party from his duties under the

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contract; after a total breach the nonbreaching party is justified in refusing to perform his obligation and may even enter into alternative contracts. See 243(1). A partial breach does not discharge the nonbreaching party, who must continue to perform his obligations under the contract. Second, after a total breach, the injured party is entitled to recover not only damages that will reasonably flow from the breach; a partial breach produces a right to damages only for the actual harm that has resulted to date, not for future harm. 243(4).

When an uncured “material” breach by one party occurs, 237 treats this as in effect the nonoccurrence of a (constructive) condition to the other party’s duty to render any performance not yet due, and performance by that party may therefore be suspended until the breach is cured. The materiality of a breach is to be decided in light of the factors listed in 241. When a material breach becomes “total,” under the rule of 242 it has the effect of discharging the other party’s remaining duties of performance and permitting that party to proceed immediately to pursue a claim for damages from total breach. 236(1).

o Difference between the 241 factors and the 6 factors listed above In 241, there is mention of good faith and fair dealing

When does a material breach become total, and thus release the nonbreaching party from its duties

o 242 indicates that the totality of a breach will depend on the “materiality” of the factors listed in 241, plus two other consideration: the extent to which further delay appears likely to prevent or hinder the making of substitute arrangements by the nonbreaching party, and the degree of importance that the terms of the agreement attach to performance without delay.

o 242, comment b suggests an additional relevant consideration: in applying the discharge rule of that section, “the reasonableness of the injured party’s conduct in communicating his grievances and in seeking satisfaction is a factor to be considered.

keep this in mindo think of how hard it is to argue in a letter that the breaching party was in total

breach (after make a good deal of payments) and the non-breaching party was thus discharged from his duties and able to sell to a third party

the non-breaching party must watch so as to not breach himselfRestatement 234. Order of Performances. 235. Effect on Other Party’s Duties of a Failure to Render Performance. 238. Effect on Other Party’s Duties of a Failure to Offer Performance. 240. Part Performances as Agreed Equivalents. 241. Circumstances Significant in Determining Whether a Failure is Material. 242. Circumstances Significant in Determining When Remaining Duties Are

Discharged. 243. Effect of a Breach by Non-Performance as Giving Rise to a Claim for

Damages for Total Breach. 245. Effect of a breach by Non-Performance as Excusing the Non-Occurrence of

a Condition.

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246. Effect of Acceptance as Excusing the Non-Occurrence of a Condition 247. Effect of Acceptance of Part Performance as Excusing the Subsequent Non-

Occurrence of a Condition. 248. Effect of Insufficient Reason for Rejection as Excusing the Non-Occurrence

of a Condition.

ANTICIPATORY REPUDIATION [110-

by virtue of he rules of constructive conditions, if one party commits a total breach when his performance is due, the other party is justified in treating her performance obligations as discharged

suppose, however, that something happens before the date specified for performance – something that causes the second party to have serious doubts about either the willingness or the ability of the first party to perform

the first party could clearly indicate that he will not perform; this advance refusal to perform, or “anticipatory repudiation,” could be expressed orally, in writing, or by conduct showing an unwillingness to perform

or, even if the first party does not actually repudiate his obligations, circumstances might give the second party reasonable grounds for “insecurity” about the ability of the first party to perform on time (financial difficulty or shortage of materials, for example).

250. When a Statement or an Act Is a Repudiationo A repudiation is

(a) a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under 243, or

(b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach

2-610. Anticipatory Repudiationo also can be a statement or voluntary affirmative act

Truman L. Flatt & Sons Co. v. Schupf

This case involves a land contract where the buyer attempted to modify the price term and when the seller rejected his proposed modification, then elected to proceed with the original terms of the contract.

A party may retract their repudiation unless the other party materially changed position in reliance on this repudiation or the other party indicates that he considers the repudiation to be final.

o Also, a repudiation must be clear and unequivocal….In the instant case, the Plaintiff’s letter to the Defendant seeking to modify the price term in the contract was not a clear and unequivocal repudiation.

the court reasoned that even if the Plaintiff had repudiated the contract, he successfully retracted it because repudiation is timely retracted if it is retracted

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prior to the aggrieved party’s changing position in reliance on the repudiation or if it is retracted before the aggrieved party indicates to the repudiating party that it is considers the repudiation to be final.

The effect of a statement as constituting a repudiation under 250 or the basis from a repudiation under 251 is nullified by retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final 256(1)

o UCC adopts the same provision 2-611 Conduct amounting to an anticipatory repudiation

o Financial difficulty, even to the level of insolvency, does not constitute an anticipatory repudiation 252, comment a

However, insolvency does constitute a ground for demand of adequate assurance of performance

Hornell Brewing Co. v. Spry

Hornell in early 1993 granted Spry the exclusive right to purchase Arizona products for distribution in Canada, and Spry formed a Canadian corporation, Arizona Iced Tea Ltd., for that express purpose. Between November and December 1993, and February 1994, defendants' unpaid invoices grew from $20,000 to over $100,000. In May 1994, after an increasingly problematic course of business dealings, Hornell de facto terminated its relationship with defendants and permanently ceased selling its products to them. Hornell learned from several sources that Spry's warehouse was empty, that he had no managerial, sales or office staff, and he had no trucks.

o UCC 2-609 authorizes one party upon reasonable grounds for insecurity to demand adequate assurance of due performance and until he receives such assurance, if commercially reasonable, suspend any performance for which he has not already received the agreed return.

Reasonable grounds and adequate assurance are defined by commercial rather than legal standards

Here, plaintiff had reasonable grounds to be insecure about defendants' ability to perform in the future: the defendants were substantially in arrears, had no financing in place, bounced checks, and had failed to sell even a small fraction of the product defendant Spry originally projected. Defendant's failure to respond constituted a repudiation of the distributorship agreement, which entitled plaintiff to suspend performance and terminate the agreement.

a party who has “reasonable grounds for insecurity” can demand “adequate assurance for due performance” from the other party. The failure to give such assurances constitutes an anticipatory repudiation of the contract 2-609; 251

Reasonable grounds for insecurityo Usually significant financial difficultieso Generally not unreliable rumors

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Under the Code after a justified demand for adequate assurances, the demanding party must wait a reasonable time not to exceed 30 days. (Note that this is the maximum period; circumstances may well make it reasonable to demand a faster response.) If adequate assurances are not given within that time, the demanding party may treat the failure to respond as an anticipatory repudiation. 2-609(4). The R. requires a party to respond to a demand for assurances within a “reasonable time” but does not set a maximum time period.

UCC 2-609, 2-610, 2-611Restatements 250-256

Recapo Must be definite and unequivocal

Statement or affirmative actiono Law of repudiation permits parties to think better of what they have done and

retract/revoke their repudiation But, a repudiation is only nullified if done in a timely matter

o Repudiation cannot be revoked when the other party has taken action or put the repudiating party on notice that it is adhering to the repudiation

o Keep in mind the demand for adequate insuranceo UCC

o Look at section ordering Demand for assurances

Leads to a suspension of services Clear and unequivocal repudiation

Leads to a discharge of duties Retraction of repudiation

2-611(2)o retraction may be by any method that clearly

indicates to the aggrieved party that the repudiating party intends to perform, but must include any justifiable assurance demanded under 2-609

EXPECTATION DAMAGES: PRINCIPLES AND LIMITATIONS

We are assuming a contract and a breach

Threshold questions: Can the non-breaching party suspend his performance or, in fact, treat his

performance as discharged, and Can he sue for damages? *Is this a (highly unique) scenario that justifies specific performance?

Because there is a calculation of damages does not mean there is one answero There are always different theories and applications in the alternative

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Damages Formulaso Restitution (non-contract, unjust enrichment)

Based on unjust enrichment Typically less compelling argument in contract cases if employed at all

o Reliance (in contract, in non-contract (promissory estoppel cases)) Put the party back in a situation as if the promise had never been made

o Expectation (common contract remedy) Determine non-breaching party’s damages, and then monetize those

damages so as to put the non-breaching parties in the position they would have been in had the contract been performed

Most common damages sought out in contract cases Almost always the most significant (amount) in damages

in 344, the R. drafters have adopted these three part analysis, along with the terminology used

Restatement 344-356

COMPUTING THE VALUE OF PLAINTIFF’S EXPECTATION [117-129]

347 General measure=loss in value + other loss – cost avoided – loss avoided

o In the case of claim for damages for partial breach, only the first two terms apply

o Remember: R formula is only the dominant approach, there are other approaches

Unless you are awfully confident you have a better approach, use the R.

347 terminology used to describe the process by which the P’s damages are computed.

o In contracts for the sale of real estate, courts often state that expectation damages are measured by the difference between the contract price and the market price at the time of breach

o In construction contracts, the measure of expectation damages for a breach by the owner is frequently stated to be the builder’s expected net profit on the entire contract plus the builder’s unreimbursed expenses at the time of breach

Basic Damages Formula (347)o Loss in Value of Other Party’s Performance

+ Other Loss (incidental or consequential damages) - Costs avoided or other loss avoided

o = Damages R. formula is not the law, but often used to calculate expectation damages

o This is the general rule, touchstone

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o Keep in mind you will almost always argue damages in the alternative because you will not always get what you want

352. Uncertainty as a Limitation on Damages.o Damages are not recoverable for loss beyond an amount that the evidence

permits to be established with reasonable certainty. When dealing with consequential damages, you always start with 351…you need

to know how foreseeable the consequential damages were

Restatement 344. Purposes of Remedies. 347. Measure of Damages in General.Real Estate Contracts

Roesch v. Bray

The sellers sold a house and entered an agreement to purchase a different house. The buyers notified the sellers that they would not close on the purchase. The buyers took out a loan to complete their purchase and attempted to sell their old house. The sellers were able to sell the house at a slightly lower price one year later. The trial court accepted a referee's recommendation of damages in the buyers' action for breach of the sales agreement and awarded damages based on maintenance expenses incurred while the house was on the market. The buyers asserted that they should also recover damages based on the difference between the contract price and the price actually received. The sellers asserted that the damages awarded for maintenance were improper. The court reversed the damages awarded and entered a new damage award of the difference between the contract price and the sales price because it determined that the sellers were entitled to a contract measure of damages of the lost value of the contract but they were not entitled to the maintenance costs since those were not reasonably foreseeable and the consequence of such a rule had never been foreseen at the time of the breach.

o Generally, under OH law, when a purchaser defaults upon a contract for the sale of real estate, the seller may recover the difference between the contract price and the market value of the property at the time of the breach

Measure of damages for breach of real estate contractso Damages for the loss of bargain in such cases are ordinarily calculated as the

difference between the contract price and the market value of the property at the time of breach

In many cases the P will also seek to recover “consequential” or “incidental” damages. Such damages are subject to certain requirements or limitations:

o (1) The requirement damages be reasonably foreseeable (i.e., breaching party had reason to foresee the harm as a probable result at the time of the contract);

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breaching party must have had reason, at the time he or she entered the contract, to look ahead and see the damage that would occur if you later choose to breach the contract

should a reasonable person in that party’s shoes know that the potential ramification of the breach would exist?

o (2) The prohibition on speculative damages (i.e., the damages must be proven with reasonable certainty); and

o (3) The duty to mitigate damages (i.e. damages may not be recovered to the extent that they could have been avoided or minimized by reasonable efforts).

What’s a reasonable effort? Important advocacy point

Proof of market valueo Real estate appraisers or other people who are qualified by education, training,

or experience can provide expert testimony about market value. Courts usually allow the owner of property to testify about its market value even though the owner may not be qualified as an expert on real estate values

o Many courts have also allowed the resale price of the property as evidence of its market value at the time of the breach, provided the resale takes place within a reasonable period of time in an arm’s length transaction

There are a variety of types of “interest” claims that might be reflected in a judgment for contract damages. When the P is successful in recovering any judgment in a court action (whether for breach of contract or other grounds), postjudgment interest will under local law usually accrue with respect to the amount of that judgment at least from its date of entry, perhaps from the date of the verdict.

Handicapped Children’s Education Board v. Lukaszewski

Prior to the beginning of the school year, Lukaszewski was offered another position at a day care center for more money. She accepted this offer and notified the Board. Lukaszewski left the day care and returned to Lightfoot School for the 1978 fall term after receiving letters from the Board's attorney. She resented the actions of the Board and retained misgivings about her job. She met with her doctor who then wrote a letter of his findings to the Board: she had a hypertension problem and it would be dangerous for her to drive long distances in her agitated state. Lukaszewski then wrote a letter of resignation.

o Key point: not our classic at will employment situationo A health danger will not excuse nonperformance of a contractual obligation

when the danger is caused by the nonperforming party. A breach of contract is established. The danger to Lukaszewski's health was self-

induced. She alone caused the 45-minute commute by choosing to live in Mequon. Lukaszewski had a history of hypertension dating back at least five or six years. Her blood pressure would fluctuate at the slightest provocation. It appears Lukaszewski resigned for reasons other than her health. The board had to incur additional costs ($ 1,026.64) in finding a replacement. It necessarily flowed from the breach and was within the contemplation of the parties when the contract was

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made. Damages for breach of contract are measured by the expectations of the parties. The Board expected to receive the services of a speech therapist with Lukaszewski's education and experience at the salary agreed upon. It neither expected nor wanted a more experienced therapist who had to be paid an additional $ 1,026.64 per year. Lukaszewski's breach forced the Board to hire the replacement and, in turn, to pay a higher salary. Therefore, the Board lost the benefit of its bargain.

o Damages as addressed by this court Damages for breach of an employment contract is:

(1) the cost of obtaining equivalent serviceso here, the only qualified replacement was more costly

(2) plus any foreseeable costso here, the incidental damages in hiring the new

replacement

Many employment contracts are “at will”o As we have seen, there are a number of potential limitations on the employer’s

right to terminate such at will relationships, however, there appears to be no movement toward similar restrictions on termination by the employee.

o The rule applied in Lukaszewski will thus have application only in cases where the employee has by contract bound herself to the employer for some stated period of time.

Illness as a defense to breach of an employment contractIn a personal service contract, the death or incapacity of a person necessary for performance may excuse nonperformance. See 262.

American Standard v. Schectman

-Plaintiffs contracted with Defendant Schectman (a demolition and excavating contractor), to convey the buildings and other structures and most of the equipment in return for defendant's payment of $275,000 and his promise to remove the equipment, demolish the structures and grade the property as specified. Schectman failed to complete the work and American Standard filed suit for contractual damages. Schectman contends that the contract did not require him to remove all of the subsurface foundations and that plaintiffs suffered no loss by reason of the breach because it makes no difference in the value of the property whether the old foundations are at grade or one foot below grade. In the usual case where the contractor's performance is defective or incomplete,

the reasonable cost of replacement or completion is the measure of damages.o When, however, there has been a substantial performance of the contract

made in good faith but defects exist, the correction of which would result in “unreasonable economic waste,” courts have measured the damages as the difference between the value of the property as constructed and the value if performance had been properly completed

See Jacob & Youngs

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the economic waste of the type which calls for application of the “diminution of value” rule generally entails defects in construction which are irremediable or which may not be repaired without a substantial tearing down of the structure as in J & Y

where, however, the breach of the convenant which is only incidental to the main purpose of the contract and completion would be disproportionately costly, courts have applied the diminution in value measure even where no destruction of the work is entailed

it is also the general rule in building and construction cases, at least under JY in NY that a contractor who would ask the court to apply the diminution of value measure “as an instrument of justice” must not have breached the contract intentionally and must show substantial performance in good faith

The cost of completion, not the difference in value, was the proper measure of damages. The court rejects Schectman's contention that the Plaintiff's suffered no loss since they sold the property for only $3,000 less than its full fair market value. Faced with the jury's finding that the reasonable cost of removing the large concrete and stone walls and other structures extending above grade was $90,000, defendant cannot assert that he has rendered substantial performance of the contract or that what he left unfinished was "of trivial or inappreciable importance.'

o Why is there no application of substantial performance as in JY? (1) grading work is not just incidental because the purpose was not

achieved (2) in JY work was done, here the grading was not done (3) the P is entitled to the value of the promised performance even if it

would not increased the value of the property in JY, the value of the pipe was the same

(4) the failure in JY was venial and unintentional, but D here was intentional

Peevyhouseo Court in essence is incentivizing people to destroy land and then simply

bring in experts to show that there was no economic waste so that they do not have to pay damages

The Restatement approacho 348(2) provides that if the loss in value to the injured party is not proved with

sufficient certainty, damages may be measured by either (a) the diminution in market value or (b) by the reasonable cost of completing performance or of remedying the defects if that cost “is not clearly disproportionate to the probable loss in value to him.”

Other key damages conceptso Specific performance (exception to the rule)

Rare

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Not in service contractso Distinguishing incidental and consequential damages

Not for purposes of 347, but because incidental damages are easy to prove and consequential damages are not

Easier to argue incidental damages rather than consequential damages because you HAD to the things related to incidental damages in order to fulfill your duty to mitigate

o Mitigationo Foreseeability

Related to consequential damages

RESTRICTIONS ON THE RECOVERY OF EXPECTATION DAMAGES: FORESEEABILITY, CERTAINTY, AND CAUSATION [129-142]

Hadely v. Baxendale

-The delivery of said shaft was delayed by the defendant's negligence and consequently the plaintiffs did not receive delivery of the new shaft for several days after they otherwise would have. Their mill work was thereby delayed and they lost profits they would have otherwise made. The plaintiffs then filed suit. For a claim for breach of a contract the supposed breaching party cannot be held

responsible for special circumstances that were not conveyed to it by the other party entering into the contract. Essentially, if there are any special circumstances that are present these special circumstances must be explicitly stated between the parties in order for the failure to meet these special circumstances by the one party and to enable the other to bring a breach of contract claim against them.

o Basic rule is that the breaching party has to pay for foreseeable damages-The court then finds that using the above rule the plaintiff and defendant entered into a general contract and that the plaintiff failed to make the defendant aware of any special circumstances, and so he should not be able to receive damages from his lost wages because they were outside of the normal consequences of the delay/breach of contract between the two of them.

Consequential damages…the damages would reasonably be supposed to be in the contemplation of both parties

Damages that are foreseeable and/or arise naturallyo However, all anybody care about today is whether the damages were

foreseeable by the breaching party at the time AT THE TIME AT WHICH THE CONTRACT WAS MADE

Modern courts are more focused on what the breaching party had reason to know

What’s the difference between a damage that arises naturally and a damage that arises under special circumstances?

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o When you hear “arise naturally,” we are typically thinking about what is a direct result of the breach

This is distinguished from another category… Damages that occur because of indirect results that the

breaching party would not have thought about unless the breaching party knew or had reason to of the “special circumstances” creating the potential for this indirect result

o The buyer must make the seller aware of potential indirect results for which he will hold the seller liable if he plans to take action in order to allow for the breaching party to make efforts to hedge against the possible loss:

You can refuse the contract You can disclaim liabilities You can insure against the lost You can charge more

Foreseeabilityo 351 and 2-715(2)

Florafax International, Inc. v. GTE Market Resources, Inc.

-It turns out that GTE, at the time at which they signed the contract, was not aware of the profits they would make. Florafax, the plaintiff, also enters into an agreement with Bellerose for flower delivery. This contract is entered into before the contract with GTE. GTE is aware that Florafax has a contract with Bellerose. GTE breaches the contract because they are losing money. Bellerose starts losing money and therefore wants to end their relationship with Florafax. Florafax is out a call center and a large contract. Florafax filed suit seeking damages for breach of contract. The Plaintiff sought damages for costs associated with performing the services the Defendant was supposed to perform and for lost profits as a result of the loss of the Bellerose contract. The trial court determined that Defendant breached the contract and awarded $750,000 in damages for lost profit among other damages in the amount of $820,000. Loss of future expected monetary gain is recoverable if the loss is within the

contemplation of the parties at the time the contract was made, or if the loss flowed directly or proximately from the breach, and if the loss is capable of reasonably accurate measure or estimate.

The court held that there was knowledge of the agreement in the contract with the Defendant, because of the breach recovery clause and there is evidence to show GTE had knowledge of the order volume. The court also held that GTE had no right of termination within 60 days. The earliest time for termination was at two years and that was the proper period. The Bellerose president indicated that they viewed the agreement with Florafax as long term and would likely not have ended the relationship in absence of performance problems attributable to GTE. Damage is shown by expert profit projection and award was within those projections.

What are the things that distinguish this case from Hadley?

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o Importance of the termination clause GTE agrees to pay for consequential damages and lost profits

You should only add a termination clause if you’re not going to breach, willing to take on the liability, or even that some person lower on the totem pole entered this clause without the consent of the supervisor

o GTM may have gotten a better deal because they entered into this clause

Limitation of consequential damages to prevent injusticeo See 351

An injured party cannot recover damages that are “speculative.” Ps must prove their damages with “reasonable certainty.” See 352.

Proof of lost profits typically requires expert testimony, and experts can vary widely in their assumptions and their resulting projections of future lost profits.

Consequential damages requirements: 351, comment eo Mitigation, foreseeablity, and certainty

Restrictions on the recovery of expectation damages “mitigation of damages”

o “cost avoided” or “loss avoided” under 347 The P may not recover for those injurious consequences of the D’s breach that

the P herself could by reasonable action have avoided. This principle is also referred to – for obvious reasons – as the doctrine of “avoidable consequences.”

Rockingham County v. Luten Bridge Co.

Luten Bridge Co. ignored the county’s “notice of cancelation,” and continued with performance, thus building a bridge in the middle of the forest, with no roads leading to it. The trial court directed a verdict for Luten Bridge Co., for the full price of the contract, and Rockingham County appeals the judgment herein.

o After an absolute repudiation or refusal to perform by one party to a contract, the other party must take the best course of action to mitigate the damages.

The county wrongfully canceled a valid contract and was liable to restore Luten Bridge Co. to the position that they would have been in, but for the breach. However, the county’s liability ended at the time that their notice of breach was received by Luten Bridge Co., and does not continue simply because Luten Bridge Co. elected to continue with performance of the contract. Luten Bridge Co. was obligated to mitigate the damages to themselves, by immediately ceasing performance, and selling any materials or supplies that they had purchased in preparation for the construction of the bridge. The trial court erred in its directed verdict for full recovery, and the case was reversed and remanded for a new trial.

Havill v. Woodstock Soapston Company, Inc.

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-Nonetheless, when she was fired, she was told it was for economic reasons, not given the formal warnings required under company personnel policies for disciplinary firings, and given a laudatory reference. The company hired people who did what she had been doing, and she was never able to find a job with the same pay and benefits.-The fact that the employee might well not have been allowed to continue working as long past age 65 as she had hoped was one factor. It was an error not to take into account the fact that the employee chose to work fewer hours after her termination, but it was not error not to include future pay increases in the award. In assessing damages, the trial court’s only responsibility is to make an award

that is limited to a reasonable time and that is not too speculative when viewing all the evidence in the light most favorable to the P

Mitigation, in the context of an employment dispute, requires that the employee make a “good faith effort to find suitable alternative employment.”

o When an employer is claiming that the employee did not properly attempt to mitigate damages, the burden of proof is on the employer to show such failure…This requires that the employer show both that suitable work existed and that the employee did not make reasonable efforts to obtain it

Rule for mitigation (1) existence of a duty to mitigate damages

o you must figure out what party has the duty to mitigate damages

o duty on employee (2) good faith requirement (3) burden of proof

o burden of proof on employer we typically put the burden on the moving party

o showing: (a) suitable work existed and

suitable work…work that is o (i) substantially equivalent to

the position lost, and o (ii) suitable to a person’s

background and experience. Similar and suits the

person’s background and experience

Very common to add geography to this definition

(b) the employee did not make reasonable efforts to obtain it

Suitable employment is that which is “substantially equivalent to the position lost and suitable to a person’s background and experience.”

The measure of damages for wrongful termination of an employment contract is the amount that the P would have earned absent the breach, less what P actually

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earned or could have earned by the exercise of reasonable diligence during the contract period after P’s termination

The court affirmed the judgment as to liability, but reversed the damages award and remanded the matter for further findings, reconsideration, and a recalculation of the damages award.

Mitigation in the UCCo Although the UCC has no provision imposing a general responsibility of

mitigation on the parties to a sales contract, Comment 1 to UCC 1-106 indicates this notion was intended to be subsumed in the more general principle that remedies are to be limited to compensation.

o The Comment also suggests that minimization of damages may be implicit in the more general obligation of good faith imposed by 1-203.

o The remedies provisions of Article 2 contain a number of specific references to actions by the buyer or the seller intended to have the effect of minimizing the loss of damage incurred by reason of the other party’ breach.

2-704(2)…seller’s privilege to complete manufacture where commercially reasonable despite buyer’s repudiation, “for the purpose of avoiding loss and of effective realization

2-706(1)…seller’s privilege of resale in commercially reasonable manner

2-709(1)(b) and (2)…attempts at resale as prerequisite to seller’s action for price

2-712…buyer’s attempt to “cover” by substitute purchase 2-715(2)(a)….buyer not entitled to consequential damages unless loss

“could not reasonably be prevented by cover or otherwise 2-716(3)…buyer’s right to specific performance conditioned on

inability to effect cover

NONRECOVERABLE DAMAGES: ITEMS COMMONLY EXCLUDED FROM PLAINTIFF’S DAMAGES FOR BREACH OF CONTRACT [142-143]

Three types of damage recovery usually denied to a P in ordinary actions at CL for breach of contract (although they may be recoverable in other kinds of action or specifically provided for by statute):

o (1) Damages to compensate the P for amounts expended on attorney feeso (2) Damages for mental distress (and related types of intangible,

“noneconomic injury”) Refer to 353

Recovery for bodily harm and/or emotional distress is excluded unless they are caused by the breach of the contract

o (3) “punitive” (or “exemplary”) damages refer to 355

punitive damages can be recovered if the breach is also a tort if the damages exceed expectation damages, they are likely to

be unrecoverable

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BUYERS’ AND SELLERS’ REMEDIES UNDER THE UCC [143-148]

Buyer’s Remedies

A seller may commit a breach of contract in two general wayso (1) a seller may deliver goods that fail to “conform” to the contract in some

way (breach of an express or implied warranty relating to the “quality” of the goods, most likely)

o (2) the seller may fail to make proper “tender” of the goods, such as failing to deliver on time, delivering too few or too many, or failing to deliver at all.

When the buyer does not have the good because the seller fails to deliver or the buyer rightfully rejects (2-601, 2-602) or revokes acceptance (2-608), the buyer may recover any part of the price that has been paid under 2-711 and also obtain cover damages under 2-712 or market damages under 2-713. Alternatively, the buyer may pursue specific performance to compel delivery of the goods under 2-716. When the buyer has accepted and retained good despite a nonconformity, the buyer’s damages are determined under 2-714. In addition to the foregoing remedies, the buyer may be able to recover consequential and incidental damages under 2-715.

Cover, 2-712 Market damages, 2-713 Damages for Accepted Goods, 2-714 Specific Performance, 2-716 Incidental and Consequential Damages, 2-715

Seller’s Remedies

Analysis of sellers’ remedies beings with 2-703, which outlines he seller’s rights in the event the buyer breaches the contract. The measurement of the seller’s damages depends partly on whether the buyer has accepted the goods based on the definition of acceptance in 2-606. If not, the seller may recover either resale damages, 2-706, market damages, 2-708(1), or lost profit, 2-708(2). If the goods have been accepted, or are not reasonably subject to resale, the seller may recover the contract price under 2-709.

Resale Damages, 2-706 Market Damages, 2-708(1) Lost Profits, 2-708(2) Seller’s Action for the Price, 2-709 Seller’s Incidental and Consequential Damages, 2-710

SPECIFIC PERFORMANCE [148-151]

The underlying policy driving specific performance is that money does not fix everything

The bottom line is that anything other than money is perceived as an extraordinary damage

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The historical exception to money damages is lando The easiest cases are those where the land is particularly unique or special

However, the CL did not evolve to include unique and special goods in specific performance damages

o UCC seems to be evolving this way, but not really fast You can analogize specific performance to injunctions In order to get specific performance, you need to show irreparable injury

o Money can’t fix it Money is so much easier to enforce and keep track of

o It is much harder to enforce specific performance Our nation is not very comfortable with the idea of forcing someone to do

something

City Stores Co. v. Ammerman

-The plaintiff, City Stores Company (owners of Lansburgh's Department Store), seeks specific performance of a contract wherein defendants allegedly promised to offer plaintiff a lease as a major tenant in defendants' shopping center

-defendants wrote a letter to plaintiffs, stating 'You have our assurance that in the event we are successful with our application, that we will give you the opportunity to become one of our contemplated center's major tenants with rental and terms at least equal to that of any other major department store in the center.'

-The court granted specific performance in favor of the tenant. The court ultimately holds that the letter was a binding unilateral contract, which gave plaintiff an option to accept a lease, and that the existence of express and implied conditions precedent did not render it invalid or too indefinite to be a contract.

o Last big argument of Ds against specific performance Ds argue that the grant of specific performance would inflict upon

them an undue hardship Balancing maxim…specific performance should not be

enforced when the hardship of the Ds is greater than the benefit received by the Ps

Court assesses undue hardship The Court holds that specific performance would not be

impossible for Ds and it would not bankrupt the Ds

some Js in the US have opposed granting specific performance of contracts for construction of buildings and other contracts requiring extensive supervision of the court, but the better view, and the one which increasingly is being followed in this country, is that such contracts should be specifically enforced unless the difficulties of supervision outweigh the importance of specific performance to the P.

Specific performance will be ordered only when damages are inadequate359

Effect of indefiniteness on specific performance

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o Specific relief will not be denied merely because the parties have left some matters out of their agreement, or left some issues to be agreed on in the future, particularly when the parties have agreed on all material terms and other equitable factors are present. 362.

On the other hand, failure to agree on material terms may result in the denial of specific relief, though lines are difficult to draw

Inadequacy of damages at lawo Modern American courts will routinely grant specific performance to

purchasers of real estate 360, comment e indicates that specific performance has traditionally

been available to both buyers and sellers. Cases awarding specific performance to sellers, however, are not very common.

o Besides the possibility that a land-related contract will be specifically enforce because of “uniqueness” of its subject matter, 360 identities other circumstances which support a claim that damages are inadequate:

These include the difficulty of proving damages with certainty, the difficulty of procuring a suitably equivalent substitute performance, and the likelihood that a damage award would not be collectible

Specific performance of development contracto Ordinary building contracts are unlikely to be specifically enforced, both

because of the difficulties of supervision and because construction services can readily be purchased on the market with money damages

o However, courts have moved away from such precedent as the burden of supervision appears less onerous than it once seemed

Other factors affecting award of specific performanceo Some are listed in 364o These include:

The possibility that the contract was the product of mistake of unfair practice, or that the exchange it calls for its grossly inadequate or the terms of the contract are otherwise unfair. These factors are reflected in the doctrine that equity will not aid one who comes to the court with “unclean hands.”

Another factor to be considered is the question whether specific relief would cause unreasonable hardship or loss to the party in breach

Effect on third partieso Besides the possibility that specific relief may disproportionately affect the D,

the court in some cases must consider the possible impact of its decree on third parties. 364(1)(b).

Specific performance under the UCCo UCC is taking a much more liberal approach here

The UCC is saying that specific performance is available in cases involving unique goods and other proper circumstances

o In 2-716 the UCC declares that specific performance “may” be decreed for a buyer where the goods are “unique,” or “in other proper circumstances.”

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o The comparable provision for sellers, 2-709(1)(b), allows goods to be forced on the buyer and the price obtained when the goods are not reasonably subject to resale to others

o Under the Code’s approach, courts will still face the question whether the goods contracted for are sufficiently “unique” to justify specific enforcement.

Restatements 359-367

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