Contracts II
I.
Defective Formulation
a.
Misunderstanding
i.
Definition: a belief by one party as to the understanding of the other party,
when both parties are in accord with some set of facts
ii.
Restatement § 20
1.
There
is no manifestation of mutual assent to an exchange if the parties attach
materially different meanings to their manifestations and
a.
Neither
party knows or has reason to know the meaning attached by the other; or
b.
Each
party knows or each party has reason to know the meaning attached by the other
2.
The
manifestations of the parties are operative in accordance with the meaning
attached to them by one of the parties if
a.
That
party does not know of any different meaning attached by the other, and the
other knows the meaning attached by the first party; or
b.
That
party has no reason to know of any different meaning attached by the other, and
the other has reason to know the meaning attached by the first party
iii.
Material Difference
1.
Peerless: the name of the ship was material enough here to allow the def to
avoid the contract bc it controlled the timing of deliver, and therefore, the
price
a.
If
two ships arrived only 15 minutes apart, not a material difference
b.
If
only one ship named Peerless, but it arrived 2 months later than normal,
contract would be valid unless dates were specified in the contract
2.
Subjectivity:
Peerless looks into the state of mind of each of the parties, when
intent to contract is actually an objective test
iv.
Level of Knowledge
1.
Equal:
where both parties have different things in mind AND they have the same level
of knowledge, no contract
2.
Reasonable: When one party’s understanding is less reasonable than the other’s,
doctrine does not apply – binding contract
3.
Clueless Rule: whoever has the least amount of knowledge gets his way if the other
knows or has more reason to know
v.
Alternatives
1.
Risk
of unreimbursed reliance has led some courts to prefer avoiding the Peerless
result if there is any reasonable means to giving effect to the contract at
issue
2.
Factors
to consider reasonableness
a.
Prior
course in dealing
b.
Conversations
c.
Customs
d.
Information
available to the other party
3.
Last Resort: if interpretation is inconclusive, courts prefer the understanding
which operates against the party who wrote the contract
vi.
Application
1.
If
A and B mean the same thing: valid contract
2.
If
A and B mean different things and are clueless as to each other’s meaning: no
contract
3.
If
A and B each know the other means something different: no contract
4.
If
A means something different from B and B knows or has reason to know: valid
contract in favor of A’s meaning
b.
Mistake
i.
Definition: A belief not in accord with the facts as they existed at the time the
contract was made
ii.
Rule:
court will read in accordance with the mistake
iii.
Hypo:
if said will sell cotton from ship called Fearless and new it should be Peerless,
contract is binding – this is not a misunderstanding but a mistake of
expression
c.
Misrepresentation
i.
Definition: an assertion that is not in accordance with the fact
ii.
Arthur Murray: told pl that she could dance so she would buy more lessons even though
def knew she had no ability
II.
Avoidance of Contract
a.
Infancy
i.
Rule:
contract with a minor is voidable (unless for necessary)
1.
Minor
must disaffirm the contract and return the item as is
2.
This
protects minors from their own bad decisions
ii.
Restatement § 14: unless a statute provides otherwise, a natural person has the
capacity to incur only voidable contracts until the beginning of the day before
the person’s 18th birthday
iii.
Effect
of rule:
1.
Contract
is voidable (NOT void)
2.
Minor,
parent, or guardian may disaffirm contract
3.
Disaffirmance
may be made before or after age 18
a.
Must
be within a reasonable time
b.
So
if turn 18 one week later, can disaffirm; but if turn 18 6 months later, may
not be allowed
4.
After
age 18 is reached, surrender the power of avoidance – contract is ratified
a.
This
is in accordance with any manifestation to be bound
b.
Silence
does not mean ratification
c.
Silence
rarely precludes avoidance unless demonstrated reliance by the other party
5.
Emancipation,
marriage, or participation in business does not relieve infant of incapacity
iv.
Return
of product
1.
Traditional rule
a.
No
obligation to account for use or depreciation
b.
Minor
does NOT have to restore other party to status quo
2.
Modern Rule
a.
Infacy
may be raised as a defense
b.
Infant
suing for rescission and recovery is allowed for value less the values of use
and depreciation
v.
Exceptions
1.
Necessaries: something the minor actually needs – things indispensable such as
food, clothing, shelter, or things proper and useful
a.
If
the item bought was a necessary, a minor can be held responsible for the
contract and he must pay a reasonable price for the item
b.
Things
considered necessaries
i.
It
is a question of law
ii.
Depends
on what is suitable in view of the infant’s social position and situation in
life, the customs of his social circle, and fortune possessed
iii.
Useful
article, although luxurious in character, may be included
c.
Policy:
encourage people to contract with minors for the things they need
2.
Removal of Disability
a.
Minors
can go to court and have the disability removed on a contract-by-contract basis
or for all future contracts
b.
Minor
petitions the court for the ability to contract in his own name for himself
(cannot be done by others)
3.
Others:
insurance, banking, education loans, military, etc.
vi.
Misrepresentation of Age
1.
Massachusetts Rule: (harshest for the seller) Minors are not liable in tort for deceit
arising from false representations as to age
2.
Middle Rule: Infant can still disaffirm, but may be liable for damages in tort for
misrepresentation or deceit
3.
Estoppel Rule: (harshest for minor) when a minor has reached a sufficient stage of
maturity and enters into a contract falsely representing himself, he is
estopped from denying that he is of age and cannot rescind or disaffirm the
contract
vii.
Emancipated
Minor
1.
Rule:
whether the minor is emancipated or unemancipated does not make a difference –
general rule still applies
b.
Mental Incompetence
i.
Restatement § 15
1.
A
person incurs only voidable contractual duties by entering into a transaction
if by reason of mental illness or defect
a.
He
is unable to understand in a reasonable manner the nature and consequences of
the transaction, or
b.
He
is unable to act in a reasonable manner in relation to the transaction and the
other party has reason to know of his condition
2.
Where
the contract is made on fair terms and the other party is wo knowledge of the
mental illness, the power of avoidance under (1) terminates to the extent that
the contract has been performed in whole/part or the circumstances have been so
changed that avoidance would be unjust – Court may grant relief as justice
requires
3.
NOTES:
a.
(1)(a)
is a cognitive test – was there a lucid interval sufficient for understanding
b.
(1)(b)
is a volitional test – even if party understands, are they able to act in a
reasonable manner
c.
(2)
takes into account considerations of fairness
ii.
Unlike
infancy, knowledge matters with incompetency
1.
Easier
to ascertain than age
2.
Society
finds it difficult to understand mental illness, so we give more deference to
seller
iii.
Burden of Proof
1.
The
court presumes all people are competent
2.
Presumption
of competence must be overcome by clear and convincing evidence
3.
If
incompetence of a general permanent nature has been shown to exist for a period
of time prior to the execution of a contract, it is presumed to continue
a.
Person
relying on contract must rebut this presumption by showing the existence of a
lucid interval
4.
Evidence
a.
Circumstances
surrounding the transaction
b.
Adequacy
of consideration
c.
Individual’s
physical condition
d.
Acts
wi a reasonable time before and after contract
e.
Relation
of trust/confidence bt the parties
iv.
Intoxication
1.
Restatement § 16: A person incurs only voidable duties if one party has reason to know
the other party has no ability to understand the nature and consequences of his
actions
2.
Impairment
must be proven to be extreme (incapable of exercising judgment)
3.
Requires
knowledge
a.
Hard
to void a contract for intoxication than mental illness
b.
Requirement
places more culpability on the alcoholic (no sympathy)
c.
Incompetency
is assumed voluntary
4.
May
ratify contract upon sobering
v.
Restitution
1.
Most
courts require mental incompetents who avoid contracts to restore the other
party to the status quo ante
2.
Cannot
tender broken, used, or depreciated things
3.
Restitution
not required when the other party acted unfairly or with knowledge of
incompetence
vi.
Guardians
1.
If
a guardian has been appointed, any contracts with the ward are void
2.
Once
a guardian is appointed, the ward has no contractual abilities
3.
This
is true even if seller is unaware of the guardianship – however, there may be a
quasi-contractual obligation of the ward for unjust enrichment or necessaries
III.
Defects in the Bargaining Process
a.
Mistake
i.
Mutual Mistake (easier to void than unilateral mistake)
1.
Restatement § 152
a.
Where
the mistake of both parties at the time a contract was made as to a basic
assumption on which the contract was made has a material effect on
the agreed exchange of performances, the contract is voidable by the
adversely affected party unless he bears the risk of the mistake under the rule
stated in § 154
b.
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
2.
Basic Assumption: fact must be central to the transaction
a.
But
for the fact, the transaction would be of no interest to the party
b.
Applied
to existing facts
3.
Material Effect: A change in the essence of the contract as opposed to a change
in value
a.
Change
in essence goes to the direct elements of the contract and is enough for
rescission
b.
Change
in value is a collateral element of the contract and may not be enough for
rescission
4.
Party Bearing the Risk: Whoever gets the worst end of the deal gets to
rescind
a.
Restatement § 154: A party bears the risk of mistake when:
i.
The
risk is allocated to him by agreement of the parties
ii.
He
is aware at the time of the contract that he has only limited knowledge wrt the
facts to which the mistake relates but he treats his limited knowledge as
sufficient (like buying a shirt wo trying on bc it looks like it will fit)
iii.
The
risk is allocated to him by the court on the ground that it is reasonable under
the circumstances to do so
5.
Every
mistake is not rescindable: court looks for something so important to the
contract it would be unfair to enforce it
6.
Mistake v. Misunderstanding
a.
Misunderstanding
is in accord with the facts
b.
Mistake
is an incorrect belief
c.
Example:
Register for Watson’s class
i.
If
two Watson then can be a misunderstanding if each believes a different Watson
is being referred to
ii.
If
no Watson, meant Weaton then a mistake (not in accordance with the facts)
ii.
Lateral Mistake
1.
Restatement § 153:
a.
Where
the mistake of one party at the time of a contract was made as to a basic
assumption on which he made the contract has a material effect on
the agreed exchange of performances that is adverse to him, the contract
is voidable by him unless he bears the risk of the mistake under the
rule stated in § 154, and
i.
The
effect of the mistake is such that enforcement of the contract would be unconscionable,
or
ii.
The
other party had reason to know of the mistake or his fault caused the mistake
2.
Basic Assumption: Mistake to vital, existing facts
a.
Mistake
is usually clerical, computational rather than a mistake in judgment
3.
Palpable Unilateral Mistake: known mistake under (ii)
a.
Too
good to be true type knowledge – when one party is aware or should be aware of
the mistake of the other party
b.
Courts
do not allow offerees to take advantage of offers too good to be true
c.
When
mistake is palpable, argue (i) and (ii)
4.
Analysis
a.
Under
Restatement
i.
Basic
assumption of the agreement – if not then valid
ii.
Is
it material – if not then valid
iii.
Does
the mistaken party bear the risk – if so then valid
1.
Does
agreement allocate risk to him
2.
is
mistake party aware of limited knowledge but treating it as sufficient
3.
Would
the court reasonably allocate the risk to the mistaken party
iv.
Would
enforcement be unconscionable – if so then voidable
v.
Does
the other party have reason to know of the mistake, or did his fault cause the
mistake
b.
Under
Boise
i.
Is
it material
ii.
Would
enforcement be unconscionable
1.
Usually
hardship is a substantial pecuniary loss
2.
Not
clear whether hardship for the deal or for the particular party
iii.
Did
mistake result from culpable negligence
1.
Was
offer made in good faith
2.
Standard
allowable mistake is a clerical mistake
3.
Is
the error one that would be made by a reasonable/cautious person
iv.
Would
party be prejudices w the exception of their loss of bargain
v.
Was
prompt notice of the mistake given
iii.
Negligence of mistaken party
1.
Restatement § 157
a.
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 UNLESS his fault
amounts to a failure to act in good faith and in accordance with reasonable
standards of fair dealing
iv.
Mistake in Transmission
1.
Rule:
Party who selects the mode of transmission bears the risk/loss
2.
Exceptions: Receiver must be innocent and not suspect error
a.
If
any of the following would indicate probable error, receiver must perform a
good faith investigation before acting
i.
Message
ii.
Attendant
circumstances
iii.
Prior
dealings
v.
Remedies
1.
Rescission
(voidable)
a.
Most
common remedy for mistake of formulation
b.
Court
will most likely allow either party a claim for restitution to restore the
party to status quo ante after contract is invalidated
c.
Court
may grant relief as justice requires in protecting reliance interest
d.
If
non-mistaken party cannot be put back to status quo ante, court may not grant
rescission
i.
It
is more difficult for pl to rescind if def changed position significantly
ii.
Court
does not have to grant if it feels the element of fairness has not been met
2.
Reformation
a.
Most
common remedy for mistake of expression
b.
Court
restores efficacy of writing that does not match oral/previous agreement
c.
Pl
must show by clear and convincing evidence
i.
Parties
had reached agreement over term at issue
ii.
Both
intended the term to be included in the subsequent writing
iii.
Bc
of mutual mistake in expression the term was not included
3.
Traditionally
a.
Rescission
was the only remedy for mistake in formulation
4.
Modern
View
a.
Reformation
can be used to remedy both mistake in expression and mistake in formulation
i.
Especially
when the non-mistaken party is fraudulent
ii.
Where
the contract is unconscionable or illegal
b.
Fraud and Misrepresentation
i.
Misrepresentation
1.
Must
be an assertion not in accordance with the facts
2.
Rule:
Courts leave the parties where they found them
3.
Exception: If the assertion is either fraudulent or material
4.
Assertion
must be relied upon by the recipient in manifesting assent
a.
Reliance
does NOT have to be reasonable
b.
Look
at the status, inequities, vulnerabilities of the party to see if reliance is
justified
5.
Contractual
v. Tortious Misrepresentation
a.
Tortious:
for money damages – criteria more difficult – must be fraudulent AND material
fact
b.
Contract:
must be fraudulent OR material fact
ii.
Fraud
1.
Restatement § 162
a.
A
misrepresentation is fraudulent if the maker intends his assertion to induce a
party to manifest his assent and the maker
i.
Kowes
or believes that the assertion is not in accord with the facts, or
ii.
Des
not have the confidence that he states or implies in the truth of the
assertion, or
iii.
Knows
that he does not have the basis that he states or implies for the assertion
2.
An
intentional perversion of the truth
3.
Material
a.
Restatement § 162
i.
A
misrepresentation is material if it would be likely to induce a reasonable
person to manifest his assent, or if the maker knows that it would be likely to
induce the recipient to do so
b.
An
innocent (non-fraudulent) misrepresentation can still be material
4.
Opinion
a.
Rule:
Generally, a party is not justified in relying on an opinion
b.
Restatement § 168
i.
An
assertion is one of opinion if it expresses only
1.
A
belief, wo certainty, as to the existence of a fact, or
2.
A
judgment as to quality, value, authenticity, or similar matters
c.
Restatement § 169
i.
To
the extent that an assertion is one of opinion only, the recipient is not
justified in relying on it UNLESS the recipient
1.
Stands
in a relation of trust and confidence to the person whose opinion is
asserted that the recipient is reasonable in relying on it, or
2.
Reasonably
believes that, as compared with himself, the person whose opinion is asserted
has special skill, judgment, or objectivity with respect
to the subject matter, or
3.
Is
for some other special reason particularly susceptible to a
misrepresentation of the type involved
d.
Exceptions (Arthur Murray)
i.
Fiduciary
relationship
ii.
Superior
Knowledge
iii.
Particularly
susceptible – parties not dealing at arms length
iv.
Person
asserting has superior access to facts
1.
Relying
party does not have the opportunity to be appraised of the truth or falsity of
the fact represented
v.
Person
asserting is using trickery or artifice
1.
Intentionally
varies from reality
2.
Close
to fraud in a factual assertion
5.
Nondisclosure as Assertion
a.
Rule:
There is no duty to disclose facts that would tend to discourage the other
party from entering into a deal
b.
Alternate Rule: Where parties are dealing at arm’s length with no inequities or
inherently unfair practices employed, the courts will leave the parties where
they find them
c.
Exceptions
i.
Restatement § 161
1.
A
person’s nondisclosure of a fact known to him is equivalent to an assertion
that the fact does not exist where he knows that disclosure
a.
Is
necessary to prevent some previous assertion from being a misrepresentation or
from being fraudulent or material (where changing circumstances have caused
something to be untrue)
b.
Would
correct a mistake of the other party as to a basic assumption on which that
party is making the contract AND if nondisclosure amounts to a failure to act
in good faith/fair dealing
c.
Would
correct a mistake of the other party as to the contents or effect of a writing
evidencing an agreement in whole or in part
d.
Where
the other person is entitled to know the fact bc of a relation of trust and
confidence bt them (families, physician/patient, lovers, etc.)
ii.
Hill v. Jones
1.
Florida Rule: where the seller knows of facts materially affecting the value of the
property that are not readily observable and are not known to the buyer, the
seller is under a duty to disclose them to the buyer
2.
Concealment:
positive action to hide is equivalent of misrepresentation
3.
Partial
Disclosure: A truthful statement that omits important qualifying facts is a
misrepresentation
a.
If
a party undertakes to disclose, he must disclose the whole truth
iii.
UCC § 1-203
1.
Every
contract or duty wi this article imposes an obligation of good faith in its
performance or enforcement
a.
You
can always make the argument that nondisclosure was a fraudulent
misrepresentation (actual assertion)
6.
Analysis
a.
Was
there an assertion not in accordance with the facts
b.
Is
it a representation of fact or opinion
i.
If
fact
1.
Is
it fraudulent (integration clauses do not insulate from fraud) – if not
2.
Is
it material
a.
Was
it the kind of thing that would induce a reasonable person to manifest assent
ii.
If
opinion
1.
Fiduciary
relationship
2.
Superior
knowledge
3.
Other
person is particularly susceptible
4.
Superior
access to facts
5.
Trickery
c.
Did
the recipient rely
d.
Was
it nonverbal, concealment
e.
Real
test: materiality bc there a plenty of cases where a material, nonfraudulent
misrepresentation has allowed avoidance but NOT many were a fraudulent,
nonmaterial one has allowed avoidance
7.
Remedies
a.
Rescission
i.
Dissolution
of contract
ii.
Parties
put to status quo ante
iii.
If
misrepresenting party received a benefit, have to repay it
b.
Consequential damages
c.
Reformation
i.
Option
if misrepresentation goes to the effect of the writing
d.
Restatement § 164
i.
If
assent is induced by the misrepresentation of someone who is not a party to the
transaction contract is voidable UNLESS the other party in good faith either
gives value or relies materially on the transaction
c.
Duress
i.
Definition: a wrongful act or threat that coerces assent to a bargain and
precludes the exercise of free will
ii.
Different
from fraud
1.
Party
is not relying on false information
2.
Party
is accurately informed of the facts but is forced by duress to consent to the contract
iii.
Must
show you tried to go elsewhere for a remedy
iv.
Restatement § 175
1.
Duress
by threat makes a contract voidable
a.
If
a party’s manifestation of assent is induced by an improper threat by the other
party that leaves the victim no reasonable alternative
b.
If
a party’s manifestation of assent is induced by one who is not a party to the
transaction, the contract is voidable UNLESS the other party to the transaction
in good faith and without reason to know of the duress either gives value or
relied materially on the transaction
v.
Restatement § 176
1.
A
threat is improper if
a.
A
crime or a tort is threatened, or the threat itself would be a crime or a tort
if it resulted in obtaining property,
b.
A
criminal prosecution is threatened
c.
The
use of civil process is threatened and the threat is made in bad faith, or
d.
The
threat is a breach of the duty of good faith and fair dealing under a contract
with the recipient
2.
A
threat is improper if the resulting exchange is not on fair terms, and
a.
The
threatened act would harm the recipient and would not significantly benefit the
party making the threat, (done maliciously)
b.
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
c.
What
is threatened is otherwise a use of power for illegitimate ends
vi.
Reasonable Alternatives
1.
If
the victim had any reasonable alternatives they may not claim duress
a.
Reasonable
alternatives depend on the circumstances and relationship of the parties
b.
Austin Instruments v. Loral: could not find anyone else who could meet the
deadline and delay was not an option
c.
Compromise
bt the objective and subjective test
2.
Suit
for contract damages can be seen as an alternative
a.
Sometimes
that is not an alternative bc of time constraints of suit
b.
Go
ahead and comply w terms to avoid threatened action and then sue for duress
later
vii.
Remedies
1.
Rescission
a.
Victim
cannot void after rescission
2.
On
avoidance, victim is entitled to restitution and must also make
restitution if he has obtained a benefit
d.
Undue Influence
i.
Different
from duress
1.
High
pressure as opposed to a threat that borders on coercion
2.
Not
as in your face as duress, which makes it harder to prove
ii.
Restatement § 177
1.
Defined: undue influence is unfair persuasion of a party who is under the
domination of the person exercising the persuasion or who by virtue of the
relation bt them is justified in assuming that the person will not act in a
manner inconsistent with his welfare
2.
Remedy:
if a party’s manifestation of assent is induced by undue influence, the
contract is voidable by the victim
3.
Third Parties: if assent is induced by one who is not a party to the transaction,
the contract is voidable by the victim UNLESS the other party in good faith and
wo reason to know of the undue influence either gives value or relies
materially on the transaction
iii.
Factors
1.
Discussion
of the transaction at unusual or inappropriate times
2.
Consummation
of the transaction in an unusual place
3.
Insistent
demand that the business be finished at once
4.
The
use of multiple persuaders by the dominant side
5.
Statements
that there is no time to consult with advisors or attorneys
e.
Unconscionability
i.
UCC § 2-302
1.
If
the court as a matter of law finds the contract or any clause of the contract
to have been unconscionable at the time it was made the court may
a.
Refuse
to enforce the contract, or
b.
It
may enforce the remainder of the contract wo the unconscionable clause, or
c.
It
may so limit the application of any unconscionable clause as to avoid any
unconscionable result
2.
When
the court claims the contract or any clause may be unconscionable, the parties
shall be afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose, and effect to aid the court in making the
determination
ii.
Restatement § 208: same as the UCC
iii.
UCC
does not define unconscionability
1.
Others
have said it is the prevention of oppression and unfair surprise
2.
This
gives a great deal of discretion to the courts
iv.
Not
a common defense
1.
Very
hard theory to win on
2.
Depends
on attitude of judge
v.
Competing
issues
1.
Traditional
notions that parties deal at arm’s length – absent this, courts will not police
agreements
2.
Also
have notions of fairness
vi.
Two Prongs
1.
Lack
of meaningful choice (procedural)
2.
Unreasonable
or unfair terms (substantive)
3.
Must
have both (not mutually exclusive)
vii.
Consumer transactions
1.
Procedural: absence of meaningful choice
a.
Gross
inequality of bargaining power – lack of voluntariness
i.
Stronger
party’s terms are non-negotiable (adhesion contract)
ii.
Weaker
party is deprived of choice (prevented by market factors, timing, or other
pressures from being able to contract with another party on more favorable
terms or to refrain from contracting at all)
b.
Manner
in which contract was entered – lack of knowledge or understanding of contract
terms bc of
i.
Complex
legalistic language
ii.
Important
terms were hidden or minimized
iii.
Disparity
in sophistication, economic and educational status of parties
iv.
Lack
of opportunity to study contract and inquire about terms
2.
Substantive: terms are unreasonably favorable to other party
a.
One
party is deprived of all benefits or agreements
b.
One
party is left wo a remedy for another party’s non-performance or breach
c.
Large
disparity bt market value and price of the thing being sold
viii.
Commercial Transactions
1.
Generally,
much harder for merchants to prove unconscionability bc businesses are expected
to have sufficient knowledge and bargaining power to protect themselves
2.
Unfair Surprise – a burdensome clause that does not come to the attention of a party
adhering to the contract
a.
Terms
hidden in printed form
b.
Inability
of adhering party to comprehend the contract
c.
Seller
never suggests party read the entire contract
3.
Procedural: unequal bargaining power/lack of voluntariness
a.
Small
company v. Big company
b.
Lack
of negotiation (like an adhesion contract)
c.
One
party has more market power
4.
Substantive: oppression
a.
Overly
harsh, one sided results with no justification
b.
What
is the potential loss
c.
Good
faith: was there honesty in fact and the observance of reasonable commercial
standards of fair dealing in the trade
5.
Zapatha v. Dairy Mart
a.
Illusory
promise – no b c required 90 days written notice to cancel contract
b.
Termination
wo cause is not unconscionable per se if you have reasonable notice
c.
Substantively
not unconscionable bc no huge financial losses or forfeitures
d.
Dairy
Mart was honest in openly disclosing the reason for terminating the contract
e.
Some
legislatures have limited the right of certain types of franchisers to
terminate wo cause
ix.
Procedural Aspects
1.
Usually
pleaded as an affirmative defense when other party sues for collection
2.
A
question of law for the court
a.
UCC
says court must allow evidence of commercial setting, purpose, and effect of
contract
b.
This
is valuable to the party asserting unconscionability
3.
Burden of Proof
a.
Party
asserting unconscionability has initial burden of persuasion that the contract
appears unconscionable
b.
After
a prima facie case is established, burden shifts to the other party to persuade
the contract was not unconscionable
x.
Remedies
1.
Rescission: court can refuse to enforce the contract
2.
Modification: court can enforce wo the unconscionable clause or may limit the
application of the unconscionable term
3.
No
right to recover damages
f.
Illegality/Public Policy
i.
Definition: agreements made unenforceable on grounds of public policy even though
the have all the aspects of a contract
ii.
Rationale
1.
Deter
undesirable conduct (assuming parties know the contract is illegal)
2.
Enforcing
is an inappropriate use of judicial process
iii.
Conduct
that renders contract unenforceable does not necessarily have to be a crime
1.
Most
commonly, the promise under the agreement is not criminal but offends public
policy
2.
A
promise to engage in conduct might offend public policy even though the conduct
itself does not
iv.
Procedure
1.
A
court can consider illegality even if it has not been pleaded by the parties
2.
Court
can examine witnesses and develop facts not brought out by the parties as well
v.
Maryland Rule: Hesitant to strike down voluntary bargains on public policy grounds
1.
Only
allowed where the common sense of the entire community would pronounce the agreement
invalid
2.
Favors
freedom of contract
vi.
Restatement § 178
1.
If
legislation provides that it is unenforceable or the interest in its
enforcement is clearly outweighed in the circumstances by a public policy
against the enforcement of such terms (relevant question: what is the purpose
to be served in denying enforcement and restitution when the contract is
against public polity)
2.
In
weighing the interest in the enforcement of a term, account is taken of
a.
The
parties justified expectations
b.
Any
forfeiture that would result if enforcement were denied, and
c.
Any
special public interest in the enforcement of the particular term
3.
In
weighing public policy against enforcement of a term, account is taken
of
a.
The
strength of that policy as manifested by legislation or judicial decisions
b.
The
likelihood that a refusal to enforce the term will further that policy
c.
The
seriousness of any misconduct involved and the extent to which it was
deliberate, and
d.
The
directness of the connection bt that misconduct and the term
vii.
Remedies
1.
Rule:
contract is void and there is no restitution
a.
Courts
prefer to leave the parties where they found them
b.
An
illegal bargain is void so that neither party can enforce it
c.
Parties
are in equal fault
2.
Exceptions: restitution may be allowed
a.
Disproportionate
forfeiture
i.
Where
the gravity of the misconduct is not too high
ii.
Or
if it involves technical rules and regulations
b.
Excusable
ignorance
c.
Claimant
is not equally in the wrong
d.
Claimant
has withdrawn from the transaction
i.
Must
withdraw before the improper purpose was achieved
ii.
Not
permitted when forces beyond claimant’s control prevented the improper purpose
(police showed up)
e.
Claimant
did not engage in serious misconduct and allowance of the claim would put an
end the situation that is contrary to the public interest
viii.
Exculpatory Clauses
1.
Generally,
a party can exempt himself from liability of harm caused by negligence
a.
No
public policy against risk allocation devices
b.
However,
they must be fairly bargained for, clearly worded, and known by both parties
i.
Exculpatory
clauses are not favorites of the courts
2.
Restatement § 195: Improper Exculpatory Clauses
a.
Terms
exemption party from harm caused intentionally or recklessly
b.
Term
that exempts one charges w a duty of public service from liability to the one
to whom that duty is owed for compensation for breach of that duty
c.
Terms
that exempt an employer from liability to employee for injury during the course
of employment
d.
If
one party is similarly a member of a class protected against the class to which
the first party belongs
e.
Terms
exempting a seller against products liability if unfairly bargained for
ix.
Covenants Not to Compete
1.
Generally
okay but possibly against public policy by putting a restraint on trade
2.
Requirements
a.
Must
be ancillary
i.
Must
be ancillary to an appropriate transaction like a sale of a business or an
employment agreement
ii.
A
mere payoff not to compete in a certain area is not enforceable
b.
Must
protect a legitimate interest of the promisee
i.
Protect
good will of customers
ii.
Protect
trade secrets, confidential information, etc.
iii.
The
employer is not entitled to prevent employee’s use of his knowledge, skill, or
general information acquired or increased through employment
c.
Must
be reasonable in scope
i.
Time
ii.
Duration
iii.
Type
of Activity
3.
Remedies
a.
Strict View: all overly broad clauses are unenforceable
i.
Employees
would be allowed to work anywhere, doing anything
ii.
Problem: restricts parties freedom to bargain and has harsh results for
employer
iii.
Benefits: employers will draft very carefully, look at precedent for reasonable
bounds, and will be very specific
b.
Blue Pencil Rule: strikes out words/phrases that make the contract unenforceable and
lets the rest be enforced
i.
Problem: Approach values wording over substance – employer will push the
envelope and include backup plans in his phrasing
c.
Reasonableness Rule: Court will rewrite the agreement to make it enforceable, unless the
employer wrote the agreement in bad faith with that result in mind
i.
Burden
of proof of good faith on employer
ii.
Pro-employer:
courts will rewrite as strict as boundaries of law allows
iii.
Bad
for autonomy of private agreements
x.
Non-Marital Cohabitation Agreements
1.
Consideration
cannot include meretricious activities
a.
To
enforce, the bargain must be independent of sexual activity
2.
If
not enforceable as an express agreement, claim for damages is different
a.
Express
agreements: parties split assets
b.
Unjust
enrichment: would only give woman what she deserves
3.
When
a contract is based on an illicit relationship, many courts see it as against
public policy
a.
Enforcement
would be a threat to the institution of marriage
b.
Illinois
strongly values the institution of marriage, Wisconsin not as concerned
i.
Difficulty
with public policy is that different states reach different results
4.
How
far courts go the use public policy as a guise to enforce morals of society
a.
Contracts
for same sex marriages being unenforceable
b.
If
basin public policy on religious beliefs, get into separation of church and
state problem
IV.
Statute of Frauds
a.
General
Rules
i.
Do
not need a writing in contract law
ii.
Exception: If it is within the statute of frauds then need a writing, otherwise
unenforceable
iii.
Exception to the Exception: Judicial gloss of statute of frauds can take it
back to the general rule of no writing required
iv.
Policy:
prevent false claims
v.
Violation: it is an absolute defense to enforcement of the contract in violation
of the statute of frauds, even if the parties admit to agree to its terms
b.
One Year Provision
i.
Rule:
if the agreement is not to be performed within one year, then it must be in
writing
1.
Points
of reference are the time the contract was made and the time when performance
is to be completed
2.
Rationale
a.
At
common law, perjury was a problem – people would fraudulently assert there was
a contract
b.
Memories
fail, evidence is weakened
3.
If
any promise of any party cannot be performed wi one year, the whole contract
falls within the statute
ii.
Exception
1.
If
the contract is performed wi a year you do not need a writing
2.
Restatement: Only contracts whose performance cannot possibly be completed wi a
year are wi the statute
a.
Possibly: if the express terms of the contract say that it will not take place
wi a year (no matter how improbably or unlikely it may be) OR there is
absolutely no possibility, even if work day and night, that the contract could
be performed wi one year
3.
Klewin v. Flagship
a.
Contract
did not specifically state a length of time, but it would be virtually
impossible to complete this major a construction project wi one year
b.
Rule:
an oral contract that does not expressly say that performance is to have
a specific duration beyond one year is, as a matter of law, the functional
equivalent of a contract of indefinite duration, which is outside the
statute of frauds and enforceable
iii.
Performance
1.
Option of Termination
a.
Termination
= performance – majority will not apply the statute
b.
Restatement
i.
As
long as one contingency is performable wi the year, it is not wi the state of
frauds and does not have to be in writing
ii.
If
contract created the power to terminate, that is an alternative performance
that can be done wi one year and not wi the statute
c.
Schmidt
i.
Pl
contracted to be exclusive distributed as long as Schmidt sold beer in the NY
metro area
ii.
Bc
Schmidt could stop selling beer wi a year through termination, there was a
possibility for performance wi one year so enforceable
2.
Death
a.
If
the promise is to do something, death is an excuse for non-performance
i.
Example:
oral agreement to work for 5 years – if promisor dies there has been no
performance
ii.
Contract
is stuck within the statute of frauds (writing required)
iii.
If
contract is “for life” or “for 5 years if A lives that long” then contract is
not wi the statutes – indefinite and contingency clauses respectively
b.
If
the promise is not to do something like a contract not to compete then death is
performance
i.
Cannot
do anything when dead
ii.
Contract
is not wi the statute if promisor dies wi one year
iii.
However,
courts will not go so far as to say bc party could die wi one year, the
contract is outside the statute
3.
Complete Performance
a.
By
one party takes the contract out of the statute of frauds and makes the promise
of the other party enforceable
b.
Unfair
for the def who has received a benefit to escape enforcement bc of the statute
c.
Some
courts apply this rule and some hold that only full performance by both sides
takes the contract out of the statute
d.
Mason v. Anderson
i.
Contract
for repayment of the loan by its repayment terms to take longer than one year
ii.
Started
repayment and then debtor died
iii.
Takes
out of the statute of frauds bc obvious a valid contract made by payments
already rendered
4.
Unilateral Contracts
a.
Do
not fall wi the statute bc a contract does not arise until there has been
performance by the promisee
c.
Surety Clause
i.
Promise
to pay the debt of another
ii.
Applies
to all contracts of suretyship and promises to sign contract of suretyship
1.
Must
be an actual debt owed by the debtor (not owed by the surety)
a.
Surety
agreement is collateral to the original debt
2.
Must
be three parties involved
a.
Surety:
obligated to creditor, but may seek reimbursement from debtor
b.
Principal
Debtor
c.
Creditor
iii.
Rationale
1.
Creditors
used to go after the money of a debtor’s friends, saying they promised to pay
for their friend’s debt
iv.
Functions
1.
Evidentiary:
promisor has received no benefit from transaction, so promise is the only
evidence
2.
Cautionary:
brings home to the prospective surety the significance of the promise, guards
against ill-considered promises
v.
Exceptions (do not require writing)
1.
Indemnity: when the third party promises the debtor he will pay
a.
Not
a promise to the creditor but to the debtor
b.
Not
a collateral but a primary promise
2.
Ovation: payment in turn for release of debtor from obligation
a.
Not
a surety bc the principal debtor is no longer involved (two parties instead of
3)
b.
Not
wi the statute – no writing required
3.
Main Purpose Doctrine: promisor has a pecuniary interest in transaction
a.
If
the surety’s actual or main purpose is for economic advantage rather than the
benefit of the principal, then no writing required
b.
Policy
worries reduced when promisor receives something substantial bc:
i.
There
is no disparity of exchange
ii.
Commercial
context provides the evidence
4.
When
the creditor neither knows nor has reason to know the promisor is a surety
vi.
Questions
to ask
1.
Is
the promise original or collateral
2.
Is
promise from promisor to debtor or from promisor to creditor
3.
Does
the promisor have an actual obligation to the creditor
4.
If
the promisor trying to further some business or pecuniary interest of his own
5.
NOTE:
If the answer to any of these takes it out of the statute, still analyze the
agreement as if were in the statute as well
d.
Marriage Clause
i.
Any
agreement in consideration of marriage must be in writing
1.
Does
not apply to mutual promises to marry
2.
Applies
to marriage settlements, pre-nuptial agreements, promises of prospective groom
to pay bride money, convey property, execute a will in consideration of
marriage
ii.
Purpose: prevent unguarded expressions of gallantry being perverted into
solemn, enforceable engagements
1.
Also
do not want contracts like: I married him bc he promised me money
e.
Executor of a will
i.
Same
thing as a surety – promise to pay damages for claims on the deceased’s estate
out of the executor’s estate requires a writing
f.
Contract
for the Sale of Goods worth $500+
i.
UCC § 2-201
1.
A
contract for the sale of good for $500 or more is not enforceable by way of
action or defense unless there is some writing sufficient to indicate that a
contract has been made and signed by the party against whom enforcement is
sought
a.
A
writing is sufficient if it omits or incorrectly states a term agreed upon
b.
Quantity
of goods must be specifically stated
2.
Between
merchants, if wi a reasonable time a writing in confirmation of the contract is
received, it satisfies the requirements of subsection (1) unless written notice
of objection to its contents is given wi 10 days after receipt of confirmation
3.
Exceptions
a.
Specially
manufactured goods are not wi the statute of frauds if
i.
They
are not suitable for sale to others in the ordinary course of the seller’s
business and cannot be easily altered to sell to others
ii.
The
seller, before notice of repudiation is received and under circumstances which
indicate the goods are for the buyer, has made either a substantial beginning
of their manufacture, or commitments for their procurement
1.
Substantial
beginning: look to see what precedent is, customs in the industry, etc.
2.
Evidentiary
worries are eased bc unlikely that the manufacturer will begin to make goods
especially for the buyer wo a contract
iii.
NOTE:
not suitable for sale to others means they are not marketable – a downturn in
the market does not count a reason for non-marketability
b.
Admission
of one party in pleading, testimony, or otherwise in court that a contract for
sale was made
i.
Contract
not enforceable beyond the quantity of goods admitted
c.
Goods
already paid for and accepted or received and accepted
ii.
How
to tell if something qualifies as goods under the UCC
1.
Goods
are moveable
2.
When
goods and services are mixed together, look to see what is the predominant
factor or main purpose of the item being purchased
a.
Installation
of linoleum: a good bc you care more about the floor than the service
b.
Contract
w artist for painting: service bc you want the talent of the particular artist
g.
Land Clause
i.
Any
agreement that contains a promise to create or transfer an interest in land
falls wi the statute of frauds and requires a writing
h.
Compliance
i.
General
Requirements
1.
A
note or memorandum is sufficient writing
2.
Writing
can be made before or after the contract
3.
It
need not be delivered to anybody
4.
Writing
must amount to an acknowledgment by the party charged that he has assented to
the contract that is asserted by the other party
ii.
UCC § 2-201
1.
Must
evidence a contract for the sale of goods
2.
Signed
by party against whom enforcement is sought
a.
Signature: any symbol executed or adopted by a party with present intention to
authenticate a writing
b.
Test
to see whether a mark is a signature: whether the other party reasonably
believes that the asserted signer’s intention is to authenticate the writing by
mark
3.
Must
specify quantity
iii.
Restatement § 131
1.
Any
writing, signed by or on behalf of the party to be charged which
a.
Reasonably
identifies the subject matter of the contract
b.
Is
sufficient to indicate that a contract with respect thereto has been made bt
the parties or offered by the signer to the other party, and
c.
States
with reasonable certainty the essential terms of the unperformed promises in
the contract
iv.
More
than one writing
1.
When
terms to satisfy the statute of frauds are in 2 or more documents and only one
of them is signed by the party to be charged, there are two different
approaches
a.
Signed
papers must have explicit reference to the unsigned papers
b.
If
the papers are in reference to the same transaction or subject matter, then
they can be taken together and considered as one writing to satisfy the statute
of frauds
i.
This
is the Restatement view
ii.
Probably
the view allowed by the UCC considering its purpose
i.
Effect of Noncompliance
i.
In
general
1.
Failure
to comply makes a contract voidable
a.
The
noncompliance defense can be waived
b.
Defense
must be raised as an affirmative defense in the pleadings – if it is not, it is
waived
2.
Complete
performance on both sides eliminates any statute of frauds problem
ii.
Admission
Exception
1.
If
the party against whom enforcement is sought admits in pleading, testimony, or
otherwise in court that a contract for sale was made, the statute of frauds
defense is gone
iii.
Restatement § 139
1.
A
promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce
the action or forbearance is enforceable notwithstanding the statute of frauds
if injustice can be avoided only by enforcement of the promise – remedy granted
as justice requires
2.
In
determining whether injustice can be avoided only by enforcement of the
promise, the following circumstances are significant
a.
The
availability and adequacy of other remedies, particularly cancellation and
restitution
b.
The
definite and substantial character of the action or forbearance in relation to
the remedy sought
c.
The
extent to which the action or forbearance corroborates evidence of the making
and terms of the promise, or the making and terms are otherwise established by
clear and convincing evidence
d.
The
reasonableness of the action or forbearance
e.
The
extent to which the action or forbearance was foreseeable by the promisor
3.
Split
of authority regarding estaoppel – three views
a.
Some
courts refuse to use promissory estoppel to circumvent the statute
b.
Some
apply whenever fraud or unconscionability is present
c.
Others
apply it whenever the ordinary elements of promissory estoppel are present
iv.
Equitable
Estoppel exception
1.
When
a representation produces detrimental reliance
a.
Example:
when one party said he did or would sign and did not
b.
Example:
when a trusted person like an attorney says that no writing is required
2.
Also
can be waived if not brought up bc it is an affirmative defense
v.
Quasi-Contract
Exception
1.
IF
there is performance and the statute prevents enforcement, a quasi-contract
remedy may be allowed
2.
UCC
provides for this is § 2-201(3)(c)
j.
Analysis
i.
Is
it a written agreement – if not
ii.
Is
wi the statute
1.
Suretyship
2.
Marriage
3.
One
Year
4.
Land
5.
Goods
greater than $500
iii.
Do
any exceptions take it out of the statute
1.
Admission
2.
Specially
manufactured
3.
Goods
accepted and received
iv.
Does
it satisfy the statute
1.
Memorandum
2.
Confirmatory
writing
3.
Second
documents
4.
Quantity
Term
5.
Signature
v.
If
not, can party assert
1.
Equitable
or promissory estoppel
2.
Unjust
enrichment
V.
Parol Evidence Rule
a.
In
General
i.
Parol
evidence rule is used to determine whether a party can bring in evidence as to
the meaning of a contract
1.
Extrinsic Evidence: conversations/e-mails/writings BEFORE the contract as to the meaning
or addition of terms
a.
If
a conversation comes AFTER the written contract, it is a modification
2.
Even
if a party does make it past the parol evidence rule and the evidence is
admitted, the trier of fact may still choose to ignore the evidence
ii.
Distinguished
from the statute of frauds
1.
Statute
of frauds tells you when you need a writing and what kind of writing you need
2.
Parol
evidence rule tells you, once an agreement is reduced to a writing, whether you
can bring in evidence to explain, modify for change what is in the writing
a.
You
can deal with both the statute of frauds and the parol evidence rule at the
same time
iii.
Policies
1.
Written
evidence is more accurate than human memory
2.
Witnesses
may use fraud or unintentional invention
a.
Prevent
juries from feeling sorry for the economic underdog when they should not be
iv.
Limitations
1.
Parol
evidence rule does not exclude evidence of negotiations that took place after
the written agreement was made
2.
Does
not exclude evidence to show that there was not agreement or that the agreement
was valid
a.
May
allow parol evidence in to show fraud, duress, or mistake
3.
Does
not exclude evidence offered to interpret the language of the writing
b.
Restatement
i.
§ 209
1.
An
integrated agreement is a writing or writings constituting a final
expression of one or more terms of an agreement
a.
NOTE:
this is NOT the strongest degree of integration
ii.
§ 210
1.
A
completely integrated agreement is an integrated agreement adopted by
the parties as a complete and exclusive statement of the terms of the agreement
a.
NOTE:
this IS the strongest degree of integration
iii.
§ 213
1.
A
binding integrated agreement discharges prior agreements to the extent that it
is inconsistent with them
2.
A
binding completely integrated agreement discharges prior agreements to the
extent that they are not wi its scope
3.
An
integrated agreement that is not binding or that is voidable and avoided does
not discharge a prior agreement
a.
Prior
agreements may be admitted to show fraud, mistake, etc.
iv.
§ 215
1.
Evidence
of prior or contemporaneous agreements or negotiations is not admissible if it
contradicts a term of the writing
v.
§ 216
1.
Evidence
of a consistent additional term is admissible to supplement an integrated
agreement unless the court finds that the agreement was completely integrated
2.
An
agreement is not completely integrated if the writing omits a consistent
addition term which is
a.
Agreed
to for separate considerations, or
b.
Such
a term as in the circumstances might naturally be omitted from the writing
c.
UCC § 2-202
i.
Terms
with respect to which the confirmatory memoranda of the parties agree or which
are otherwise set forth in a writing intended by the parties as a final
expression of their agreement may not be contradicted by evidence of any prior
agreement or of a contemporaneous oral agreement but may be explained or
supplemented by
1.
Course
of dealing or usage of trade or by course of performance; and
2.
Evidence
of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the
agreement
ii.
Explained:
1.
Final
is analogous to restatement’s partially integrated or integrated
2.
Even
if the agreement is complete and exclusive, you can let in evidence of course
of dealing/performance or usage of the trade
3.
UCC
is a little more liberal in allowing things in
4.
How
to tell if consistent
a.
Would
the agreed upon terms certainly (as opposed to naturally) have been
included in the document – if so, writing is complete and exclusive
d.
Integrated Writing
i.
Four Corners Test
1.
The
terms of the agreement are determined solely from the face of the document
2.
Contract
must appear on its face to be incomplete in order to be deemed partially or not
completely integrated
3.
Criticized
bc it is hard to know what a contract was intended to cover wo looking to see
what was left out
4.
Sometimes
deed have a particular format which would dictate whether something might
naturally be included or excluded
ii.
Restatement § 216 Test
1.
Only
allows evidence of items that would naturally be made in a separate agreement
a.
Those
things are called collateral matter
b.
Mitchell v. Lath: Icehouse was not collateral bc it was what made her decide to buy the
property
2.
Objective Test: if a reasonable person would have put the item in a separate
agreement, then the contract in question is not integrated as to that item
a.
Also,
if reasonable parties would not have put the item in a separate agreement, then
the contract is integrated as to that item
i.
Must
have been purposefully excluded
b.
Look
at surrounding circumstances, parties, collateral agreements
iii.
UCC Test
1.
If
evidence would certainly have been included in the document then it is not
allowed in
a.
Policy:
it should have been in the contract to begin with so you do not get to put it
in now
2.
If
it would certainly have been included, it is not a consistent additional term
iv.
Corbin Test
1.
All
relevant evidence should be taken into account to search out the actual
intention of the parties
2.
Subjective Test: allows evidence of prior negotiations
e.
Inconsistent Terms
i.
Consistency
Analysis
1.
Until
we know what the terms mean, we cannot decide if parol evidence contradicts
2.
Prior
oral statements come in quickly to allow the judge to interpret the contract
3.
Then
the parol evidence is compared to the interpreted contract independently and
its consistency is judged
4.
Paradox:
court must use the evidence in question to determine whether or not that
evidence should be admitted
ii.
Test
for inconsistency
1.
Hunt’s Food Test
a.
If
the parol evidence contradicts or negates a specific term in the writing then
it is not admissible
b.
Terms
which has a lesser affect is admissible
c.
Narrow
view of contradiction
d.
More
parol evidence is allowed in
2.
Snyder Test
a.
A
term is inconsistent if there is an absence of reasonable harmony bt the
established agreement and the parol evidence asserted
b.
Broader
view of contradiction
c.
Less
parol evidence is allowed in
f.
Analysis
i.
Is
a written expression intended by the parties to be a complete and exclusive
final expression of their agreement
1.
If
so: no extrinsic evidence will be admitted, even if consistent
a.
Restatement
calls this a completely integrated agreement
b.
UCC
calls this a complete and exclusive agreement
2.
How
to tell – ask if the extrinsic evidence would naturally be included in the
agreement
a.
If
yes – it should have been included and cannot be included now
i.
Exception: UCC allows course of dealing/trade to explain agreement even if
complete and exclusive
b.
If
the kind of thing that would naturally be talked about orally and have a
collateral agreement on, go to step ii
c.
Look
at the four corners of the document to see if it looks like something else
needs to be included
d.
Look
at the extrinsic evidence together with the evidence in the writing to see if
that is the kink of thing you would normally but in a contract
i.
After
deciding, throw evidence back out
ii.
If
you progress to step ii by deciding the agreement is not
complete/final/exclusive the evidence may be readmitted to determine
consistency
ii.
Is
a written agreement intended by the parties to be a final expression of their
agreement
1.
If
so – extrinsic evidence that is consistent with this expression may be
introduced
a.
Restatement
calls this a partially integrated or integrated agreement
b.
UCC
calls this a final agreement
2.
How
to tell if consistent
a.
Hunts
Food: inconsistent or negates a specific term
b.
Snyder:
absence of reasonable harmony bt the contract and the extrinsic evidence
3.
If
not even a final or partially integrated agreement, the extrinsic evidence is
admissible even if inconsistent
g.
Merger/Integration Clauses
i.
Commercial Sales
1.
Integration
clause is NOT an automatic ban on parol evidence – it merely strengthens the
presumption of integration
a.
Evidence
for the beyond the four corners test
b.
Parties
intent may rebut this presumption
2.
Still
must examine the circumstances surrounding the making of the contract to
determine whether the intent of both parties was to include everything in the
integration clause – look at:
a.
Length
and detail of contract
b.
Length
and nature of negotiations preceding execution
c.
Absence/presence
of evidence that parties intended non-written terms to be part of the overall
agreement
ii.
Consumer Sales
1.
Purpose: protect truly integrated writings
2.
Best
evidence of integration: a merger clause contained in a writing which has
objectively been assented to by both parties
a.
In
many cases, boilerplate clauses are ineffective bc not objectively assented to by
the consumer
b.
If
the merger clause is viewed as an attempt to disclaim the express warranty, the
warranty prevails to protect the buyer
c.
If
the merger clause is viewed as an attempt to totally integrate the writing, UCC
2-202 applies and would appear to protect the seller
3.
Restatement § 211 (3) Comment
a.
A
party who adheres to the other party’s standardized term does not assent to a
term if the other party has reason to believe that the adhering party would not
have accepted the agreement if he had known that the agreement contained a
particular term
i.
Closely
related to the policy against unconscionable terms and the rule of
interpretation against draftsmen
iii.
Merger
Clauses and the Parol Evidence Rule
1.
A
merger clause is not always enough to defeat the parol evidence rule
a.
Courts
will usually hold the merger clause (disclaimer) to a high standard of the code
b.
Especially
where there is some surprise to the buyer
c.
Especially
when the clause is buried in boilerplate language
h.
Warranties and Disclaimers
i.
UCC § 2-313
1.
Express
warranties by the seller are created as follows
a.
Any
affirmation of fact or promise made by the seller to the buyer which relates to
goods and becomes part of the basis of the bargain creates an express warranty
that the goods shall conform to the affirmation or promise
b.
Any
description of the goods which is made part of the basis of the bargain creates
an express warranty that the goods shall conform to the description
c.
Any
sample or model which is made part of the basis of the bargain creates an
express warranty that the whole of the goods shall conform to the sample or
model
2.
It
is not necessary to the creation of an express warranty that the seller use
formal words such as warrant or guarantee or that he have a specific intention
to make a warranty, BUT, an affirmation of the value of the goods or a
statement purporting to be merely the seller’s opinion of the goods does not
create a warranty
3.
NOTE:
distinguish express warranty from sales puffing
a.
Test:
is it the basis of the bargain
b.
Williston: would the statement induce you to buy the goods
4.
Disclaimer – UCC § 2-316 (1)
a.
Words
or conduct relevant to the creation of an express warranty and those tending to
negate or limit warranty shall be construed wherever reasonable as consistent
with each other; but subject to the provisions of § 2-202 on parol evidence,
negation or limitation is inoperative to the extent that such construction is
unreasonable
i.
If
the warranty and disclaimer terms just contradict each other, buyer wins most
of the time
ii.
Generally,
express warranty will not be affected by a disclaimer
1.
They
are very difficult to disclaim
2.
Policy:
protect consumer from boilerplate language in contract
ii.
UCC § 2-314
1.
Unless
excluded or modified, a warranty that the goods shall be merchantable is
implied in a contract for their sale if the seller is a merchant wrt goods of
that kind (the serving for value of food or drink to be consumed either on the
premises or elsewhere is a sale)
2.
To
be merchantable, goods must be at least such as
a.
Pass
wo objection in the trade under the contract description; and
b.
In
the case of fungible goods, are of fair average quality wi the description; and
c.
Run,
wi the variations permitted by the agreement, of even kind, quality, and
quantity wi each unit and among all units involved; and
d.
Are
fit for the ordinary purposes for which such goods are used; and
e.
Are
adequately contained, packaged, and labeled as the agreement may require; and
f.
Conform
to the promises or affirmations of fact made on the container or label if any
3.
Disclaimer – UCC § 2-316 (2)
a.
Language
must mention merchantability
b.
In
case of a writing, language must be conspicuous
4.
NOTE:
seller must be a merchant wrt to goods of that kind
a.
An
item sold at a yard sale not protected bc not a merchant
b.
Merchant: someone who deals in goods of a kind and holds himself out as such
c.
Merchantability
is not a synonym for perfect – must conform to other products in the trade
iii.
UCC § 2-315 (Fitness)
1.
Elements
a.
Buyer
must have a particular purpose in mind and seller must have reason to know that
purpose
b.
Buyer
relies on seller’s skill or judgment to select or furnish suitable goods
c.
Unless
excluded, there is an implied warranty that the goods will be fit for that
purpose
2.
NOTE:
goods can be merchantable, yet still not fit for a particular purpose
3.
Disclaimer – UCC § 2-316 (2)
a.
Must
be in writing and conspicuous
b.
Sufficient
if writing states there are no warranties which extend beyond the description
of the face hereof
i.
Thus,
harder to create an implied warranty of fitness, but also harder to disclaim it
than merchantability
iv.
UCC 2-316 (3)
1.
Applies
to all implied warranties
a.
Notwithstanding
subsection (2)
i.
Unless
the circumstances indicate otherwise, all implied warranties are excluded by
expressions like as is, with all faults, or other language which in common
understanding calls the buyer’s attention to the exclusion of warranties and
makes plain that there is no implied warranty; and
ii.
When
buyer has examined the goods, sample, or model or has refused to examine the
goods, there is no warranty with regard to defects which such an examination
ought to have revealed to him; and
iii.
An
implied warranty can also be excluded or modified by course of dealing or
course of performance or usage of trade
v.
Failure
of a warranty
1.
If
a warranty fails its essential purpose, then other UCC remedies are available
a.
Consequential damages: loss caused by general or particular needs of the
buyer which seller had a reason to know at the time of contract which could not
be reasonably prevented by cover
b.
Cover:
right of the buyer, after breach by seller, to purchase goods on open market to
substitute the goods, then to recover from the seller the difference in cost bt
cover and contract price
VI.
Conditions and Performance
a.
In
general
i.
Risk of performance
1.
When
determining the scope of what a party has to perform, parties to a contract can
adjust risk of liability for non-performance by
a.
Using
a condition on the duty to perform, or
b.
Enforcing
a warranty if someone does not perform
ii.
Condition
1.
Definition: an event, not certain to occur, which must occur (unless its
non-performance is excused) before performance under a contract becomes due
2.
Condition Precedent: must be satisfied BEFORE a contractual duty comes into existence
a.
Makes
the duty dormant until the condition is satisfied
b.
If
condition is half satisfied, the performer may be entitled to quantum meruit
3.
Condition Subsequent: an event that extinguishes an existing duty
iii.
Distinguished
from promise
1.
Promises
are often the actual consideration for the bargain and their breach is grounds
for an offensive suit
2.
Conditions
are not part of the consideration, they just determine when a dormant duty
becomes active
a.
Usually
used in a defensive posture – condition was not satisfied and therefore def is
not liable
b.
Express Conditions
i.
Express
conditions have been expressly agreed upon in words and placed in the contract
by the parties
1.
Also
called true conditions
ii.
Implied
in fact conditions are created by the parties through their words, actions,
etc.
iii.
Characterized
by language such as:
1.
provided
that
2.
if
and only if
3.
unless
4.
on
the condition that
iv.
Performance
1.
Express
conditions must be fully performed and have the strongest effect wrt forfeiture
of any type of condition
a.
Have
literal compliance requirements
b.
Substantial
performance is not enough
2.
Possible
excuses for non-performance
a.
If
the condition was not an essential theme of the contract
b.
If
condition conflicts with public policy
v.
Categories
1.
Rule:
performance of a condition depens on what type of promise you have
a.
Independent
i.
Promises
are not connected at all
ii.
Still
have to perform promise even if other promise is not performed
iii.
Remedy:
sue for damages
b.
Dependent
i.
Promises
are always conditional upon each other
c.
Dependent but collateral when departure is insignificant
i.
A
condition that may not impose a duty if promise is not met
ii.
Arises
when departure from promise is insignificant
2.
How
to tell what type of promise
a.
Look
at considerations of justice and presumable intention of the parties
b.
Justice:
can the parties get back to status quo by enforcing the condition
i.
If
not: promise may fall into third category
ii.
Otherwise,
harsh and unfair to the party who must rip out structure and start over
c.
Jacob & Youngs v. Kent: homeowner wanted reading pipes – installed
different pipes – is man’s promise to pay dependent on promise to install
Reading pipes
i.
If
expressly conditioned, non-performance would excuse payment
ii.
Here,
just part of the contract and not expressly conditioned – probably
insignificant departure
vi.
Four factors of substantial performance
1.
Purpose to be served
2.
Desire to be gratified
3.
Excuse for deviation
a.
If
a willful transgression the non-performance is not easily excused
b.
Mere
negligence is probably okay
4.
Cruelty of enforced adherence
vii.
Damages
1.
If
substantial performance – other party gets an offset for breach – two options
a.
Replacement
cost
b.
Difference
in value
2.
If
express condition – other side excused from performance – no duty to pay
c.
Excuse of Conditions
i.
Arguments
1.
Condition
precedent was never intended
2.
Agreement
was modified by the parties to exclude the condition
a.
UCC:
no new consideration needed
b.
Restatement: requirements for modification
i.
Voluntary
ii.
Unanticipated
circumstances
iii.
Made
before full performance by either side
iv.
Fair
and equitable
3.
Condition
was waived by the parties
4.
Court
should discharge the condition
ii.
Waiver
1.
Failure
of a promise can subject the promisor to contract damages – failure of a
condition means the duty to the promisor never arises
a.
Cannot
waive a promise wo rescission or additional consideration
b.
Can
waive a condition
2.
Express Waiver
a.
Party
which the condition benefits expressly tells the other party that the condition
will not be required to activate the duty
b.
The
party’s duty is no longer dormant
3.
Election Waiver
a.
Waiver
after failure of express or constructive condition – may take place through:
i.
Waiver by Conduct
ii.
Waiver by Promise
4.
Estoppel Waiver: party relies on other’s representation that condition will not be
necessary
5.
Anti-Waiver Clause
a.
Agreement
says there can be no waiver of any condition in this agreement
b.
Relevant
but not conclusive
c.
Sometimes
courts will ignore the clause if the promisor’s acts constitute a waiver
d.
To
be sure that you are not abandoning the condition, then write specifically,
this is not a waiver
6.
Retraction
a.
UCC § 2-209 (5)
i.
A
party who has made a waiver affecting an executory portion of the contract may
retract the waiver by reasonable notification received by the other party that
strict performance will be required of any term waived, unless the retraction
would be unjust in view of a material change of position in reliance on the
waiver
7.
Analysis
a.
Was
the provision not complied with a condition or a promise
i.
Does
the provision go to the substance of the contract
ii.
If
so – promise; if not – condition
1.
If
a promise, promisee could sue for breach but still must perform duty
b.
If
a condition, was it waived
i.
Expressly
1.
A
representation that the promise will not enforce the condition
ii.
Implied
– go to (c)
c.
Was
the condition central to the bargain
i.
If
not – condition waivable by election
1.
Condition
has failed and promisee acts as if the condition has not failed
ii.
If
central – condition not waivable unless by estoppel
1.
Promisee
tells promisor not to worry about the condition and the promisor relies on that
statement
2.
Wo
estoppel, you would need new consideration
iii.
Discharge
by court
1.
Restatement § 229
a.
To
the extent that the non-occurrence of a condition would cause disproportionate
forfeiture, a court may excuse the non-occurrence of that condition unless its
occurrence was a material part of the agreed exchange
2.
Disproportionate Forfeiture
a.
Weigh
what one is giving up compared to what the other wants to protect against
b.
Within
the discretion of the court – three factors to consider
i.
Was
it an adhesion contract
ii.
Would
enforcement operate as a forfeiture
iii.
Does
the enforcer have a legitimate purpose in wanting condition enforced
iv.
Excuse
for deviation form the letter
v.
Prejudice
of the party enforcing the condition if it is waived
3.
Changed
circumstances may make compliance with condition impracticable
a.
Might
also go to disproportionate forfeiture as well
d.
Constructive conditions
i.
Independent Promises
1.
The
parties intend that performance by each of them is in no way conditioned by
performance of the other
2.
Parties
exchange promises for promises – not performance for performance
3.
Failure
to perform and independent promise does not excuse non-performance on the party
of the adversary party
4.
If
one does not perform, he is liable to the adversary party for breach
ii.
Dependent promises
1.
Parties
intended performance by on to be conditioned upon performance by the other
2.
If
mutually dependent, a promise may be:
a.
Precedent
b.
Subsequent
c.
Concurrent
iii.
Rule
1.
When
there is no express condition, the court may construct the condition if it is
not fair for one party to perform wo reciprocal performance by the other party
2.
Three
questions to be answered
a.
Who
will perform first
b.
How
much performance is needed
c.
If
there is a breach, should the other party get restitution
iv.
Order of Performance
1.
Historical View: courts did not construct conditions if none were in the agreement
a.
Promises
were prima facie independent of each other
b.
If
seller refused to tender goods, buyer still had to pay and then sue for breach
2.
Modern View: court constructs a condition of dependency for mutual promises
a.
Rationale
i.
Provides
both parties maximum security against disappointment
ii.
Prevents
one party from having the burden of financing the other before the latter has
performed
b.
Effect:
dependent promises require reciprocal acts performed concurrently
c.
Presumption
of dependency is a default position and can be contracted around
i.
Must
be a deliberate manifestation of intent for the agreements to be independent
3.
How
to tell if dependent
a.
Intent
of parties
b.
Order
required by transactions
c.
Justice
4.
Restatement § 234
a.
Where
all or part of the performance to be exchanged under a promise can be rendered
simultaneously, they are due simultaneously, unless the language or the
circumstances indicate to the contrary
b.
Where
the performance of only one party under such an exchange requires a period of
time, his performance is due at an earlier time that that of the other party,
unless the language or the circumstances indicate the contrary
5.
Where
the acts of the parties are concurrent, the covenants are dependent – neither
party can maintain an action against the other wo averring and proving
performance on his part
a.
If
the breach was not material, could claim partial performance or a substitute
that was just as good
b.
If
partial performance – the court would only require and offset for the different
in value
v.
Substantial Performance
1.
Rule:
no duty for A to perform if B commits a material breach or if B does not
substantially perform
2.
Definition (use the factors)
a.
Purpose
to be served
b.
Desire
to be gratified
c.
Excuse
for deviation (should be inadvertent and unintentional)
d.
Cruelty
of enforced adherence v. forcing promisee to receive less than he bargained for
3.
Restatement § 241
a.
In
determining whether a failure to render or offer performance is material, the
following circumstances are significant
i.
The
extent to which the injured party will be deprived of the benefit which he
reasonably anticipated;
ii.
The
extent to which the injured party can be adequately compensated for the part of
that benefit of which he will be deprived;
iii.
The
extent to which the party failing to perform or to offer to perform will suffer
forfeiture;
iv.
The
likelihood that the party failing to perform or to offer to perform will cure
his failure, taking account of all the circumstances including any reasonable
assurances;
v.
The
extent to which the behavior of the party failing to perform or to offer to
perform comports with standards of good faith and fair dealing
vi.
Recovery/Damages
1.
Even
if there has been a material breach or lack of substantial performance, some
recovery may be awarded to the party who has partially performed
2.
Restatement § 234: where performance requires a period of time, performance is due
before payment is made
a.
This
is a default rule and can be expressly contracted around
b.
Other
ways to under the rule are below
3.
Divisibility
a.
If
contract is divisible, and one portion is substantially performed, breaching
party may recover for the portion performed – look to see if the consideration
is able to be apportioned
b.
UCC § 2-307
i.
Default
rule: deliver goods in a single delivery and payment is due only when all goods
are received
ii.
BUT:
where circumstances give either party the right to make or demand delivery in
lots the price (if it can be apportioned) may be demanded for each lot
4.
Quantum Meruit
a.
Generally,
unless the def has expressly stated that payment will be given only on
completion, this will operate when there has been substantial performance
(breaching party recovers for benefit conferred on non-breaching party)
5.
Modern Trend
a.
Breaching
party can recover net benefit conferred in excess of the actual damages caused
b.
Burden
of proof is on breaching party to show that there is a net benefit conferred
over the actual damages caused by the breach
c.
Rationale: otherwise, the more the breaching party performs, the greater the
loss he suffers if he can only recover for full performance
6.
Restatement § 374
a.
The
breaching party is not entitled to restitution if the value of the performance
as liquidated damages is reasonable in light of the anticipated or actual loss
caused by the breach
7.
UCC § 2-718
a.
Damages
for breach may be liquidated in the agreement but only at an amount which is
reasonable in light of the anticipated or actual harm caused by the breach, the
difficulties of proof of loss, and the inconvenience of otherwise obtaining an
adequate remedy
b.
Where
seller justifiably withholds delivery of goods bc of buyer’s breach, the buyer
is entitled to restitution of any amount by which the sum of his payments
exceeds:
i.
The
amount to which the seller is entitled by virtue of terms liquidating the
sellers’ damages per subsection (a), or
ii.
In
the absence of such terms, 20% of the value of the total performance for which
the buyer is obligated under the contract or $500, whichever is smaller
VII.
Changed Circumstances
a.
Existing Impracticability
i.
The
impracticability exists at the time the contract is made, but the promisor is
unaware of the conditions making his performance impracticable
ii.
Generally,
the promisor is thought to have assumed the risk
iii.
Restatement § 266
1.
Where,
at the time the contract is made, a party’s performance under it is
impracticable wo his fault bc of a fact of which he has no reason to know and
the non-existence of which is a basic assumption on which the contract is made,
no duty to render that performance arises, unless the language or circumstances
indicate to the contrary
2.
Distinguished
from mutual mistake
a.
Mistake
is a material effect on performances
b.
Impracticability
is that performance is impracticable
i.
Mistake
is easier to win
ii.
Increased
expense is generally not sufficient on its own for impracticability, but may be
enough for material effect
c.
Always
raith both issues on the exam and analyze both
iv.
Analysis
1.
Basic Assumption Test
a.
In
determining whether one party naturally assumed the risk of the event’s
non-performance, court looks at terms of the contract and circumstances – 2
factors
i.
If
the event is unforeseeable that suggests the non-occurrence was a basic
assumption
1.
However,
the parties may not have though the risk was important enough to have made it a
subject of their bargaining
ii.
Relative
bargaining positions of the parties and the relative ease with which
either could have inserted a clause
2.
Superior Risk Bearer Test
a.
The
party who is the most efficient bearer of the particular risk in the particular
circumstances should bear the loss
b.
Conditions
i.
Contract
does not assign the risk
ii.
The
event giving rise to the discharge was not avoidable by any cost justified
precautions
c.
In
making this determination – 3 factors
i.
Knowledge
of the magnitude of the loss
ii.
Knowledge
of the probability that it would occur
iii.
Other
costs of self or market insurance
b.
Supervening Impracticability
i.
In
General
1.
Something
happens after the contract is made to render performance impracticable
2.
Essence of the analysis: who assumes the risk of the surprise
ii.
Restatement § 261
1.
Where,
after the contract is made, a party’s performance is made impracticable wo his
fault by the occurrence of an event the nonoccurrence of which was a basic
assumption on which the contract was made, his duty to render that performance
is discharged, unless the language or the circumstances indicate the contrary
2.
Four
elements
a.
Occurrence/surprise/contingency
b.
Nonoccurrence
of surprise was a basic assumption on which the contract was made
i.
Destruction
of the subject matter of the contract
ii.
Death
or illness of person essential for performance
iii.
Supervening
illegality or prevention by the law
c.
Did
either party assume the risk of the surprise occurring
d.
Performance
was impracticable
i.
Impossible,
excessively costly, or very difficult
iii.
UCC § 2-615
1.
Except
so far as a seller may have assumed a greater obligation and subject to the
preceding section on substituted performance:
a.
Delay
in delivery or non-delivery by a seller is NOT a breach of his duty under a
contract for sale if:
i.
Performance
has been made impracticable by the occurrence of a contingency
ii.
The
nonoccurrence of which was a basic assumption on which the contract was made,
or
iii.
By
compliance in good faith with any applicable foreign or domestic governmental
regulation or order whether or not it later proves to be invalid
2.
Two
prongs:
a.
Basic
assumption test
i.
Does
the contract center around the fact that the surprise will not occur
ii.
Did
one party assume the risk or was one party in a better position to discover the
risk
b.
Commercial
impracticability
i.
Loss
must be particularly severe, not just an increase in costs
iv.
Assumption of the risk
1.
Rule:
if a party assumes the risk of the surprise, then that party is not excused
2.
Factors:
a.
Posner:
superior risk bearer
i.
Who
has knowledge of the magnitude of the potential loss
ii.
Who
has knowledge of the probability that the loss will occur
iii.
Who
can bear the risk most efficiently by self/market insurance
b.
Farnworth: foreseeability
i.
Foreseeability
is emphasized
ii.
Examine
relative bargaining power: who could have included a clause protecting itself
in light of foreseeable risk
3.
Contractual
terms allocation risk
a.
Take or pay clause
i.
Requires
the seller either take a certain amount or pay for that amount now and take it
later
ii.
Producer
assumes risk of rising production costs
iii.
Seller
assumes risk that there will be market demand for his refined good
b.
Fixed price contract
i.
Buyer
assumes risk of decreased costs
ii.
Seller
assumes the risk of increased costs
c.
Force Majeure Clause
i.
Designed
to insulate a party from extraordinary risks like acts of God or strikes
d.
Reopener Clause
i.
Provides
a chance to reopen the contract for negotiation if gross inequities arise
ii.
There
is a lot of good faith involved here
4.
Restatement § 262
a.
If
the existence of a particular person is necessary for the performance of a
duty, his death or such incapacity as makes performance impracticable is an
event the nonoccurrence of which was a basic assumption on which the contract
was made
b.
Necessary for performance: person is necessary to agreement if the
performance is a personal matter requiring personal skill, ability, or judgment
i.
Test:
could the duty of the dead/incapacitated person have been assigned to another
wo the other party’s consent
5.
Destruction of an essential thing
a.
If
the existence of a specific thing is necessary for the performance of a duty,
its failure to come into existence, destruction , or such deterioration as
makes performance impracticable is an event the nonoccurrence of which was a
basic assumption on which the contract was made
6.
Exclusive source of supply
a.
When
a particular source of supply is exclusive, the seller must employ all due
measures to ensure the source will not fail or he will be considered to assume
the risk when it does
c.
Frustration of Purpose
i.
Restatement § 265
1.
Where,
after a contract is made, a party’s principle purpose is substantially
frustrated wo his fault by the occurrence of an event the nonoccurrence of
which was a basic assumption on which the contract was made, his remaining
duties to render performance are discharged, unless the language or the
circumstances indicate the contrary
2.
Comment A: this defense is used when one party’s performance becomes virtually
worthless to the other
a.
The
purpose that is frustrated must have been the principal purpose
i.
The
object must be so completely the basis of the contract that wo it the
transaction would make little sense
ii.
Both
parties must understand this to be the case
b.
The
frustration must be substantial
i.
It
is not enough that the transaction has become less profitable for the affected
party or even that he will sustain a loss
ii.
Must
be so severe that it is not regarded as wi the risks assumed under the contract
c.
Nonoccurrence
of the frustrating event = basic assumption
i.
The
foreseeability of the event is a factor in that determination
ii.
But,
the mere fact that the event was foreseeable is not dispositive that its
nonoccurrence was not a basic assumption
iii.
Also
consider the relative bargaining positions of the parties and the relative case
with which either party could have inserted a clause
ii.
Compare
to Impracticability
1.
With
impracticability, the performance of one party is extremely burdensome or
impossible for that party to perform
2.
With
frustration, performance of both parties is practicable, but the purpose of one
of the parties is frustrated to the extent that the performance of the other
party is valueless to him
3.
Courts
very rarely use frustration of purpose – they use it sparingly, and have to
prove each element
iii.
Change
in price alone does not constitute substantial frustration
1.
The
change can be evidence of frustration, but there must be something else
2.
What
would do it – a change in the trading rule, switch from freemarket to communist
economy, etc.
VIII.
Good Faith
a.
Types
of contracts
i.
Contract Formulation
1.
Bad
faith in contract formulation is
a.
Misrepresentation
b.
Failure
to correct a discovered error
ii.
Employment at will contracts
1.
Bad
faith in these agreements is
a.
Malicious
termination of employment contract in retaliation for something employee did or
refused to do in consonance with public policy
b.
Now,
state and federal statutes help govern this area
iii.
Discretion in Contract Performance
1.
Bad
faith in performance is
a.
Party
using discretion in an abusive manner
b.
Behavior
inconsistent with common standards of decency, fairness, and reasonableness
c.
Behavior
inconsistent with the parties agreed upon common purpose and justified
expectations
b.
Different
Approaches
i.
Common Law Rule (New Hampshire Test)
1.
When
an agreement appears to invest one party with a degree of discretion in
performance sufficient to deprive another party of a substantial proportion of
the agreement’s value, the parties intent to be bound by the contract raises an
implied obligation of good faith to observe reasonable limits in exercising
that discretion, consistent with the parties purpose in contracting
2.
Ask
4 questions
a.
Does
the agreement allow or confer upon one party a degree of discretion tantamount
to a power to deprive the other of a substantial portion of the agreement’s
value
b.
If
so – did the parties intend to make and enforceable contract
c.
Has
the def exercise of discretion exceeded the limits of reasonableness
d.
Is
the cause of the pl damage the def abuse of discretion, or does it result from
circumstances beyond the control of either party, against which the def has no
obligation to protect the pl
ii.
Burton’s Theory
1.
When
unstated economic opportunities are bargained away, it is bad faith for one
side to use the contract terms to recapture such an opportunity
iii.
Restatement § 205
1.
Every
contract imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement
2.
Comment a: the meaning of good faith should vary somewhat within the context
a.
Good
faith emphasizes faithfulness to an agreed common purpose and consistency with
the justified expectations of the other party
3.
Comment d: the following types of bad faith have been recognized in judicial
decisions
a.
Evasion
of the spirit of the bargain
b.
Lack
of diligence and slacking off
c.
Willful
rendering of imperfect performance
d.
Abuse
of power to specify terms
e.
Interference
with or failure to cooperate in the other party’s performance
iv.
UCC
1.
§ 1-203: every contract or duty wi this act imposes an obligation of good
faith in its performance and enforcement
2.
§ 1-203 (b): in the case of merchant buyers and sellers, good faith means both
honesty in fact and the observance of reasonable commercial standards of fair
dealing in the trade
a.
Bad
faith conduct violates community standards of decency, fairness, or
reasonableness
3.
§ 1-201 (19): Good faith, at a minimum, means honesty in fact in the conduct or transaction
involved
v.
Excluder Theory
1.
The
meaning of good faith is best determined by the conduct excluded rather than
through an a priori, structured definition
a.
The
general duty of good faith and fair dealing is no more than a minimal
requirement, rather than a high ideal
vi.
Analysis
1.
A
contract is breached and the defense claimed is this
a.
A
change resulted in a surprise, and bc of this change, I should not have to
perform
2.
Will
the defense stand – factors to consider
a.
What
was the nature of the risk event and what was its impact on the contract
b.
Was
the party claiming the defense at fault
c.
Did
the contract allocate the risks to the party claiming the defense
i.
Condition
on the contract
ii.
Force
Majeure clause
iii.
Insurance
d.
How
is the court to fill the gap in risk allocation
i.
Restatement
§ 266 – existing impracticability
ii.
Restatement
§ 261 – Supervening impracticability
iii.
Restatement
§ 265 – Frustrated purpose
e.
What
is the nature and scope of relief
i.
Discharge
of contract with appropriate restitution
ii.
Continued
performance under adjusted terms
iii.
Remedial
middle ground
f.
Is
refusal to negotiate a proposed modification in good faith
i.
Good
faith is very contextual – an I know it when I see it kind of argument
IX.
Prospective Breach
a.
Rules
i.
In
general
1.
When
the circumstances or the promisor’s words or conduct create doubt whether the
performance will be forthcoming as agreed but do not amount to a breach, the
promisee has a more limited remedy
2.
In
the proper circumstances, the promisee may suspend performance and demand
adequate assurance from the promisor
3.
If
assurance of due performance is not forthcoming, the promisee may treat it as a
repudiation and resort to the unusual affirmative and defensive remedies
a.
This
promotes mitigation of damages
4.
the
promisee may also decide to suspend performance, reserving any claims for
damages, and seek to resolve the dispute by agreement
ii.
Restatement § 250
1.
A
repudiation is 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
2.
A
voluntary affirmative act which renders the obligor unable or apparently unable
to perform wo such breach
3.
Comment a: even if it occurs before any breach by nonperformance, it may
a.
Give
rise to a claim for damages for total breach
b.
Discharge
the other party’s duties
c.
Excuse
the nonoccurrence of a condition
iii.
UCC § 2-609
1.
A
contract for sale imposes an obligation on each party that the other’s
expectation of receiving due performance will not be impaired – when reasonable
grounds for insecurity arise wrt the performance of either party the other may
in writing demand adequate assurance of due performance and until he receives
such assurance may if commercially reasonable suspend any performance for which
he has not already received the agreed return
2.
Bt
merchants the reasonableness of grounds for insecurity and the adequacy of any
assurance offered shall be determined according to commercial standards
3.
After
receipt of a justified demand, failure to provide wi a reasonable time not exceeding
30 days such assurance of due performance as is adequate under the
circumstances of the particular case is a repudiation of the contract
iv.
UCC § 2-610 (b)
1.
When
either party repudiates the contract wrt a performance not yet due the loss of
which will substantially impair the value of the contract to the other, the
aggrieved party may
a.
Resort
to any remedy for breach even though he has notified the repudiating party that
he would await the latter’s performance and has urged retraction
v.
UCC § 2-711
1.
Where
the seller repudiates, the buyer may cancel and whether or not he has done so
may in addition to recovering so much of the price has been paid
a.
Cover
and have damages as to all the goods affected whether or not they have been
identified to the contract
b.
Recover
damages for non-delivery as provided in this article
c.
Recover
the goods that have been identified
d.
Obtain
specific performance or replevy the goods
b.
Steps
to take
i.
In
writing, tell obligee I am secure, please give me adequate assurance of your
due performance
ii.
Until
such assurance is received, performance that has not yet been paid for may be
suspended
iii.
If
assurance is not received wi 30 days, the contract may be repudiated and the
order may be cancelled
X.
Compensatory Damages
a.
Basic
Policies
i.
Expectancy, reliance, and restitution damages
1.
Primary
purpose of the contract remedy: to compensate the pl for loss of expectation
2.
Primary
purpose of tort remedy: to restore (restitution)
ii.
Emotional Disturbance
1.
Border
bt contract and tort – when the breach of contract is the cause and the injury
is a tort, in addition to losing the value of the bargain, the pl is worse off
physically than he was before the contract
2.
Restatement § 353
a.
Recovery
for emotional disturbance will be excluded unless the breach also caused bodily
harm or the contract or the breach is of such a kind that serious emotional
disturbance was a particularly likely result
3.
Application
a.
ED
is not available for breach of an employment contract
b.
ED
is generally available for mishandling of corpses
i.
These
types of claims are most likely genuine
iii.
Punitive Damages
1.
Traditional Rule: punitive damages are not awarded for breach of contract
2.
Restatement § 355: punitive damages are not recoverable for a breach of contract unless
the conduct constituting the breach is also a tort for which punitive damages
are recoverable
3.
Common Rule: The breach must constitute an independent and willful tort
accompanied by fraud, malice, wantonness, or oppression to be eligible for
punitive damages
4.
Purpose
a.
Punishment
b.
Deterrence
– there must be a public interest to be served
5.
Application
b.
Breach or Repudiation by Performer
i.
Normal
Breach
1.
Natural
and usual value of the contract under ordinary circumstances
a.
Difference
in either the contract price and the cost which was or would have been incurred
in purchasing substitutions on the open market at the time of breach
b.
Difference
bt the value of what was promised and what was received
2.
When
the pl lost bargain is measured in this way, no consequential damages are
involved
ii.
Incidental
Reliance
1.
Definition: damages other than those necessary to perfect the non-breaching
party’s rights under the contract
a.
Include
loss profits, reliance expenditures, etc.
2.
Two
Types
a.
Those
that arise naturally from the breach
b.
Those
that are reasonably contemplated by the parties at the time the contract was
made
iii.
Test of Foreseeability
1.
Hadley v. Baxendale: damages which the non-breaching party ought to receive in should be
such as may fairly and reasonably be considered either arising naturally, or
such as may be supposed to have been in the contemplation of both parties at
the time they made the contract, as the probable result of the breach of it
2.
Special Circumstances: if the special circumstances under which the
contract was made were communicated by the pl to the def, and thus known to
both parties, the damages resulting from the breach of such a contract which
they would reasonably contemplate would be the amount of injury which would
arise generally
a.
The
special circumstances must be communicated so the parties can have the chance
to provide for them in the terms of the contract
iv.
UCC § 2-715 (2)
1.
Consequential
damages resulting from the seller’s breach include
a.
Any
loss resulting from general or particular requirements and needs of which the
seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise
i.
Cover:
buyer’s duty to mitigate damages
b.
Injury
to person or property proximately resulting form any breach of warranty
v.
Restatement § 351
1.
Damages
are not recoverable for loss that the party in breach did not have reason to
foresee as a probable result of the breach when the contract was made
2.
Loss
may be foreseeable as a probable result of a breach bc it follows from the
breach
a.
In
the ordinary course of events
b.
As
a result of special circumstances beyond the ordinary course of events, that
the party in breach had reason to know
3.
A
court may limit damages for foreseeable loss by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, or otherwise
if it concludes that in the circumstances justice so requires in order to avoid
disproportionate compensation
XI.
Third Party Interests
a.
Assignment of Rights
i.
Terminology
1.
Obligor: party who has not yet performed his duty
2.
Obligee: Party wo whom obligor owes a duty and has a contract right to get
performance
3.
Assignor: If the obligee transfers his right against the obligor, he becomes an
assignor
4.
Assignee: The 3rd party to whom the obligee/assignor transfers his
contract right to
5.
Account Receivable: promise to pay for services/goods that has already been performed or
delivered
6.
Contract Right: promise for future performance
ii.
Assignment
1.
In
general parties convert a right to future payment into present cash by
transferring the right to another
a.
Assignment
was not recognized at common law bc there was a lack of privity bt the 3rd
party and the obligor
b.
In
equity, this was never a problem
2.
Rights:
the rights of an assignee are subject to all the terms of the contract bt the
assignor/obligee and the obligor and any claim or defense arising therefrom
3.
US Government: claims against the US cannot be assigned
a.
Purpose:
protect the government from harassment
b.
Prevent
collusive bidding, and other bad things
iii.
Restatement § 317
1.
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 of
the 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
2.
Material
change of duty
a.
If
all of a sudden your credit card company makes you send your payment to
Siberia, and postage costs substantially more, it might be non-assignable
3.
Public
Policy
a.
A
divorced woman could not assign her right to collect child support Atlantic
City Casino bc we have a concern for the well being of the child
4.
Validly
precluded by contract
a.
Allhusen v. Caristo: must include a phrase like contract is non-assignable, else contract
will be void – otherwise, assignment is just a breach of a promise not
to assign and the resulting damages would be minimal
i.
Rationale: must balance the freedom of assignability with the freedom to
contract
ii.
Contract
wins out as long as it is specific
iv.
UCC § 2-210 (2)
1.
Unless
otherwise agreed, all rights of either seller or buyer may be assigned except
where the assignment would materially change the duty, or materially increase
the burden or risk imposed on the other party, or materially impair his chance
of obtaining return performance
a.
A
right to damages for breach of the entire contract or a right arising out of
the assignor’s due performance of his entire obligation can be assigned despite
agreement otherwise
i.
Thus,
the UCC adopted a rule that an anti-assignment clause is ineffective
2.
Fitzroy v. Cove: could argue that his duty was materially changed bc all five debts
were consolidated – Cove may have purposefully spread the debt out for easier
payment schedule, etc. – now, all payments were due at once
v.
Gratuitous Assignment
1.
Restatement § 332 (1)
a.
Unless
a contrary intention is manifested, a gratuitous assignment is irrevocable if
i.
The
assignment is in writing either signed or under seal that is delivered by the
assignor, or
ii.
The
assignment is accompanied by delivery of a writing of a type customarily
accepted as a symbol or as evidence of the right assigned
2.
The
pattern adopted is consistent with the requirement respecting gifts of chattels
that a symbolic or constructive delivery is required
a.
Do
not necessarily have to have consideration
vi.
Obligor’s
defenses against assignee
1.
Assignee
stands in the shoes of the assignor
a.
Assignee’s
claim against the obligor is subject to the same defenses the obligor would
have against the original obligee (fraud, impracticability, statute of frauds,
etc.)
2.
Notice:
an obligor is not affected by the assignment until he has notice thereof
a.
If
debtor pays his obligation to the assignor in ignorance of the assignment, he
is relieved of all liability to the assignee
b.
Sufficient Notice: such information given to the obligor as will fully inform him that
the alleged assignee is the owner of the contract right
i.
Assignee
does not have to provide a copy of the assignment unless requested by the
obligor
3.
Modification: after notice of assignment is given, the original parties cannot then
modify the contract wo the assent of the assignee
a.
UCC
permits modification to an extent
4.
Implied Warranty from Assignor: in the absence of an express agreement to the
contrary, and assignor impliedly warrants that:
a.
The
assignor will do nothing to defeat or impair the value of the assignment
b.
The
right exists and is subject to no defenses or limitations not stated or apparent
c.
Any
document evidencing the right is genuine
d.
NOTE:
the assignor does not impliedly warrant that the obligor is solvent or will
perform
5.
Priority of Successive Assignees of the Same Right: priority goes to the
assignee whose enforceable assignment is first in time unless the second
assignee, in good faith and wo reason to know of the prior assignment, gives
value and obtains:
a.
Payment
or satisfaction of the obligation
b.
Judgment
against the obligor
c.
A
new contract with the obligor by novation
d.
Possession
of a writing of a type customarily accepted as a symbol or as evidence of the
right assigned
b.
Delegation of Duties
i.
Issues
1.
In
general, when the obligor (delegator) appoints another person (delagatee) to
perform his duty to the obligee
2.
To
what extent can one party delegate the duty of performance created by a
contract to a 3rd party wo the consent of the obligee
3.
If
the delegatee fails to perform, what is the liability of the delegator
ii.
Restatement § 318
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
iii.
UCC § 2-210 (1)
1.
A
party may perform his duty through a delegatee unless otherwise agreed or
unless the other party has a substantial interest in having his original
promisor perform or control the acts required by the contract
2.
No
delegation of performance relieves delegator of any duty to perform or any
liability for breach
3.
UCC § 2-201 (5): the other party (obligee) may treat any assignment which delegates
performance as creating reasonable grounds for insecurity and may wo prejudice
to his rights against the assignor/delegator demand assurances from the
assignee
a.
Insecurity
allows a party to suspend performance until he receives reasonable assurance
iv.
Substantial Interest
1.
Contracts
usually pass the substantial interest test when:
a.
The
contract is predicated on the unique skills of the obligor, and
b.
Where
the contract is predicated on the trust and confidence that the obligee has
placed on the obligor
2.
Application
a.
Sally Beauty v. Nexxus: court held that having an exclusive dealings
contract delegated to a wholly owned subsidiary of a direct competitor violated
a substantial interest
i.
Court
did not rule on the effect that would have if Sally were only a partially owned
subsidiary, not under the direct control of Alberto Culvert
v.
Liability of Parties
1.
Delegator
cannot free himself of liability to the obligee
2.
Delegee:
a.
Restatement: delegatee who accepts delegation promises the delegator to perform
delegator’s duties
c.
Third Party Beneficiaries
i.
Creation
of rights
1.
Intended Beneficiaries: a person for whom a promisee extracted the
benefits of a promisor’s promise
a.
Promisor
is the party to give the performance that ultimately goes to the 3rd
party beneficiary
b.
Promisee
is the party bargaining for the other promisor’s promise to benefit the 3rd
party
i.
Analysis:
always ask first who is the original promisor and promisee
2.
Tests
(intention)
a.
To
whom the benefit runs
i.
If
the benefit runs directly to the 3rd party, that party is intended
ii.
If
the benefit runs directly to the promisee, the 3rd party is usually
an unprotected incidental beneficiary
b.
Intent
to benefit
i.
Whether
the 3rd party was an ultimate intended beneficiary of the promisor’s
performance
1.
Did
the promisor reasonably understand that the promisee intended to benefit the 3rd
party
ii.
A
party who receives benefit but was not intended to be a beneficiary is
incidental
1.
Criteria:
a.
Language
and terms of the contract
b.
Actual
reliance and needs of the commercial setting
3.
Restatement § 302
a.
Unless
otherwise agreed bt 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
i.
The
performance of the promise will satisfy and obligation of the promisee to pay
money to the beneficiary, or
ii.
The
circumstances indicate that the promisee intends to give the beneficiary the
benefit of the promised performance
b.
An
incidental beneficiary is a beneficiary who is not an intended beneficiary
i.
NOTE:
the restatement still makes a distinction and requires a donee/creditor
scenario
4.
Competing Policy Considerations: factors to balance when determining whether to
allow 3rd party beneficiary to recover
a.
The
extent to which the transaction was intended to affect the pl
b.
The
foreseeability of harm to the pl
c.
The
degree of certainty that pl suffered injury
d.
The
closeness of connection bt the def conduct and the injury suffered
e.
The
moral blame attached to the def conduct
f.
The
policy of preventing future harm
ii.
Government Contracts
1.
Can
a 3rd party enforce a contract where the government is promisor or
promisee
a.
Difficulty: potentially every citizen has a claim
i.
Everything
the government does is with the intent of benefiting the public
2.
Shell:
as long as the 3rd party is the intended beneficiary, they can sue
a.
Policy
considerations: encourage the party dealing with the government not to breach
its contract
3.
Martinez: the contract must specifically state an intent to benefit that class
of people
a.
There
the contract did not specifically benefit the 3rd party, but it was
an employment scheme designed to benefit all of East L.A.
4.
Factors
a.
Possibility
of excessive financial burden
b.
Risk
of multitude of claims
c.
Likelihood
of impairing government services
d.
Difficulty
of determining the intent of Congress
e.
Availability
of alternatives such as insurance
iii.
Nature
of Rights
1.
Old Rule: donee’s rights vest at the moment the agreement is made (Tweeddale)
a.
No
modifications can be made wo the 3rd party’s consent, whether they
have notice of their status as a beneficiary or not
2.
Restatement § 311
a.
Discharge
or modification of a duty to an intended beneficiary by conduct of the promisee
is ineffective if a term of the promise creating the duty so provides
b.
In
the absence of such a term, the promisor and promisee retain power to discharge
or modify the duty by subsequent agreement
c.
Such
a power terminates when the beneficiary, materially changes his position in
justifiable reliance on the promise or brings suit on it or manifests assent to
it at the request of the promisor or promisee
3.
Majority View: the right to rescind or modify a 3rd party beneficiary contract,
wo the consent of the 3rd party, ceases once the contract is
accepted, adopted, or acted upon by the 3rd party
a.
Acceptance: knowledge of the contract coupled with a failure to object is not
enough in some states
b.
Minority view: there is a presumption of acceptance when the beneficiary is an
infant