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Contracts II Outline

Contracts II Outline V. Interpreting the Agreement Contract Interpretation Review

Courts will not necessarily view these maxims as controlling! Maxims are helpful but not silver bullets

Article says the ones in Latin are written first - theres no order to the list!

Numbers are meaningless!

This battery of maxims is never fired all together its not an overarching rubric and many dont apply in the same context

Specific provision is exception to a general one Order of precedence clause

Specific dickered terms matter more than the general boilerplate language

Handwritten or typed provisions are preferred example - on checks, the handwriting trumps the numbers

Contra Proferentem Construing against the drafter Highly disfavored and rarely comes up because both parties typically draft the contract

Interpretation that makes it valid is preferred to one that makes it invalid Consistent with UCC of making business easier and getting deals through

203(a) Court should prefer an interpretation that makes an agreement reasonable, lawful, and effective over one that makes it seem ridiculous

Interpret Contract as a Whole Look at disputed provision in the context of the entire agreement. This is a truism that is done anyway

Contrasted with Purpose of the Parties which is used with caution because people interpret things different ways The Parol Evidence Rule Common Law Rule Evidence of prior or contemporaneous agreements is inadmissible to contradict or vary the terms of a written agreement. Parol Evidence is an exclusionary rule, similar to an evidentiary rule (although this rule is a part of the substantive law) about excluding certain types of information

Keep out unreliable evidence on theory that written evidence is reasonably reliable

Things to note:

Substantive rule not a rule of evidence (less easily waived)

Only operates to exclude evidence

Excludes PRIOR written agreements as well as oral evidence Parol Evidence Rule does NOT apply to agreements made AFTER the execution of the writing, only prior to/contemporaneous with

Not tied to the Statute of Frauds: applies to written agreements that couldve been made orally Four questions to keep in mind:

What is an integrated agreement?

What is the difference between a fully integrated agreement and a partially integrated agreement?

What is a collateral agreement?

What are the fundamental exceptions to the parol evidence rule?

Purpose

Farnsworth: The rule is best understood in light of its purpose: to give legal effect to whatever intention the parties may have had to make their writing at least a final and perhaps also a complete expression of their agreement If the parties had such an intention, the agreement is said to be integrated, and the rule bars evidence of prior negotiations for at least some purposes. If the rule had no such intention, the rule does not apply Provides certainty for parties

Prevents the introduction of unreliable evidence

Deters attempts to rewrite agreements with hindsight

Procedure for Application of Parol Evidence Rule:

Determine level of integration of the agreement. 210(3).

(a) Is it an Integrated agreement: one that is the final expression of one or more terms of an agreement. 209(1). Final agreement, not preliminary negotiations (b) Completely integrated agreement: one that is the final and complete and exclusive statement of the terms of an agreement. 210(1). Merger clause is evidence of complete integration; (four corners approach makes it conclusive evidence; R2d does not: an agreement cannot prove its own completeness. 210 cmt b) If completely integrated, then you cant contradict/add to terms

Partially integrated agreement: one that is not completely integrated final statement of some of the terms, but not all. 210(2). If partially integrated, then you can add to but NOT contradict terms

Default: a writing which in view of its completeness and specificity reasonably appears to be a complete agreement is assumed integrated unless other evidence establishes that the writing is not a final expression. 209(3).

Determine whether parol evidence is used to

Contradict.

Evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing. 215. Can only contradict an unintegrated agreement. (Parol Evidence Rule does not apply to unintegrated agreements)

Supplement (Add to) Can supplement a partially integrated agreement. 216.

Explain

Can explain a completely integrated agreement. (i.e., parol evidence can always be used to explain an agreement). 214(c).

Determine whether there are exceptions: Ways That Evidence of Prior or Contemporaneous Agreements/Negotiations Can Be Used. 214.

To determine whether writing is integrated or not. [Note, courts applying the four corners / Williston approach will not allow oral evidence to show writing is not integrated if it contains a merger clause, and may require indication from the writing itself that it is not a complete agreement. (See Thompson) Distinguish between parol evidence that can help with interpretation from parol evidence that can add to/contradict written terms

Classical Approach (Thompson) Integration is determined from four corners of the writing, without looking at extrinsic evidence

A Merger Clause (this document constitutes entire agreement of parties) would conclusively establish that the writing was integrated

Thinks that considering extrinsic evidence on the question of integration allows what the parol evidence rule is designed to avoid

Modern Approach (Restatement) Finding of Integration should depend on actual intent of parties and a court should consider evidence of all the facts surrounding the execution of the contract

Merger clause not solely determinative of integration (216 comment e, UCC 2-202 comment 1a)

Believes that one cannot know the intent of the parties by simply looking at the document

Both approaches admit that the parol evidence rule does not bar the use of extrinsic materials for interpretation. Difference: Plain Meaning (Classical) extrinsic evidence cannot uncover a latent ambiguity. Modern approach allows use of evidence if disputed language of the contract is reasonably susceptible to the different meanings of the parties

Apatent ambiguityis obvious to anyone looking at the document; for example, when a blank space is left for a name.

Alatent ambiguityat first appears to be an unambiguous statement, but the ambiguity becomes apparent in the light of knowledge gained other than from the document. An example is I give my gold watch to X, when the testator has two gold watches. To determine whether completely or partially integrated. To explain the meaning of any agreement (even integrated). [Note: some courts require threshold showing of ambiguity, but most do not.]

To show fraud, duress, mistake, lack of consideration, etc. [Note: some courts only allow showing of fraud in the execution = lies about what is being signed; not fraud in the inducement. See Sherrodd.] Many courts believe that not even merger clause + disclaimer can shield a party from a claim of fraud; but others agree with Sherrodd that a party cant base a claim of fraud upon the very type of representation that is disclaimed in the writing

To show grounds for granting/denying rescission, reformation, specific performance, or other remedy. [such as addition of a term inadvertently omitted] Evidence to show an entitlement to an equitable remedy (e.g., reformation of the contract) (214(e))

To show agreement(s) made after the execution of the writing PE can explain later amendments or oral discussions

Later amendments must meet standards of contract bargained for exchange w/ consideration To show effectiveness of agreement was subject to an oral condition precedent. 217. [e.g., board approval]

To establish a collateral agreement [=a separate agreement concurrent with the writing: traditionally must be separate subject matter, see Thompson v. Libby; R2d allows showing a consistent additional agreed term which is (a) agreed to for separate consideration, or (b) such a term as in the circumstances might naturally be omitted from a writing. 216(2).] Like buying a protection plan from BestBuy Generally, reliance is NOT an exception (no promissory estoppel exception to the Parol Evidence Rule). Reliance not reasonable where it contradicts the terms of a written agreement. Thompson v. Libby (Minn. 1885) Classical Approach Thompson sells logs to Libby under a signed written agreement for a certain kind of logs at a certain price. Libby refuses to pay for the logs because he said there was a warranty regarding the quality of the logs that was not met but nothing in the contract about quality!

Parol evidence is inadmissible to contradict or vary the terms of a valid written instrument.

Four Corners approach: If writing imports on its face to be a complete expression of the whole agreement, it is to be presumed that the parties have introduced into it every term and parol evidence cannot be admitted to add another term Stricter than restatement Buyer says the warranty was a collateral (separate and apart) agreement

This argument is difficult to make because there was no separate consideration for it

Like BestBuy offering you a protection plan you have to pay for it

Holding Nothing in the contract about warranty = no parol evidence allowed about warranty. It would be a term of the sale, not a separate (collateral) contract Taylor v. State Farm (Arizona 1993) Example of Interpretation of Agreement by Extrinsic Evidence Taylor sued State Farm for bad faith refusing to settle. He signed a release to get uninsured motorist money ($15K) that on its face appeared to release State Farm from any claim of bad faith refusal to settle

Taylor released all contractual rights against State Farm and all subsequent matters Taylor believes the bad faith claim to be in tort and not covered by contractual release. He wants to enter parol evidence to show his intent Issue is around whether the release language is ambiguous. Did the parties intend to release bad faith claims or not even think about the issue?

Rule When K is in writing, parol evidence will not be admitted to vary/contradict the writing but understandings may be admissible for purposes of interpretation court must decide whats admissible for interpretation

Classical Rule extrinsic evidence only based on the four corners of the document

But what appears plain/clear to one judge may not be so plain to another

Restatement Rule i. Allow extrinsic evidence to reveal latent ambiguity (determine parties intent) and determine level of integration of the contract

ii. Once ambiguity is reasonably shown, apply parol evidence rule: allow parol/extrinsic evidence to explain the contract, but not to contradict the meaning of the written agreement

Not limited to four corners of the document admit for interpretation, not contradiction

Judge first considers evidence and if he finds the language is reasonably susceptible to interpretation asserted by its proponent, evidence is admissible to determine the intent of the parties

Holding Trial court properly considered/admitted extrinsic evidence to interpret release and determine whether it included the bad faith claim.

This case is a different approach from Thompson, using the Corbin view of looking at the evidence first then determining what to exclude, as opposed to the four corners approach

Thompson Buyer wants to supplement (add to) the agreement. He wants contract to be partially integrated

Court looks to four corners of document

Willison (Classical) Document must appear integrated on its face

Taylor Wants to convince court contract means something else

Court will look to extrinsic evidence to see if Parol Evidence Rule applies

Corbin (Restatement) Consider all circumstances, writing cant prove its own completeness

Before you get to Parol Evidence Rule, court determines whether or not its completely/partially integrated

210(3)Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule. Sherrodd v. Morrison-Knudsen (Mont. 1991)

Sherrodd construction bid on job based on representation of 25,000 cu. yds. dirt to be moved. Actual amount was >2x. Contract has merger clause and says that Sherrodd personally inspected the job before bidding. Sherrodd alleges fraud in inducement. Defendants assert Parol Evidence Rule. Sherrodd says they signed knowing the work was worth more because the GC threatned to withhold payment for work already done

Small, family owned business vs. Morrison-Knudsen (big!)

Issue Should Parol Evidence be included?

Holding Court takes a classical interpretation of the parol evidence rule Parol Evidence Rule applies: evidence of oral contract cannot be used to show fraud where the oral evidence directly contradicts a term of written agreement. Cant bring evidence of concurrent oral representations that Sherrodd would be paid on per cu.yd. basis due to merger clause: no oral agreements to modify K. When agreement is in writing, there can be no evidence of the terms of the agreement other than the contents of the writing, except when a mistake is claimed or validity of agreement is in dispute

Reasoning Efficiency its better to enforce written agreements, it lets parties rely on them, etc.

Dissent says there was an oral representation that makes the courts ruling unfair. Due to this, Sherrodd has lost money, cant get loans, etc.

Parol Evidence Rule does not exclude other evidence of circumstances under which agreement was made or other evidence to explain fraud

Let Parol Rule keep evidence in. If its not credible, evidence rules will keep it out

Based on this decision, all a fraudulent party needs to do to avoid accountability for fraud is to get their victim to sign the agreement

Other ways for plaintiff to win: Unjust enrichment, Promissory Estoppel (might be unfavorable because there is a written agreement), oral condition precedent exception

UCC UCC 2-202. Final Written Expression: Parol or Extrinsic Evidence Liberal approach

Specifies the kinds of evidence that courts might use to explain or supplement the parties written agreement (whether completely integrated or not) may NOT be used to contradict

Course of performance (parties behavior on this particular agreement)

Course of dealing (parties behavior in their previous interactions)

Trade Usage (very common and well known customs of the trade or place)

Express Terms Trump All!

Express Terms>Course of Performance>Course of Dealing>Usage of Trade

Expressly rejects that the court must find ambiguity before looking at the above (2-202 cmt 2)

Consistent additional terms can be incorporated unless the court finds that the writing was intended as a complete and exclusive statement of the terms of the agreement) (2-202(b))

If you want course of dealing, trade usage, course of performance out, you have to carefully negate them pretty high bar!

Nanakuli Paving v. Shell Oil Co. (9th Cir. 1981) Modern Contract Law/UCC Nanakuli was under contract with Shell where it said the price of asphalt would be at Shells Posted Price at the time of Delivery but Shell price protects Nanakuli on its first 2 occasions of raising price (by giving 60 days notice or similar), because Nanakuli had incorporated that price into its bids. Shell breached the practice by raising their prices without any notice/production due to Arab Oil embargo and new Shell leadership.

Chevron and Shell (only two sellers in Hawaii) had price protected because government contractors were buying it and contracts with the government fixed their prices; contractors based bids on the posted price

Nanakuli argues trade usage and course of performance indicates price protection is required; Shell argues Parol Evidence Rule because Contract specifies list prices Issues/Rules:

(1) How broad was trade to whose usages Shell was bound under its agreement (do we look to whole asphalt/paving industry or just buyers/sellers in Hawaii)?

Trade Usage Any practice/method of dealing having regularity in place, vocation, or trade as to justify an expectation that it will be observed with respect to transaction in question

(2) Were the two instances of price protection acts of waiver or course of performance?

Action of the parties in carrying out contract at issue. One instance does not constitute course of performance

Preference for waiver only applies when acts are ambiguous here theyre not

(3) Is express contract terms consistent with trade usage and Shells course of performance?

Agreement means the bargain of parties as found in their language or by implication from other circumstances, including usage of trade or course of performance. Express terms dont constitute the entire agreement

(4) Court jury have found that good faith obliged Shell to give notice of price increase?

Holding - Jury is moved by trade usage and course of performance that Nanakuli should prevail. But what about express terms of the contract?

If there is a practice that is so prevalent that the parties should be aware of it, then the contract must specifically negate the trade usage if they want to vary from it.

They say parol evidence of course of performance and trade usage is supplementing, since the price protection term wasnt in the contract Price protection isnt a total negation (contradiction) of Shells posted price of delivery. Total negation would be buyer sets price at delivery

Is there some way Shell can ensure that in this contract, the terms of the contract are what matters, not extrinsic evidence?

Comment 2 to UCC 2-202(2) Unless carefully negated they have become an element of the meaning of the words used

CISG - No Parol Evidence Rule 8(3) Court should give due consideration to all relevant circumstances of the case including the negotiations

Article 8(1) interpret the contract according to a partys intent when the other party knew or could not have been unaware of what that intent was. (Modified objective approach to interpretation, consistent with R2d 201, 212, 214 use one partys intent if the other party knew or could not have been unaware of that intent).

VI. Supplementing the Agreement Rationale of Implied Terms Implied means adding language/terms/agreements/concepts to contracts that are not in the written agreement Parties dont include all terms because transactions costs might be high if you had to negotiate everything all the time, nothing would get done Terms can be Implied in Fact (through parties words or conduct); Implied by Law Implied by Law terms come from (1) statutes; (2) common law precedent (like duty of good faith); and (3) because the court concludes its appropriate

Tailored Rules: Had the parties thought about a term, they would have said this (implied in fact) Untailored Rules: All parties to all contracts are basically going to get the same standard solution that represents what the majority of parties would have wanted given the circumstances (like UCC implied warranties)

Goals: Make it easier for parties, reduce bargaining costs, promote some public policy In UCC we want to speed things up. For example, the court wont impose quantity term but they can impose price because that can be found in the marketplace

Common reasons why parties omit terms: (1) High transaction costs; (2) Strategy Parties have every intention of something but dont want to disclose it to the other party because it may scare them off, lead to another price term, addition of other terms

In Wood, recent decisions follow its principle that an implied obligation to use reasonable efforts will prevent a somewhat indefinite promise from being illusory

NOTE: IN DISTRIBUTORSHIP RELATIONSHIPS, THE UCC APPLIES!!! (Leibel) UCC is important because it provides gap fillers

2-309 (notice of termination) , 2-308 (place of delivery), 2-310 (time of payment), 2-509 (risk of loss), 2-514 (buyers right of inspection How to determine how much time is reasonable: (1) giving party time to seek a substitute arrangement (recoup of investment); or (2) considering time needed to sell off inventory; or (3) up front costs laid out in establishing the business Jury determines it!

UCC Gap Fillers can be contracted around if contract in Leibel said either party can determine without advance notice, thats OK

If no term, we read in a reasonable term. But parties can agree to whatever they want

BUT if facts would lead to an unconscionable result, you cant do it

If agreement said distributor could terminate with no notice if sales decreased for 2 years, thats OK because 2-209(3) says termination of one party except on the happening of an agreed event Wood v. Lucy, Lady Duff-Gordon (N.Y. 1917)

Justice Cardozo

Lucy is a fashionista who gave Wood an exclusive distributorship of her naming rights. Lucy placed her endorsement on some clothing without his knowledge, withholding the profits and he sues

Lucy moves to dismiss because theres no contract in that Wood didnt really promise to do anything

The underlying assumption the court makes is the implication that Woods promise means he would use reasonable efforts to market Lucys name

Without an implied promise, the transaction cannot have the business efficacy as both parties must have intended

Woods promise to pay Lucy of the profits resulting from the exclusive agency and to tender accounts monthly was a promise to use reasonable efforts to make a profit

Hypo Assume Lucy is retiring and interviews many distributors and only trusts Wood

This takes away the premise that she entered into the contract to make money, because here she had no other option

Cardozo is implying that the only way the deal in the case makes sense for her to maximize profits is to assume a bargain. In this hypothetical, her good name is given higher priority rather than maximization of profit The barrier to enforcement was the failure of Wood to make a commitment in return. Once court said there was an implied commitment, the court proceeded to the enforcement of Lucys express commitment but what if Lucy was the plaintiff? Wood would have to define what reasonable effort is tough to quantify

Leibel v. Raynor Manufacturing Co. (KY 1978) Leibel and Raynor entered into an agreement where Leibel was to have an exclusive distributorship of Raynors garage doors. Two years after the agreement, Raynor told Leibel that they were terminate the relationship. Leibel sues for breach, saying he didnt get adequate notice of termination beforehand, even though no notice provision was specified

Issues: Does UCC apply? If so, does it require reasonable notice?

UCC?

Princess Cruises What substantially predominates here? The sale of goods (garage doors) vs. the distributorship arrangement

The way the dealer makes money is selling doors sale of goods!

UCC is important here because it provides gap fillers; KY statute does not!

UCC 2-309. Absence of Specific Time Provisions; Notice of Termination (2) If contract provides for successive performances but is indefinite in duration, it is valid for a reasonable time, but unless otherwise agreed may be terminated at any time by either party

(3) Termination of a K by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable

If you dont give reasonable notification, its unconscionable!

Holding Reasonable notification is required to terminate an ongoing oral agreement for sale of goods in dealer-distributor relationship

If distributorship is terminated without allowing dealer sufficient time to sell his remaining inventory, substantial damages may result; also want time for other party to seek a substitute arrangement Implied Obligation of Good Faith Good faith is the absence of bad faith. Situations where one party claimed to be acting in ways expressly permitted or not forbidden by the contract, but other party complained such conduct was somehow improper UCC 1-203 Every contract or duty imposes an obligation in good faith in performance/enforcement

Rest. 205 Duty of Good Faith and Fair Dealing No precise definition there appears to be a subjective element of honesty

2-103 In the case of merchants, honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade

Not taking advantage, fully disclosing facts, mitigating other partys damages, etc.

We let legislatures and courts read/write in these terms because its believed it will make the commercial marketplace more effective

The issue obviously is that theres is no uniform standard its a concept courts will supplement to agreements

The implied covenant of good faith doesnt override the express rights to terminate, but it means breach may have occurred before termination of K, in performance

Apply Good Faith Obligation where:

To fill in a term that was not explicit in a contract, but is necessary to fulfill the parties expectations (Wood)

When reason for termination is given in bad faith or is mere pretext (Leibel)

When a party has discretion regarding its performance under a contract (Seidenberg)

Note: Good Faith generally cannot override an express term of the agreement:

Parol Evidence rule: blocks evidence required to contradict an express term Implied term: should supplement the agreement, but not contradict it

Distinction between subjective honesty in fact and objective commercially reasonable behavior

Mathis v. Exxon Exxon raised gas prices on franchisees with purpose of driving them out, even though the raised price was comparable with their competitors. Court said breach of good faith on the part of Exxon breach can be shown through improper motive even though prices were objectively reasonable

Good Faith in a commercial context Morin Satisfaction term in a contract is subject to good faith. Subjective honesty of opinion required where the topic is artistic/inherently subjective. BUT objective reasonableness is required where topic is utilitarian Difference is functioning cost vs. aesthetics Aluminum is a budget exterior solution. If you choose functionality and value, youre suggesting artistic discretion is compromised/lessened

It becomes a reasonable person standard instead of a good faith aesthetic standard

228 Satisfaction of the Obligor as a Condition Where personal services are involved, court is more likely to use subjective test

Where contract conditions performance by one party on others performance to satisfaction of an independent third party, Restatement indicates more tolerance for subjective test, since third party is less likely to be affected by obligors interests

Preference for objective test may be justified to avoid forfeiture

Even if court does agree with subjective honest dissatisfaction test, it doesnt mean D will ultimately prevail, it just raises Ps burden

Similarly, objective reasonableness standard doesnt necessarily mean P will win

Courts should look to what the parties are bargaining for when imposing the subjective honest standard of good faith (Locke)

UCC: Requirements and Output Contracts:

Parties leave quantity terms flexible

Requirements Contract Seller will supply all goods that buyer requires Stride Rite supplies all shoes for Wal-Mart

Output K Buyer obligated to buy all of sellers output of a given item

Tropicana buys all oranges a grove can produce

2-306. Output, Requirements, and Exclusive Dealings (1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

Exclusivity is typically an aspect of output/requirements contracts

Basically, you cant exploit an output/requirements contract you need good faith!

Originally, this may be seen as an illusory promise because youre not binding yourself to a specific thing (the output of an output K could be 0!)

Seideneberg v. Summit Bank (N.J. App. Div. 2002) Seidenberg sold health companies to Summit Bank. Agreement acknowledges joint obligation to work together with respect to the future performance of the health companies. They claim Summit failed to allow for a creation of a close relationship which impacted reasonable expectations of compensation. Summit later fired them alleged breach of implied covenant of good faith/fair dealing The lower court dismisses because (1) theres no disparity in bargaining power and (2) bringing in good faith term violates Parol Evidence Rule because its not in 4 corners of document

Regarding disparity in bargaining power, lower court is saying that when parties are competent and represented by counsel, all bets are off and no new terms can come in

Court says the Parol Evidence Rule cant inhibit the application of the implied covenant because its implied! Its NOT prior to/contemporaneous with, its implied into the agreement

Three applications of implied covenant of good faith/fair dealing:

(1) When term has to be applied to protect partys expectations

(2) When bad faith served as a pretext for the exercise of a right to terminate

Plaintiff says they got screwed because the whole employment context was a rouse they planned on firing them just so they could take company

(3) When contract provides party with discretion in its performance

Court reverses Summary Judgment. On remand, Plaintiff needs to prove that bank was out to do them harm; motive wasnt to maximize profits but to hurt them

Morin Building v. Baystone, Inc. (7th Cir. 1983) Good Faith in Commercial Context Form vs. Function Judge Posner

GM hired Baystone to build an addition to the Chevy plant. Baystone hired Morin to supply and erect aluminum walls for the addition. The contract provided for a specific kind of aluminum and that all work be done subject to final approval of GM. Morins walls didnt have a uniform finish and GM rejected it. Baystone refused to pay the balance of the contract price and Morin sued Issue How much discretion is the owner going to get consistent with a good faith standard for the purposes of accepting work?

228 - If it is practicable to determine whether a reasonable person in position of obligor (GM) would be satisfied, an interpretation is preferred under which the satisfaction occurs if such a reasonable person in obligors position would be satisfied

We can determine if owner would/should have been satisfied by asking other people architects, people who buy aluminum siding, etc.

Two standards: Reasonable Person when contract involves commercial quality, operative fitness, etc. (function over form)

Good Faith when contract involves personal aesthetics or fancy (form over function)

Here, the aesthetic considerations were secondary for function/cost considerations they chose a budget exterior solution!

Posner is saying that the contract is ambiguous based on its language. Because of that, the court reads in a reasonableness requirement because of the circumstances

Its unlikely Morin intended to bind itself to a higher standard of achieving whatever perfection GM wanted too high a risk of rejection!

Posner (economic) reasoning: The issue here is over forfeiture

You can take aesthetic standard or commercially reasonable standard. Under commercially reasonable standard, party gets paid. Under aesthetic, party does not get paid

Avoid a forfeiture!

Why is this case different from when you hire someone to paint a picture?

Case here says that you can write a contract saying your decisions are final, and court may rewrite this to change to objective standard

Difference is functioning cost vs. aesthetics Aluminum is a budget exterior solution. If you choose functionality and value, youre suggesting artistic discretion is compromised/lessened

Lowest price wins; you dont choose your artists that way

Locke v. Warner Brothers (Cal. Ct. App. 1997) Locke started dating Clint Eastwood. They broke up, she sued, they settled with her getting a development deal. They gave $250/K year for first-look and $750K for pay or play directing deal where Warners had discretion to make her films are not. They pay her all the money owed but dont use her at all. She sues contending development deal was a sham Warners is not required to hire her as a director this is much more aesthetic, not functional. They have a right not to like her stuff, but it must be in good faith

Shes suing for consequential damages Given the waiting period before she can pitch to other studios, her efforts would have been better used elsewhere where she could start her career

Rule Where a contract confers one party discretionary power, duty is imposed to exercise that discretion in good faith/fair dealing. When its a condition of obligors duty that he be subjectively satisfied with respect to obligees performance, standard is subjective honest satisfaction

There was evidence that Warners categorically wasnt going to work with her

She had a gender discrimination claim that she wound up waiving but this may implicate bad faith

Heres the takeaway Locke wasnt bargaining for Warners money, she was bargaining to get her career started as a director! Court should take what party is bargaining for into account Warranties Original Common Law Caveat Emptor Buyer Beware. Seller has no responsibility unless he expressly gave a warranty Since last quarter of 19th century, American courts responded to changing market conditions (industrial revolution) by reversing caveat emptor and imposing obligations on seller as to quantity of goods sold

After WWII, the implied warranty extends to housing market (habitability, skillful construction)

UCC 2-313 Express Warranties If seller makes a signal to the buyer to induce them to buy the product. Section says any its very broad!

Making statement/promise about goods; providing a sample; describing goods

You dont have to say warranty or guaranty, BUT an affirmation of the value of the goods or a statement of sellers opinion doesnt create warranty

Key thing youre not reading anything in!

UCC 2-314 Implied Warranty of Merchantability A merchant who regularly sells goods of a particular kind impliedly warrants to the buyer that the goods are of a good quality (pass without objection in trade) and are fit for their ordinary purpose If seller is a merchant, goods shall be merchantable for their ordinary purpose When a merchant says something, theyre guaranteeing that the product will work for its ordinary purpose If you buy this boat it will be good for boating W/o objection in trade whether significant # of consumers would object to buying goods

Fit for ordinary purposes whether goods are reasonably capable of performing their ordinary function UCC 2-315 Implied Warranty of Fitness for a Particular Purpose When a seller has reason to know of any particular purpose for which goods are required and that the buyer is relying on sellers skill/judgment to select or furnish suitable goods This is NOT just for merchants, its for all sellers Goods need not be defective, just that theyre not fit for buyers purpose Circumstances must be such that seller has reason to realize the purpose

Particular purpose differs from ordinary purpose

Reliance normally suggests superior knowledge on the part of the seller

UCC 2-316 Exclusion or Modification of Warranties (1) Express Warranties tend to be relatively hard to disclaim. Its inconsistent to suggest you can state a warranty and disclaim it at the same time Express disclaimers are clearly articulated and written

Since express warranties are created orally or by one of several writings, Parol Evidence Rule comes into play. Some courts bar it under the rule, some allow for an exception

Implied Warranties

(2) To exclude implied warranty of merchantability, you have to superficially mention merchantability and do so conspicuously (bold letters, big print)

For implied warranty of fitness, it must be in writing and conspicuous (less specific than merchantability disclaimer) (3) All implied warranties are excluded by expressions like as is, with all faults

(3b) When buyer before entering into K examines goods or refused to examine goods, theres no implied warranty with regard to defects which h and examination ought to have revealed to him (patent defects)

Patent defects Things a reasonable inspection could disclose

Duty to notice a dent in a car

Latent defects Things a reasonable inspection would NOT disclose

Termite damage

A well-crafted disclaimer may disclaim both kinds of defects

As a result of implied warranties, things cost more!

Regarding warranties of habitability and skillful construction, should sellers be able to disclaim?

This applies only to new houses. No disclaimer because a home is a huge investment

Some courts will enforce disclaimer if it is conspicuous, specific, mutually agreed upon

Law and Economics Argument Focus on who is in better position to avoid the risk, then who is in better position to bear the risk

Warranty is designed to encourage builders to build safe homes because theyre in a better position to avoid latent defects Bayliner Marine Corp. v. Crow (VA. 1999) Crow buys a fishing boat for offshore fishing. He relies on Tidewaters representation of Bayliners boat. He wanted to know about speed of boat so he sees boat can go 30 MPH when using a specific propeller. He buys boat with a smaller prop and adds 2000 lbs of extra gear, boat cant go fast. He files for breach of express/implied warranty

Particular purpose is that speed is important in Tidewater because fishing area is 90 miles offshore and speed = how long you can fish Express Warranties Any affirmation of fact/promise or any description of goods made by seller relating to goods and becomes part of the basis of the bargain creates an express warranty

Sellers opinion is NOT a warranty

Statements in the prop matrix did not relate to particular boat purchased by Crow

Hypo If Crow test drives boat and it reads 30 MPH, this may create an express warranty under (c) if thats the boat promised to him and sample becomes part of basis for bargain

Implied Warranty of Merchantability For all goods sold by merchant. Goods must be such as would pass w/o objection in the trade and are fit for the ordinary purposes for which goods are used

Crow failed to prove that boat would not pass without objection in the trade

Fit for ordinary purpose he used it for 850 hours, it works!

Implied Warranty of Fitness When a seller has reason to know of any particular purpose for which goods are required and that the buyer is relying on sellers skill/judgment to select or furnish suitable goods

Facts didnt establish that seller knew that a boat incapable of going 30 MPH was unacceptable to Crow. Crow has to express to dealer that he needs boat that goes 30 Caceci v. Di Canio Construction (N.Y. 1988)

Caceci (P) buys house from builder (D). D guaranteed for one year from title closing, work against defective workmanship, limited to replacement/repair of any defects. Four years after title, there was a dip in the kitchen floor. D tried to fix it with little avail. P hired an outside firm who said it had to do with soil, they repaired it for a cost more than the house

Issue Is caveat emptor appropriate in circumstances of home building?

Whats a reasonable inspection when you buy a home? Is average homeowner capable of determining if house has been built on solid foundation? Do we want inspector to rip up floor?

Rule Industrial revolution eviscerates laissez faire and implied warranty of merchantability becomes the law. After WWII, real property gets included in this as well It would be ironic if the law offered greater protection to a dog leash than a house!

Implied warranty of habitability and skillful construction

Reasoning

Cost prohibitive for home buyer to discover latent defects. Builder is in a better position to avoid them

Efficiency and fairness unfair to put burden of correcting defects when builder was the cause of them

Consistent with parties expectations VII. Avoiding Enforcement Before, how/when to enforce contracts (offer/acceptance), then how to interpret contracts. Now we have an enforceable contract and one party wishes to be released from the promises it has made This is not breach!

Three categories of escape mechanisms:

Lack of Capacity despite the objective manifestation of assent - (a) age; (b) mental incapacity

Bargaining Process through which the contract was made was unfair to one of the parties (focus on process, NOT the bargain itself) (a) duress; (b) undue influence; (c) misrepresentation

Unfair Term Individual term or bargain is so unfair that courts shouldnt give it effect (shocks the conscience) Minority and Mental Incapacity Minorities were declared to lack capacity to contract because they did not have judgment to protect themselves in the marketplace Over history, women, slaves, blacks, have been denied ability to contract

Clash between protecting those who need to be protected from being taken advantage of, versus protecting partys expectations when they enter into a bargain

Here, the contract isnt unenforceable, its VOIDABLE at option of party that lacked capacity at the time the contract was made Minority Rest. 2d 14 A minor can incur only voidable contracts until age 18 Exceptions: Benefit and Use Rule (Dodson)

To require a disaffirming minor to make restitution for diminished value is, in effect, to bind the minor to a part of the obligation which by law he is privileged to avoid

Dodson court makes minor pay for benefit received or depreciation in value; some courts go further and require minor to pay for the value of all benefit received

General Rule: Under statutory age of majority, minor can avoid contract (or affirm it) Infancy Doctrine If party is a minor at the time of contract, its voidable by the minor

Voidable minor has the option to enforce it or not; adult has no such power

Key exception Upon reaching age of majority, minor has to act within a reasonable time to disaffirm, or theyre deemed to affirm the transaction

Even under traditional rule, minors right to avoid contract is limited they are liable for the reasonable value of necessaries food, clothing, shelter

Minors ability to disaffirm MAY also be restricted if minor misrepresents age or willfully destructs goods Many states have exceptions so that certain contracts with minors are enforceable e.g., checking accounts

Sellers mere ignorance of minors age is NO defense to minors disaffirmance

Some states say marriage automatically give minor contractual capacity

Rule is a clear objective test as to who can be protected Downside is that there are some really smart 16 and 17 year olds who can get out of contracts

Also, youre not more responsible on your 18th birthday than you were the day before

Mental Incapacity

Rest. 2d. 15: (1) A persons contracts are voidable if by reason of mental illness: (a) He is unable to understand in a reasonable manner the nature & consequences of the transaction (cognitive test used by Hauer) 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 (volitional test) BUT (2) If contract is on fair terms and the other party did NOT know about mental illness, then power of avoidance terminate to the extent of part or full performance or changed circumstances such that avoidance would be unjust. In this case, court may grant relief as justice requires The burden of proof is on the party seeking to avoid the K because there is a presumption of competence Absent fraud or knowledge of incapacity by other party, contractual act of an incompetent is voidable by the incompetent, only if avoidance accords with equitable principles If the contract is made on fair terms and the other party has no reason to know the incompetency, the contract stops being voidable where performance changes the situation such that the parties cannot be restored to their previous positions The Rule for mental incapacity is a much more subjective standard, its more complicated People can objectively declared mentally incompetent, but not everyone seeks that adjudication -Minor generally can disaffirm even if restoration cannot be made; mental incompetent is required to make restoration to other party unless special circumstances -Contract is voidable if party has reason to know that because if intoxication, the other person is unable to understand the transaction or act in a reasonable manner (Rest. 2d. 16) Dodson v. Schrader (Tenn. 1992) Minority Incapacity Dodson took his girlfriends grandmothers money to buy a truck when he was 16. Seller thought he was 18 but they never IDd him. Car had problem, he didnt pay to fix it, and then it died. He wants refund, seller says no. He parks it in his front yard and while lawsuit is pending it gets hit Infancy Doctrine If party is a minor at the time of contract, its voidable by the minor

Voidable minor has the option to enforce it or not; adult has no such power

Reasoning Infancy privilege is to be used as a shield, not a sword

Exceptions

Benefit Rule Whatever benefit the minor received

Refund purchase price minus the benefit derived by the minor (deduction for use of the article)

Compare what a 9 month lease/rental car value would be

Use Rule Refund is subject to deduction for use, depreciation, or deterioration while in the minors custody (value of item itself) Court chooses Use Rule and further requires that transaction must have otherwise been fair and honest minor cant be overreached in any way, no undue influence, contras is fair If theres any fraud, this exception doesnt apply and minors K is fully voidable

Reasoning: It doesnt encourage honesty and integrity or good business practices if minors are taught they can buy their own things and go back to the seller to return them when theyve already used it this would lead to corruption and encourage dishonesty

Hauer v. Union State Bank (Wis. 1995) Mental Incapacity Hauer is deemed incompetent and needs a guardian after a brain injury. Guardianship terminates and Ben Eilbes wants her to cosign a note that he would repay, using her mutual funds as collateral. If he doesnt pay, she becomes contractually liable. Despite being told by her stockbroker that she was mentally incompetent, the EVP of the bank gave her the loan. When it was time for her to pay up, she sued Test Whether person in transaction had sufficient mental ability to know what hes doing AND the nature/consequences of the transaction Traditional Cognitive Standard

There was sufficient evidence that she did not know what she was doing (thought she was just cosigning)

15(2) Bank had reason to know that she was incompetent because stockbroker told the EVP she was incompetent

Evidence of bad faith is relevant to 15(2)

But the restatement just says that the K must be on fair terms

Theres no affirmative duty to inquire into the mental capacity of a loan applicant, but a contracting person exposes himself to a voidable K where it is given reason to suspect other partys incompetence Duress and Undue Influence Procedural defects in the bargaining that may affect one partys ability to enforce the contract The mere fact that something is economically challenging, inconvenient, or problematic is NOT what were looking for. Its procedural issues

Duress Typically contexts like imprisonment or actual/threatened harm (174) Now, expanded to include threats to property, economic duress

175 When Duress by Threat Makes a Contract Voidable (1) Partys manifestation of assent induced by an improper threat that leaves victim with no reasonable alternative, then K is voidable by victim

Three elements: (1) Wrongful/improper threat; (2) lack of reasonable alternative; (3) actual inducement of contract by the threat

The wrongful/improper threat need not be illegal

176 When a Threat is Improper (1) A threat is improper if

(a) What is threatened is a crime or a tort

(b) What is threatened is criminal prosecution

(c) What is threatened is use of civil process AND threat is made in bad faith

(d) Threat is breach of duty of good faith/fair dealing under existing K (2) A threat is improper if the resulting exchange is not on fair terms AND

(a) threatened act would harm recipient and would not significantly benefit the party making the threat

(b) effectiveness of threat in inducing manifestation of assent is significant 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

Contract is void if made under physical coercion. Economic duress contracts are deemed voidable Economic duress is a special type of 176(d) duress Threatening party causes financial hardship or takes undue advantage of existing financial hardship; threatens to breach existing K; which leaves other party with no reasonable alternative; and induces agreement

Posner in Selma Co. case The fact that a party agreed to a settlement because of need for cash could NOT be the basis for duress unless the other side caused the financial hardship

Inability of parties strapped for cash to enter into enforceable agreements could cause other parties to refuse to settle even when both sides wanted to this is bad

Duress Doctrine is based on principle of prevention of excess gain resulting from exploitation of impaired bargaining power The theory works best as a band-aid for incredibly egregious situations; but you cant embrace economic duress without understanding that it hurts fundamental notions of our economy

Undue Influence More economic type of coercion

Evolution of undue influence is all about who is doing the bargaining. It almost always deals with some kind of confidential (fiduciary) relationship

The difference between legitimate persuasion and excessive pressure rests in the manner in which parties go about their business

177 When Undue Influence Makes a Contract Voidable (1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising persuasion OR who by virtue of the relationship between them is justified in assuming that the person will not act in a manner inconsistent with his welfare

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

(3) If a 3rd party asserts the influence, the contract is voidable unless the other party is in good faith, has no reason to know of the influence, AND gives value or relies materially. A confidential relationship is NOT necessary, but it certainly adds to the analysis

Confidential relationship where one party has a responsibility for the other such that the other person would be more than normally susceptible to their influence. The whole point of the relationship is that person seeks guidance and therefore should be able to rely on it

Trusts, fiduciary duties, doctor/patient, attorney/client, priest/parishioner, Parents/Spouses

NOT employer/employee

To see if we have undue influence Look at Odorizzi factors! (1) Discussion of transaction at an unusual place; or (2) time

(3) insistent demand that business be finishing immediately

(4) emphasis on consequences of delay

(5) use of multiple persuaders by dominant side against a single servient party

(6) absence of third party advisors to servient party (outside counsel)

(7) statements that theres no time to consult advisors/attorneys

Were interested in substitution of will, not the substance

Totem Marine v. Alyeska (Alaska 1978)

In Totems first contract, their performance was rendered late. After Alyeska terminated the contract, Totem submitted invoices for debts incurred. If they werent paid, they would go bankrupt. Alyeska said payment may take 6-8 months, with full knowledge of Totems economic situation. Totem winds up signing a release getting them about 1/3 of their claims

Totem claims economic duress in the execution of the release. They want to rescind settlement

Elements of Duress:

(1) One party involuntarily accepted terms of another

(2) Circumstances permitted no other alternative

They couldnt wait because otherwise they would have gone bankrupt

(3) Such circumstances were the result of coercive acts of the other party

They knew full amount and they know Totems dire straits. They said they would pay full price but not in a reasonable time.

Duress must be proven by evidence that it resulted from defendants wrongful and oppressive conduct, not plaintiffs necessities

The improper threat is not paying or withholding the money for 6-8 months so that it would cause Totem to go bankrupt

On remand, the case is about whether or not settlement was signed under duress

Totem doesnt need to prove the exact amount of what they were owed, only that Alyeska acknowledge that it owed approximately that amount

Odorizzi v. Bloomfield School District (Cal. Ct. App. 1966) Odorizzi was a school teacher. He was arrested on criminal charges of homosexual activity and a day later resigned. He says his resignation was invalid because it was obtained through duress, fraud, mistake, and undue influence when after he was arrested, booked, on no sleep for 40 hours, the superintendent and principal of the school came to his house and made him sign resignation or else hed be embarrassed publicly

Duress Causing him to consent to a transaction through fear. It must be unlawful and a threat to take legal action (IN THIS CASE) is not unlawful unless party making claim is false. Their intention to suspend/dismiss him is legal so NO duress

No physical threat and what the school did is NOT illegal they can legally fire him

Fraud Conscious misrepresentation, breach of confidential relationship. No misrepresentation here and employer-employee isnt confidential NO fraud

Mistake No mistake here

Undue Influence Taking an unfair advantage of anothers weakness of mind, or taking a grossly oppressive and unfair advantage of anothers necessities or distress

Influence + Susceptibility

In combination, elements of undue susceptibility in servient person and excessive pressure by dominating person make the latters influence undue, for it results in the apparent will of the servient person being in fact the will of the dominant person Factors the court might find important when deciding if we have undue influence:

(1) Discussion of transaction at an unusual place; or (2) time

They spoke to him at his home, after he was up for 40 hours

(3) insistent demand that business be finishing immediately

Sign this otherwise your life will be difficult

(4) emphasis on consequences of delay

(5) use of multiple persuaders by dominant side against a single servient party

2 vs. 1

(6) absence of third party advisors to servient party (outside counsel) (7) statements that theres no time to consult advisors/attorneys

The factors say NOTHING about whether influence was right or wrong. Its a procedural claim Misrepresentation and Nondisclosure Misrepresentation lying; Nondisclosure Not telling something you should have Misrepresentation Contract action for rescission and tort action

Contract Remedy itself is the rescission which leads to return of consideration

May require P to return property sold. If P cant, rescission may not be allowed

A party may rescind a contract for a material misrepresentation even if misrepresentation was not made with fraudulent intent

Tort Seeking to be compensated for the wrong (punitive damages)

If misrepresentation is NOT fraudulent, courts may not recognize a tort action or may limit remedy

You can plead both or one in the alternative

164 When a Misrepresentation Makes a Contract Voidable (1) If a partys manifestation of assent is induced by either a fraudulent OR a material misrepresentation by the other party upon which the recipient is justified in relying, K is voidable by recipient

162 When a Misrepresentation is Fraudulent or Material (1) Misrepresentation is fraudulent if maker intends his assertion to induce a party to manifest his assent and the maker:

(a) knows/believes that assertion isnt in accord with facts, or

(b) doesnt have the confidence he states or implies, or

(c) knows that he doesnt have the basis that he states/implies for the assertion

(2) Misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent (objective), or if the maker knows that it would be likely to induce the recipient to do so (subjective) When is Opinion a Misrepresentation?

The opiner honestly doesnt believe what hes saying. R2d 159 Opiner falsely implies that the opinion is based on facts, or implies absence of facts that make the opinion false; R2d 168(2) When the opiner and recipient have a confidential relationship R2d 169(a) When the opiner has special skills or judgment R2d 169(b) When the opinee is especially susceptible to misrepresentation of the type involved R2d 169(c) 160 When Action Is Equivalent to an Assertion (Concealment)Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist. A party need not correct all mistakes of the other and is expected only to act in good faith and in accordance with reasonable standards of fair dealing, as reflected in prevailing business ethics A buyer of property, for example, is not ordinarily expected to disclose circumstances that make the property more valuable than the seller supposes. 163 When a Misrepresentation Prevents Formation of a Contract If a misrepresentation as to the character or essential terms of a proposed K induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed K, his conduct is NOT effective as a manifestation of assent Puffery A piece of writing like on a book jacket that contains exaggerated praise, used for promotional purposes

The action of praising or extolling in inflated language for a purpose, specially by way of advertisement

168 Reliance on Assertions of Opinion (1) Opinion if expresses only an uncertain belief as to existence of a fact or expresses only judgment

Classic Rule was that a statement of opinion could NOT be fraud. Now it can be a misrepresentation of fact if person giving it misrepresented his state of mind

(2) If its reasonable to do so, the recipient of an assertion of a persons opinion as to facts not disclosed and not otherwise known to the recipient may properly interpret it as an assertion

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

(b) that he knows facts sufficient to justify him in forming it 169 When Reliance on an Assertion of Opinion is Not Justified To the extent that an assertion is one of opinion only, the recipient is NOT justified in relying on it unless the recipient:

(a) Has a Fiduciary Relationship with the other (b) Is an expert on the matters covered by the opinion (c) is for some other special reason particularly susceptible to a misrepresentation of the type involved

Nondisclosure Classical View was that a party to a K could not avoid transaction because of nondisclosure of material information by other party

Laidlaw Buyer knew that War of 1812 ending would raise tobacco prices, but he didnt tell seller. Early bird gets the worm, no duty to disclose This is distinguishable from Hill because now you can find out if war ended. Finding termite damage is much different

Modern View In some situations a failure to disclose a material fact may justify rescission. Keetons factors:

(1) Intelligence of parties; (2) relation of parties; (3) manner in which information is acquired; (4) nature of facts not disclosed; (5) generally class of people concealing information; (5) nature of K itself; (7) importance of fact not disclosed; (8) any conduct of person not disclosing something to prevent discovery

Economic Analysis of Nondisclosure:

Deliberately acquired information should not be required to be disclosed because its socially desirable to give parties incentives to do their homework

Casually acquired information should be required to be disclosed because disclosure is least costly method

You shouldnt reward someone who has casually acquired information by letting them take advantage of others

161 When Non-Disclosure is Equivalent to an Assertion A persons non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases ONLY:

(a) Where he knows disclosure is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material

(b) Where he knows disclosure would correct a mistake of the other party as to the basic assumption on which party is making the K AND if non-disclosure amounts to a failure to act in good faith

(c) Where he knows disclosure would correct a mistake of the other party as to contents or effect of a writing, evidencing an agreement

(d) Where other person is entitled to now because of fiduciary relationship

Syester v. Banta (Iowa 1965)

Little old lady, widow, buys 4000+ hours of dancing lessons, giving her stars. The studio fired her coach but they convince him to come back when she sues. He flirts with her to drop the suit, sign a release, and she buys more hours. She was 68, she wasnt going to get much better She sues alleging fraud and misrepresentation in obtaining dismissal of previous suit and getting her to sign the releases. Trial court gives her actual and punitive damages Ps argument Studio made false statements to induce her, knowing that she cant dance.

Ds arguments No fraud/misrepresentation because her reliance on them was not justified

No confidential relationship so no duty protect her interests

We were just puffing her up

Possible Undue Influence Claim Syester was in her teachers control and the studio know it.

Odorizzi factors: They discussed transaction at her place of work (not at dance studio), he said dont waste your skills, etc.

If you want to show that the dancing critique isnt puffing, that its fraudulent misrepresentation, you want to show that Carey knows enough facts to render such an opinion and he knows that shell never be a good dancer

The Defendant convinced her to drop her attorney. Its a professional conduct issue for Ds lawyer if he knows his client is making fraudulent claims to her. Opponents lawyer cant talk to client if that client is being represented by her own counsel

Rules of Professional Responsibility assumes that lawyers are smarter and more persuasive

Court says theres evidence of fraudulent overreaching so Syester wins

Hill v. Jones (Ariz. Ct. App. 1986)

Hill contracts with Jones to buy his home. Purchase agreement provided that sellers were to pay for and place in escrow a termite inspection report. Hill noticed a small ripple in the floor and asked if it was termite damage, Jones says it was water damage. Termite inspection doesnt find termite evidence. After Hill moves in, he learns about previous termite issue sellers never mentioned it.

Hill wants to rescind purchase agreement, alleging misrepresentations concerning termite damage and failure to disclose info about termites Note Contract had a merger clause and Hill wants to bring in merger clause. Remember, Parol Evidence doesnt preclude fraudulent statements!

Vendor has an affirmative duty to disclose material facts facts that are important to the value of the property

Here, the nature of the fact disclosed - termite knowledge is a deal breaker The person concealing, a seller, would likely have to disclose that information

Its a home contract, so termite information is a big deal

Also, buyer asked and the seller lied, the seller hid termite spots from inspection

161(b) Disclosure would have corrected a mistake of fact as to a basic assumption and disclosure necessary for good faith dealing

161(a) Disclosure would have prevented previous statement from being a misrepresentation

Economic - Also, the seller had the information first hand. It was casually acquired information because they live there!

A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question

Hypo #1 What if Jones wasnt aware of termites but they should have been

Restatement seems to only include situations where they only know the facts

Hypo #2 A&B negotiate over the sale of As land to B. A tells B that land is 100 acres but its really only 90. They enter into K, can B void it?

If A knows its only 90 acres and tells B otherwise, can void since A is lying (material misrepresentation)

162(1) If A induced B to buy land on a fraudulent misrepresentation

Hypo #3 A thinks its 100 acres, but is wrong

162(1)(c) Misrepresentation is fraudulent if its to induce party and A knows that he does not have the basis that he states or implies for his assertion

162 It may be material or maybe not

Might NOT be material if those 10 acres are in excess, like if 600 of beachfront property are still contained in those 90 acres

Hypo #4 A tells B that plumbing is copper pope. Hes guessing and has no idea whether pipes are copper or not. Pipes are plastic. Can B void K?

162(1)(c) He knows that he doesnt have basis for his assertion so representation is fraudulent

162(2) Facts may determine materiality if its in a place where pipes may burst, or if youre going to flatten the house for raw materials

Park 100 v. Kartes (Ind. Ct. App. 1995)

Kartes owned a video store and was about to move to Park 100. They had their lawyer work out a lease. Right before they were to move, Someone from Park 100 came by and told them they had lease papers for them to sign and they couldnt move in unless signed. They were rushing to their daughters rehearsal dinner so they quickly called the lawyer, said it was lease papers and signed. Years later they learned this wasnt a lease, but rather a personal guaranty

After a default later on, Park 100 sued to collect unpaid rent. Kartes allege fraud defense

Fraud Clear/Convincing Evidence standard (highest civil law proof standard)

Fraud is a VERY serious allegation

Elements of Fraud: (1) material misrepresentation of past or existing facts by party to be charged which (2) was false, (3) made with knowledge or in reckless ignorance of the falsity; (4) was relied upon by complaining party; and (5) proximately caused complaining party injury

Saying they were lease papers was a material misrepresentation. He knew they werent lease papers, this proximately caused the rent they now supposedly owe

Park 100 only has to defeat one element they would go after reliance element (4), saying they had a duty to read

Also it might not be a material misrepresentation because a personal guaranty may be part of lease agreement

Material misrepresentation in singing a totally different document fraud in the execution (163)

Fraud overrules the general duty to read

Also 161(b) - Non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist where he knows disclosure would correct a mistake as to a basic assumption where nondisclosure amounts to bad faith

Court here isnt worried about duty to inform because they think Park 100 lied

Also undue influence/duress He came at end of day right before daughters rehearsal dinner and said if you dont sign you can move in Hypo Does the result change if Kartes were a big business with a legal team?

No because Park 100 was a scum bag

Yes because duty to read is heightened

Unconscionability If it doesnt SHOCK THE CONSCIENCE then its NOT unconscionable During the first half of the 20th century, problem of unfair bargains became bigger because of growth of large commercial enterprises with standards for contracts and boilerplate provisions presented on take it or leave it basis 208 Unconscionable Contract or Term If a K or term is unconscionable AT THE TIME THE CONTRACT IS MADE, a court may (1) refuse to enforce the K, or (2) may enforce the remainder of the K without the unconscionable term, or (3) may so limit the application of any unconscionable term as to avoid any unconscionable result UCC 2-302 (1) If the court as a matter of law finds the K or any clauses to have been unconscionable AT THE TIME IT WAS MADE the court may refuse to enforce the K, or it may so limit the application of any unconscionable clause so as to avoid any unconscionable result

(2) When it is claimed or appears to the court that the K or any clause thereof 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

Unconscionability determined by a JUDGE, not a jury

Unconscionability includes an absence of meaningful choice on the party of one of the parties together with contract terms with are unreasonably favorable to the other party

Procedural element = absence of meaningful choice

Substantive = the terms themselves

Procedural (Absence of Meaningful Choice) factors: Bargaining power, manner in which K was entered into, whether party understood terms, hidden terms (small print, etc.), adhesion K? Some courts hold that an adhesion contract is by definition procedurally unconscionable, other courts require something more (Higgins)

Substantive element whether terms are so extreme as to shock the conscience

Most courts require both procedural AND substantive unconscionability on a sliding scale

If only one element is outrageous enough, it may be enough for unconscionability

Public Policy

R2d 178(1): A term is unenforceable on grounds of public policy if legislation provides that its unenforceable, or interest in enforcement is clearly outweighed by a public policy against enforcement of such terms.

(2) factors weighing in favor of enforcement: Parties justified expectations Forfeiture if enforcement denied?

Public interest in enforcement of the particular term.

(3) factors weighing against enforcement Strength of policy against (legislation or judicial opinions)

Likelihood that non-enforcement furthers the policy Seriousness of misconduct; was it deliberate? Direct link between misconduct and the term?

Approaches to deal with unenforceable term:

Rescission: void entire contract Blue pencil: eliminate grammatically severable unreasonable provisions. Under this test, burden is on drafter to ensure restraint is narrow and tailored enough that it properly balances interests. If not, it will be VOID. Re-write agreement (reformation): replace scope / duration w/ more reasonable terms decided by judge. Problem: this approach may encourage employers to write awful terms, knowing court will fix if challenged. Re-write unless theres evidence of fraud/bad-faith/overreaching by drafter (R2d 184 approach) Williams v. Walker-Thomas Furniture Co. (D.C. Cir. 1965) Furniture company sells household items in payment installments (rent to own). Contract also had a provision that kept a balance due on every item purchase until the balance due on all items was paid. The old stuff paid for became collateral for new stuff. When Williams defaulted on a stereo, Walker tried to repossess all items such had purchased

Procedural Unconscionability

Store knew person couldnt afford to enter into agreement, Williams had no bargaining power, they went to home to conduct sales, term is hidden in the contract, no meaningful choice because of no competitors Seller would visit around first of the month (welfare check) adds to unusual place/time - Odorizzi Substantive Unconscionability

Ds argument This isnt a burgeoning market; theyre taking a big risk by selling to Williams; items in question are furniture which plummet in value when they leave store

Also Williams bought a stereo which is not an essential item, like a crib might be

Ahern v. Knecht (Ill. App. Ct. 1990) Note Case after Williams Woman has broken A/C unit, she calls Knecht who chargers her $700, demands payment, then doesnt fix it. She gets it fixed for $72 from someone else. Court said Knechts services were worth $150, subtracted $72, and gave judgment to her for the excess she paid Knecht

Procedural unconscionability Knowledge asymmetry, shes relying on their expertise

Substantive unconscionability They didnt do the work and they charged her more than 10x the cost of what someone else was willing to do for it

Sliding scale! Substantive unconscionability is egregious! Even when there is no actual fraud, courts will relieve against unconscionable contracts which have been procured by taking advantage of condition, circumstances, or necessity of other parties

Hypo Assuming they fixed the A/C, whats the cost justification?

They came right away, it was hottest day of the year

Scholars say anything more than 100% of market rate shocks the conscience, but it depends what were talking about

Remember people make different bargains! A bad bargain for you might be good for someone else (Batsakis)

Higgins v. Superior Court of LA County (Cal. Ct. App. 2006)

Extreme Makeover Home Edition! 5 kids move in with neighbors after their parents die. Theyre given a lengthy release to sign which includes an arbitration provision buried in the bottom. They sign it without counsel and the neighbors wind up kicking the kids out. They sue TV show claiming exploitation, TV show wants them to arbitrate issue is over unconscionability of arbitration clause Court says its unenforceable if its a contract of adhesion that is procedurally/substantive unconscionable

Adhesion (C&J Fertilizer) (1) Standardized contract; (2) negotiated (or take it or leave it); (3) significant bargaining power

Here its a standardized contract, ABC vs. bastard kids, producers met only with neighbors not kids

Procedural Unconscionability Arbitration provision is one paragraph at end of long document, its not bold, its labeled miscellaneous. ABC vs. Children. The childrens vulnerability made them attractive to ABC in the first place Substantive Unconscionability Only ABC can compel arbitration, not the kids. ABC never had to agree to provision, only the kids. Language written in one sided terms Review (Problem 7-4) See next tab VIII. Justification for Nonperformance Were still looking for ways to get out of a contract

Changes in circumstance that have occurred/come to light after formation

What most of these doctrines are doing is allocating risk between parties either prospectively or after the fact

Mistake You dont always have information and things can go wrong but parties anticipate contingencies then draft remedy clauses if that contingency occurs Mistake overrides or avoids (nullifies) parties agreements

151 Mistake A mistake is a belief that is not in accord with the facts Expectations arent facts so you cant be mistaken as to them

152 When MUTUAL Mistake Makes K Voidable (1) Where mistake of both parties AT THE TIME THE K WAS MADE as to a basic assumption on which K was made has a material effect on the agreed upon exchange, the K is voidable by the adversely affected party unless he bears risk of mistake under 154

(2) In determining whether the mistake has a material affect on the K, account is taken of any relief by way of reformation, restitution, or otherwise

NOTE theres a lack of consistency in mutual mistake cases. Court in Gartner allowed rescission on basis of mutual mistake of fact opposite of Lenawee Gardner had to do with zoning ordinances which is a matter of public record the assumption of the risk seems greater there 155 When Mistake of BOTH Parties as to Written Expression Justifies Reformation Where a writing that evidences or embodies an agreement fails to express the agreement because of mistake of both parties as to contents or effect of writing, court may at the request of a party reform the writing, except to the extent that rights of third parties will be unfairly affected

NOTE Relief available for mutual mistake other than mistake in writing is ordinarily rescission, along with appropriate restitution. Some courts fashion a remedy to fit nature of the mistake

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

(a) The risk is allocated to him by agreement of the parties, or

(b) he is aware, at the time the K is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

(c) the risk is allocated to him by the court on the ground that its reasonable under the circumstances to do so

153 When UNILATERAL Mistake Makes Contract Voidable Where a mistake of one party at a time of K was made as to a basic assumption on which he made the K has a material effect on the agreed exchange of performances that is adverse to him, the K is voidable by him if he does not bear the risk of the mistake as stated in 154 AND (a) Effect of mistake is such that enforcement of the K would be unconscionable OR

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

NOTE Unconscionable in this context means severe enough to cause substantial loss See rule from Wil-Freds Differs slightly!

Courts are disinclined to let people out of K simply because they entered into a bad deal they need to be mistaken as to some basic assumption for entering into K 157 Effect of a Partys Fault on Availability of Relief: the party can still avoid the contract as long as fault was not failure to act in good faith / fair dealing 158 Restitution Damages Available: (along w/ rescission of K), Reliance damages and other relief available if restitution isnt enough to avoid injustice. Lenawee County Bd. of Health v. Messerly (Mich. 1982) Mutual Mistake Pickles bought apartment building from Messerly. After the deal, the board of health shut down the place because of defective sewage system, installed before Messerlys ownership. Pickles made no payment for land, Messerly files cross complaint against them and Pickles counterclaims for rescission

No fraud/misrepresentation because both parties didnt know! Issue is over mistake

Court says BOTH parties were mistaken as to the income-producing capacity of the property in question that property had a functioning septic tank

D says no mistake because the defect arose after K was executed, but this confuses existence of the mistake with its discovery Court approaches rescission on a case by case basis Rescission when mistake relates to basic assumption on which K was made AND which materially affects performance, unless affected party bears risk of mistake

They dont like the Messerlys argument regarding distinction between mistakes as to value (no rescission) and mistakes that touch substance of consideration (rescission) Messerlys arguments Mistake relating to value of property A&M Land Development Co. Mistake was that he thought he could install septic tanks to develop and sell each lot. Court said even though this was true, the land still has value so its not enough for rescission

Pickles argument Mistake relating to Essence of Bargain Sherwood (Cow Case)

Thought they were selling a barren cow (used for meat or as a pet), then found out it was fertile and seller wouldnt sell. Court says rescission is allowed

Theres not much of a difference Court says theyre unhappy with the test and want to look at it case-by case

But this may lead to a lack of consistency

Restatement Application:

Mistake The septic tank was in working order & property would meet health requirements

Both Parties Neither party knew

At time K was made They found out after K was made

Basic Assumption Had parties not been mistaken, they wouldnt have bought and seller wouldnt have gotten that price

Material Effect Materiality is proven by the fact that its a basic assumption (Its not a minor inconvenience)

Adversely Affected Party Tough one here court assigns risk to buyer because of as-is clause

He bears the risk of mistake under 154(a) the risk was allocated to him

Risk was allocated by the parties

Rescission is an equitable remedy but because of as-is clause, risk is allocated to buyer rather than seller

Court suggests that neither party knew and sellers could have done an investigation but they allocated risk to buyer. If buyer chose not to investigate, they did so at their own risk

DIFFERENT from Caceci case with implied warranty of construction because here both parties had no knowledge Messerly didnt install septic

Court says Pickles not entitled to rescission because even though theyre disadvantaged, the risk was on them

Wil-Freds v. Metropolitan Sanitary District (Ill. App. Ct. 1978) Unilateral Mistake Ciaglo is a subcontractor to Wil-Freds. They made a mistake thinking they could use heavy construction equipment so they wound up underestimating costs by $150K the total bid was off by 50%. Wil-Fred wants to withdraw bid but District wont let them because there was a clause in the contract that if they withdrew they wouldnt get security deposit back Issue isnt over getting out of the K they can definitely do that its over Wil-Fred wanting their bond back because Ciaglo would have to file bankruptcy if forced to do work

Wil-Freds argument is just that they were unilaterally mistaken

Rule: (1) Mistake relates to a material feature of K; (2) it occurred notwithstanding the exercise of reasonable care; (3) it is of such grave consequence that enforcement of the K would be unconscionable; (4) other party can be placed in status quoevidence must be clear and positive

(1) Wil-Fred never would have submitted bid if Ciaglo didnt make their 17% mistake. Substantial mistake = material

(3) Grave Consequences if Wil-Fred loses bonding capacity, they cant bid on jobs (its like losing insurance). Ciaglo would be bankrupt (4) Sanitary district could be put in status quo because they didnt rely on bid, were told it was in error immediately; they estimated job at $1.2 million which was near the 2nd bid (2) Reasonable Care is the issue!

Due care when Wil-Fred selected Ciago because they had experience, had worked together

They reviewed price quote twice and told District about mistake immediately

The quote was $235K lower than next bid discrepancy should have placed District on notice that bid had an error Changed Circumstances Changed circumstances SINCE the formation of contract If nothing has changed since parties got into the contract, move on to another theory Mistake has to do with something not understood at time of contract. If parties are not mistaken and then something changes, its into this subcategory Defense of changed circumstances is a question of law for a judge, not a jury

Impossibility Relates to sale of UNIQUE goods

If YOU break the unique item, its breach. If it breaks beyond your control, then its impossibility

Taylor v. Caldwell Music hall burned down and Caldwell couldnt be liable because hall was essential to the K and parties had contracted on the basis of its continued existence

When a person or thing is necessary for Ks existence dies/incapacitated or destroyed/damaged, duty of performance is excused

Impracticability Sometimes let party out of K where its really difficult/expensive to perform and that wasnt obvious at the time parties entered into the K

So expensive its not unreasonable, BUT only because of changed circumstances

Mineral Park v. Howard gravel extraction case that court excused because of VERY large increase in costs

Determine if something occurs whose non-occurrence was a basic assumption on which K is made

If that thing occurs, then duty to perform is discharged

261 Impracticability Rule Where, after a K is made, performance is made impracticable without his fault by an occurrence of which the non-occurrence of which was a basic assumption on which K was made, his duty to perform is discharged, unless language/circumstances indicate otherwise Mere lack of profit under K is insufficient

Continuation of market conditions and financial situation of one of the parties are ordinarily NOT such assumptions Severe shortage of supplies due to war, crop failure, etc. which causes big increase in costs may bring it under this rule

Some courts occasionally find impracticability resulting from an unexpected event that causes an overwhelming increase in cost of performance (like Mineral Park) 263 Thing Necessary for Performance If existence of a specific thing is necessary for performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which K was made

262 Person Necessary for Performance If existence of a particular person is necessary for performance of a duty, his death/incapacity that makes performance impracticable is an event the non-occurrence of which was a basic assumption on which K was made 264 Prevention by Government Regulation If performance of a duty is made impracticable by having to comply with a governmental regulation, that regulation is an event the non-occurrence of which was a basic assumption