CONTRACTS OUTLINE

CONSIDERATION

CONSIDERATION Value given by one party in exchange for performance or promise to perform by another party legal detriment suffered by the promisee in exchange for the promisor’s promise

Gratuitous promises w/no reliance or consideration unenforceable (DeLeo – Jewish congregation)

Exception for charities (Allegheny College – Cardozo pulls a fast one, memorial = reliance)

Forbearance of a legal right (detriment) (irrelevant whether promisee benefits) can serve as valid consideration (Hamer v. Sidway – nephew promised $ if stops smoking, gambling, etc.)

NOMINAL CONSIDERATION

Mere inadequacy of consideration will not void a contract (Batsakis 591)

Martin v. Little Brown & Co. (471) law student gave tip about plagiarizer

Implied In Fact Contract = Agreement legitimately inferred from parties’ intentions evidenced by circumstances, course of dealing & common understanding. Must render services in circumstances promisor can entertain reasonable expectation of payment by party benefited. No bargained-for-exchange & no consideration by promisee – not enough to establish existence of implied contract

Implied In Law Contract “quasi-contract” = obligation created by law for reasons of justice

Qunatum meruit given in cases of unjust enrichment

REST. 2d § 71(2) – BARGAIN DEFINITION:A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

Bargain Element For a promise to be supported by consideration, the promisee’s detriment must have been bargained-for by the promisor (see definition for bargain).

PAST CONSIDERATION

Promises unsupported by consideration, not done at D’s request, & for services received in the past are generally held unenforceable (Mills v. Wyman 211)

Webb v. McGowin (216) P saved D and D promised payment. D affirmed they duty to pay.

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Unrequested rescue created moral duty to P, since D received directed benefit. D affirmed by offering compensation.

Where promisee cares for, improves, & preserves promisor’s property, though done w/o request = sufficient consideration for subsequent agreement to pay for service b/c of material benefit received Where benefit of services to promisor (and/or provider cost) substantial, courts will most likely hold K enforceable

REST. 2d. § 86 – Promise for Benefit Received(1) A promise made in recognition of a benefit previously received by the promisor from the

promisee is binding to the extent necessary to prevent injustice(2) A promise is not binding under Subsection (1):

(a) if the promisor conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or

(b) to the extent that its value is disproportionate to the benefit.

Exceptional Situations- Reasonable Payment Expectation is essential element of a claim for restitution - Compensation justified where person acting in course of profession- Purely humanitarian or otherwise non-professional voluntary acts of small value not entitled to compensation and contractual obligation

(snotty law student trying to receive compensation for volunteering)

Other cases binding without consideration – SOL, bankruptcy, minor contractsStatute of Limitation

- Most states require promise to pay debt be in signed writing - Sometimes promise to repay implied from debtor’s actions

Voluntary acknowledgement of debt Voluntary transfer of money, etc. Statement that SOL won’t be pled as defense

Bankruptcy - Most states require promise to pay debt be in a signed writing- Courts enforce express promise & won’t infer promise from debtor’s actions

PRE-EXISTING LEGAL DUTY RULE

C/L Requirement of additional consideration for modification to be enforceable- Exceptions

o Unforeseen Circumstanceso Statute Provisiono Detrimental Reliance (material change in position b/c of mod)

UCC § 2-209 (abolishes PDR) Modification, Rescission and Waiver- Only a good faith requirement, no consideration necessary- Modifications bringing K w/in SOF must be in writing- Although “No Oral-Modification Clause” – may be waived

o (Universal Builders v. Moon Motor Lodge 617), foreman waived by requesting add’l work

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REST. 2d, § 73Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration

REST. 2d, § 89 – Promises Modifying ContractsA promise modifying a duty under a contract not fully performed on either side is binding

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

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

in reliance on the promise

Party cannot claim estoppel based on his own wrong, where the promise is simply a repetition of a subsisting legal promise When party merely does what already obligated to do, he can’t extort more money (Alaska Packers Ass’n - 601)

Alaska Packers – fisherman were given insufficient nets, thus fewer fish and less compensation

Parties can rescind contract by mutual consent & then make new K where their mutual promises are consideration for each other (Schwartzreich 605 – Coat designer rehired at higher wage so he wouldn’t leave)

Gray Area – parties agree to mutual rescission and then sign new contractMany argue the aim of rule is better left to duress doctrine

Brian Construction v. Brighenti (612) (1978) – P is general building a post office. D is sub grading the site. Found rubble. P agreed to pay D additional compensation to clear it.

When party agrees to perform obligation already owed, although for lesser money, 2nd

agreement invalid however, new & distinct agreement imposing additional burdens supported by consideration is valid. Unforeseen, burdensome circumstances (additional obligation) involving greater consideration constitute separate contract

***Isn’t the smarter thing to do here just build up damages and then sue for B/K? Loss of reputation? Build it into K as liquid damages (? Maybe). If D claims impractability let him see how he fares. Unless paternalistic ct. then D should fulfill K.

Universal Builders v. Moon Motor Lodge (617) (1968) P had K to build motel. K that changes must be ratified by D in writing.

UCC § 2-209(4)(5) – K can be modified orally even if K has no oral modification clause may waive provision – If oral agreement or permission given while performance of condition possible & in reliance on agreement/permission, while it is un-revoked, promisee materially changes his position = enforceable

Promissory Estoppel

REST. 2d, § 90 – Promise Reasonably Inducing Action or Forbearance

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(1) Promise which promisor should reasonably expect to induce action or forbearance on part of promisee or third person & which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of promise. Remedy granted for breach may be limited as justice requires.

(2) A charitable subscription or marriage settlement is binding under subsection (1) w/o proof that the promise induced action or forbearance

NOTE – Usually limited to reliance damages, but modern courts have leaned towards expectation damages (in alliance w/norms of contract law)

THREE PART TEST(1) Promise which promisor should reasonably expect to induce action or

forbearance of a definite & substantial character?(2) Promise induced such action or forbearance?(3) Injustice avoided only by enforcement of the promise?

Ricketts v. Scothorn (231) Grandfather induced g.daughter to stop working.

Where a gift induces detrimental reliance, the donee may collect on the promise under the doctrine of promissory estoppel

NOTE For intra-family gifts upon which there is reliance, damage award is typically limited to “out-of-pocket” losses, not expectation interest.

Goodman v. Dicker (279) (1948) D applied for dealer franchise under P’s urging. Caused harm. Misrepresentation?

Where reasonable reliance is incurred in furtherance of oral promise, equitable reliance damages are appropriate to serve the ends of justice

Reliance on negotiations may be enforceable through doctrine of PE (Hoffman v. Red Owl 284 – P worked with Red Owl representatives to sell his biz, move, and relied on Red Owl. Somewhat odd case.

- Expands PE doctrine even though no actual offer existed (just promises)

Allegheny College v. Chautauqua Bank (234) charitable endowment later repudiated.

Posthumous remembrance = consideration to make K enforceable

NOTE Modern courts typically DO NOT impose detrimental reliance requirement in cases of charitable subscription (only applicable w/written promises) – Rest, 2d § 90(2)

RELIANCE & STATUTE OF FRAUDS

PART PERFORMANCE (remedy against SOF): E 269 Specific Performance = remedy in Part Performance cases (involving only land) To compel SP, reliance must not be adequately compensable in money Critical enforceability element = actual possession by promisee w/promisor’s

acquiescence – varying forms in different stateso In some: possession

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o In others: possession + partial (or whole) paymento In others: possession + permanent improvements

REST. 2d. § 139 – Part Performance(1) Promise which promisor should reasonably expect to induce action or forbearance on part

of promisee or third person & which does induce the action or forbearance is enforceable notwithstanding the SOF if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.

(2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant:

a. Availability & adequacy of other remedies, particularly cancellation & restitution;b. The definite & substantial character of action or forbearance in relation to remedy

sought; c. The extent to which action or forbearance corroborates evidence of making &

terms of promise, or making & terms are otherwise established by clear & convincing evidence;

d. The reasonableness of the action or forbearance;e. The extent to which the action or forbearance was foreseeable by the promisor

Seavey v. Drake (225) (1882) Father tricked son. Gave him land but never title. Conduct shows K

Expenditure in money & labor (in equity) = consideration for promise & will be enforced Where SOF may exempt for lack of written contract or memo, equity mandates that there be an exception to rule when part performance/reliance has taken place

EQUITABLE & PROMISSORY ESTOPPELo Majority expansion of PP desirable (beyond land cases)o Equitable Estoppel deals w/past wrongs & Promissory Estoppel deals w/reliance on

future promises and damages resulting from the reliance

LIMITED PROMISES

ILLUSORY PROMISE: Statement which appears to be promising something, but which in fact does not commit promisor to anything at all

REST. 2d, § 77 – Illusory & Alternative PromisesA promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless(a) Each of alternative performances would have been consideration if it alone had been bargained for; or(b) One of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration

Where promise reserves complete discretion to the promisor to act as he chooses, promise is illusory & unenforceable – in effect, promisor fulfills his promise however he acts (Davis v. General Foods Corp. 355, 1937 – P offers recipe expecting payment. D offers illusory promise back.)

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Nat Nal Service Stations v Wolf 355 – neither party was bound to any obligation due to the indefiniteness of the time period. Each sale constituted a separate contract, thus the wholesaler was not obligated to give the discount.

ALTERNATIVE PROMISES: A promise which reserves to promisor several alternative performances

Generally enforceable if each alternative performance would have been consideration if it had been bargained for alone (Rest. 2d, § 77(a))

Consideration where one alternative would be consideration & substantial possibility that, before promisor makes choice, events will eliminate others

PARTY DISCRETION If one party’s performance left completely to his discretion, so that he may choose not to perform at all, he has not furnished consideration for the other party’s promise

MUTUALITY OF OBLIGATION

Promise = consideration if performance promised, either act/forbearance, would be consideration if it alone were bargained for (bilateral contract context) Each party must make promises that somehow bind them at some period of time

Gurfein NOT IN CASE BOOK – parties are bound since there was a time when seller could have shipped and buyer was obligated to pay, even though buyer had the right to cancel before shipment

The fact that a rule of law renders a promise voidable or unenforceable does not prevent it from being consideration (Rest. 2d, § 78) – allows purchaser who was defrauded option to still make purchase

IMPLIED PROMISES

Wood v. Lady Duff Gordon (361) Lucy hires Wood to place her endorsements and sell her designs – he has exclusive right. Wood will give her % of profits. Lucy claims that “unless he gave his efforts, she could never get anything” – e.g., lack of mutuality. Wood’s promise to pay her profits was, in effect, a promise to use reasonable efforts to bring profits and revenues. He also had duty to try to sell her designs and place her endorsements on others’ designs; otherwise, no point in promising to account for profits.

Implied promise to use “good faith efforts” to market D’s designs = sufficient detriment to P to constitute consideration for D’s counter-promise of exclusivity – understood that there was a circumstantially & textually implied “instinct of obligation”

REST. 2d, § 205 – Good FaithEvery contract imposes upon each party duty of good faith & fair dealing in performance & enforcement

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Good Faith Emphasizes faithfulness to agreed common purpose & consistency with justified expectations of other party

Bad Faith (1) Evasion of spirit of bargain, (2) lack of diligence/slacking off, (3) willful rendering of imperfect performance, (4) abuse of power to specify terms, & (5) interference with or failure to cooperate in other party’s performance

REQUIREMENTS & OUTPUT CONTRACTS

Non-UCC requirements & output contracts usually valid if buyer (requirements contract) implicitly promises “best efforts” to sell goods and/or seller (output contract) implicitly promises attempt to maintain production at reasonable level

UCC § 2-306 – Output Requirements & Exclusive Dealings(1) Term which measures quantity by output of seller or requirements of buyer means actual output

or requirements as may occur in good faith except no quantity unreasonably disproportionate to any stated estimate or in absence of 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 seller to use best efforts to supply goods and by buyer to use best efforts to promote their sale

- Exclusivity of dealings implied (buyer/seller buys everything from other) - Does not lack for mutuality of obligation – “best efforts” qualifies

Feld v. Henry S. Levy & Sons (370) – Bread Crumbs

Short of cancellation provided for in K, D expected to continue to perform in good faith & could cease production only in good faith. Good faith required continued production until cancellation, even if no profit (good faith cessation might’ve been ok)

Output Ks don’t lack mutual obligation & not unenforceable b/c of term indefiniteness. Party to determine quality/quantity required to act in good faith & produce in good faith according to reasonable commercial standards

Corenswet 373 Franchise termination by giving 10 days notice. Extent of good faith requirement? – termination of contract not a violation of good faith if there is a clause allowing termination without reason

Raises separate issue of whether unilateral termination w/o cause violates unconscionability clause

MUTUAL ASSENT

MUTUAL ASSENT: For contract to be formed, parties must both intend to contract & must agree on at least the main terms of the deal

Irrelevant whether parties to K subjectively intended to be bound; intentions measured by what reasonable person in position of other party would have thought 1 st party intended

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Dickey v. Hurd 295 (selling of land, ambiguous statements) – if one party is aware of the other party’s ambiguity of term, they must inform them

Embry v. Hargadine McKittrick Dry Goods Co. (296) – salesman about to lose job. Boss reassures him. Employee takes that as keeping job.

Law imputes intention corresponding to reasonable meaning of words & deeds – judges intention by outward expressions & excludes all questions in regard to unexpressed intention. If outward expression and/or acts manifest intention, immaterial what may have been real, but unexpressed, state of promisor’s mind on subject of agreement

Kabil Developments v. Mignot (300) – Ds provide helicopter services; deny existence of construction project K w/P; P sues for breach of K.

Objective theory of contracts objective test doesn’t preclude admission of ‘subjective’ testimony concerning whether party felt he was entering into contractual agreement When dispute concerns unwritten agreement, conclusion of mutual assent constructed from evidence of negotiations/other past conduct

NOTE: If parties’ actions make clear intention to be bound even b/f legal document, courts will almost always find enforceable K (regardless of document)

If neither party intends the meaning of the contract, then not bound to it(New York Trust Co. v. Island Oil & Transport Corp. 304 1929 – sham K’s with sham subsidiary organizations.)

REST, 2d § 21 Neither real nor apparent intention that promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract

Moulton v. Kershaw – 317 Salt Advertisement

Generally, advertisements not considered offers ; however, if offer clear, definite & explicit, leaving nothing open for negotiation, may be enforceable as offer inviting acceptance (e.g. wording expressing commitment – particular number of units or particular manner – are more likely to be considered offers)

Empro Mfg. Co. v. Ball-Co Mfg., Inc. 380 (1989) – P wants ct to enforce letter of intent as binding agreement. P left itself lots of escape clauses, but D ended up pulling out of deal.

Parties may have agreement in principle, but if material terms left for future negotiations = unenforceable

“Sliding scale” of bindingness:- letter of intent- option K

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- regular KEasterbrook doesn’t buy the argument that it was an [enforceable] option K.

Preliminary agreements typically not binding, those that are fall into 2 categories:Fully binding preliminary agreement – parties agree on all parts but agree to

memorialize agreement in formal documentBinding preliminary agreement – parties agree on certain major terms, but leave

others open for further negotiation, only required to have good faith in negotiations

UCC § 2-305 – Open Price TermThe parties, if they so intend, can conclude a contract for the sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if:

(b) nothing is said as to price; or(c) the price is left to be agreed by the parties and they fail to agree; or(d) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a

third person or agency and it is not so set or recorded

UCC § 2-305 – Open Price Term- Price is a reasonable price at the time set for delivery - Price term to be fixed in good faith- Where price term not fixed by fault of one party, other may cancel or fix the

term at a reasonable price

UCC § 2-309 – Time for Shipment Unspecified- Reasonable time after contracting- Termination by one party (except on happening of agreed event) requires

reasonable notification & an agreement dispensing therewith is invalid if would be unconscionable

OFFER & ACCEPTANCE

REST. 2d § 24 – OfferThe (objective) manifestation of willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude [the bargain]

OFFER – Creates immediate power of acceptance in offeree

Invitation to Deal v. Offer- Communication advising interested parties that something is for sale for “a

price not below x” merely establishes basis for auction & does not constitute offer (unless perhaps on basis of prior dealings)

o Bid Solicitations – basis for preliminary negotiations – whether solicitee would reasonably believe a bid is a solicitation or offer

If containing words of commitment, may become offer (i.e. highest bidder by certain date)

o Price Quotations – implies reservation of right on supplier’s part to accept or reject customers’ orders

Can be considered as an offer if language dictates “for immediate acceptance”

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No offer if reserving power to close deal w/proposero Retail Advertisements – usually just invitations to deal

Can be offers if sufficiently definite & explicit, inviting particular performance

Particular number of units or sale in particular manner

INDEFINITENESS

REST, 2d. § 33 – Certainty/Indefiniteness(1) Even though manifestation of intention meant to be understood as an offer, it cannot be

accepted so as to form a contract unless the terms of the contract are reasonably certain(2) The terms of contract reasonably certain if they provide basis for determining existence

of a breach and for giving an appropriate remedy(3) The fact one or more terms of proposed bargain are left open or uncertain may show

manifestation of intention is not intended to be understood as offer or as an acceptance

Terms of a contract are sufficiently definite (1) if they provide basis for determining existence of breach and (2) basis of appropriate remedy

Even if terms are initially too indefinite, subsequent performance may cure the indefiniteness

Essential Elements of Agreement – - Parties to the contract- Subject matter of the contract- Time for performance &- Price

UCC § 2-204 – Formation in General(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes existence of such a contract(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined(3) Even though one or more terms are left open, K for sale does not fail for indefiniteness if the parties have intended to make a contract, and there is a reasonably certain basis for giving an appropriate remedy

Comment: The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement, but their actions may be frequently conclusive on the matter despite the omissions

If intent to K evident, Court supplies missing terms – UCC § 1-303…- Trade Usage (general standards in the field)

o Flower City Painting Contractors v. Gumina Constr. Co. 293 K to paint units. Sub says only interior. General says int. and

exterior – consistent w/trade usage. Who’s right? Can ct. enforce according to trade usage? Would expect ct to agree w/general. But instead says no K, no meeting of the minds. Maybe ct went easy on sub since it was new to the business (unsophisticated).

- Course of Dealing (previous dealings b/w parties to K)- Course of Performance (conduct after entering K)

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Empro Mfg. Co. v. Ball Co Mfg. 380 (1989) – P wants ct to enforce letter of intent as binding agreement. P left itself lots of escape clauses, but D ended up pulling out of deal.

LOI test is whether parties intended to be bound (objective theory) best way of telling is through the actual words of LOI phrases such as “subject to” indicate that LOI not intended to be binding

MISUNDERSTANDING – Prevents K from Ever Existing

REST. 2d, § 20 – Effect of Misunderstanding(1) There is no manifestation of mutual assent to an exchange if the parties attach materially

different meanings to their manifestations; anda. Neither party knows or has reason to know the meaning attached by the other; orb. Each party knows or 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

GENERAL RULE: If misunderstanding concerns material term & neither party knows, or has reason to know, of misunderstanding, no contract

If offeree is negligent in misunderstanding the terms of the offer, he is generally bound by the K terms as stated. Exception: Flower City Painting Contractors v. Gumina Constr. Co. 293 K to paint units. Sub says only interior. General says int. and exterior – consistent w/trade usage. Who’s right? Can ct. enforce according to trade usage? Would expect ct to agree w/general. But instead says no K, no meeting of the minds. Maybe ct went easy on sub since it was new to the business (unsophisticated).

No “meeting of the minds” & “latent ambiguity” as to what terms of agreement actually signified – no consensus If misunderstanding concerns material term & no meeting of the minds, there is no contract

REST. 2d § 50 – AcceptanceOfferee’s (objective) manifestation of assent to terms of the offer, made in a manner invited by the offer

Cobaugh v. Klick Lewis, Inc. (331) (1989) – Hole-in-one

Offer = manifestation of willingness to enter bargain w/understanding that acceptance of another party to enter terms of bargain will conclude it. Manifested, objective intent of offeror, not subjective intent, determines whether offer is invitation for assent & acceptance according to its terms (where no specified time-limit on offer, it remains open for a reasonable time – unless revoked)

Raffles v. Wichelhaus (Peerless) (292)

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NOTE Claimant must know of offer when giving desired information or performance; otherwise, mere public service or accidental action (reporting crime, etc) – impossible to assent w/o knowledge of existence

Glover v Jewish War Veterans (334) (1949) – Gave information leading to arrestlater found out there was an reward for that info. Didn’t receive reward because impossible to assent w/o knowledge of existence

DURATION OF POWER OF ACCEPTANCE

REST. 2d, § 36 – Methods of Termination of Power of Acceptance(1) An offeree’s power of acceptance may be terminated by

(a) rejection or counter-offer by the offeree, or(b) lapse of time , or(c) revocation by the offeror, or(d) death or incapacity of the offeror or offeree

(2) In addition, an offeree’s power of acceptance is terminated by the nonoccurrence of any condition of acceptance under the terms of the offer.

Rejection – terminates offer unless…- The offeror indicates the offer still stands in spite of rejection or- The offeree states that, although not presently accepting, wishes to consider

Lapse of Time - If no time limit explicitly set on offer, expiration after “reasonable time”- Offeror may treat a late acceptance as valid if he so chooses

Counter-Offer – terminates offer unless…- Offeror indicates otherwise- Original offer was irrevocable (option K)- Counter inquiry (still has power to accept) distinguished from counter-offer

Death or Incapacity Non-occurrence of Condition of Acceptance

UCC, § 2-206 Offer and Acceptance in Formation of Contract(1) Unless otherwise unambiguously indicated by language or circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances

(2) Where beginning a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance

RULE: If mechanism or medium of acceptance unspecified, offeree may complete acceptance through the medium of his choice (but if performing, must notify offeror of acceptance within a reasonable time)

REST. 2d § 32 – Invitation of Promise or PerformanceIn case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance as the offeree chooses

REST, 2d § – Effect of Performance Inviting Either Performances or Acceptance(1) Where offer invites offeree to choose between acceptance by promise and acceptance by performance &

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offers beginning of invited performance or a tender of a beginning of it is an acceptance by performance.

(2) Such an acceptance operates as a promise to render complete performance.

Allied Steel v. Ford (338) (1960) F hired A for construction in F’s plant. Initial purchase order K had narrow indemnity provision. Then amended to include broad indemnity provision. But before A returned the acknowledgement (specified manner of acceptance), injury occurred. A says not liable since provision not in force at the time.

If offeror prescribes exclusive manner of acceptance, attempt by offeree to accept offer in different manner does not bind offeror in absence of meeting of minds on altered type of acceptance Where offer unclear as to acceptance by promise or performance, offeree may accept by either (Rest. 2d § 32) & beginning performance IS acceptance of full performance contract (Rest. 2d § 62)

Davis v. Jacoby (341) – Old man/wife needed help/promised to come

Where doubt as to whether offer invites acceptance by performance or promise (unilateral/bilateral), offeree may choose his method – presumption towards construing ambiguity as bilateral contracts

OPTION CONTRACTS

REST. 2d § 45 – Option Contracts Created by Part Performance or Tender(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a

promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it

(2) The offeror’s duty of performance under any option of contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

Where offer clearly unilateral (inviting performance), beginning of performance creates temporary irrevocability – option contract (Rest. 2d § 45(1))

- IMPORTANT LIMITATION – temporary irrevocability takes place only once performance begun

- Preparation insufficient to qualify (exception – see Rest. § 87(2))

UCC § 2-205 – Firm Offers An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed 3 months…

- Non-Merchants are not bound by gratuitous “firm offers”

Principle of Indirect Communication- Where offeree learns of inconsistent behavior by offeror w/offer (i.e. selling

to someone else), the offer has been revoked- Knowledge of negotiations w/third party or mere rumor of inconsistent

activity on part of offeror not enough to constitute revocation

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Petterson v. Pattberg (320) (1928) Offer: if you pay mortgage by certain time, I’ll give you a discount. Debtor shows up w/money in hand, creditor tells him that he already sold mortgage to someone else.

D’s offer withdrawn b/f binding = no K. If offeror says, “I revoke,” b/f offeree accepts, K is non-binding Mere preparations for performance (i.e. getting money to pay) not enough to make offer irrevocable

NOTE Modern courts likely to allow recovery to the extent necessary to avoid injustice – “reliance damages” (Rest. 2d, § 87(2))

REST. 2d, § 87 – Option Contract(1) An offer is binding as an option contract if it:

a. Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

b. Is made irrevocable by statute(2) An offer which the offeror should reasonably expect to induce action or forbearance of a

substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice

Thomas v. Bescher (261) – D withdrew offer to sell land before deadline for payment by P. D argues it was an option K which was withdrawn before P’s performance and therefore not enforceable.

Where an option contract recites purported consideration the option is enforceable, even though the consideration is never actually paid

NOTE Prevailing view of sealed options is option agreement under seal valid in jurisdiction where C/L significance of seal remains, even though no consideration given (purported consideration)

Drennan v. Star Paving (269) (1958) – Sub bid/General relied/Mistake

D had reason to expect bid, if lowest, would be used; once part of requested performance begun, offeror can’t revoke his offer (Rest. 2d § 45)

CONDUCT CONCLUDING BARGAIN

Livingstone v. Evans (447) – Land offer $1800/counter/response “no less”

D’s response was a renewal of original offer (i.e. “cannot reduce price”) Counter-offers serve as rejections (Rest. 2d, § 36); however, offeror may renew offer

SILENT ACCEPTANCE

Assent inferred from many things – in some cases, even failure to object or respond, viewed contextually, may be enough to indicate an implied contract

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REST, 2d § 69 – Acceptance by Silence or Exercise of Dominion(1) Where offeree fails to reply to offer, his silence & inaction operate as acceptance in the

following cases only:a. Where offeree takes benefit of offered services with reasonable opportunity to reject

them & reason to know that they were offered with the expectation of compensationb. Where offeror has stated or given offeree reason to understand assent may be

manifested by silence or inaction, & offeree in remaining silent & inactive intends to accept the offer

c. Where b/c of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept

(2) An offeree who does any act inconsistent with offeror’s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.

Hobbs v. Massasoit Whip Co. (467) (1893) – Eel skins/not returned

Conduct implying acceptance or assent is acceptance or assent whatever may have been actual state of mind of the party silence, combined w/retention, amounted to an acceptance & binding contract (previous course of dealings, Rest, 2d § 69 (1)(a))

THE PRIVILEGE OF SILENCE (E23) Silence will not usually be acceptance of an offer in absence of duty to speak Exceptions –

- Taking benefit of offered services- Reason to understand silence as consent- Prior conduct making silent acceptance reasonable- Acceptance by dominion

Additional Terms Additional, non-material terms become part of K unless timely notice of objection Silence makes fair to assume additional terms have been assented to by offeree Even where material alteration, prior dealings may provide basis for concluding

offeree reasonable in inferring assent from offeror’s failure to object to it

Austin v. Burge 470 (1911) – Asked not to send/continued payment

Although objecting to something, if one continues to receive & use item under circumstances where he had no right to suppose it was a gratuity held to have agreed by implication to pay their value

DEVIANT ACCEPTANCE (E 26) – Any “new” or “variant” terms render offer dead and contract must start over again. Common law rule. UCC does away with this see below. Deviant acceptance is rejection in C/L. UCC has different rules below:

UCC § 2-204 – Formation in General(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including

conduct by both parties which recognizes the existence of such a contract(2) An agreement sufficient to constitute contract for sale may be found even though the moment of its

making is undetermined

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UCC § 2-207 – Additional Terms in Acceptance or Confirmation(1) A definite and seasonable expression of acceptance or a written confirmation which is sent

within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

a. The offer expressly limits acceptance to the terms of the offer;b. They materially alter it; orc. Notification or objection to them has already been given or is given within a

reasonable time after notice of them is received(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a

contract for sale although the writings of the parties do not otherwise establish a contract. In such cases the terms of the particular contract consists of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act

ROLE OF 2-207 Battle of the Forms(1) To determine whether contract formed by exchange of documents;(2) what the terms of that contract (if formed) actually are

Merchants – § UCC 2-207(2) – largely overthrows C/L “mirror-image” rule- Additional Terms automatically become part of K, unless:

o Offer expressly limits K to terms of offero Material alteration (i.e. disclaimer of warranty)

Material alteration if consent to it cannot be presumedo Notification of objection to additional terms

- Conflicting Terms in Documentso “Knockout Rule” – UCC gap-filler provision used (if relevant)o Conflict b/w expressly drafted clause & UCC gap-filler (UCC wins)

Knock each other out, but UCC gap-filler comes back in

- Where the acceptance is expressly conditional on the offeror’s assent, no K is formed by the exchange of documents – the “acceptance” probably becomes a counter-offer which is accepted by performance on the part of the offeror (performing under the K – “contract by conduct”)

- Terms are those on which the parties writings agreed, plus supplementary terms from the UCC

Merchant & Consumer – UCC § 2-207(2)- Additional terms do not become part of the K, unless the offeror explicitly

assents to it

Confirmation Terms- Terms different in a confirmation of an oral agreement will almost never

become part of K, even if receiving party fails to object (same for ‘expressly conditional’ confirmation clauses

Ardente v Horan 449 Attorney “accepted” house with reservations

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Language in acknowledgement must virtually track language in 2-207 in order to be found unenforceable – must show an express unwillingness to proceed apart from assent to variant terms (E36)

ProCD Inc. v. Zeidenberg (458) (1996) – phone database/shrinkwrap term

Vendor may invite acceptance by conduct (UCC 2-204) & propose limitations on conduct constituting acceptance – license binding on D; terms are as to contents of package, & buyer may not pick & choose his terms of choice contract not formed until buyer received the goods & kept them for period beyond prescribed return period – yields contract on seller’s terms (acceptance of buyer by performance)

NOTE This is the not formed until receipt approach – often criticized (ProCD)(acceptance by performance)

NOTE II Other approach is formed at time of order approach (Klocek 465 Opposite result of ProCD)

(a) Buyer typically considered offeror(b) Seller = offeree (terms additional)(c) Buyer usually not merchant

a. Where seller is merchant & buyer is not, the terms do not become part of contract unless buyer specifically assents

b. B/w merchants, terms automatically become part of K if silent on subject

C/L Mirror-Image Rule – Acceptance must be a precise mirror image of the offer (if containing different terms, it is counter-offer or rejection)

- Alternatively to the “Mirror-Image Rule”, Rest § 59 similar to UCC 2-207C/L “Last Shot” Principle

- Party sending last written proposal (if other party began performing) got benefit of counter-offer acceptance

REST. 2d, § 59 (similar to UCC § 2-207)A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter offer

Official Comment: Definite & seasonable expression of acceptance operative despite statement of additional or different terms if acceptance not made to depend on assent to additional or different terms.

MAILBOX ACCEPTANCE RULE

Morrison v. Thoelke (309) (1963) –acceptance/b/f arrival called

An acceptance is effective upon mailing, not receipt an unqualified offer was accepted & acceptance made manifest by postage Exceptions –

a. Rule does not apply if offer stipulates acceptance not effective until receipt

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b. Rule does not apply for option contracts (effective upon receipt)c. First sends rejection & then sends acceptance, whichever arrives first = effectived. If offeree sends acceptance and then a rejection, the acceptance is effective

unless the rejection letter arrives first & the offeror detrimentally relies upon it

VERY IMPORTANT Offeror = master of offer Offeror chooses medium of conveyance (i.e. mail, email, etc) Whatever medium of conveyance offeror chooses, offeree may respond

through THAT medium or through faster one & rule is Deposit Acceptance If offeree chooses slower response (email offer/mail acceptance), the rule is

acceptance upon receipt

REST, 2d § 63 – Time When Acceptance Takes EffectUnless the offer provides otherwise,

(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but

(b) an acceptance under an option contract is not operative until received by the offeror

REST, 2d § 40 Rejection – Acceptance Upon Receipt Rejection or counter-offer by mail or telegram does not terminate power of

acceptance until received by offeror, but limits power so that letter or telegram of acceptance started after sending of otherwise effective rejection or counter-offer only counter-offer unless acceptance received before he receives rejection or counter-offer

STANDARDIZED FORMS

Adhesion Contracts (1) standardized form (take it or leave it) & (2) gross disparity in bargaining power, (3) large number of non-negotiated pre-drafted terms, (4) standardized terms complicated, ambiguous & exceptionally favorable to the drafter

GENERAL RULE TO AVOID ENFORCEMENT OF ADHESION CONTRACT (1) The contract itself is actually an adhesion contract and(2) The contract either …

a. Violates his reasonable expectations; orb. Is unconscionable (shockingly unfair)

UCC § 2-302 – Unconscionable Contract Clause- Allows courts to police contracts (whether K at formation was unconscionable)- Principle one of prevention of oppression & unfair surprise (not bargaining)

REST, 2d § 208 – Unconscionable Contract or Term- Similar to UCC (broad latitude)

Sharon v. City of Newton (480) (2002) – Cheerleading indemnity for daughter

Indemnity Release binding when person of ordinary intelligence reviews a document clearly labeled for purpose of indemnification for child’s participation in school activities

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Exception = baggage check or ticket stubs (pseudo-contracts) are not such that person of ordinary intelligence would understand indemnification unless expressly informed

Changes to standardized contract become effective once party receives copy of revised contract if changes clearly described & set apart (i.e. plain English, visible) - Internet website assent agreements. Updated agreements.

EXCULPATORY CLAUSES

Henningsen v. Bloomfield Motors (664) (1960) – possible steering wheel defect

General Rule = failure to read does not absolve P of assumption of burden, but D must also show that agreement was understandingly made. Disclaimers unfairly procured, if not brought to buyer’s attention/sufficiently aware or not clear & explicit, are invalid (inequality of bargaining power as well)

UCC § 2-314 – A warranty that goods shall be merchantable is implied in contract for their sale if the seller is a merchant with respect to goods of that kind

UCC § 2-315 – Where seller at time of K has reason to know any particular purpose for which goods required & that buyer is relying on seller’s skill or judgment to select/furnish suitable goods, there is unless excluded or modified under next section an implied warranty that goods shall be fit for such purpose

UCC § 2-316(2) – (as is) Exclusion or Modification of Warranties

Richards v. Richards 671 (1994) – Wife indemnity/riding w/18 wheeler spouse. Found invalid.

Exculpatory contracts, though viewed unfavorably, are not automatically void court must weigh against public policy to decide validity overly broad & general exculpatory contracts are invalid

Three Factors to Consider:(1) Document’s purpose not clearly identified (“passenger authorization” when

actually indemnity agreement)(2) Release is extremely broad & all-inclusive – breadth demonstrates one-

sidedness & unreasonably favors drafter(3) Standardized contract offering little or no negotiability or bargaining ability

PAROL EVIDENCE RULE

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PER Governs the effect of a written agreement on any prior oral or written agreements b/w parties to suit- Policy: Meant to reduce possibility of perjury. Gray area: more injustice in

excluding perjury or real evidence? Which is more frequent? Somewhat circular: look at to decide if it can be looked at for interpretation.

o Despite incomplete contracts, commerce has survivedo Legal Realist approach, meant merely as a tool for judge to decide

what he wants.o Used to not allow party’s testimony or interested 3rd party, no longer

the caseo Can easily change a promise to a warranty or fact statement, thus

inserting the evidence

Subsequent Oral Agreement Does not bar evidence of oral agreements after writing

Interpretation Maxims- Does not bar evidence about meaning parties intended particular contract terms- Ambiguous terms usually construed against the draftsman (contra proferentem)- Course of performance & course of dealing help illuminate (custom)- Primary purpose of parties in making K given great weight- Terms given lawful, reasonable & effective meaning when at all possible- Negotiated terms take precedence of standard terms

Three Approaches to Interpretation- Four-Corners (document on its face)- Plain Meaning (evidence about context, but not preliminary negotiations)- Liberal Rule (evidence of prior negotiations admissible)

oWeakens PER rule significantly

REST, 2d §§ 209-216 (471-473) Whether integrated agreement exists determined by court as question preliminary to determination of interpretation or application of PER

Mitchill v. Lath (387) (1928) – ice house removal

To admit oral evidence (1) agreement must be collateral in form; (2) must not contradict express or implied provisions of written agreement; (3) must be one that parties would not ordinarily be expected to embody in writing

PER EXCLUDES IF…(1) Not collateral in form(2) Inconsistent w/implied or express terms(3) Naturally included

DIAGRAMExcluded Permitted Separate/DistinctNatural Part of Contract No separate cons/Not necessarily Sep consideration

within contract initially

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INTEGRATION

Integration Parties intend document to represent final expression of agreement

Partial Integration document not intended by parties to include all agreement details- No evidence of prior or contemporaneous agreements or negotiations (oral

or written) may be admitted if contradicts term of written agreement

Total Integration document intended by parties to include all details of agreement- No evidence of prior or contemporaneous agreements or negotiations

(oral/written) admitted if contradictory or additional to written agreement

RULE SUMMARY (1) Evidence may never be allowed which contradicts integrated writings(2) May never supplement an integration intended to be complete

Hatley v. Stafford 394 (1978) – Wheat/buyout $70 acre/buyout in peak season

Presumption towards complete integration – presume writing intended to be complete, when complete on face & should admit evidence of consistent additional terms only if substantial evidence that parties did not intend writing to embody entire agreement

Two Viewpoints - PER(1) JUST look at K itself to decide whether it appears to be integrated & then decide

whether to admit evidence of oral agreement (four-corners rule)(2) Consider all evidence to decide whether admittable under PER to jury for

consideration of facts to see if it really existed & was enforceable oral agreement

Additional Terms Inconsistent Additional NO NO

Completely Integrated Agreement_____________________________________________________________________

MAYBE NOPartially Integrated Agreement(Is term “naturally” sort of thing to be incl.)

UCC § 2-202 Final Written Expression: Parol or Extrinsic Evidence Agreement may be supplemented by course of dealing/trade usage (1-205, 1-208) No inconsistent terms ever allowed *questions of law for a judge to decide* May not supplement (even w/consistent terms) a totally integrated agreement

RULE Consistent, collateral & unnatural (not likely to be included in contract) terms should be allowed consideration within partially integrated agreements

THRESHOLD Partially Integrated or Completely Integrated NEXT LEVEL Consistent or InconsistentNEXT LEVEL Unnatural or Natural

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FRAUD EXCEPTION TO PER (E 181)

Even if writing completely integrated, PER always allows evidence of earlier oral agreements to show illegality, fraud, duress, mistake or lack of consideration

Lipsit v. Leonard (413) (1974) Employment arrangement = series of annual letter agreements. P claims specific oral promises accompanied writings, e.g., P would be given equity interest in the business

PER no bar in actions in tort for money damages based upon oral fraudulent promises inducing written agreements Fraud Damages out of pocket rule

BOA v. Pendergrass 416 (1935) – promissory note/payable on demand

PER not admissible where, as here, it would prove a promise directly at variance with the promise of the writing Direct Variance Rule ***But evidence is relevant for fraud claim

LaFazia v. Howe (418) (1990) – New restaurant/bad tax returns/bought

Fraud vitiates all contracts, EXCEPT where express specific disclaimer or “merger clause” blocks fraud action (specificity = touchstone issue for deciding whether valid)

Merger Clause = a clause indicating writing constitutes sole agreement b/w the parties- Where clause is broad & boilerplate, it does not block oral evidence- Where specific concerning representations that have not been made, the

majority of courts will not allow the oral evidence

FOUR-CORNERS RULE

Pacific Gas & Elec. v. Thomas Drayage & Rigging (434) (1968) K to replace metal cover of P’s turbine. Indemnity clause: D to perform “at own risk and expense” and to indemnify P “against all loss, damage... liability... in any way connected w/this K.”

Four-Corners Rule (belief in potency & meaning of words) Test for admissibility of extrinsic evidence = whether offered evidence relevant to prove meaning to which language of instrument is reasonably susceptible Court must determine intent by looking at words contextually. If court decides, after looking at agreement contextually, that evidence is susceptible to one interpretation, parol evidence is inadmissible

Federal Dep. Ins. Corp. v. W.R. Grace & Co. 439 (1989) NO FACTS

Four-Corners Rule not ridiculous language not taken lightly. If language clear b/c judge doesn’t know commercial context – ‘extrinsic ambiguity’ – challenging party should present objective evidence (not say-so) that K doesn’t mean what it plainly says.

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Spaulding v. Morse (439) (1947) Trust: beneficiary receives $1200/yr, then after entering college, $2200/yr up to 4 yrs. What happens if beneficiary doesn’t go to college?

Every written agreement interpreted w/view to material circumstances of parties at time of execution, in light of pertinent facts within their knowledge, & in such manner as to give effect to main end designed to be accomplished

REST, 2d § 212 – Interpretation & Integrated Agreement(2) A question of interpretation of integrated agreement determined by trier of fact if depends on credibility of extrinsic evidence or on choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise, question of interpretation of integrated agreement determined as question of law

Cmt: Historically, questions of interpretation of written documents treated as questions of law in the sense that they are decided by the trial judge rather than by the jury.

POLICING THE BARGAIN Chapter 4

COMPETENCY TO CONTRACT

Infancy Doctrine Minor’s absolute right to void any contracts for non-necessary items- Right to disaffirm only survives for a reasonable time after majority

Doctrine of Necessities If the purchased item is necessary, minor liable for contract

Halbman v. Lemke (566) (1980) – Minor disaffirms vehicle K

Infancy Doctrine (C/L) absolute right of minor to disaffirm K for purchase of non-necessary items Generally, minor entitled to recover all consideration proffered relating to transaction & give in return as much of original purchase as left to other contracting party (however, disaffirmance permitted even where such return impossible)

UNDUE INFLUENCE

Odorizzi v. Bloomfield School (578) (1966) – Teacher gay/arrested/fired

Undue Influence coercive persuasion – overcoming will w/o convincing judgment & taking unfair advantage of another’s weakness of mind or taking grossly oppressive & unfair advantage of another’s necessities or distress Combination of Elements Proves UI undue susceptibility + excessive pressure = undue influence. *** Does this apply to standard form contracts when the receptionist with power over your treatment gets edgy when you don’t sign immediately? (Jerks… jk )

Von Hake v. Thomas (582) (1985) 82 yr-old P distressed over foreclosure sale of ranch; D induced him to believe that he wanted to save the ranch; gained P’s trust. No undue influence

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A confidential relationship [where one party, having gained trust & confidence of another, exercises extraordinary influence over another] is a prerequisite to proving constructive fraud law does not assume that one’s will has been overborne by another

FINALIZING DISPUTES SETTLEMENT AGREEMENTS

DURESS

Hackley v. Headley (623) (1881) – Logger came for payment, was in economic problem. Hackley wouldn’t pay. Compromised for partial payment. No duress because it’s not Hackley’s problem that Headley had financial problems. ***Didn’t discuss accord and satisfaction but that would seriously complicate things.

Duress unlawful act inducing party to perform some act under circumstances which deprive him of free will However, where party does not threaten anything which he does not have legal right to perform no duress

NOTE Subjective to P – irrelevant if person of average firmness would have yielded

Capps v. Pacific (625) (1969) – Found lessee for D. Didn’t receive commission and D made P sign new commission agreement when he was having financial problems.

“Better rule allows statement of a duress cause or defense such as P has pleaded here to be tried on its facts [personal difficulties]” – more recent cases different view from Hackley

General Rule – Hackley approach still most popular financial difficulty by itself will not justify setting aside a settlement

REVISIONS OF CONTRACTUAL DUTY

Austin Instrument v. Loral Corp. (606) (1971) D had K with navy for equipment. P was sub. P threatened to stop shipments of 1st K if not awarded 2nd K. Caused D’s economic duress. Court held for P, no economic duress.

Contract voidable under duress when established that party making claim forced to agree by means of wrongful threat precluding free will economic duress/compulsion demonstrated by (1) immediate possession of needful goods threatened, (2) breachee unable to obtain goods sought elsewhere, & (3) ordinary remedies for BOC inadequate

Wolf v. Marlton Corp. (609) (1959) – threat to sell to “undesirable purchaser” if Marlton didn’t let Wolf’s out of contract.

Duress is tested, not by nature of threats, but rather by state of mind induced in victim SUBJECTIVE TEST

NOTE Exertion of legally permissible right won’t always escape judicial scrutiny – must determine whether “rightful” exercise of legal right

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MISTAKE, MISREPRESENTATION, WARRANTY & NONDISCLOSURE

Constructive Fraud Breach of legal or equitable duty which law declares fraudulent b/c of tendency to deceive others, to violate public & private confidence, or to injure public interest. Neither actual dishonesty of purpose nor intent to deceive is essential element of constructive fraud (relationship dependent)***Fraud case is built – constructed. Not for arms length transactions because one should assume other party is trying for best deal. Does this mean ‘good faith’ takes on a new meaning when you have relationship with contracting party?

Jackson v. Seymour (483) (1952) Lucy conveyed land she was unfamiliar w/to her brother for $275. 2 1/2 yrs later, found out land had up to $5000 worth of timber; brother had already cut and sold it at unknown price.

Neither party aware land value (mutual mistake) where inadequacy of price shocks conscience, equity seizes slightest circumstance indicative of fraud, either actual or constructive

FIDUCIARY DUTIES Mere inadequacy or quality isn’t per se grounds for avoiding enforcement

o However, may be such unconscionableness or inadequacy of a bargain so as to demonstrate gross imposition or undue influence

o In such cases, Courts of Equity interfere on satisfactory Ground of Fraud Should “shock conscience”

Constructive Fraud Two Relationship Groupso Fiduciary

Relationship requiring high degree of candor & reliability b/w parties (i.e. trustee/beneficiary; principal/agent; attorney/client)

Key ascendancy of one party over another – achieved through placing of trust & confidence of one & assumption by the other

o Confidential Less the product of legal status than result of unusual trust or

confidence reposed in fact (i.e. blood relationship, marriage, physician/patient, minister/parishioner)

All that is required is parties don’t deal on equal terms & high degree of confidence placed in honesty & good faith of other party

MUTUAL MISTAKE

Mistake Refers only to mistaken belief about existing fact, not an erroneous belief about what will happen in the future

REST, 2d § 152 Requirements for Avoiding Enforceability Under Mutual Mistake(1) Basic Assumption must concern basic assumption on which contract was made(2) Material Effect material effect on “agreed exchange of performances

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(3) Risk of Mistake adversely-affected party must not bear risk of mistakea. Means of Allocation of Risk

i. By agreement of partiesii. Aware at formation of only limited knowledge but treats such

knowledge as sufficientiii. Allocated risk by court on ground that it is reasonable in

circumstances to do so

Sherwood v. Walker (490) (1887) – Barren/fertile cow/K rescinded

Where mistake affects substance of the contract, it must be considered that there was no contract to sell item as it actually was – mistake as to very nature of item (cow) mistake only as to quality of item not enough (remedy = rescission of whole K)

REPLEVIN action or writ for receipt of what one owns (title has passed to person)

Beachcomber Coins Inc. v. Boskett 496 (1979) – Coin mistakeSmith v Zimbalist 500 (1934) – Both mistaken as to true value of violins. Rescission.

Where parties know doubt exists as to certain matter & contract on that assumption K not rendered voidable b/c one is disappointed however, parties must be conscious of the uncertainty of the pertinent fact

UNILATERAL MISTAKE

REST, 2d § 153 – Three Basic Requirements for Unilateral Mistake Avoidance(1) Same criteria must be met as for bilateral mistake; and(2) Either of the following must be the case

a. Mistake is such that enforcement would be unconscionable; orb. Other party had reason to know of mistake or his fault caused mistake

Elsinore Elementary v. Kastorff (500) (1960) D overbid for contract because of math mistake

Where honest clerical error in bid & D’s subsequent prompt rescission, he is not obliged to execute contract bargain too sharp & no reliance by D (other party knew or had reason to know of mistake in bid)

S.T.S. Transport v. Volvo 505 (1985) (7th Circuit) No facts given

If mistake results from economic climate miscalculation (enforceable) problem solved by excluding miscalculations of judgment [as opposed to miscalculations of fact] courts will generally grant relief for errors which are ‘clerical or mathematical’

Distinction b/w errors of judgment (enforceable) & errors of fact (not enforceable)

WARRANTY ALTERNATIVE

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EXPRESS WARRANTY Explicit promise or guaranty by seller that goods will have certain qualities

UCC § 2-313 – Express Warranties by Affirmation, Promise, Description, Sample(1) Express Warranties by Seller Created as Follows:

a. Any affirmation of fact or promise made by seller to buyer which relates to goods & becomes part of basis of bargain creates an express warranty that goods shall conform to affirmation or promise

b. Any description of goods made part of basis of bargain creates an express warranty that goods shall conform to the description

c. Any sample or model made part of basis of bargain creates express warranty that the whole of the goods shall conform to the sample or model

(2) Not necessary to creation of express warranty that seller use formal words such as “warrant” or “guarantee” or that he have specific intention to make warranty, but an affirmation merely of value of goods or statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty

- If disclaimer of express warranty & express warranty not consonant, disclaimer invalid

Tribe v. Peterson (508) (1998) – Everyone w/prior experience w/horse found him to be calm and gentle. Buyer alleges “no-buck guarantee” – sues for breach of express warranty when horse throws him and wife.

In order for a seller to make an express warranty, they must make a statement of fact that relates to the goods and becomes part of the bargain. ***Price is indicative of what was actually warranted. Express Warranty created by any affirmation of fact made by seller to buyer relating to the goods & becoming part of the basis of the bargain must be a positive & unequivocal statement concerning thing sold which is relied upon by the buyer which is understood to be an assertion concerning items sold & not opinion

IMPLIED WARRANTY OF MERCHANTIBILITY UCC § 2-314- Disclaimer must mention “merchantability” & (if writ) must be conspicuous- Can’t be buried in fine print- Implied limitations – “as is” “with all faults” etc (UCC § 2-316)- Implied warranty can also be excluded by prior course of dealing

WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE UCC § 2-315- Express disclaimer must be in writing & conspicuous

Conditions Buyer Must Prove for Recovery – UCC § 2-315(1) Seller had reason to know buyer’s purpose(2) Seller had reason to know that buyer was relying on seller’s skill or

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

MISREPRESENTATIONThree Types of Misrepresentation

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Intentional (“deceit” at C/L)o Original “fraud”o Intent = distinguishing characteristic/essential element

Negligent o Lacks scienter (intent)o Negligent if reasonable person in same or similar position

would have discovered or communicated Innocent – sometimes known as “equitable fraud”

Johnson v. Healy (517) (1978) – House settled after purchased. Seller promised it was made from “best material” implying full satisfaction with physicality of structure. Extending UCC warranty principles to realty cases

Where innocent misrepresentation which he reasonably relied upon to his detriment, P entitled to choose b/w rescission of contract & damages (Strict Liability) ***Elusive statement – this can be construed for either party… somewhat capricious.

Man makes statement in regard to matter upon which hearer may reasonably suppose he has means of information…and statement is made part of business transaction, or to induce action from which speaker expects to gain an advantage, he should be held liable for the consequences of reliance upon his misstatement. Williston, Contracts (1920)

Cushman v. Kirby (523) (1987) sulfur water wasn’t disclosed to buyers.

When person has full information & represents as much, but fails to disclose entirely & leads other party to believe that entire representation has been made, guilty of fraud if words & reliance upon them bring about adverse consequencesSilence alone insufficient to constitute fraud unless a duty to speak if facts known & accessible, bound to disclose such facts & make them known

NONDISCLOSURE & CONCEALMENT Duty to disclose arises where facts are:

- Unlikely to be discovered; or- As a result of close relationship

Duty rarely arises where parties deal at arm’s length & info is ordinary Modern View several situations vendor is obliged to disclose:

1. Disclosure necessary to prevent previous assertion from being misrepresentation or from being fraudulent or material

2. Disclosure would correct mistake of other party as to basic assumption on which other party is relying (good faith)

3. Disclosure would correct mistake regarding writing4. Other person entitled to know fact b/c of trust relationship

CHANGED CIRCUMSTANCES JUSTIFYING NONPERFORMANCE

IMPOSSIBILITY When impracticable & impracticable when can only be done at excessive & unreasonable cost

REST 2d § 261 – Impossibility

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Where after a contract is made a party’s performance is made impracticable w/o his fault by occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render performance is discharged unless language or the circumstances indicate contrary

Summary (1) Event must have occurred after the contract was made(2) Non-occurring event must have been a basic assumption of contract(3) Event was not the fault of the party seeking discharge(4) Language or circumstances don’t dictate discharge should be denied (i.e. b/c

of allocated risk)

Taylor v. Caldwell 529 (1863) – Music Hall Burning Down

Where person or “thing” necessary to contract fulfillment (music hall), destruction excuses vendor from obligation if performance becomes impossible b/c of perished thing, impossibility (if not arising from vendor’s fault) excuses vendor from liability

Carroll v. Bowersock (535) (1917) – New flooring/fire destroyed

D liability, must have benefited from P’s work something = benefit once attached to D’s realty Where benefit accrued to vendee (incorporated realty), he is responsible for paying damages; otherwise, vendor is liable & assumes risk (i.e. construction)

Lincoln Welding Works v. Ramirez (538) (1982) – Work flood damage. Contracted out of default rule.

Court will enforce the terms of the contract if it says that one party will bear the risk of the loss (Can contract out of the default rule)

RISK & INSURANCE IN LAND PURCHASES Majority View doctrine of equitable conversion

o Places risk on vendee for fortuitous casualties after entry into contract of sale & prior to closing

o Vendee’s right to specific performance means that contract amounts to equitable ownership in vendee

o Question as to what happens in instance where vendor has insured property but it hasn’t actually passed to vendee

Most jurisdictions posit that vendee may have specific performance w/price abatement (e.g. to unpaid price)

Minority View vendor bears liability until either title has been transferred or vendee has taken constructive possession of premises

o Absent change in title or possession, loss remains where it falls (on the property’s owner), not to be shifted to another person

IMPRACTICABILITY

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REST. 2d § 264 – Prevention by Government Regulation or OrderIf the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.

Louisville & Nashville R.R. Co. v. Crowe (542) (1913) D R.R. recalled P’s lifetime pass, which was originally given in consideration for P’s conveyance of strip of land

Contract lawful when made terminated by later governmental regulation rendering performance unlawful BUT party who received performance under such agreement should not retain it w/o payment (damages)

American Trading v. Shell International Marine (548) (1972) Closure of Suez Canal

Issue: Whether D obliged to pay extra expenses P incurred in going alternate route whether Suez Canal was exclusive method of performance

Impracticability not applicable b/c the mere increase in cost alone is insufficient must be extreme and unreasonable expense

Maple Farms v. City School District (552) (1974) Supply milk to school district

Except in most exceptional circumstances, party claiming discharge of an obligation b/c of adverse financial circumstances is unlikely to get relief

UCC § 2-615 – Excuse by Failure of Presupposed ConditionsDelay or non-delivery by seller (who notifies & allocates production reasonably & fairly) is not a breach of duty if performance has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption of the K or by compliance in good faith w/applicable government regulation

Comment: Increased price alone insufficient to qualify, unless it is the result of unforeseen circumstances altering the essential nature of the contract

Mishara Construction v. Transit (553) (1974) Labor strikes allowed D to get off on impracticability

Circumstances drastically increasing difficulty & expense of performance may be within compass of impossibility (not usually a successful argument, though)

SUMMARY OF IMPOSSIBILITY “Incorporation” into structure & benefit key

o REST. 2d § 272 recovery in impossibility & frustration may go beyond mere restitution & include elements of reliance by claimant even though they have not benefited other party

FRUSTRATION OF PURPOSE

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Factors of Consideration - Foreseeability of supervening event - Risk allocation- The extent of the damage (i.e. completely/partially thwarting purpose)- Whether party seeking discharge was at fault (or failed to guard against)

Krell v. Henry (555) (1903) – Window renting/royal procession watching

Coronation procession was foundation of K & non-event prevented performance of K

Lloyd v. Murphy (560) (1944) Car dealership lease allowed for new auto sales and limited used auto sales, plus repair shop/gas station. Fed gov’t ordered new car sales discontinued except for narrow class of people. D repudiated on ground of commercial frustration.

Doctrine of Frustration performance remains possible but expected value destroyed by fortuitous event which supervenes to cause failure of consideration supervening frustrating event must have been (1) not reasonably foreseeable & (2) a near complete destruction of the ability to perform as contemplated ***War had created demand for cars, D profited for this very reason.

UNCONSCIONABLE INEQUALITY

UCC § 2-302 - Unconscionable Contracts (Rest, 2d § 208 – same)(1) If the court as a matter of law finds the contract or any clause of the contract to have been

unconscionable at the time it was made the court may refuse to enforce the contract(2) or it may enforce the remainder of the contract w/o unconscionable clause(3) or it may so limit the application of any unconscionable clause as to avoid any unconscionable result

Questions for Consideration- Was it unconscionable to include the term at the time of the contract- Would the person have agreed to terms at time of the K, if fully understood- *** K can be unconscionable because of imbalanced bargaining power and

risk placement see Martin v Joseph Harris Co. 704 (1985)

Woollums v. Horsley (684) (1892) – P is incredibly ignorant, D was not.

Where K substantively unconscionable & unjust enforcement, the K is unenforceable***Court of equity will not enforce a claim that is substantively unjust. More the court’s view of equity being just and fair (as opposed to law?), unclean hands influence, protect the small guy.

Waters v. Min Ltd. (691) (1992) Gangsta defendants. Classic duress scenario.

Where K obtained under adverse circumstances & totality of circumstances (including price disparity) indicate too hard a bargain (or no bargain), court will not enforce the K

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Williams v. Walker Thomas Furniture (693) (1965) – Rent to own crooked terms

C/L unconscionability = absence of meaningful choice (procedural unconscionability) together w/contract terms which unreasonably favor other party (substantive unconscionability) – in determining reasonableness or fairness, primary concern must be contract terms in context of circumstances in which they were made

Brower v. Gateway (700) (1998) – Ps claim arbitration clause is: invalid under UCC 2-207, unconscionable under 2-302, and an unenforceable contract of adhesion.

Where party meddled w/remedies to make them prohibitively expensive or unreasonable (leaving a party w/o remedy) K may be unenforceable solely on substantive grounds

CONDITION an operative fact subsequent to acceptance & prior to discharge

Rest 2d § 224 – Condition DefinedA condition is an event not certain to occur which must occur unless its non-occurrence is excused before performance under a contract becomes due.

Fact can be made to operate as a condition only by:o Agreement of both parties (express – written out or implied by actions)o Construction of the law (constructive – imposed by courts for fairness)

Non-occurrence of a condition will prevent existence of a duty in other party Classification of Condition

o Precedent Conditions = any event, other than lapse of time, which must occur before performance under a contract is due

o Subsequent Conditions = event operating by agreement of parties to discharge a duty of performance after it has become absolute

No substantive difference b/w two, but procedural distinction importanto For conditions precedent – burden of proof is on Po For conditions subsequent – burden of proof is on D

Howard v. FCIC (759) (1976) (4th Circuit) – Crops cut/b/f inspection

Legal policy opposed to forfeitures – policies typically construed in insureds’ favor when doubtful whether promise or condition precedent exists, words construed as promise insertion of clause concerning destruction of stalks inserted for convenience (not precedent condition) in evaluating damages

Prevention Doctrine – A party who prevents fulfillment of a condition of his own obligation cannot rely on such condition to defeat his liability an express promise to perform on the happening of an event warrants implication of a promise to refrain from

EXPRESS CONDITIONS

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activity impeding its happening, and breach of the implied promise is legally as serious as the breach of the express (Traynor).

REST. 2d § 227 – Standards of Preference with Regard to Conditions(1) In resolving doubts as to whether event is made a condition of an obligor’s duty and as to the nature of such an event an interpretation is preferred that will reduce the obligee’s risk of forfeiture unless the event is within the obligee’s control or the circumstances indicate that he has assumed the risk

Illustration: A (general contractor) contracts w/B (sub-contractor) for plumbing work on construction project. B to receive $100,000, no part of which shall be due until five days after Owner shall have paid A therefore. B does plumbing, but owner becomes insolvent & fails to pay A under duty to pay B after a reasonable time (General Rule of Construction) – obligee (B) did not assume the risk of forfeiture.

Schuler-Haas v. Aetna no express language to contrary in document (& no extrinsic evidence), where payment stipulated to occur on event, occurrence of event fixes only time for payment not a substantive condition of legal responsibility to pay

Clark v. West (792) (1908) Drunk law professor case. ***But how fair is it to D when P could perform terribly. Without D’s assurance of adequate compensation, P could produce work below what D hoped for

CP may be waived (reliance upon waiver assurance) either by implication – words & acts – or expressly (newer rule waivers may be revoked if no detrimental reliance on them)

REST. 2d § 229 – Excuse of a Condition to Avoid ForfeitureTo the extent that the non-occurrence of condition would cause disproportionate forfeiture may excuse non-occurrence of condition unless its occurrence was a material part of the agreed exchange

Aetna Cas. & Surety Co. v. Murphy (796) (1988) Claim against D for damages to which P became subrogated. D failed to give Chubb notice for over 2 yrs. after being served. Motion to implead Chubb as 3rd party D filed and granted. Chubb moved for SJ, alleging D’s noncompliance w/terms of policy which required written notice as soon as practicable.

Issue: Whether insured who gives belated notice of claim can still recover on insurance K by rebutting presumption that his delay has been prejudicial to insurance carrier

If insurer suffered no material prejudice from delay or non-occurrence, it may be excused b/c not material part of agreed exchange If occurrence of condition required by agreement of parties (express), rather than matter of law (constructive), strict compliance. Rule relaxed so failure to perform EC excused to avoid disproportionate forfeiture

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Although many cases apply literal enforcement, there may be instances of disproportionate forfeiture occasioned by such enforcement (i.e. where bargaining unequal, unfair forfeiture & lack of prejudice towards obligor)

Jacob & Youngs v. Kent (817) (1921) K required Reading pipes in house. D installed non-Reading pipes and refused to replace.

While full performance still standard of duty, when omissions both trivial & innocent, may sometimes be atoned for by allowance of resulting damage & not always be found to be breach of condition followed by disproportionate forfeiture (substantial performance)

CONDITIONS OF SATISFACTION

EXCUSE FOR IMPRACTICABILITY

Grenier v. Compratt Construction Co. (801) (1983) City Engineer letter required but no such thing. City attorney gave approval

Where condition isn’t material to agreed exchange & impracticable due to circumstances unforeseen at time of K inception, contract may be enforceable w/condition being excused (full performance of K)

Second Nat’l Bank v. Pan American Bridge (806) (1910) NO FACTS GIVEN

Certification may not be excused merely b/c it was unreasonably & unfairly withheld – must have been done in bad faith

SUBSTANTIAL PERFORMANCE

REST. 2d § 228 – Substantial PerformanceIf it is practicable to determine whether a reasonable person in the position of the obligor would be satisfiedan interpretation is preferred under which the condition [that the obligor be satisfied with the obligee’s performance] occurs if such reasonable person in the position of obligor would be satisfied

Nolan v. Whitney (807) (1882) • in Building Ks there can be recovery for substantial performance [minus damages to other party as a result of not strictly satisfying condition]• Making satisfaction a condition of the K allows one to withhold paymt until performance is satisfactory. (Rather than having to go to small claims court to recover $ back b/c they were dissatisfied) Pottow: “SELF HELP” by contracting this into their K.

Where performance substantial (doesn’t have to be literal & exact in all cases) (given circumstances & evaluation) unreasonable refusal of certification dispenses with its necessity (condition) ***Construction-substantial performance is acceptable to bypass architect. Maybe because construction is easy to quantify (except ugly fountains).

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Van Iderstine v. Barnet (808) (1926) All goods were to go through broker. Broker rejected them. D must not buy because acceptance was conditional on broker approval.

SP limited to construction contracts b/c unjust enrichment (benefit appropriated w/o payment); in other cases, certificate of approval must be withheld in bad faith for P to recover (unreasonable doesn’t get you there)

NOTE Non-occurrence doesn’t apply where benefit hasn’t unjustly accrued to D

Fursmidt v. Hotel Abby (809) (1960) – Personal Fancy K. Fired launderer and valet.

Reasonable person standard (objective evaluation) applies when the contract concerns operative utility satisfaction; and a standard of good faith is employed when the contract involves personal aesthetics or fancy

CONSTRUCTIVE CONDITIONS: ORDER OF PERFORMANCE

Constructive Conditions –(1) Conditions not agreed upon by the parties, but which are (2) supplied by courts for fairness & (3) only substantial compliance w/constructive conditions is generally required

Kingston v. Preston (721) KB (1773) sale of biz to nephew and stranger. From days when performances were independent.

Where apparent that bargained-for part of K is a condition precedent to performance (constructive condition), non-occurrence of condition absolves the non-breaching party from liability

REST. 2d § 234 – Order of PerformancesWhere all or part of performances to be exchanged under exchange of promises can be rendered simultaneously they are to that extent due simultaneously unless language/ circumstances indicate contrary

Cmt: Applies where (1) same time fixed for performance of each party; (2) where time is fixed for the performance of one and not the other; (3) where no time is fixed for either; (4) where same period is fixed within which each party is to perform

REST. 2d § 238 – Effect on Other Party’s Duties of a Failure to Offer PerformanceWhere all or part of the performances to be exchanged under an exchange of promises are due simultaneously it is a condition of each party’s duties to render such performance that the other party either render or with manifested present ability to do so offer performance of his part of the simultaneous exchange (TENDER)

Price v. Van Lint (724) (1941) P depended on D for loan. D had promised to loan. Wasn’t able to build because of D’s failure to lend.

General Rule NOT construe promises as independent unless nature indicates intention to be construed as such (agreed exchange of promises – presumption towards simultaneity in exchange, unless contract indicates otherwise) Where performance for one party may arrive b/f performance of other, K of independent promises

Stewart v. Newbury (745) (1917) Custom was for installment payments. Court held that

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payment comes after.

Where contract to perform work & no agreement as to payment made, work must be substantially completed b/f payment can be demanded

Rules of Construction: Where one party’s promise requires a substantial amount of time for performance

o Party whose performance requires time extends credit to the latter o LONG performance (work) due before SHORT performance (payment)

Kelly Construction v. Hackensack Brick (748) (1918) P: builder ; D: brick supplierP’s failure to pay for bricks delivered so far does not excuse D from K unless expressly specified, payment cannot be demanded until work/performance is completed(Pottow: probably wrong outcome here...)

Where no payment time specified in contract & sale for specified quantity of goods, contract is “entire” & failure to pay by buyer when part delivery has been made doesn’t absolve seller from obligation to complete delivery

UCC 2-307 – Delivery in Single Lot or Several LotsUnless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the 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

Cmt. 4: Where the circumstances indicate that the seller is entitled to deliver in lots, the price may be demanded for each lot if it is apportionable

REST, 2d, § 233 (gist of UCC § 2-307)

Tipton v. Feitner (749) (1859) – divisible contracts; Dressed hogs and live hogs

Two deliveries didn’t constitute “entire” contract (different prices, delivery & bargaining) & delivery & payment concurrent for dressed hogs – probable reading that payment was meant upon delivery separately for live & dressed hogs Court treats two parts of contract like independent promises

- Buyer breached on 1st contract (damages for Seller)- Seller breached on 2nd contract (reduction in damages reclaimed on 1st

breach for failure to fulfill contract w/Buyer)

REST. 2d § 240 – Part Performances as Agreed EquivalentsIf the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents a party’s performance of his part of such a pair has the same effect on the other’s duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised

Cmt: When it is proper to regard parts of pairs of corresponding performances under a contract as agreed equivalents, the contract is loosely referred to as “divisible” or “severable”

Trapkus v. Edstrom’s Inc. (752) (1986) NO FACTS

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Absent clear expression of divisibility, presumption to treat terms of contract as interdependent (CP); further, contracts calling for installment performance aren’t necessarily divisible contracts depends on intention, fair construction of terms & provisions of the contract itself

NOTE Doctrine of Conditions substantial performance of one part of divisible contract has same effect on corresponding part as substantial performance of an indivisible duty has on entire contract

Express Conditions (“IF” clause) Strict Compliance Exceptions

o Excuse of Condition o Impracticability/Impossibilityo Waivers of Conditionso Disproportionate Forfeiture

Constructive Conditions (Implied in Law) Substantial Performance enough Payment Condition – party w/performance time extends credit to other party

o C/L rule is payment AFTER substantial performance (or full)o However, if apportionable, that’s sensible application of C/L Rule

PROTECTING THE EXCHANGE ON BREACH

DISTINCTION COURTS MAKE Two types of breach(1) Complete, major & material typically made “conditions” by courts(2) Partial, minor & immaterial typically treated as IP (non-conditions)

Perfect Tender Rule - Where time specified, terms clear & precise, & delivery time material to K, failure to deliver per K absolves non-breaching party of duty to accept

Beck & Pauli Lithographing v. Colorado Milling & Elevator Co. (832) P made sketches of D’s buildings

Where manufactured goods such that prohibit resale (or at substantial loss) & delivery time isn’t material condition (or late delivery doesn’t prejudice buyer), refusal to accept over “trifling delay” not justified. *** Correct remedy is damages for delay.

SCOPE OF UCC “Goods” & “Services”

UCC § 2-508 – Cure by Seller of Improper Tender or DeliveryUCC § 2-510 – Effect of Breach on Risk of Loss

- If tender non-conforming, risk loss remains w/seller until cure/acceptanceUCC § 2-601 – Buyer’s Rights on Improper Delivery

- Reject whole- Accept the whole

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- Accept part & reject restUCC § 2-602 – Manner & Effect of Rightful Rejection

- Within reasonable time after delivery or tenderUCC § 2-605 – Waiver of Buyer’s Objections by Failure to Particularize

- Failure to particularize defect precludes buyer from relying on the unstated defect if (a) the seller could have cured or (b) seller makes a request for full & final written statement of defects buyer relies upon for rejection

UCC § 2-606 – What Constitutes Acceptance of GoodsUCC § 2-607 – Effect of Acceptance; Notice of Breach; Establishing B After AcceptanceUCC § 2-608 – Revocation of Acceptance in Whole or In Part

- Must occur within reasonable time after acceptanceUCC § 2-609 – Right to Adequate Assurance of Performance

Plateq Corp. v. Machlett Labs (834) (1983) Custom built goods

Issue is ACCEPTANCE. Did the buyers (upon engineer’s inspection) accept the goods?o if YES: buyers pay the K price

UCC 2-608 can revoke acceptance if nonconformity of goods (to K) substantially lowers the value to the buyer

o if NO: rejection. Improper rejection? –Rejection can be improper:

2-602: must be in reasonable time 2-605: fail to notify seller, fail to state specific probs w/it (reasons

for rej.) Held: buyers DID accept when they said their trucks would come for pickup in a couple

of days, (and upon engineer’s inspection...)o ACCEPTANCES: 2-606

saying you will fails to make effective rejection does any act inconsistent with seller’s ownership of goods in question

ACCEPTANCE UCC § 2-606(1) acceptance of goods occurs when buyer (a) after reasonable opportunity to inspect goods signifies to seller that he will take them in spite of non-conformity; or (b) fails to make effective rejection”

REJECTION D failed to reject as provided by § 2-606 & § 2-605 also provides that buyer precluded from relying on un-particularized defects in rejection notice if defects could have been cured (w/seasonable notice) by making a substituted, conforming tender

POST-ACCEPTANCE UCC § 2-607, buyer must pay K rate after acceptance & bears burden of establishing non-conformity of goods; UCC § 2-608(1) further requires non-conformity of goods have substantially impaired value to buyer

CLASS DIAGRAM UCC REJECTION (contract off) ACCEPTANCE (contract on) REVOCATION (off)

ISub. Impairment

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Fortin v. Ox-Bow Marina, Inc. (839) (1990) – Problems w/Boat

Combination of factors (even if minor individually) may constitute substantial impairment (UCC 2-608), necessitating return of good & restitution of purchase price

WILLFUL DEFAULTER

General Rule willful breach defeats a claim of substantial performance

Hadden v. Consolidated Edison Co. of NY (821) (1974) Employer discovered evidence that gave grounds for terminating employee, but he was retired. Cut pension? Ct. says no.

Willfulness one of several factors in considering whether substantial performance conduct may be material breach, but if essence of K fulfilled, substantial performance may still be found & obligation still exist in non-breaching party to pay for enrichment

Worcester Heritage Society v. Trussell (822) (1991) historic house being reconstructed

Where breaching party’s actions not (1) fraudulent, (2) do not go to essence of contract, & (3) have not repudiated contract, non-breaching party may not maintain action for rescission of the contract

DELAY Presumption that time is not the essence of the contract, unless contract states that it

is or the circumstances indicate that the need for promptness is apparent

ANTICIPATORY REPUDIATION REST. 2d, § 250 – Anticipatory RepudiationA definite & unequivocal manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives [reasonable certainty important]

BREACH BY ANTICIPATORY REPUDIATION UCC § 2-610 Anticipatory Breach occurs on clear repudiation of party’s contractual duties b/f

time has come for performance (may be oral & indicated by actions) Suit can be brought at once for anticipatory repudiation occurring b/f performance

date is due (up to P as to when he wants to sue b/f or after)

Wholesale Sand & Gravel v. Decker (733) (1993) – Driveway Problem. Wholesale continually breached assurances.

Anticipatory Repudiation (AR) intent may be communicated through actions/words actions/words must be definite, unequivocal, & absolute.

K & G Construction Co. v. Harris (736) (1960) Subcontractor’s employee knocks down wall: Breach or BREACH?

[Breach]? not a total breach still has to pay subcontractor payments

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-K req’d sub to get insurance for these occurrences, maybe evidence that it’s only a [Breach]?or[BREACH]? total breach of K K is done contractor avoids payments to sub?-knocking down wall was breach of term in K that req’s that work be done in “workmanlike manner”

Whether promises dependent or independent (intention & circumstances controlling factor) presumption towards dependent construction in bilateral contracts GENERAL RULE = where total price for work is fixed by K the work is not rendered divisible by progress payments (injured party can treat total breach as partial)

NOTE If performing party stops performing or performs badly, paying party can suspend payment (generally speaking)

Retraction of Repudiation (UCC § 2-611) – permissible until other party…(1) materially and reasonably relies on repudiation (changes position)(2) other party sues for breach(3) other party states that repudiation is final

POTTOW DIAGRAM

Non-Substantial Breach Partial/Material Breach Total (comp.) BreachContract ON Suspension (payments Contract OFF - unless

can be withheld) non-breaching partyContract status ? treats as

partial breach Breach Materiality Factors

- Deprivation of expected benefit (non-breaching party)- Part performance – greater amount rendered, less likely material breach- Likeliness or willingness to cure- Willful (more likely to be regarded as material)- Delay – usually considered insubstantial

ADEQUATE ASSURANCE

UCC § 2-609 – Right to Adequate Assurance of Performance (Self-help remedy)(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 with respect to 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

Seller may suspend performance until he receives buyer’s AA of due performance. Even if seller’s suspicion buyer insolvent inaccurate, seller entitled to protection of UCC 2-609 if acting in good faith & reasonable grounds for insecurity w/respect to buyer’s payment. *** AA is proof of solvency, ability to pay, bank statements, etc. No concrete method of showing AA

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REST. 2d, § 251 – When Failure to Give Assurance May be Treated as Repudiation(1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance

that would of itself give the obligee a claim for damages for total breach, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance

(2) The obligee may treat as a repudiation the obligor’s failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case

INSTALLMENT CONTRACTS

UCC 2-612 – “Installment Contract” Breach (Perfect Tender rule)- Buyer must accept under (2) an installment delivery if the non-conformity is

curable & the seller gives adequate assurance of the cure- Under (3), if the non-conformity substantially impairs the value of the whole

K, there is a breach of the whole K & buyer may treat as such

REST. 2d § 253 – Effect of Repudiation(1) Where obligor repudiates duty before committing breach by non-performance & before receiving

all of agreed exchange, his repudiation alone gives rise to a claim for damages for total breach(2) Where performances are to be exchanged under exchange of promises one party’s repudiation of

a duty to render performance discharges the other’s remaining duties to render performance

Cherwell-Ralli, Inc. v. Rytman Grain Co. (854) (1980) – Buyer late/wanted AA???If reasonable doubt as to buyer’s default is substantial, seller (P) may suspend until it can ascertain whether buyer able to offer adequate assurance of future payments however, buyer’s conduct – if sufficiently egregious – can by itself constitute substantial impairment of value of whole contract & present breach of entire contract seller then allowed under UCC § 2-703 to cancel remainder of contract

DAMAGE REMEDIES

Expectation Damages Attempt to put P in position he would have been had D performed P awarded (1) out-of-pocket costs & (2) profit he would have made had contract been completed

Acme Mills & Elevator Co. v Johnson (21) (1911) Can’t get higher price for wheat than would have received under contract. Difference between market price and contract price

Reliance Damages Attempt to put P in as good a position as she was in prior to making contract P awarded out-of-pocket expenditures incurred in performing contract

Restitution Damages Prevent unjust enrichment of D by returning to P who has partially performed the value of the performance rendered to D

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Quasi-Contract Restitution & Reliance awarded in suits where recovery on contract is unavailable (1) unenforceable contracts & (2) “material breach” by P

Advanced Inc. v. Wilks 19 (1985) Defectively constructed house. Jury awarded cost of performance, even though higher than diminution of value damages. ***Question of ugly fountain here

Cost of Performance/cost of repair in unique, special instances land/property particularly suited for thing “cost of performance/repair” applicable. Where land solely for investment purposes it may be appropriate to apply market value diminution analysis

Expectation Interest Market Diminution (Peevyhouse) = Value of D’s promised performance (usually contract price) minus the benefits (if any) P received from not having to complete performance

Cost of Performance = cost of completing contract (usually construction cases)

Louise Caroline Nursing Home v. Dix Construction 38 D to build nursing home. Did not complete work by K date. P wants diminution in value = market value of completed building-value of building as D left itDamages should not put P in better position than it would have been had K been performed. As long as cost of performance + amount already paid to D does not exceed K price, no compensable damages since P can just hire someone else to finish at same cost as expected.

In cases involving failure to complete construction contracts damage measure = calculated on cost of performance standard, thus “making whole” or attaining initial expectancy of the contract.

LIMITATIONS ON EXPECTATION OF DAMAGES

Rockingham County v. Luten Bridge Co. (60) (1929) (4th Circuit) P Luten to build bridge under K w/County. D notified P that it would have to breach the K (anticipatory repudiation) – P had spent $1900 on construction at this point. P did not stop; now suing for $18,300 cost of building bridge.

Duty to mitigate damages upon notice of breach damage measurement = materials & labor expended & future lost profit resulting from failure to specifically perform P only interested in profits resulting from K = equally advantageous to sue for expectation damages (profit)

LB FORMULA Distinguishes b/w fixed costs (overhead) & variable costs

Leingang v. City of Mandan Weed Board (63) (1991) D awarded K to P to cut weeds on large lots. Awarded different K to someone else for small lots. But D assigned large lots to small contractor for $1933 K price. D asserts that damages should be reduced by

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overhead expenses, too.

Anticipated Profits constant “overhead expenses” not included as COP b/c P must pay whether or not K breached P compensated by recovering K price reduced only by expenses saved b/c contract wasn’t performed

Kearsarge Computer Inc. v. Acme Staple Co. (64) (1976) P has K for data processing. D breaches. P can have multiple K’s at same time… there is no mitigation need.

General Rule Profits on Ks after breach do not mitigate damages unless first K required services to extent that concurrent performance would have been impossible

Parker v. 20th Century Fox (66) (1970) D to pay $750,000 to Shirley MacLaine to play female lead in “Bloomer Girl,” musical comedy. D offered her lead role in “Big Country, Big Man,” a western drama, instead. P declined, demands K salary + interest. D alleges deliberate failure to mitigate damages.

General Rule recovery measure for wrongfully discharged employee = salary agreed upon for service period, less amount employer proves employee earned or w/reasonable effort might’ve earned elsewhere b/f projected earnings from other employment accounted for, employer must show other employment was comparable or substantially similar to that which employee was deprived of – rejection of inferior or different employment not be used to mitigate damages reasonableness isn’t requirement of employee’s decision to reject or fail to seek different or inferior employment1

DAMAGES UNDER THE UCC

UCC § 2-713 What does time when buyer learned of the breach mean?

GENERAL RULE When seller repudiates, buyer’s damages calculated by market price at expiration of commercially reasonable time after buyer learned of repudiation

COMMON LAW When seller repudiates, buyer’s damages calculated by use of market price at time of performance (Missouri Furnace Co. v. Cochran 27)

BUYER SELLER2-711 (Cover or damages) 2-703 (List of things)2-713 (Damage formula) 2-708 (Damages formula)2-712 (Cover remedy) 2-706 (Resale remedy/cover)2-715 (Inc. & cons damages) 2-710 (Incidental damages)2-716 (Specific Performance) 2-709 (Action for price)2-714 (Damage for breach of accepted goods)

Neri v. Retail Marine Corp. (32) (1972) – P cancelled purchase of boat from D. D

1 Reasonableness of efforts in seeking employment is a consideration; not the choice to accept or reject

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resold but argues no need for mitigation because supply is infinite. Ct. agrees.

D’s right to recover under § 2-718 offset to extent D proves right to recover damages under another article of UCC § 2-708 = damage measure = difference b/w market price at tender & contract price unless inadequate to place seller in as good a position as he would’ve been w/sale. Where seller is dealer & buyer breaches sale, seller damaged even though he resells article for same price breach depletes dealer’s profit

Qualification of Lost-Volume Seller- Should not focus on seller’s capacity to supply breached units- Seller must establish not only that it had capacity to produce breached unit in addition to re-sold unit but also that it would have been profitable to do so

Commonwealth Edison Co. v. Decker Coal (37) (1987) NO FACTS

§ 2-708 remedies only available to seller not entitled to contract price under § 2-709 § 2-708 = fallback position for sellers not entitled to recover under 2-709 (see 2-709(3))

***Purpose to put seller in as good of position as he would have been. Same with Buyer. No punitive damages in contracts

Hadley v. Baxendale (75) (1854) Ps’ mill’s crankshaft broke; had to send it through D carrier to get new one – told clerk to rush. Ps received new shaft several days late, resulting in loss of profits.

RULE damages such as may be (1) fairly & reasonably considered to have naturally arisen from breach of contract itself or (2) such as may reasonably be supposed to have been in contemplation of both parties at time of entering into contract as probable result of breach of contract

Tacit Agreement Test (1) likely to be within promsior’s contemplation & (2) whether it is or not should be worked out on terms which it fairly may be presumed he would have assented to if they had been presented to his mind (rejected by UCC § 2-715)

Victoria Laundry v. Newman Indus (82) (1949) P’s machine broke down. D knew P needed it for biz.

Reasonably Foreseeable (1) imputed knowledge ordinary person knowledge of likely loss from BOC; (2) actual knowledge whether breachor possesses knowledge of special circumstances outside ‘ordinary course of things’ which would make a breach cause additional loss only necessary that breachor, if he had considered question , would as reasonable man have concluded that the loss in question was liable to result (tacit agreement test)

FORESEEABILITY TODAY

REST, 2d § 351 – Unforeseeability & Related Limitations on Damages(1) Damages are not recoverable for loss that the party in breach did not have reason to

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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 b/c it follows from the breach

a. In the ordinary course of events, orb. As a result of special circumstances, beyond the ordinary course of events, that

a 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

Valentine v. General American Credit (87) (1984) P seeks damages for mental distress above and beyond exemplary damages for breach of employment K.

P May not recover mental distress damages for breach of employment contract NARROW EXCEPTION = whether K has (1) elements of personality & (2) whether damage suffered capable of adequate compensation by reference to terms of K mental distress damages for BOC have not been awarded where there is a market standard by which damages can be adequately determined. ***This is torts, not contracts. Courts don’t want to deal with emotional damages. Too hard to quantify and punitive.

Hancock v. Northcutt (89) (1991) housing contract that was ‘special’ to owners

For mental distress damage award, emotional tranquility must be the contract’s essence

REST, 2d § 353 – Emotional DisturbanceRecovery for emotional disturbance excluded unless breach also caused bodily harm or contract or breach is of a kind that serious emotional disturbance was a likely result

Freund v. Washington Square Press Inc. (96) (1974) College Prof/Book/Royalty

Measuring damages by awarding cost of publication would unjustly enrich P at D’s expense & place him in better position than he’d have been in had the K been fulfilled the royalties expected from sales fails for uncertainty damages not measured by cost saved by D in breaching but by NPC of breach to the plaintiff.

Fera v. Village Plaza (97) (1976) New Business Speculative Profits

Reluctance to award damages based on untried business profits should not be read as per se prohibiting every new business from recovering such damages problem not w/damages themselves but with proving w/reasonably certainty those damages where injury to some degree is found, recovery is not precluded for lack of precise proof

REST, 2d § 352 – Proof of ProfitsDifficulty lies in establishing basis for new business damages

o Damages may be established w/reasonable certainty w/aid of expert testimony, economic & financial data, market surveys, etc.

If well established business, damages based on past expectations & profits

ALTERNATIVE INTERESTS: RELIANCE & RESTITUTION

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REST 2d § 349 - Damages Based on Reliance InterestAs an alternative to the [expectation interest measure of damages the injured party has a right to damages based on his reliance measure of interest including expenditures made in preparation for performance or in performance less any loss that the party in breach can prove w/reasonable certainty the injured party would have suffered had the contract been performed

Chicago Coliseum Club v. Dempsey (41) (1932) Boxing Case

Where speculative profits, (1) damages must be proved w/a reasonable degree of certainty in order to be compensated & (2) any obligations assumed prior to contract w/D are not chargeable to D & (3) reliance damages pursuant to contract b/w date of contract signing & actual breach (notice from D) are recoverable to the extent that they were pursuant to & in furtherance of the contractual agreement.

Anglia Television v. Reed (50) (1971) English drama employing American actor

Where lost profit can’t be proved, P entitled to recover wasted expenditure & not necessarily limited to that incurred after contract made D must’ve known damage would result from breach & should bear consequences

QUANTUM MERUIT

Boone v. Coe (99) (1913) Quantum Meruit - Oral K for P & families to leave KY to live on and cultivate D’s farm for one year. D wouldn’t let them in house or farm. Ps went home. Want reliance damages = expenses of abandonment, travel, and lost time

General Rule damages not recoverable for violation of SOF-barred contract QM becomes issue (quasi-contract) & key question whether damage incurred by P was (1) accepted by D & (2) benefited him, thereby implying promise to pay contract

U.S. v. Algernon Blair Inc. (102) subcontractor will lose big time. Sues in quantum meruit

Accepted Principle promisee upon breach has right to forego suit on contract & claim only reasonable value of performance P may join claim for QM w/claim for damages under BOC recovery = reasonable value of performance STANDARD for measuring reasonable value is amount for which such services could have been purchased from one in P’s position at the time & place the services were rendered

Kearns v. Andree (104) (1928) D breached K to buy P’s house after P repainted and repapered walls to D’s specifications. Wants expenses for meeting D’s specs, for meeting purchaser’s specs, and for difference b/t K and resale prices.

When contract is wholly unenforceable & P cannot bring an action on the contract for some reason other than his default is permitted recovery for reasonable value of services, w/o regard to whether those services have benefited the other party if work done to adapt to D’s desires & under terms of oral agreement for sale of premises, in good faith, & in honest belief of definiteness & enforceability, P is entitled to compensation

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Oliver v. Campbell (107) (1954) – Divorce proceeding virtually complete, D gets rid of P (attorney). Value of services was $5000.

Restitution is not available to one who has fully performed… if only part of the agreed exchange for such performance not been rendered by D is the sum of money constituting a liquidated debt ***I’m assuming sub in Algernon hadn’t substantially performed… and that’s the difference between these cases.

Britton v. Turner (117) (1834) – 9 ½ month laborer/quit/sued for QM

Hired laborer compensated for service actually performed, though not continuing for contract term & such contracts presumed to be made w/reference to that understanding unless express stipulation shows contrary if D receives benefit beyond damage occasioned by failure to complete, D must pay P reasonable value of services (minus damage to D) (may not recover damages over contract price)

Majority View Contract which fails to satisfy test of substantial performance may recover in

quasi-contract for the work done (less the other’s damages)

WILLFUL BREACHModern View

Even intentional departure from contract specs will not necessarily defeat recovery, but may be considered as factor in determining whether QM recovery

Vines v. Orchard Hills Inc. (127) (1980) failed condominium purchase. Peters authored opinion. No actual damages because price went up.

Purchaser whose breach is not willful has a restitutionary claim to recover money paid that unjustly enriches seller requires P to prove that D has been unjustly enriched (show imbalance in damages)

Damage Clauses Only Enforceable…Two Part Test(1) If the damages are “difficult” to measure(2) If the amount fixed is a reasonable forecast of what is required to justly

compensate injured party

Vines v. Orchard Hills Inc. (127) (1980) failed condominium purchase. Peters authored opinion. No actual damages because price went up.General Rule If agreement provides for a penalty or forfeiture w/o statutory authority, it is unenforceable. Where damages difficult to ascertain, provision fixing damages in advance upheld if amount is reasonable measure of anticipated probable harm

NOTE Liquidated Damage Clauses = meta-contracts (about the contract itself)

LIQUIDATED DAMAGES CLAUSE

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Yockey v. Horn (137) 7th Circuit (1989) biz partnership with agreement not to voluntarily participate in litigation against the other.

Where liquidated damages clause is reasonable either at the time of contracting or at the time of injury (providing there are actual damages), the contract is enforceable.

Muldoon v. Lynch (136) (1885) Italian marble for gravestone delayed. Liquidated damages? Emotional damages in contracts?

If on its face the K was intended by parties as a penalty, the clause is unenforceable, especially when the result would be a sum disproportionate to any actual damage.

REST, 2d § 356 – Liquidated Damages & PenaltiesDamages for breach by either party may be liquidated in agreement but only at amount reasonable in the light of the anticipated or actual loss caused by the breach & the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty

Comments: Two factors (1) anticipated or actual loss caused by breach & (2) difficulty of proof of loss – the greater the difficult either of proving that loss has occurred or of establishing its amount w/requisite certainty, the easier it is to show that the amount fixed is reasonable

Rest, 2d embraces the anticipated or actual loss (hindsight) approach (see UCC 2-718)

Wilt v. Waterfield (142) (1954) P had K to buy D’s farm. D sold to someone else. Clause limiting damages is unenforceable because it was interpreted as a penalty.

Undifferentiated Clauses Presumption of InvalidityDamage formulas invariant of the gravity of the breach (applying to a variety of breaches of varying degrees of importance) are not a reasonable effort to estimate damages especially true when fixed sum greatly exceeds losses likely to flow form minor breaches

UCC § 2-719 – Contractual Modification or Limitation of Remedy

Fretwell v. Protection Alarm Co (147) (1988) – Alarm co. limits damages to $50

Issue(s): Whether the clause of the contract is enforceable which limits damages to $50 and (3) whether the indemnity clause of the contract is enforceable

Where damage clause makes no effort to reasonably forecast just compensation for harm caused by breach, it is clearly an attempt to limit damages provisions limiting liability under burglary alarm services generally upheld (D not an insurer) finally, indemnity provision of agreement is enforceable if intention to do indemnify in K is unequivocally clear from the agreement

ENFORCEMENT IN EQUITY

SPECIFIC PERFORMANCE

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GENERAL RULE SP reserved for situations where aggrieved party can show that money-judgment remedy would be inadequate remedy

LIMITATIONS ON EQUITABLE REMEDIES (SP & INJUNCTIONS)- Equity granted only if the K’s terms are definite enough to frame an order- No relief where enforcement/supervision would be difficult (service Ks)

***This should be questioned. Receivers have been used many times to oversee projects and could probably do so easily. Probably more a concern of the court reaching too far (reaching out into the real world quote). Madden v Rosseter (court ordered receiver to take horse from California and deliver to Kentucky) My own research MORGAN v McDONOUGH (school desegregated)

- Contracts for sale of land specifically enforced (inherent parcel uniqueness)- Personal service contracts rarely (almost never) awarded SP

Van Wagner Advertising v. S & M Enterprises (151) – Billboard Lease

SP imposed as remedy for breach of real property contracts & available (in appropriate circumstances) for real property leases. Point at which SP granted is whether uncertainty valuing it (volume, refinement & reliability of available info about substitutes) If damages conjectural & incalculable w/reasonable certainty, D compelled to SP equitable remedy must not itself work inequity & SP should not be undue hardship.

REST, 2d § 360 – Factors Affecting Adequacy of DamagesIn determining whether the remedy in damages would be adequate [to protect the expectation interest of injured party], the following circumstances are significant

(a) the difficulty of proving damages w/reasonable certainty(b) the difficulty of procuring a suitable substitute performance by means of money

awarded as damages, &(c) the likelihood that an award of damages could not be collected

UCC § 2-716(1) Specific performance may be decreed where the goods are unique or in other proper circumstances (although liberalized, still extraordinary remedy)

Fitzpatrick v. Michael (166) (1939) – Lifetime caretaker/interest in estate

Where K is one for personal services, P is not entitled to SP, although breach of legally enforceable K = service contracts are of personal & confidential nature such they can’t be specifically enforced w/any success

ENFORCING NON-COMPETITION PLEDGES

TEST Express anti-competitive covenant rigorously examined & specifically enforced only if satisfies certain requirements = no SP unless necessary to protect trade secrets, customers lists, good will of employer’s business or employer exposed to specific harm b/c of unique nature of E’s service.

SUMMARY Enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any such agreement

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imposing unreasonable restraint is illegal, void & unenforceable even as to so much of covenant or performance as would be reasonable restraint *** Similar to liquidated damages in that only to justifiable amount.

Data Management v. Greene (175) (1988) – P alleges breach of 5-yr noncompete covenant covering all of Alaska. Trial ct found covenant overbroad, denied P’s action for injunction. Court chooses to alter covenant to render it enforceable since co. acted in good faith. Previous approaches to overbroad covenants:1) Hold them “unconscionable” and hence unenforceable. This approach can lead to unduly harsh results.2) “Blue pencil” rule – court renders it enforceable by deleting specific words. This approach values wording over substance.3) If drafted in good faith, that is, employer did not willfully overreach, court can reasonably alter it to render it enforceable.

If overbroad covenant can be reasonably altered to render enforceable, court shall do so unless it determines covenant not drafted in good faith.

Pingley v Brunson (172) (1979) – Auto mechanic piano player at restaurant.

Fullerton Lumber Co. v Torburg (174) (1955) – war vet manages lumber yard then starts own. 10 years is excessive

RIGHTS & DUTIES OF NON-PARTIES

THIRD PARTY BENEFICIARIES

Lawrence v. Fox (869) (1859) – H $300 loan to D (for P); D not give to P. Holly told Fox to pay Holly’s debt to Lawrence. Fox didn’t. Lawrence sues Fox.

Any person for whose direct benefit a contract was intended can sue on it

***If parties don’t want intended benif. to have rights then they can put that into contract

***Hoffman v. Red Owl 284 – P worked with Red Owl representatives to sell his biz, move, and relied on Red Owl. Wife was able to sue as a 3 rd party using promissory estoppel.

NOVATION New contract substituted for & displacing old one

Two Categories of Beneficiary Creditor Beneficiary: if a promise would satisfy an actual or supposed duty of the

promisee to a third party, third party is creditor beneficiary (Lawrence v. Fox, 843) ***Can sue promisor (Fox) and promise (Holly)

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Donee Beneficiary: if the promisee entered the K for the purpose of conferring a gift on the 3rd party, that 3rd party is the donee beneficiary (Seaver, 849) ***Can sue promisor (If applicable – Fox)

REST, 2d § 302 – Intended & Incidental Beneficiaries(1) Unless otherwise agreed b/w promisor & promisee, beneficiary of promise is intended beneficiary if

recognition of right to performance in beneficiary appropriate to effectuate parties’ intent and eithera. The performance of the promise will satisfy an obligation of the promise to pay money to the

beneficiary [creditor beneficiary]b. The circumstances indicate that the promise intends to give the beneficiary the benefit of the

promised performance [donee beneficiary](2) An incidental beneficiary is a beneficiary who is not an intended beneficiary

INCIDENTAL BENEFICIARIES ARE NEVER ENTITLED TO RECOVERYNOTE The right to performance in a 3rd party beneficiary is determined both by (1) intention of the

contract parties & (2) by the intention of one of them to benefit the 3rd party

Pierce v. Nemours Foundation (855) (1988) NO FACTS

Intent to confer 3rd party beneficiary benefit determined by K language in context in which written typical owner insulated from subs during course of construction & during pursuit of recovery in event of default (buffer zone)

INTENTION TO BENEFIT – THE ASSUMING GRANTEE OF LAND When identifying intended B, intention usually turns on promisee’s intention Two choices vendee where mortgaged land sold two options

o Assume existing mortgage Lawrence v. Fox (Fox = principal debtor) Holly = secondarily liable to Lawrence (surety) Lawrence subrogated to Holly’s claim as surety against grantee

o Accept land subject to mortgage Grantee buying “equity of redemption” = margin of value left

above balance due on mortgage debt Debt payment falls on grantee (must be done in order to

preserve grantee’s investment) If land value increases, grantee has incentive to keep

payments up to date (small liability for grantor) In this instance, grantee is not liable to neither the mortgagee or

grantor no promise to pay has been made

Anderson v. Fox Hill Village Homeowners (859) (1997) Retirement/Ice, worker fell on ice. Sue on other party’s K?

P must show she was intended beneficiary & lessor intended to give her the benefit of the promised performance (language & circumstances for intention) Intent MUST be clear & definite (P incidental beneficiary)

H.R. Moch v. Rensselaer Water Co. (861) (1928) – Hydrant liability. D let hydrants go dry, are citizens intended beneficiary’s? Court says they are incidental.Doyle v South Pittsburgh Water Co. (864) (1964) – Same situation but liability found in

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tort. ***Better rule in my opinion. Where life limb and property is in danger… but this is a tort not contract claim

No action against D unless intention appears D answerable to individual members of public as well as to city (privity) for loss ensuing from failure to fulfill K MUST be primary, individual duty to beneficiary (immediacy) (public = incidental beneficiary)

REST, 2d § 313 – Government Contracts(1) The rules [on contract beneficiaries] apply to contracts with a government or governmental agency

except to the extent that application would contravene the policy of the law authorizing contract or prescribing remedies for its breach

(2) In particular, a promisor who contracts with a government or governmental agency to do an act for or render a service to the public is not subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform unless

a. The terms of the promise provide for such liability; orb. The promisee (government) is subject to liability to the member of the public for the

damages & a direct action against the promisor is consistent with the terms of the K & with the policy of the law authorizing the K & prescribing remedies for its breach

Robson v. Robson (897) (1981) – NOT IN CASE BOOK. Ex-Wife sued on dead husband’s rescinded provision in contract. No reliance = rescission was proper before he died/after divorce = she gets nothing

Distinction b/w Donee Beneficiary & Creditor Beneficiary DB = no vested right (gratuitous promise), whereas CB has pre-existing obligation to 3 rd party no right to discharge CB contract (pre-existing duty) – vested rights as soon as K executed (reliance presumed); DB can be revoked unless beneficiary has reasonably relied upon K

REST, 2d § 311 – Variation of Duty to Beneficiary (no distinction b/w DB & CB)(1) Discharge or modification of duty to intended beneficiary by conduct of promise or by subsequent agreement b/w promisor & promisee is ineffective if a term of the promise creating the duty so provides(2) In absence of such a term, promisor & promisee retain power to discharge or modify the duty by subsequent agreement(3) Such a power terminates when beneficiary, before he receives notification of the discharge or modification, materially changes [reliance] 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(4) If the promisee receives consideration for an attempted discharge or modification of the promisor’s duty which is ineffective against the beneficiary, the beneficiary can assert a right to the consideration so received. The promisor’s duty is discharged to the extent of the amount received by the beneficiary

ASSIGNMENT & DELEGATION

Assign rights & Delegate duties

Assignment Act or manifestation by owner of right (assignor) indicating his intent to transfer that right to another person (assignee)

All rights may be assigned, UNLESS …- materially changes the duty of the obligor

o Most commonly happens in personal service K

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- Materially increases burden of risk- Impairs obligor’s chance of obtaining return performance- Materially reduces value of return performance to obligor- Law restricts assignability of specific right involved

Langel v. Betz (875) (1928) K: P to sell land to H. H assigned K to Benedict, who assigned it to D. Assignment contains no delegation to D of performance of assignor’s duties. D refused to perform even after P granted extension on D’s request.

Assignment of K, unless specifying to contrary, is not an assignment of duties of assignee, but only rights to K, but assignee may expressly or impliedly bind himself to perform the assignor’s duties by contract w/the assignor or w/the other party. Must ask whether party dealings indicate implied intent for assignee to assume assignor’s duties

REST, 2d § 328 - Interpretation of Assignment; Effect of Acceptance/Assignment(1) Unless the language or the circumstances indicate the contrary, as in an assignment for

security, an assignment of “the contract” or of “all my rights under the contract” or an assignment in similar general terms is an assignment of assignor’s rights and a delegation of his unperformed duties under the contract

(2) Unless the language or the circumstances indicate the contrary, the acceptance by an assignee of such an assignment operates as a promise to the assignor to perform the assignor’s unperformed duties,& the obligor of assigned rights is an intended beneficiary of the promise

Caveat: Restatement offers no opinion whether the rule in subsection (2) applies to an assignment by purchaser of his rights under a contract for the sale of land (Langel v. Betz)

Herzog v. Irace (878) (1991) – Jones was in motorcycle accident. D is lawyer for Jones. Jones assigned proceeds of accident to P.

Assignor must make intent clear to relinquish right to assignee & must not retain any control over the right assigned or any power of revocation. If, after receiving notice of assignment, obligor (D) does not pay amount to assignee (P) or pays to other creditors (i.e. client & other expenses), obligor does so at own risk b/c assignee may enforce rights against obligor directly

NOTE Assignments may be gratuitous or valuable no specific wording needed for assignment, but intent to vest in assignee right in thing assigned manifested by some oral or written word or by conduct signifying relinquishment of control & appropriation to assignee

REST, 2d § 332 – Revocability of Gratuitous Assignments(1) Unless contrary intention manifested, a gratuitous assignment is irrevocable if

a. The assignment is in a writing either signed or under seal that is delivered by assignor; orb. 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) Except as stated in this section, a gratuitous assignment is revocable & the right of the assignee is

terminated by the assignor’s death or incapacity, by a subsequent assignment by the assignor, or by notification from the assignor received by the assignee or by the obligor

(3) A gratuitous assignment ceases to be revocable to the extent that before the assignee’s right is terminated he obtains

a. Payment or satisfaction of the obligation, or

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b. Judgment against the obligor, orc. A new contract of the obligor by novation

(4) A gratuitous assignment is irrevocable to the extent necessary to avoid injustice where the assignor should reasonably expect the assignment to induce action or forbearance by the assignee or a sub-assignee & the assignment does induce such action or forbearance

Options can be assigned. Duties depend on UCC or C/L and express language.

General Rule Cannot assign credit w/o creditor’s approval (materially changes oblig)

P/T Ltd v. Friendly Mobile Home (882) (1989) NO FACTS

UCC holds (contrary to C/L) that duties & rights pass under assignment unless circumstances or language to contrary UCC § 2-210(4)

Macke Co. v. Pizza of Gaithersburg (883) (1970) – vending machines resupply

Generally, duties may be assigned or delegated Exception = duties under personal services K may never be delegated, nor rights be assigned under K where personality element is ingredient of bargain Nothing requiring speciality, genius or extraordinary skill in stocking vending machines & no material change in performance of obligations justifying refusal of D to recognize the assignment

DELEGATION UNDER UCC

UCC § 2-210 May treat any assignment which delegates performance as creating reasonable grounds for insecurity & may w/o prejudice demand assurances from assignee (§2-609)

NOTE Code sanctions delegation, except where delegated performance would be unsatisfactory to obligee

REST, 2d § 318 Unless otherwise agreed, promise requires performance by a particular person only to extent that obligee has substantial interest in having that person perform or control the acts promised

Homer v. Shaw (893) (1912) Creditor/P gave contractor money to finish job but then new contract and he was cut out.

Parties, while unable to modify to assignee’s prejudice K terms w/o consent (assignee), or by secret fraudulent arrangement deprive him of benefit of assignment, were not precluded from entering new agreement if performance by assignor had become impossible from unforeseen circumstances (assignee = no enforceable claim on new K)

STATUTE OF FRAUDS

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Year – Promises incapable of being performed within one year after making K are unenforceable if not in writing (performance within 1 year must be impossible) Exception = generally Ks for more than one year, but which provide for discharge in a shorter time, not performable in a year

- Sale of Goods cases (UCC) fall under the SOF one year provision even if they don’t require writing under the UCC

- The question is whether the principal purpose of the contract has been fulfilled (discharge w/in a year usually doesn’t qualify)

Land – Promise to transfer or buy any interest in land is within the SOF & unenforceable unless in writing

Goods – UCC § 2-201 Contract for sale of goods of $500 or more not enforceable unless there is some writing sufficient to indicate contract for sale has been made Exception =

specially manufactured goodsparties admit to contractparty accepted and paid for goods

MEMO REQUIREMENTS - Reasonably identifies the subject- Indicates that contract has been made b/w parties- States w/reasonable certainty the essential terms of the contract- Signed (can be electronic) by or on behalf of party charged

IX. TORT● punitive damages not allowed in K; breach of K must also constitute a tort (fraud, increasingly bad faith)● variety of torts may occur w/breach of K● tortious interference w/K: 3rd party convincing party to K to break K

- one party has every right to break K with the other, but a party to the K can’t be convinced by a third party to breach- must be done in bad faith (JD Edwards & Co., consultant misleads company for personal benefit, 901)- traditionally applied to master-servant relationship, but expanded (Lumley v. Gye, opera singer lured away by rival company, 895)

Additional:Paternalism – Aetna v Murphy 796 courts are meant to balance justice and fairness. Thus if a clause will hurt one party excessively but the other party suffers no material prejudice, the offending clause will be struck. “The law has come to permit a complainant to seek a fair allocation of profit and loss

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despite the complainant’s own failure to comply fully with his contract obligations… What is fair… must however depend upon a proper showing by the complainant who seeks this extraordinary relief.”

Parole Evidence: Pierce Assocs. V. Nemours Foundation 855 Though applying to third party beneficiaries, the court’s language is enlightening: “The language of a contract, however, cannot be divorced from the context in which it is written.” This might let courts to always allow external evidence that shows context.

Public Policy Cases:

Private choice should be overridden by social ends.Cobaugh 331 – GamblingRichards 671 – Exculpation ClauseBaby M 583 – Surrogacy

Regulation of contracts/Paternalism1- Unequal bargaining power – Utilities, transportation, and

insurance required to provide service to all2- Prohibited terms: Gambling, exorbitant exculpation

clauses, surrogacy, crime for hire, etc.3- Severe or unanticipated consequences – Mutual assent

really given for such an unbalanced contract?4-

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