CONTRACTS II OUTLINE

Defenses

A. Misrepresentation a. If a party commits a misrepresentation, the K is voidable

i. Elements:1. Assertion or statement2. That’s not true3. Fact or term of K (not an opinion unless one of the exception applies –

Vokes)4. Material5. Causal connection

a. But for6. Reasonable reliance

a. availability of information is relevantii. Victim entered into the K b/c of (but for)

1. a statement (misrepresentation)/assertion 2. that is false (not in accord with the facts)3. Of a material (fraudulent or material) 4. fact (usually not an opinion, unless…) 5. V’s reliance was reasonable. 6. Then the K is voidable.

iii. Test: Does the evidence tend to show that the aggrieved party would not have entered the contract unless the false statement had been made?

b. Fraud in the inducement allows K to be voidablei. Fraudulent misrepresentation (assertion or statement)

ii. Negligent misrepresentation (material)iii. Innocent misrepresentation (material)

c. Fraud in the factum allows K to be voidi. Ex. Signing one thing while thinking you are signing another

ii. Third Party Rule: misrepresentation by a 3 rd party (not a party to the K) makes the K NOT voidable by the victim if the other, innocent party to the K:

1. acted in good faith;2. did not know or have reason to know of the misrepresentation; and

either gave value or relied materially on the transaction/K.d. Lawrence S. C. Kang v. W. Dewey Harrington

i. Issue: Whether duty to read both Ks was abrogated/overridden by fraud/misrepresentation.

ii. Holding: Fraud outweighed duty to read

iii. Rule: When written documents do not match terms discussed in the oral K and a reasonable person would probably not have read the documents before signing, the fraud overrides the duty to read.

e. Syfox Corporation v. The Boeing Companyi. Issue: Whether misrepresentation of Boeing’s commitment to Skyfox was

overridden by duty to read.ii. Holding: Duty to disclose failed, the duty to read overrode the

misrepresentation because both parties were sophisticated businesses with counsel and no fraudulent misrepresentation.

iii. Rule: The misrepresented fact must be preexisting or a present fact, not a promise about future occurrences.

f. Counterarguments:i. Duty to read: a party is held to the terms of a written K that they sign

ii. Duty to investigateg. Audrey E. Vokes v. Arthur Murray, Inc.

i. Holding: Misrepresentation of opinion does not qualifyii. Rule: misrepresentation of opinion does not qualify

h. Do not have to wait until sued to use as a defense, can rescind or void. But if K is affirmed, then right to use as a defense is lost

B. Failure to Disclose a. Silence or active concealmentb. General rule: no duty to disclosec. Only a duty to disclose when:

i. there is a fiduciary duty (not between a buyer and seller)ii. Joint venture

iii. Duty imposed by statuteiv. If you know the other is mistaken

1. Disclosure is necessary to correct something that has already been said that was a misrepresentation

v. If you tell half the truthvi. Material facts not known to buyer and not readily discoverable

vii. If asked, must correctly respondd. 4 instances where failure to disclose can be misrepresentation:

i. where the party knows that disclosure is necessary to prevent a previous assertion from being a misrepresentation (fraudulent or material)

ii. where the party knows that disclosure would correct a mistake of the other party as to a basic assumption on which that party is making the K and nondisclosure is bad faith*;

iii. where the party knows that disclosure would correct a mistake of the other party as to the contents or effect of a writing pertaining to the K; or

iv. where the other person is entitled to know the fact because of a relation of trust and confidence between them, such as a fiduciary relationship.

e. Warren G. Hill and Gloria R. Hill v. Ora G. Jones and Barbara R. Jonesi. Holding: there was a duty to disclose

ii. Rule: If buyer makes an inquiry, then seller has a duty to disclose. iii. Duty to disclose where the facts materially alter the value of the property.iv. Duty to disclose if there was a previous statement made that is false, with

knowledge.f. Jeffrey M. Stambovsky v. Helen V. Ackley and Ellis Realty

i. Holding: Seller had duty to disclose and failed to do so, so K was rescindable.ii. Rule: Duty to disclose overrides duty to inspect and investigate when buyer

doesn’t have the ability to discover and seller has created the situation.iii. Case of equity, not law

C. Mistake of Fact a. A mistake is a belief about a present or past fact which is not in accord with the facts at

the time the K is made, as to a basic assumption on which the K was made, which has a material effect on the agreed exchange of performances

i. Not an opinionb. Mutual Mistake of Fact

i. Makes the K voidable by the affected party – unless he or she “bears the risk of mistake”

ii. Elements:1. Basic assumption - mistake must concern and the contract is founded

on it2. Material effect3. Assumption of the risk

iii. Todd A. Oliver v. Felisha E. Clark1. Holding:2. Rule: In order to set aside a release of liability for injury, P must produce

evidence that parties were not aware of serious injuries at the time and that the K was only to minor injury.

a. An opinion is not a mistake3. K to pay injured person $500 for release of any and all claims vs. driver,

including known and unknown injuries4. Injured person’s condition worsened, wants more money from co.5. Co. argues that release is valid. 6. Injured person argues that release is invalid b/c injuries weren’t known

at the time.7. Whether mutual mistake re: P’s injuries allows P to void the release?

c. Unilateral Mistake of Facti. K is usually not voidable unless:

1. Enforcement of the K would be unconscionable or

2. The other, non-mistaken party had reason to know of the mistake (e.g. was taking advantage of the mistaken party) or his fault caused the mistake

ii. First Baptist Church of Moultrie v. Barber Contracting Company1. Holding: Bid could be rescinded b/c Church knew about the mistake

before the K and to allow them to go through with the K would take advantage of the construction company

2. Rule: If K is not relied upon to the detriment of the mistaken party and the mistake is known before the K, it may be rescinded.

d. Assuming the risk:i. Even if mutual or unilateral mistake makes the K voidable, it is NOT voidable if

the adversely affected party/the one seeking to avoid it has “assumed the risk,” by:

1. Agreeing with the other party to assume the risk of the mistake (as is sale or course of dealing)

2. Being aware at the time the K is made that he doesn’t really know the truth but he proceeds anyway (ex. Contracting with conscious doubt as to the fact); or

3. The court allocating the risk to him, if reasonable (could be trade useage)

e. Mistake made in transmission (or by intermediary ): the message “as transmitted” is operative unless the other party knew or should have known of the mistake (i.e., it was obvious).

f. Mistake in expression means the parties agreed, but there was an error made in the written K – ct will reform the K and enforce the agreement actually made.

D. Unconscionability a. Is a balancing issueb. Requires:

i. Procedural U = unfair process of contract formation, AND1. Pressure, relationship, fear, imbalance of power…

ii. Substantive U = unfair K terms, content, clauses…unreasonably favorable to other party

1. Cross collateralization clausea. If you quit paying on one thing, can take back everything

iii. In order to find K unconscionable, ct. usually must find elements of both kinds, but there are cases where only one kind is present of more of one than the other

iv. Context: assessment of U is made “in the light of the general commercial background and the commercial needs of the particular trade or case.”

v. Testing time: fairness is tested at the time the K is made, entered into. (This doctrine does not pertain to bad faith in the performance of a K, after it’s made.)

c. If K is found to be unconscionable, it is voidd. In UCC 2-302 and Rest. 2d 208:

i. If K or any clause is unconscionable, then ct can refuse to enforce K, or enforce it without the U term, or limit the application of the K term to avoid any unconscionable result. Courts usually require some element of both procedural U and substantive U to find a K “unconscionable:”

e. Robert W. Ryan v. Norman D. Weineri. Rule: When one party is sophisticated and has an attorney and the other is not

educated and has no representation, the K is unconscionable.f. Tony Brower v. Gateway 2000

i. Holding: Unconscionable because ICC was cumbersome and inaccessible and defending a suit against D would cost more than the computer.

1. Procedural unconscionability was weak, but substantive unconscionability is very strong

ii. Rule: Even when one type of unconscionability is weak, if the other is strong enough, can tip the scales and the K can be deemed unconscionable.

g. Brooklyn Union Gas Company v. Rafael Jimenizi. Holding: K was unconscionable b/c D could not protect himself since he did not

speak or write English fluentlyii. Rule: Even when one type of unconscionability is weak, if the other is strong

enough, can tip the scales and the K can be deemed unconscionable.iii. Procedural Unconscionability controlled here, no substantive unconscionability

mentioned by the court1. Opposite of Brower

h. Nez Perce Tribe of Indians v. The United States

K Interpretation

A. Implied Terms – Unspoken Understandings and Expectations a. Implied terms: are unspoken understandings and expectations of the parties inferred

from:i. The conduct of the parties (course of dealing, course of performance)

ii. The arrangement and function of the transactionsiii. The customs of the industry or trade (trade usage)iv. Local history and circumstances (community norms)

b. A variety of sourcesc. Canon of interpretationd. Contexte. What if these terms violate the parties’ intentions?

i. At common law, these implied terms became part of the K

ii. The Restatement (Sections 202, 203, 219-223) gives these implied terms great weight in K interpretation and the UCC (Sections 1-205 and 2-208) explicitly includes these implied terms in the K: when it defines “agreement” as the bargain of the parties in fact as found in their language (the K terms) or by implication from other circumstances including course of dealing (“COD”) or usage of trade (“TU”) or course of performance (“COP”) - UCC 1-201(3)

f. The UCC governs K’s subject to it, but common law applies where the UCC is silent - UCC 1-201(3).

g. Trade Practices, Community Norms, and Other Regular Routinesi. Nanakuli Paving and Rock Company v. Shell Oil Company, Inc.

1. Issue: Whether the K should be price protected b/c of past dealings2. Holding: reasonable for Nanakuli to rely on price protection b/c price

protection was a custom in the industry; N relied heavily on price protection; past dealings included price protection

3. Rule:4. Ct. looked at the implied terms of the K when the K was formed, which

showed clear intent to price protect5. When implied terms conflict with express terms6. Nanakuli Exception: COP, COD, and TU can form exceptions to Express

Terms without actually conflicting with the ET. a. Note that evidence of COP, COD, and TU is always admissible

even if the express K is “fully integrated.”ii. COD – sequence of previous conduct between the parties which establishes a

common basis of understanding for interpreting their expressions and other conduct (UCC 1-205 (1))

iii. TU – 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 (UCC 1-205 (2))

iv. COP – is the conduct of the parties to the transaction, during this particular transaction

v. Rock Paper Scissors: sets out rules of precedence: 1. express terms control both COD and TU and COD controls usage of

trade (UCC 1-205(4))a. more specific controls the more general

2. 2-208(2): Express terms control over COP; COP controls COD and TUvi. Fisher v. Congregation Bnai Yitzhok

1. No express terms in the K, but impliedh. Best Efforts, Good Faith, and Similar Communal Norms

i. Every K has implied term of good faith in K performanceii. Good Faith = in case of a merchant means honesty in fact and the observance of

reasonable commercial standards of fair dealing in the trade

1. Subjective: Acting honestly and without an improper motive, without an ulterior motive unconnected with the K

2. Objective: what is commercially reasonable and fair dealinga. UCC uses both tests

iii. In both outputs (buyer promises to buy all that seller produces within certain time period) and requirements (buyer promises to buy all that the buyer needs within certain time period) Ks, UCC imposes a duty of good faith to operate business so as to generate some output/requirements

1. 2-306 (1): there is a duty of good faith to operate business in good faith so as to have outputs/requirements to avoid illusory nature

a. On the seller: output ki. Buyer promises to buy all that seller produces within

certain time period b. On the buyer: requirement K

i. Buyer promises to buy all that the buyer needs within certain time period

c. In both, duty of GF is imposed to operate business so as to generate some output/requirements

2. AND: contracting party can’t use a quantity that is unreasonably disproportionate to:

a. An amount estimated in K orb. If K is silent, to any “normal or comp. prior

outputs/requirements.”iv. Duty of good faith to sell imposed by UCC in exclusive dealings, exclusive agency

Ksv. Paul Reid and Mary J. Reid v. Key Bank of Southern Maine, Inc.

1. Holding: GF was breached because bank did not act in good faith when it prematurely cut off credit, didn’t term relationship in the usual manner

2. Rule: vi. Simcala, Inc. v. American Coal Trade, Inc.

1. Issue: Can buyer reduce its requirements in a requirements K disproportionately to the agreed upon estimate when it’s acting in good faith (2-306)?

2. Holding: Even though acting in good faith, buyer cannot reduce quantity disproportionately…following the plain meaning of the UCC

3. Rule:4. Exclusive dealings – exclusive agency

a. UCC implies a duty of GF to sell in these Ks5. Ct. holds buyer to 2-306 even if operating in GF

a. Adopts the plain meaning of UCC

i. Concludes that Simcala has violated the UCC by ordering disproportionately less than the estimate

vii. Peter Dalton v. Educational Testing Service1. Issue: Whether obligation to “consider” should be exercised with good

faith?2. Holding: ETS didn’t consider his info in good faith; they summarily

dismissed it.3. Rule:

viii. United Airlines, Inc. v. Good Taste, Inc., dba Saucy Sisters Catering1. Issue:2. Holding: Good faith was not breached b/c K allows termination at will3. Rule:4. Express terms overrode duty of good faith

i. Interpretive Presumptions and Implied Termsi. Jeffrey Poole et al v. City of Waterbury et al.

B. Interpreting Express Terms a. Express: written or oral term of K that is explicitb. Parol Evidence Rule

1. PER: Purpose is to carry out the apparent intention of the parties and facilitate judicial interpretation by having a single, clean source of proof on the term of the bargain. This a substantive rule of K law, not a rule of evidence. But it operates to preclude admissibility of evidence. Only applies when a K is in writing.

2. Keeps out evidence that may contradict the writing of an agreement if the writing is meant to be complete

3. Integrationa. Full

i. Intent for the writing to be final and completeii. Prior or contemporaneous terms regarding the

transaction are inadmissibleb. Partial

i. Intent was to be final but not complete1. Ex. deeds

ii. Knowledge that terms agreed on were left outiii. Prior or contemporaneous, conflicting terms are

inadmissibleiv. Consistent, additional terms are admissible

1. If term is one that parties would naturally omit from a written K AND

2. If they agree that it’s consistent, then can make conclusion that K is partially integrated and allow into evidence

v. Ct. decides what is consistent and contemporaneousvi. Wigmore aid test: if an oral term is mentioned in the

written K, then evidence of it is excluded1. Presumably the writing contains all that the

parties intended to sayc. If K is not integrated at all:

i. Then all evidence of outside arguments, or terms = admissible

d. *Merger clause is evidence of intent*ii. Parol Evidence Rule and the Exclusion of Evidence

1. Exceptionsa. Ambiguity – most courts require before it will be admittedb. TU, COP, COD are always admissible in UCC Ks to explain or

supplement a termc. Defenses to formation and enforcement are always admissibled. PER can be applied broadly or narrowly depending on the

circumstancese. PER not applicable to subsequent oral or written Ks, including

modificationsf. Separate or collateral agreements are admissible both oral and

writteng. Oral conditions precedent are admissibleh. Evidence about consideration is admissible

2. Betaco, Inc. v. Cessna Aircraft Co.a. Issue: Whether cover letter should be admissible.b. Holding: The cover letter is a consistent, additional term and is

thus admissiblec. Rule:

3. Merk v. Jewel Food Stores4. 4 corners rule:

a. Integration should be decided on the written K alone AKA plain meaning rule

b. If writing appears to be plain and unambiguous on its face, then meaning can be determined from the four corners of the instrument without admitting extrinsic evidence

c. The Interpretation of Terms in an Integrated Writingi. Formal and Contextual Interpretation

1. Objective theory of K interpretation: cts. consider extrinsic evidence to determine the parties’ intent and use a reasonable person standard

2. Formal approach/plain meaning rule: words have specific, objective meaning

a. No extrinsic evidence admissible if meaning of the K term is plain from its face

3. Contextual approach: words have meaning based on the context in which they are used, more subjective

a. Admits extrinsic evidence to show parties’ intent and the meaning of particular terms

ii. The Ambiguity Rule and the “Ambiguity” of Language1. Pacific Gas and Electric Company v. G.W. Thomas Drayage and Rigging

Companya. Issue: Whether K should be read as its plain meaning or should

extrinsic evidence be admitted to prove alternate meaning?b. Holding: Extrinsic evidence should be admittedc. Rule: Even if term isn’t ambiguous on its face, certain situations

and contexts require that extrinsic evidence be admitted to determine.

2. Trident Center v. Connecticut General Life Insurance Companya. Issue: b. Holding:c. Rule: Upholds ROL in Pacific Gas

3. Frigaliment Importing Co. v. BNS International Sales Corp.a. Issue: Does the pollution exclusion clause include or exclude

carbon monoxide poisoning?b. Holding: An ordinary person would not understand the policy to

include carbon monoxide under the K exclusioni. Contextual approach vs. plain meaning approach

c. Rule: Even if a term is unambiguous, insurance K will be interpreted according to the reasonable expectations of an ordinary policy holder.

i. Can result in an interpretation that differs from the plain meaning

d. Policy issue: insured pays premiums and expects to get coverage

e. Somebody new to the trade is bound by TU unless it’s not generally known in the industry

d. The Reasonable Expectation Doctrine and “Blanket Assent” – Interpretation of Standard Form Contracts

i. Reasonable Expectation Doctrine only applies to insurance Ks1. Allows the ct. to review these Ks and determine what a reasonable

policy holder would have thoughtii. Blanket Assent: when there is a form K, with no ability to negotiate terms

(offered on a take it or leave it basis), with boilerplate terms – there is still a K,

but the unreasonable terms are thrown out (those that if you knew they were there, you would not agree)

1. Blanket assent is assumed minus the indecent terms (those that don’t violate the reasonable expectations of the signer/consumer)

2. Boilerplate: includes: ready-made language that will fit in a variety of documents AND fixed or standardized contractual language that relatively non-negotiable

a. Generally used by sellers to save timeb. Detriment to the seller to imbalance bargaining power

iii. Regional Bank of Colorado, NA v. ST. Paul Fire and Marine Insurance Companye. Adhesion K: imprecise term used to describe a document containing non-bargained

clauses that are in fine print, complicated, or exceptionally favorable to the drafteri. Generally on a take it or leave it basis

ii. To avoid enforcement: must prove that it was an adhesion K AND that it violates reasonable expectations, or is unconscionable

f. International Ks, United Nation Sales Convention on the international sale of goodsi. Article 8.1: subjective meaning used first if the other knew that there was an

ambiguityii. Article 8.2: use objective meaning when 8.1 doesn’t apply

iii. Article 8.3: all extrinsic evidence is admissible to determine objective meaningg. UCC Warranties (“W’s”):

i. Express:1. Affirmation2. Promise3. Description4. Sample5. No formal words required

a. Can be oral, in writing or in Kb. 2-313 by affirmation or promise, description, sample

6. No intent to make Express W req’d 7. Opinion not a W8. No reliance required9. Q of fact10. General disclaimer ineffective11. Timing not material12. False statement? Try fraud/misrep

ii. Implied:1. K is silent2. 2-312 Title3. Merchantability UCC 2-314: All K’s for the sale of goods have an

implied W of merchantability and fitness for the ordinary purposes & that goods will conform to the promises made on label,

a. if seller is a merchantb. COD and TU can create implied W’s as well.

4. Fitness for Particular Purpose UCC 2-315:5. There is an implied W that the goods will be fit for a particular purpose

if, a. at the time the goods are sold, b. seller has reason to know any particular purpose for which the

goods are required and c. that the buyer is relying on seller’s skill or judgment to select

suitable goods for that purpose, d. unless excluded or modified

iii. Disclaiming UCC warranties1. An express warranty cannot be disclaimed through a blanket disclaimer

a. disclaiming “all W’s, express or implied.” 2. Disclaiming Implied W’s: can be excluded or modified - UCC 2-316:

a. to disclaim the implied W of merchantability, the disclaimer must mention merchantability and be conspicuous;

b. to disclaim the implied W of fitness for PP, it’s enough to say “there are no W’s which extend beyond the description on the face hereof” as long as it’s in writing and conspicuous.

c. TU, COD, and COP can also exclude implied W’s.d. AS IS: However, terms “as is” or “with all faults” or the like

disclaim all implied W’s.3. Duty to inspect: No W’s if buyer inspected a sample or model or failed

to do so, and the inspection would have revealed the defects to buyer. 4. 3d party rights – see UCC 2-318.

Chapter 8 – Understanding Contractual Obligations: Liability

A. 4 types of K terms:a. Promise

i. A commitment to do or not to do somethingii. If promise is not fulfilled, there is always a breach of K

iii. Independent promises: if one party breaches, the other has to performiv. Legal consequences:

1. Effect of non-occurrence: if a promise is not performed, then the promissory is liable for breach of K and may be required to pay damages or be subject to an order of specific performance

2. Extent of non-conformity: Most promises (although not all) are subject to the doctrine of substantial performance. This doctrine provides that

relatively trivial, unintended deviations from a required performance will not preclude a performer’s right to payment or other return promise

3. Modification or Excuse: In general, a promise can be modified only by mutual agreement, and the modification must satisfy the consideration requirement or some exception to it. The exceptions include UCC § 2-209, which allows enforcement of a good faith modification without consideration in a contract for sale of goods, and Restatement 2d of Contracts §89, which allows enforcement of a modification without consideration made in response to an unanticipated change in the circumstances of the contract.

b. Conditioni. an event, not certain to occur, that must occur, unless excused, before

performance of a contractual obligation becomes dueii. Legal Consequences:

1. Effect of non-occurrence: If a condition is not fulfilled, then the obligation it qualifies does not become due. This does not result in liability for either party

2. Extent of non-conformity: The doctrine of conditions requires that conditions must be strictly fulfilled. If a condition does not occur in precisely the way indicated by the contract term, then the conditioned performance does not become due.

3. Modification or Excuse: Conditions can be unilaterally waived by the party whose performance is conditioned. Waiver does not require mutual agreement nor consideration. In addition, a condition can be excused by the court in order to avoid extreme or unjust loss to a party.

c. Promissory Conditioni. both a promise and a condition of another obligation

ii. Legal consequences:1. Effect of non- occurrence: If a promissory condition is not performed,

then the promissory is liable for breach of contract and may be required to pay damages and the obligation qualified by the promissory condition does not become due.

2. Extent of non-conformity permitted: Generally, a promissory condition, as a condition, must be strictly fulfilled

3. Modification or Excuse: Generally, promissory conditions can be unilaterally waived, modified by mutual agreement, or excused by the court

d. Insignificant termi. a mere suggestion, request, or notation that has no legal significance

ii. Legal Consequences:

1. Effect of non-occurrence: If an insignificant term is not fulfilled, there is no effect on the parties’ rights and obligations. Therefore, there is no significance to deviation from an insignificant term or to modification of an insignificant term

e. HOW TO DETERMINE WHAT A TERM IS? Courts look at: (1) parties’ intentions (backwards looking); (2) effect of characterization (forward looking); (3) trade practices in the industry; (4) preference for promise due to flexibility of substantial performance doctrine; (5) words & behavior; and (6) overall purpose or function of K. Words such as shall, promise, commit, agree suggest promise; words such as provided that, subject to, and in the event that suggest condition.

f. Condition Precedent : an event that must occur before the obligation becomes duei. (example: Annette promises to produce a training film for Beto’s Fabric

Company, if Beto pays her 4,000 on or before July 1. ….Beto’s paying 4,000 on or before July 1 is a condition precedent of Annette’s obligation to produce the film. If Beto fails to pay 4,000 on or before July 1, Annette is not obligated to produce the film, unless the condition is excused.)

g. Condition Subsequent : an event that terminates an obligation that is presently duei. (example: notice requirement in an insurance policy)

h. The Restatement 2d rejects this distinction, observing that almost all conditions function as conditions precedent and the distinction causes unnecessary confusion

i. Conditions Concurrent: conditions concurrent are those that are capable of occurring together, and that the parties are bound to perform at the same time (ex. tender of deed for cash)

j. Express or Implied Conditions: Like promises, conditions can be Express or Impliedk. True vs. Constructivel. Conditions of Satisfaction: Sometimes contracts specify that one person’s performance

should be of sufficient quality to “satisfy” the other party. Such terms are called “conditions of satisfaction.” These are interpreted either as:

i. An “objective” satisfaction, using a “reasonableness” standard, meaning the condition is met if a reasonable person would be satisfied (Rest. 228); or

ii. A “subjective” standard, based on the actual satisfaction of one party to the K.B. Conditions

a. Implied and Express conditions fall under True Conditionsb. Troy Jarvis v. Gary Ensminger, James Johnson, Motors, Inc., and Fairbanks Nissan, Inc.

i. Issue: Whether there was a breach of K when employer did not fulfill promise to offer stock options to P.

ii. Holding: K condition was illusory, therefore no Kiii. Rule: When the plain meaning includes conditions in K and conditions aren’t

met, cannot enforce the K (strict fulfillment)iv. When there is no K, must argue promissory estoppel

1. Not reasonable for P to rely on condition b/c he knew that the shares weren’t owned

c. James J. Thompson v. Doreen A. McCann et al.i. Issue:

ii. Holding: Seller must perform since the conditions in the K benefited the buyer and the buyer waived those conditions

iii. Rule: If the condition is only for the benefit of one party and it is waived, the condition is gone.

C. Constructive Conditions, Substantial Performance, and the Rule of Perfect Tender a. Constructive Conditions are not implied conditions:

i. They are a fictionii. They should always be read with dependent promises

iii. If a party is not ready, willing, and able, K is in breachb. Substantial Performance Doctrine allows promissor to get paid even if they don’t fulfill

the entire promise:i. Material breach = breach = other party’s performance is excused and damages

are due from breaching partyii. Minor breach = substantial performance = other party’s performance is not

excused but they have a remedy = cost of completion from breaching party (unless circumstances warrant diminution in value – Jacob & Youngs v. Kent)

iii. Test: 1. Purpose to be served – to install pipe of a certain quality = met!2. The desire to be gratified – to have pipe of a certain quality – met!3. Excuse for deviation from ltr of K – unintentional & trivial, not wilful or

intentional4. Cruelty of enforced adherence – expense of replacing all the pipes =

HUGE/DISPROP to the value of doing soc. Rule of Perfect Tender

i. UCC’s version of substantial performanceii. 2-601, 2-703

iii. Buyer can reject goods for any reason, even minor breach before acceptanceiv. Seller has right to cure defects before due date and within reasonable time after

1. If seller does not cure, buyer can rescind/cancel Kv. After acceptance, buyer can only reject goods (and revoke acceptance) for a

material breach (substantial impairment)d. Divisible Ks

i. Court can split a single K into two or more separate Ks and treat them as independent Ks

ii. Breacher can get “paid” for the Ks he or she has performed, even if he or she breached the other Ks

iii. Use if1. The performance of each party is divided into two or more parts under

the K2. The number of parts due from each party is the same

3. The performance of each part by one party is the agreed on quid pro quo of the other AND

4. The K does not state that it is expressly indivisible5. Court won’t use this doctrine if distinct terms aren’t spelled out for

distinct parts of the Ke. Jacob & Youngs, Inc. v. George Edward Kent

i. Issue: ii. Holding:

iii. Rule: iv. Cost to remove pipes installed and replace with pipes specified in K would be

disproportionate to the value of doing sov. Excuse for deviation was unintentional and trivial, not willful or intentional

f. Ernest Ramirez and Adele Ramirez v. Autosporti. Issue:

ii. Holding:iii. Rule: Rule of Perfect Tender

D. Anticipatory Breach and Related Doctrines a. P can sue for Implied or Express Anticipatory breach ORb. Wait until the time set for performance in the K and sue for real breachc. Definition: AB = an unequivocal, express or implied repudiation of a contract before the

time set for full performance.d. “I will not perform our K!”e. Result: AB may be treated as an immediate breach of contract, the non-breaching party

is excused from performance and has a choice to: (1) sue now for AB, (2) treat K as revoked, or (3) wait until time for performance and sue for real breach:

f. Wait options: (a) suspend performance and see if performance happens on the due date and if not, sue for real breach, or (b) perform and sue for real breach on the due date.

g. Implied repudiation occurs when a party puts it out of his power to perform the K. h. Retraction/reaffirmation: An express or implied repudiation can be retracted by a

reaffirmation of the K. Then, the K goes forward and there is no AB.i. H.B. Taylor v. Elizabeth and Ellwood Johnston

i. Holding: P did not have any legal rights at the time he mitigated damages because the time on the K had not expired

1. Since time hadn’t run out, K had not been breachedii. P argued that there was an anticipatory breach

j. AMF, Incorporated v. McDonald’s Corporationk. Changed Circumstances:

i. This rule is triggered when: 1. an unanticipated or extraordinary event occurs, 2. that makes the contractual duties impossible or impracticable, or

frustrates the K purpose,

3. the nonoccurrence of the event is a basic assumption of the parties in making the K (the less foreseeable, the more likely ct is to excuse performance, but foreseeability is not the test – Specialty Tires case),

4. neither party has assumed the risk , either explicitly (by K language) or implicitly (by circumstances or TU), of the event occurring,

5. neither party is at fault in causing or bringing about the event (or failing to guard or insure against event, in certain situations) (this is related to (4)),

6. impossibility is determined by an objective standard, whether anyone could perform the duties, not whether the particular contracting party/promisor can do it, and

7. the impossibility, etc. must arise after the K is entered into. If it exists at the time of K formation, it is better analyzed under the doctrine of “mistake.”

Chapter 9 – Changes after Formation: Frustration, Impracticability, and Agreed Modifications

a. Impossibility of Performance/Frustration of Purpose:i. Main Rule: If performance of one’s contractual duties under a contract becomes

impossible or impracticable, or if the entire purpose of the contract is frustrated although performance is still technically feasible, then one’s duties under the contract may be “discharged” -- meaning both parties’ duties are excused under the K and either may sue for rescission of the K and restitution/UE (see Cazares case) for any part performance or benefits rendered to date (see Rest. Sections 261-269).

ii. Impossibility – K can’t be performediii. Impracticability – it’s too costly to perform the Kiv. Frustration of purpose – K can be performed but performance is meaningless,

nowb. Frustration of Purpose

i. Special Rules:ii. Frustration excusing K performance exists if the purpose of the K has become

valueless due to a supervening event not the fault of the party seeking discharge. Performance is still possible, but it is meaningless, due to the supervening event. Example: Scotty’s birthday cake fictional excerpt in the casebook. Elements:

(1) supervening act or event arising after the K is made(2) not reasonably foreseen by the parties at the time they made the K

(3) the purpose of the K is completely or almost completely destroyed as a result

(4) the purpose of the K was realized by BOTH parties at the time K was made

UCC 2-615 applies in these situations, too, in K’s for sale of goods.Supervening governmental order making performance impracticable

qualifies.iii. Brenner v. Little Red School House, Ltd.

c. Impossibility (or Impracticability) of Performancei. Impossibility Examples and Specific Rules:

1. death or physical incapacity of a person necessary to effectuate the K qualifies (see Cazares case, for example).2. supervening illegality: discharges duties under a contract, if the performance

becomes illegal after the contract was entered into.3. destruction of the contract’s subject matter or means of performance, if it is

not the fault of the promisor (e.g., house burns down), includes failure to come into existence or deterioration:

ii. Specialty Tires of America, Inc. v. The CIT Group1. it was impracticable for D/seller to perform, so K was unenforceable. 2. Event was a 3d P’s refusal to deliver goods owned by seller, to seller, so

that seller could fulfill their obligations under a K for purchase and sale of those goods

iii. Portland Section of the Council of Jewish Women v. Sisters of Charity of Providence in Oregon

1. K to provide hospital bed2. Hospital should have anticipated rise in costs, so K was not excused

iv. Roy Cazares and Thomas Tosdal v. Phil Saenz1. K was excused2. Frustration of Purpose: as lawyer was appointed judge

B. Agreed Modifications and the Pre-Existing Duty Rule a. Pre-Existing Duty Rule/Modifications

i. C/L – all mod’s require Cii. Modern trend – to require less C for mod’s to be valid, uphold if mod is fair &

equitable and there are changed circumstancesiii. UCC does NOT require C for mod to be valid

b. Alaska Packers’ Ass’n v. Domenico et al.c. Lester L. Quigley, Jr. and Veronna Kay Lovell

i. ROL for waiver (different from modification)d. Farm Equipment

i. Issue: whether allied modified K by COP to allow the return of partsii. Holding: Allied did NOT modify K by COP

1. COP was that Allied had accepted return of parts in past

2. 2 clauses in K served different purposes; therefore3. COP concerning one clause did not affect the other

iii. No oral modification clause1. Modifications must be in writing

a. COP will not countiv. Non waiver clause

1. Party’s actions don’t waive the K

Chapter 10 – RemediesA. Holmes Bad Man Theory:

a. You can breach your contracts as long as you’re willing to pay the price, and it’s morally neutral.

b. Ex: lease for 12 months, breach at 9.B. Benefit of the Bargain: Specific Performance

a. Specific Performance (rare?)i. Makes the D do what they contracted to do, under the K.

ii. Available when: there is no adequate remedy at law ($ damages), e.g., landiii. Will only be ordered if:

1. The acts required of the defendant were clear (the K terms are sufficiently certain);

2. Performance will not be unfairly difficult for the defendant; 3. Performance will not have any negative impact on the public; 4. Money damages would not adequately compensate the P's loss

[consider several factors like (a) difficulty of proving damages with reasonable certainty, (b) difficulty of obtaining suitable substitute performance with a monetary award, & (c) likelihood that a monetary damage award is uncollectible; and

5. The subject matter of the contract is unique and has no established market value.

6. Defenses: (1) unclean hands; (2) laches; (3) sale to 3dPBFP b. Monetary Damages

i. No damages if breach of K leaves wronged party better off1. Damages only make the wronged party whole

ii. Formula for calculating themiii. Pain & suffering (rare)iv. Punitive Damages (rare)v. Limitations: Causation, Certainty, Foreseeability, Mitigation

vi. Liquidated Damages Clause in K?vii. Limited Liability Clause in K

c. Expectancy (C/L) Damages:i. The loss in value to P of the D’s contractual performance:

1. Formulae:2. Cost of completion = $90,000

a. Alt: Diminution in value between work as promised and work as delivered = $3,000

3. Plus incidental or consequential damages,a. Includes pain & suffering, in approp. cases

4. Minus any costs or other losses avoided by not having to performd. Reliance Damages:

i. Out of pocket losses and expenses resulting from D’s breach (recall Hoffman case)

ii. Restitutionary Damagesiii. FMV of the benefit rendered by P (recall Dews v. Halliburton)

e. Measure of Damages for Specific Situations:i. K for sale of land:

1. Standard measure is difference between K price and fair market value of land

2. Alternatively, specific performance may be a better and attainable measure of damages, though

ii. Employment Ks1. Breach by employer:

a. Standard measure is full K price (irrespective of when breach occurs).

b. Employee has duty to use reasonable care in finding similar new job (i.e., mitigate damages). Burden is on employer to show jobs were available.

2. Breach by employee:a. Intentional: standard measure is cost to replace employee.

i. Difference between cost to get a new employee to do the work and the cost of the old employee to do the work.

ii. Modern view: employee may offset this against any money due to employee for work done (under UE concept).

b. Unintentional: standard measure is same as intentional (see above).

i. Employee may have right to quasi-K recovery for work done to date (under UE).

3. Construction Ks:a. Breach by owner:

i. Before construction started:1. Builder is entitled to profits he would have

derived from K.

ii. During construction:1. Builder is entitled to profit he would have

derived from K, plus costs he has incurred to date.

2. Note: K price minus cost of performance gives same result.

iii. After construction completed:1. Builder entitled to full K price, plus interest on

it.iv. Mitigation: builder has no duty to avoid owner’s

breach, but does have duty to not continue work after breach. Completion is allowed if it decreases damages.

b. Breach by builder:i. Before construction started:

1. Measure of damages is cost of completion = what it will cost above the K price to get work completed, plus reasonable compensation for delay.

ii. During construction (after partial performance):1. Owner entitled to cost of completion plus

reasonable compensation for any delay 2. If completion would involve undue economic

waste, measure is the diminution in value: difference between value of what would have been received if K fully performed and what was actually received (ex: Jacob & Youngs v. Kent; American Standard).

iii. Late performance (completes, but is late):1. Owner has right to damages for any loss

incurred b/c of the delay, like rental income.2. But if damages are not easily determined,

owner can recover only interest on the value of the building (as a capital investment).

iv. K calling for installment payments, where payment is not made:

1. Aggrieved party can recover only missed payment.

2. Unless K contains an “acceleration clause,” that makes the entire amount due upon one missed payment, which then allows aggrieved party to recover full K price.

f. Sokoloff

g. Beverly Glen Music, Inc. v. Warner Communications, Inc. and Anita Bakeri. did not allow SP in employment (viol 13th Am)

ii. Apply Lumley Rule: usually can enjoin the D from working elsewhere, but in California, P could not enjoin D or its competitor (Warner) from employing D, had to ask for $ damages

C. Monetary Damages for Breach of Contract a. Expectation, Reliance, and Restitution Interests

i. Alice Sullivan v. James H. O’Connorb. Persistent Issues in the Measurement of Expectation Damages

i. The Risk of Windfall: The Choice between Cost of Completion and Diminution in Value

1. American Standard, Inc. and Westinghouse Air Brake Co. v. Harold Schectman and United States Fire Insurance Company

a. D argues dimunition in value was nominalb. D failed to demolish to one foot below grade c. Usual measure of damages in a construction contract breach

case is ?d. Court awarded cost of completion here ($90K plus int and

costs), versus diminution in value ($3K).e. Substantial performance factors not met

ii. Pecuniary vs. Non-Pecuniary Loss1. Pain & Suffering/Mental Anguish

a. Damages for mental anguish are available in K’s where - i. (1) mental anguish is foreseeable from the breach of

the K and ii. (2) where the contractual duty is so coupled with

matters of mental concern or solicitude, or with the feelings of the party to whom the duty is owed, that a breach of the duty will necessarily or reasonably result in mental anguish or suffering

2. Carla Deitsch et al. v. The Music Companya. Band no-showed for wedding reception, which was a breach of

K. b. Issue = damages

i. P argued for entire cost of reception1. Ct. thought this would be too much b/c the

reception was not a complete lossii. D argued for deposit only

1. Out of pocketc. Ct awards somewhere in between

i. calculated on basis of stress, inconvenience, and loss in value of the reception plus out of pocket loss of deposit

d. Get p&s damages in this case b/c of the inconvenience and immediate loss caused by the breach (of the type of K entered into).

i. Usually awarded when there are emotional connections to the breach of the K

3. Liberty Homes, Inc. v. Darniece B. Epperson and Fred R. Eppersona. Issue: whether buyer was entitled to P&S damages?b. Rule: Damages for mental anguish can be awarded where the K

is coupled with matters of mental concern or solicitude, or feelings

iii. The UCC Remedies Provisions: Market, Cover, Resale, and Other Measures of Damages

1. UCC Remedies – Buyera. BUYER’s Alternatives:

i. Cover – make substitute purchases and recover the difference between cost of cover and K price,

ii. Hypothetical cover – recover difference between K price and market price at time Buyer learned of the breach,

iii. Specific performance if goods = unique or cover is not otherwise possible,

iv. Keep goods & sue for breach of W, get difference btw goods as warranted and goods as delivered,

v. Plus: incidental and consequential damages – less expenses saved

2. UCC Remedies – Sellera. SELLER’S Alternatives:

i. resell goods and get difference between K price and sales price,

ii. get difference between K price and market price at time and place of tender,

iii. if above is inadequate, then can get lost profit on the sale,

iv. Plus incidental damages, less expenses saved as a result of Buyer’s breach

1. Incidental: small damages that are from the ripple effect

v. “LOST VOLUME SELLER” EXCEPTIONc. Three Limitations on Damages: Certainty, Foreseeability, and Mitigation

i. Apply to CL AND UCC Casesii. Causation and Reasonable Certainty

1. Causation – are they too remote?

2. Certainty – are the damages too speculative? Not proved?3. Geraldine Lipshie v. George M. Taylor and Son, Inc.

a. Seller entered into K to sell property to Buyer by 3/31/97; then entered into K with D to do work on property to remove oil tank. D failed to do work properly = BREACH. Buyer and Seller did not go through with sale. Seller sold property for $132K less.

b. Ct says D’s breach did not cause Seller’s damages of $132K. 4. Halliburton Co. v. Eastern Cement Corporation

a. K for pneumatic cement pumping system – UCC case, seller breaches by not delivering properly working product, this is breach of implied W of M and FPP. Damages: P wants $24M; ct says this is too remote; P wasn’t in the containerized cargo business already.

b. Lost profits!c. “Nail that lost the kingdom”

iii. Foreseeability1. Consequential damages

a. The money you would have madeb. Overall loss

2. Hadley v. Baxendalea. Damages are those resulting from breach + those reasonably

contemplated at the time of K formationb. D says the damages awarded to the P are too remote, so that

the P does not receive the damages. Ct agrees and reverses for new trial. P asks for lost profits while the mill is shut down.

c. ROL: Damages have to be foreseeable by breaching party at time of K formation to be awarded.

d. Modern trend: knew or should have known (Foreseeability)iv. Mitigation

1. Shirley MacLaine Parker v. Twentieth Century-Fox Film Corp. a. SM is entitled to reject the second movie b/c it was not equal to

the first movie, the roles weren’t the same, location, genre, reputation.

b. She has a duty to mitigate; she fulfilled her duty to mitigate; she was not required to take the alternative employment because it was not equivalent in quality to what she lost under the breached contract.

d. Contract Terms Regarding Remediesi. Liquidated Damages Clause

1. Sets a price on damages recovered in a breacha. Use UCC 2-718 for test to determine validity

2. Michael E. Kvassay, d/b/a Kvassay Exotic Foods v. Albert Murray, et al.

a. ROL: use the UCCb. Trial ct. compared last years’ income to damages in the case

ii. Limitation of Liability Clauses1. Sets an upper limit on damages if breached

a. Are valid as long as they limit damages for just ordinary negligence (Elsken)

b. The clause might be invalid if it extended to gross negligence c. Against public policy if it entirely disclaims liability for fraud or

willful injury2. When trying to categorize such a clause, need to know:

a. Is the amount reasonable when compared to actual damages?b. What evidence is available to prove actual damages?c. Parties’ intentions?

3. Jimmie Elsken, Administrator of the Estate of Patricia Ann Elsken v. Network Multi-family Security Corporation

Chapter 11 – Third Party InterestsA. Third Party Beneficiaries

a. Types:i. Intended Beneficiaries

1. Can be “Donee” or “Creditor” Type2. C can sue promisor (B) to enforce K3. But is subject to all defenses that are good against the promisee (A)

ii. Incidental Beneficiaries1. C cannot sue promisor (B) to enforce K; no rights, no “privity”

iii. Test for distinguishing an “intended” 3d P beneficiary from an “incidental” 3d P beneficiary

1. Can be explicitly intended in K or implicitly intended (if arguing for implicit, look to intention of parties, purpose of K, and if it’s a promise to pay $, no other alternative recourse - Scarpitti)

b. Interlocking Rights:i. Creditor 3d P Beneficiary:

ii. -- creditor beneficiary (C) can sue both promisor (B) and promisee (A); iii. -- if promisee (A) ends up paying the beneficiary, then promisee can sue

promisor (B);iv. -- promisee (A) can ask for specific performance vs. promisor (B) if

promisor hasn’t paid beneficiaryv. Donee 3d P Bene’s:

vi. --donee bene can sue the promisor (B);vii. --donee bene cannot sue the promisee (A), unless sued in reliance/P.E.,

and

viii. --promisee (A) can still sue the promisor (B).

c. L.A.C. v. Ward Parkway Shopping Centerd. William Scarpitti v. William Weborge. Henry Horner Mothers Guild v. The Chicago Housing Authorityf. Alvin Stangland and Bruce Kintschi v. Norman D. Brock

B. Assignment of Rights and Delegation of Duties (and “Assignment of a Contract”) a. Assignment of Rights

i. Validity: Rights are usually Assignable1. Unless: (1) the express terms of the K prohibits assignment; or (2)

the assignment would vary materially the duty of the obligor, increase materially the burden of the risk imposed by the K, or impair materially the obligor’s chance of obtaining return performance (Evening News v. Peterson, citing Rest. Sect. 152)

2. UCC encourages assignment of rights.3. Some state and federal laws limit assignment of wages by

employees and rights to government payments.ii. Validity: Assignment of Rights that are unenforceable

1. to receive unique personal services based on a relationship of confidence

2. that materially change the duty of the obligor3. that materially increase the burden or risk imposed on the obligor

by the K4. that materially impair the obligor’s chance of obtaining return

performance5. that materially reduce the value of the K to the obligor6. that are forbidden by statute or public policy7. that are validly precluded by K8. And: requirements & outputs K not assignable under common law

(but are probably assignable under UCC)iii. Consequences: Interlocking rights upon assignment

1. Assignee (C) can sue obligor (B) for performance of the K 2. Assignee (C) is subject to any defenses obligor (B) can raise against

assignor (A) arising before assignment, unless obligor (B) waived right to assert defenses against subsequent assignees in the A-B contract (Equico)

3. Note: such waivers prohibited in consumer transactions by FTC and state consumer protection statutes

4. Note: closely connected doctrine is an exception (Equico) iv. Validity: Non delegable duties

1. A delegation is not valid if it will change the quality or character of the performance:

a. duties involving personal judgment and skills of A, even if C is just as good as or better than A;

b. unique and personal (e.g., services) of A, where performance by another person would not be the same or comparable;

c. duties where a special trust has been reposed in A by B;d. duties where performance by C would materially change

B’s expectancy under the K,i. (ex: requirements and outputs K’s, exclusive

distributorships – Sally Beauty)e. increase materially the risk or burden imposed on B by the

K, or impair materially B’s chance of obtaining return performance (UCC 2-210(2)); and

2. when the express terms of the A/B K prohibit delegations of dutiesv. Consequences: Interlocking rights upon delegation

1. Obligee (B) can sue delegee (C) or obligor/delegor (A) for performance of the A-B K

2. Obligor/delegor (A) can sue delegee (C) on the A-C K3. Obligee (B) is a 3d P intended beneficiary of the A-C K4. Obligee (B) must accept C’s performance if the duty is delegable

vi. Consequences: Novation Rights1. B can sue C if she fails to perform as a 3d P intended beneficiary of

the A/C K2. A can sue C on the A/C K if she fails to perform3. B can sue A on the A/B K unless there has been a complete

novation, meaning B agreed to release A from liability4. Note: C is NOT a 3d P beneficiary of the A/B K!

vii. Evening News Association v. Petersonviii. Equico Lessors, Inc. v. A. Moneim Ramadan

b. Delegation of Duties, Including “Assignment of a Contract”i. Sally Beauty Company, Inc. v. Nexxus Products Company, Inc.

ii. Hunter Tract Improvement Company v. S.H. Stone et aliii. Geyen v. Time Oil Co.