Contracts Outline - Final

Elle Klein Fall 2015

Overview1. Contract = a promise or set of promises for the breach of which the law provides a

remedy, or the performance of which the law in some way recognizes a duty a. Governing:

i. UCCii. Restatement

b. Types i. By Formation

1. Express2. Implied3. Quasi

ii. By Acceptance 1. Bilateral2. Unilateral

a. Modern view allows for acceptance by promise or start of performance

3. Test: each party has a duty and a right = bilateral, one party has a duty, one party has a right = unilateral

iii. By Validity 1. Void = without legal effect2. Voidable = elect to avoid3. Unenforceable = otherwise valid – defenses

c. Creation of a K = MA + C - ∆2. Mutual Assent

a. Objective theory of contracts = apparent intentionb. The Offer

i. A direct and complete proposal for a contract be entered into providing for the exchange of defined performances

ii. Expression of a promise, undertaking, or commitmentiii. Certain and definite iv. Communicated to the offereev. Termination?

1. By offeror a. Revocation

i. Direct or indirect ii. Effective when received iii. Limitations

1. Options 2. Firm offers = signed writing to be held open3. Detrimental Reliance 4. Part performance

a. Irrevocable once performance has begun for a reasonable time

2. By offereea. Rejection

i. Expressii. Counter

b. Lapse of Time 3. By Law

a. Termination by death or incapacity b. Destruction of Subject Matter

c. The Acceptance i. Must be unequivocal

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1. Restatement: different or additional terms make the acceptance a counter/rejection Mirror Image Rule

a. last shot rule the boilerplate document that is sent just before performance governs the contract.

2. UCC a. §2-207 – Battle of the Forms

i. A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time….even if it states additional or different terms

ii. Additions are construed as proposals and become part of the contract unless

1. Offer expressly limits acceptance 2. Materially alters 3. Or notification of objet has already been given in a

reasonable time iii. Different terms can

1. Treat like additional and determine if they should be accepted

2. Knock out and filled with gap filler 3. Disregarded

ii. Must be communicated1. May be accepted by any “medium reasonable in the circumstances” 2. Mailbox rule

a. Moment of dispatch 3. Consideration

a. R§71(1): something of value that is being bargained for in exchange for something else

b. Elements :i. Bargained-for Exchange : requires that the promise induce the detriment and

the detriment induce the promise 1. Gift = not C

a. Act or Forbearance by Promisee must be of benefit to Promisor b. Economic Benefit not Required = Peace of mind or gratification

2. Past or Moral Consideration = not sufficient considerationii. Benefit-Detriment Theory

1. Majority = detriment to the promisee in performing the act/making promise is the exclusive test of consideration

2. Second Restatement = Bargained-for exchange 3. Detriment = promisee has to do something he has no legal obligation

to do/refrains from doing4. Specific Situations

a. Pre-existing legal duty Ci. New or different consideration required ii. UCC no new C for modification to be binding. Implied

good faithc. Mutual & illusory promises

i. Requirements & Output Contracts 1. C = parted with the legal right to buy or sell goods he may need

d. Substitutes for Consideration i. Promissory Estoppel or Detrimental Reliance

1. C not necessary 2. Elements:

a. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a

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third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

ii. Promises in Writing 1. UCC and Written Promises

a. Modification of a Kb. Firm offers

4. Defenses to K a. ∆ in formation, ∆ in defect in capacity, ∆ to enforcement b. Defenses to Formation ( absence of mutual assent, absence of consideration, and

public policy considerations)i. Absence of mutual assent

1. Mutual mistake Voidable if:a. Mistake concerns basic assumptionb. Mistake has material effect c. Party seeking avoidance did not assume the risk

i. Consciously aware of their ignorance ii. Mistake in general value generally not a defense

d. Unilateral mistake If one party is mistaken, no K formation prevention UNLESS nonmistaken party knew or had reason to know of the mistake made by the other party

e. Latent Ambiguity Mistakes – Mutual Misunderstanding @ K formation

i. Neither party aware of Ambiguity – No Kii. Both Parties Aware of Ambiguity – No Kiii. One party Aware of Ambiguity – K (according to intention

of unaware party)2. Misrepresentation

a. Fraudulent Misrepresentation – i. Voidable by innocent party if they justifiably relied on the

misrepii. “Fraud in the inducement”

1. v. Fraud in Factum b. Nonfraudlent Misrepresentation voidable if Material

i. If innocent party justifiably relied on misrep & it was material

ii. Material if:1. Information asserted would induce a reasonable

person to agree2. The maker of the misrep know the info asserted

would cause a particular person to agree. ii. Absence of Consideration

1. Illusory Promiseiii. Public Policy

1. Illegality = defense for enforcement c. Defenses based on Lack of Capacity

i. Legal Incapacity 1. Infants

a. Age of majority = 18b. Contract is voidable by infant until age of majority then he has a

reasonable time to disaffirm c. Exception:

i. Necessities Bound to pay reasonable value

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2. Mental Incapacity a. Incapable of understanding the nature and signifigance of the K

may disaffirm when lucid ie voidable 3. Intoxication

a. Voidable if other party had reason to know of intoxication ii. Lack of Volitional Consent

1. Duressa. Voidable b. Where one party takes advantage of another party’s economic

needs usually doesn’t equal duress2. Fraud in the Inducment

a. Voidable by innocent party. Know a K is being entered into but under false impression

d. Defenses to Enforcement i. Statute of Frauds

1. A writing signed by the parties sought to be bound2. Agreements covered:

a. Interest in Land i. Partial performance or full performance of an oral

promise in an interest in land may be enforceable if it unequivocally indicates K, will take the K out of the SOF

b. Performances not within one year i. Starts at date of K formationii. Must be humanly impossible to perform w/I one yeariii. Lifetime Ks not in SOF bc person can die.

c. Goods Priced at $500 or more i. UCC – must be in writing ii. Orally enforced if:

1. Specially manufactured goods2. Written confirmation between merchants 3. Goods = all things which are moveable at the time

of the identification to the K d. Other three: consideration of marriage, suretyship, debt

personal payments 3. Requirements:

a. Any writing suffices as long as it contains EVERY essential term i. Identity of the party sought to be chargedii. ID of the contracts subject matteriii. Terms and conditions iv. Recital of the Considerationv. Signature of the party sought to be charged

b. UCC quantity, signature of party to be charged, and writing sufficient to indicate that a K was formed

4. Noncompliance with SOF renders a K unenforceable at option of party to charged. It is a ∆ for party charged to say there was a lack of writing.

5. Situations where SOF not applied a. Admissions b. Performance

i. To the extent of the partial or full payment or performance

c. Promissory Estoppel

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i. If an oral agreement foreseeably induces a plaintiff to change his position in relaiance on an oral agreement, courts may use PE to remove K out of SOF

6. Remedies = reasonable value for part performance, OR restitution of benefit that has conferred. = quantum meruit (what one has earned)

ii. Unconscionability 1. Allows court to refuse to enforce a provision of an entire K to prevent

oppression and unfair surprise. (UCC)2. TEST in light of the general commercial backgrounds and needs of

the particular party, the clauses involved are so one-sided as to be unconscionable

a. One-sided bargains where one party has substantially superior bargaining power

3. Inconspicuous Risk-Shifting Provisions a. Disclaimer of warranties b. Add on clauses!

4. Contracts of Adhesion – “Take it or Leave it”a. One sided bargain. Buyer has not choice

5. Price Unconscionability rare 5. Rights and Duties of Nonparties to the K

a. General rule: only confer rights & duties only on the parties thereto b. Exceptions:

i. Third party beneficiaries ii. Transferred beneficiaries

c. Third-Party Beneficiaries i. A enters into K with B that provided that B will render some performance to

C. A is the promisee, B is the promisor, and C is the third party. ii. Which 3rd Parties can sue?

1. Intended (can) v. Incidental (cannot)2. TEST: was the purpose of the promisee, according to the language of

the K, to get the benefit for herself primarily or to confer a right to another party?

3. Determining Intentionsa. Expressly designated?b. Performance directly to 3rd?c. 3rd have any rights?d. Relationship?

iii. When do the rights of the beneficiary vest?1. Manifests assent to the promise in a manner invited or requested by

the parties;2. Brings suit to enforce the promise; or 3. Materially changes position in justifiable reliance on the promise

d. Assignment of Rights & Delegation of Duties i. Assignment of Rights

1. X and Y have a K. Y assigns rights to Z. 2. X (obligor) ----------------- Y (Assignor) ------------ Z (Assignee)3. Generally all K rights may be assigned. Exceptions:

a. Assigned Rights would substantially Change the Obligor’s Duty i. Personal Service Ksii. Requirement and Output K

b. Rights Assigned would Substantially Alter Obligor’s Riskc. Assignment of Future Rightsd. Assignments Prohibited by Law e. Express contractual provision against assignment

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i. Assignment of the K bars duties, but not rights usually 4. Necessary for an effective assignment:

a. (sometimes) writing requirement b. adequate descriptionc. present words of assignmentd. no requirement of consideration

5. Partial Assignments okayii. Delegation of Duties

1. X and Y have a K. Y delegates duties to Z. Y is the obligor since Y is the one with the duty to perform the obligation. Y also is the delegator since Y delegated the duty to Z. X is the obligee, since X is the one for whom Y or Z is obligated to perform

2. X (obligee) ------------------ Y (delegator/obligor) ------------- Z (delegatee)3. Generally, all contractual duties can be delegated. Exceptions:

a. Duties involving personal judgment and skill b. “Special Trust” in Delegaot c. Material changes of Obligee’s expectancy d. Contractual Restriction of Delegation

4. KEY – a delegator will remain liable until the delegatee completes performance

6. Rules of Contract Construction & the Parol Evidence Rule a. Rules of contract construction

i. Contracts are fully integrated ii. Plain Meaning Rule iii. Custom and usage iv. Preference to construe contract as valid and enforceable v. Ambiguities construed against party preparing contract

b. Parol Evidence Rule i. Complete Integration = When parties express their agreement in writing with

the intent it embody the full and final expression1. All written/oral prior evidence not admissible 2. Merger Clause strengthens presumption of all negotiations are present

ii. Purpose: to carry out the apparent intention of the parties and to facilitate judicial interpretation by having a single clean source of proof (the writing) on the terms of the agreement

iii. If a K is a complete integration is a question of fact for a JUDGEiv. TEST:

1. Willistonian “4 Corners” approach 2. Corbianian/Modern – interpretation of the parties most imp.

v. Extrinsic Evidence outside the scope1. Formation defects (Fraud, Duress, Mistake, Illegality)2. Conditions Precedent 3. Evidence to show interpretations of K ambiguities 4. “True Consideration”

7. Interpretation and Enforcement of the K (has a present duty to perform arisen and has the duty to perform been discharged?)

a. When has a contracting party’s duty to perform become absolute?i. Distinction between promise and condition

1. Promise = the manifestation of mutual intent to act or refrain from acting in a specific way so as to justify a promisee in understanding that a commitment has been made

2. Condition=an event, not certain to occur, which must occur, unless its nonperformance is excuse, before performance under a K becomes due

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b. Classification of conditionsi. According to Time of Occurrence

1. Condition precedent 2. Conditions Concurrent = capable of occurring together3. Condition Subsequent

ii. Expressed, Implied (in fact), and Constructive (Implied in law) Conditions 1. Express2. Implied in Fact = inferred from party’s intentions 3. Implied in Law/Constructive = read into a K by the courts

iii. Have the conditions been excused?1. Excuse of condition by actual (material) breach 2. Excuse of condition by substantial performance

a. Courts usually only apply in constructive conditions, not express b. Arises if breach is minor

c. Has the absolute duty to perform been discharged?i. Discharge by performance ii. Discharge by Impossibility, Impracticability, or Frustration

1. Discharge by impossibility a. Impossibility must be objective – the duties could not be

performed by anyone2. Discharge by Impracticability

a. The test for finding of impracticability is that the party to perform has encountered:

i. Extreme and unreasonable difficulty/expense ii. This difficulty is not anticipated

b. Can not be mere changes in degree of difficulty or expenses due to such cases

c. UCC the nonoccurance was a basic assumption on which the K was made

i. Crop failure, currency devaluation, war 3. Discharge by Frustration

a. Frustration will exisit if the purpose has become valueless by virtue of some supervening event not the fault of the party seeking the discharge

i. Parade exampleiii. Discharge by rescission

1. Must be an executory iv. Partial Discharge by modification of the Kv. Discharge by Releasevi. Discharge by Lapse vii. Discharge by SOL

8. Breach of the Contract and Available Remedies a. When Does a Breach Occur?

i. Under an absolute duty to perform and this duty has not been discharged, then failure to perform in accordance with the K will amount to a breach

b. Material v. Minor i. Minor = not relieved of duties ii. Material = obligee doesn’t receive substantial benefits of bargain

c. Determining Materiality of Breach i. Amount of Benefit Received ii. Adequacy of Damages iii. Extent of Part Performance iv. Hardship to Breaching Party v. Negligent or Wilful Behavior

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vi. Likelihood of Full Performance d. Failure of Timely Performance

i. As specified by Nature of K = not material unless explicitely stated ii. When Delay Occurs = more likely to be material prior to performance

starting iii. Mercantile Contracts iv. Land Contracts = more delay is req. v. Availability of Equitable Remedy = more lenient in tolerating considerable

delay in equity courts e. Remedies for Breach

i. Damages 1. Types

a. Compensatory Damages i. Put the nonbreaching party where she would have been

had the promise been fulfilled 1. Expectation Damages – “benefit of the bargain”

damagesa. Reliance Damages Alternative – put the π in

the position she would have been in had the K never been formed

2. Consequential Damages – any losses resulting from the breach that a reasonable person would have foreseen. π has burden of proof.

b. Punitive Damage c. Nominal Damages – may be awarded where a breach is shown

but no actual loss is proven d. Liquidated Damages – have been agreed on by both parties

before hand 2. Duty to Mitigate

a. She must refrain from piling up damages after she receives notice of breach

i. Ie) don’t keep building the bridge 3. Effect of the Liquidated Damages Provision

a. Enforceable if:i. Damages for K breach have been difficult to ascertain or

estatime at the time the K was formed ii. Been a reasonable forecast of compensatory damages

b. Recoverable even if no actual damagesii. Suit in Equity for Specific Performance

1. If the legal remedy is inadequate, the nonbreaching party must seek specific performance

2. Available for Land and Rare/Unique Goods 3. Not Available for Service Ks

a. Injunction is an alternate remedy iii. Rescission and Restitution

1. Where the nonbreacher has transferred a benefit to the breacher in an attempt to perform on her side, she is entitled to restitution of that benefit

iv. Other forms of Relief Arising out of Contractual Situations1. Quasi-Contract

a. Not really a K b. Legal fiction to avoid injustice of unjust enrichment c. Requirements for a QC:

i. Failed K

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1. Failed k must result in unjust enrichment a. Tornado destroy house that’s partially

painted. Still gets partial payment ii. Where no K is involved

1. π conferred a benefit 2. π had reasonable expectation of being

compenstated3. not just volunterred4. ∆ was unjustly enriched

d. Measure of recovery:i. Recovery measured to the detriment of the π

McWilliams’s Contracts Outline

Theme 1: What qualities must a private undertaking have to merit enforcement by public institution?

An Enforceable Contract(Offer + Acceptance)=MA & Consideration

1. Establishing an Enforceable Contract a. Sources of contract law

i. Contract law is governed primarily by two sources: statutes & common law. 1. Common law -- Services & real property

a. Restatement (2d) of Contractsb. “stare decisis”: let the decision (precedent) stand

2. Statute -- Goods: a. Uniform Commercial Code (UCC)b. states will adopt UCC in statutesc. goods: “all things which are movable at the time of identification

to the contract

First stepThe first question when analyzing a contracts problem is:

1. Is the K for goods or services?a. If goods, then the K is governed by the UCC.b. If not goods, the K is governed by the Restatement.

2. What if the K is for both goods and services?a. What was the intent of the parties, what was the K originally for, what was

the most money paid for, the good or the service?Answer: UCC-Contract for Goods (wooden boxes)

Contracts (defined): A contract is a promise or set of promises for the breach of which the law gives a remedy; or the performance of which the law in some way recognizes as a duty. Restatement § 1

Promise (defined): A promise is a manifestation of intention to act or refrain from acting in a specified way; so made as to justify a promise in understanding that a commitment has been made. Restatement § 2 (1)

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ii. Theories of Contract Law1. Classical Approach – Williston

a. Less sympathetic look at K b. Intent determined by what reasonable person would find 1st

parties intent was by words & actionsc. “Four corners approach”d. Applies hard, fast rules without regard for social justice

2. Modern Approach – Corbina. More sympathetic: subjectivity sometimes consideredb. More attentive needs of the commercial marketplace.c. Responsive to social issues.d. Includes fairness doctrine

3. Today, contract law adheres to the Objective Theory of Contracts: Courts determine what a reasonable person would objectively think, regardless of a party’s personal, subjective thoughts Williston Approach

b. Qualities every contract must have:i. Offerii. Acceptance iii. Consideration

The Basis of Contractual Obligation: Mutual Assent and Consideration1. Mutual Assent (B = O + A) MA + C = K

The Function of Legal FormalitiesEvidentiary Function:

Provides evidence of a contract’s (1) existence AND a contract’s (2) terms Cautionary Function:

Evidence of intention to be boundProvides a check against inconsistent or hasty action

Channeling Function:Channels into court the types of cases the court wishes to hear; and channels away from court the types of cases the court doesn’t want to hear.

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2.

Intention to be Bound: The Objective Theory of Contracts i. Ray v. William G. Eurice and Bros

Facts: Eurice Bros. signed contract to build house according to certain specifications. They claimed to have been mistaken as to the specifications later on and refused to build the house

Issue : Does a unilateral mistake make a bilateral contract void? Holding : No, a unilateral mistake does not make a bilateral contract unenforceable Rule :

o plain meaning rule words are given the ordinary meaning assigned to them as understood by a reasonable person

despite the individual intent of a party, a reasonable person’s interpretation of the words is binding

Rationale – protection of parties reasonable expectations. No more “meeting of the minds” which was subjective. There is sufficient MOA whenever a party uses an expression that he knows, or has reason to know, the other party would reasonably interpret as an O or A, and the other party does so interpret it.

o Takeaway: an intention to be bound is required, NOT an intention to be bound by the contents of the agreement

This is the fundamental point of the Objective Theory of Contracto A unilateral mistake will not void a K. A mutual mistake is more likely to o An official bid is considered an offer; an estimate is considered a request for

an offer.__________________________________________________________________________________________________2. Offer & Acceptance in Bilateral Contracts

Bilateral contracts – an offer that requires acceptance by a promise (express or implied) is called an offer for a bilateral contract. Promise for a promise (or promise of performance).

Exception: full performance by offeree can lead to offer being irrevocable.

In a bilateral contract, each party is a promisee and a promisor.

Acceptance of offer for a bilateral contract Promissory acceptance Not necessarily verbal…promise implied from offeree’s conduct and act designated by offer to signify a promise

Requirement of a Bargain: (Restatement §17) The formation of a K requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

Bargain: a negotiated exchange. Mutual Assent: offer or proposal of one party, followed by an acceptance by another party. Consideration (§71(1)): something of value that is bargained for in exchange for something

else.

Mode of Assent: (Restatement §22)1.) The manifestation of mutual assent to an exchange ordinarily takes the form of an

offer or proposal by one party, followed by an acceptance by the other party or parties.

2.) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined.

KEY: The manifestation of mutual assent to an exchange is typically an offer and acceptance, but it may be oral, written, or implied by conduct.

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a. Offer R§24 – an offer is the 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 it ****UCC does not define offer ****

a. The offeror is the “master of the offer”i. The offeror can prescribe the method of acceptance: if the offeree fails to

accept the offer in a manner set out by the offeror, there is no binding agreement

ii. The moment the offeree accepts, the offeror loses the power of revocation, and private, enforceable law is created.

b. Two essential elements: (1) intent to enter into a bargain; and (ii) definiteness of the terms

i. Intent: has to be more than words suggesting negotiations (“Are you interested?...”). Think more harsh to suggest offer (“I will sell..”)

ii. Definiteness: usually not an offer unless offer makes clear (i) the subject matter of the proposed bargain; (ii) the price; and (iii) the quantity…these don’t necessarily have to be met if there is intent determinative

Powers Created in Offeree by offer :b. Power of acceptance

a. if that party manifests her acceptance of the offer in a legally effective way, then at the moment a K is created.

c. Counter-Offerd. Revocation

Methods to terminate the power of acceptance1. Rejection of Offer (offeree)

-By conditional or qualified acceptance adds or changes the terms of the offer (unless under sale of goods)

i. -Exception: an offeree’s power of acceptance is not terminated by an acceptance that is conditional or qualified in form, but in substance merely spells out an implied terms of the offer.

1. - UCC § 2-207(1) a definite and seasonable expression of acceptance operates as acceptance even though it states terms additional to or different from those offered or agreed upon…unless acceptance was expressly based on those terms.

2. counter-offer (offeree)3. revocation (offeror)

i. only needs reliable communication of revocation to lose powerii. To be effective, a revocation must normally be communicated by offeror

to the offeree 1. Exception: indirect revocation – if the offeree obtains reliable info

that the offeror has taken action showing that he has changed his mind.

2. Revocability of firm offers – The promise to hold the offer open for a fixed period is not binding if the promise was made without consideration. See pages below

1. Exception: Option contracts – if the offeree gives consideration for the promise, offer is irrevocable for the stated time period

2. Exception: Nominal consideration – even if there is no true consideration, under majority rule the offer is irrevocable if it recites a purported or nominal consideration – at least if the offer is in writing and proposes an exchange on fair terms

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within a reasonable time. (i.e.: old people transferring land)

3. Exception: Reliance – if the offeror should have reasonably foreseen that the offeror would induce reliance by the offeree prior to acceptance (Drenan v. Star Pavement)

4. Restatement v. UCC. 4. lapse in time

i. norm: three months unless otherwise specified5. death or incapacity or either party

** The general rule is that an offer is revocable unless an exception applies. Exceptions: The (i) offer was supported by consideration (real or nominal), (ii) caused reasonably foreseeable reliance, (iii) was a U.C.C. firm offer, or (iv) was an offer for a unilateral contract for which performance had begun.**

Has an offer been made? Look to: language parties relationship prior practices industry custom method of commerce circumstances

NOT offers : Mere invitation (jest) Preliminary negotiations (solicitation of bids or statement of future intention to

contract)o Offeree knows/should know offeror intends further manifestation of assent

(Lonergan) Price quotations/Estimates (request for an offer) Most advertisements are not offers. When an auctioneer puts an item up for auction, this is not an offer. A note is a promise to pay NOT a K.

Offer: Official bid

b. Acceptance R§50(1) – acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offeror.

Modes of Acceptance: (Restatement § 50(2) & (3))(2) Acceptance by performance: requires that at least party of what the offer request be performed or tendered and includes acceptance by a performance which operates as a return promise. (3) Acceptance by a promise: requires that the offeree complete every act essential to the making of the promise

Mailbox Rule: (Lonergan)a. Acceptances are effective when sent.b. Offers and Revocations are effective when received.c. Rationale: (i) encourages contracting parties at a distance from each other by making

the offeree just as secure as if the contract were made face-to-face and (ii) creates a contract at the earliest possible moment.

Must have clear offeree K is intended for

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Elle Klein Fall 2015 ** In general, all communications except an acceptance are effective on receipt. An acceptance is effective on dispatch**

Specific Performance as a remedydoing what was set out in contract (Lonergan) Equitable Remedy Rarely granted (except in real estate cases): normally only granted when $$$ is not

an adequate remedy.Acceptance by silence????

Ads (Izadi) An advertisement can constitute an offer if a reasonable person would read it as such. Traditional Rule ads mere invitation for offersdoesn’t contain sufficient words of

commitment to sellLonergan v. ScolnickRule: Preliminary Negotiations do not constitute valid offers (§26)Facts: ∆ wanted to sell land. Parties correspond and the ∆ says that the π must hurry because there are other potential buyers. π gives money to an escrow agent, but ∆ sells to someone else.Issue: Did the ∆ make an offer? No (communication was prelim negotiation)Holding: No, because π knew that the ∆ needed to make some further expression of assent. The parties’ correspondence was merely preliminary negotiations.

Izadi v. Machado (Gus) Ford, Inc. Reasonable Belief (Ad)If a reasonable person would believe it to be an offer it is an offer

Facts: Δ placed a misleading adΠ thinks that he could trade in a beat-up car for $3000 & get a deal on a new car. This was clarified in the fine print. Issue: did the misleading ad constitute an offer? Holding: Despite the ∆’s intent, misleading ad constituted an offer, but this is not usually the case. Here, the court held the ad was an offer because a reasonable person would interpret it as one. The court wanted to hold the ∆ liable for the ∆’s bad faith.

1. Ad’s are typically not considered offers because they aren’t sufficiently direct

2. Usually, ads are considered solicitations for offers

Normile v. Miller Counter Offer

Facts: ∆ is selling real estate. ∏ makes an offer to ∆ with a specified time for acceptance by "August 5 at 5:00." ∆ makes changes and sends it back. ∏ is told by a reliable third party about the selling, “you snooze you lose” but tries to accept anyways.changes constituted counter offerHolding & Rule: π did not have the power to accept the offer because the ∆’s changes to

the offer constituted a counter offer. a. When an offeree makes a “qualified acceptance” or a “conditioned

acceptance,” it acts as a counter offer.b. In effect, a counter offer rejects the original offer, and substitutes a new offer.c. Mirror image Doctrine at common law, an acceptance had to be a mirror image

of the offer. Additional or different terms deemed it a qualified acceptance and therefore did not for a contract, had the legal effect of a counter offer

2. If an offeree receives reliable communication of revocation (or in this case, reliable communication of the offeror acting inconsistently with the offer), the offeree’s power of acceptance is lost (§43)

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Elle Klein Fall 2015 c. Options Contract – R§25 An option contract is a promise which meets the requirements for the formation of a K and limits the promisor’s power to revoke an offer

Function: 1. An option contract is a “mini contract” that holds an offer open for a specified amount of time (limits the offeror’s power of revocation)2. “mini contract”: the option K must be contracted for, just like any other K (req. all components & consideration)

__________________________________________________________________________________________________3. Offer & Acceptance in Unilateral Contracts Unilateral contract: Offeror exchanges promise of future performance only in return for the offeree’s actual rendering of the performance rather than a mere promise of future performance.

Performance = acceptance of KPerformance must be complete before the offer is accepted (old rule)

Bilateral: an offer that is to be accepted by a promise

Petterson v. Pattsberg Traditional Rule

Facts: Pattberg told Petterson he would save him a certain amount of money if Petterson paid his mortgage before a certain date. Petterson went to pay the mortgage before the date, but Pattberg refused to accept it because he had already sold the mortgage. Rule: The offer is revocable by the offeror until the offeree renders COMPLETE performance (i.e. the offeror’s duty to perform is created when the offeree renders complete performance)Holding: bc Pattsberg revoked the offer before Petterson rendered complete performance (handed over the money), the offer was revoked.

This type of harsh result (requiring complete performance) gave rise to the ameliorating doctrine found in Restatement (Second) § 45, below. (Public policy Question!)*

Today, substantial performance makes an offer irrevocable substantial performance does not apply to preparations to perform. (seen in Cook v. Coldwell Banker)

Example: Walking across the Brooklyn Bridge example: when Π substantially performed his walking across the Brooklyn Bridge, the K became an option and the Δ lost his power to revoke the K. Offeree can either quit or complete performance, rendering the original unilateral. K enforceable

Cook v. Coldwell Banker Modern (Corbin) Rule

Facts: ∆ offered its employees a bonus to be paid in December. π had already well-qualified for the bonus when the ∆ changed the offer to say the bonus would be paid in

Rule (Traditional Rule): The offer is revocable by the offeror until the offeree renders complete performance, i.e., the offeror’s duty to perform is created when the offeree renders complete performance.

Rule (Modern Rule): In a unilateral K, an offeror loses the power to revoke once the offeree renders substantial performance.

Option Contract Created by Part Performance or Tender R§45 :

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March. π left company at the end of the year and ∆ told π that she did not qualify since π did not stay until March

Noteworthy aspects of § 45 – 1) offer open for reasonable time 2) preparing v. performing

NOTE: does NOT say substantial/part performance but most courts look for substantial performance

*** On exam, use the Restatement Rule (beginning of performance), but also mention the Coldwell Banker approach (substantial performance)Key Points:

1. The beginning of performance (or substantial performance under Coldwell) does not bind the offeror to perform, it merely limits the offeror from revoking the offer . The offeror is bound to perform once the invited performance is completed. (i.e.: the offeror just cant revoke any more BUT he doesn’t have to perform on his end until the offeree has completed their performance)

2. Restatement §45 and Coldwell are creating options.

Acceptance/Revocability – Bilateral v. Unilateral ContractsBilateral Contract Unilateral Contract

Modes of Acceptance - Express promise - Promise implied from conduct -In appropriate cases, performance of an act designated by the offeror to signify a promise (when offeree leads offeror to believe silence will constitute acceptance or when offeror specifies that silence will constitute acceptance and offeree subjectively intends silence to constitute acceptance)

- Performance of the act requested in the offer.

Communications of the Offeror

Offeree must communicate acceptance to form a contract

Offeree does not need to give notice of performance to form a contract, but must diligently try to notify offeror in a reasonable time after completion of performance to obligate the offeror

Obligation of Offeror On acceptance, both offeree and offeror are bound to perform

On acceptance, offeror is bound to perform; offeree has already completed performance

Revocability Being to perform before making a required promissory acceptance might not constitute reasonable reliance and therefore be revocable

An offeree will be protected under the Restatement §45 (the offer is irrevocable after the start of performance)

__________________________________________________________________________________________________

Option Contract Created by Part Performance or Tender R§45 :

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Elle Klein Fall 2015 Other Methods of Reaching Mutual Assent – UCC

1. The UCC – Generallya. Application

i. Applies to “goods”ii. More functional (conduct-based) than the Restatement/CL How people really

workiii. A lot more flexibility for what constitutes a valid contract (in comparison to the

Restatement)iv. Looks to parties’ conduct, Firm Offer, or Battle of the Forms when looking for

formationv. If there is a gap in the UCC, look to the Common Lawvi. Applies to both consumers AND commercial (merchant) sale of products

1. Consumer-consumer transactions2. Consumer-merchant transactions3. Merchant-merchant transactions

b. Terms II. Goods defined (UCC § 2-105) : all things which are movable at the time of

identification to the contract (for sale)

III. Merchant defined (UCC § 2-104) : a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction

Harlow v. Jones (UCC)Facts : Harlow supplied Andrews steel. Forms were swapped that included different dates

of shipment. Some of the steel arrived a month late and Advance refused to pay. Issue: Which form constituted the offer, signifying the contract’s shipping dates?Rule:

1. Establishing a Contract under the UCCa. Conduct of both parties that recognizes the existence of a K is sufficient to

establish a K UCC §2.204b. Indefinite terms do not preclude the formation of a contract so long as

there is a “reasonably certain basis” for granting an appropriate remedy

c. Even though the moment of its making is undetermined. d. Even though terms are missinge. Even though the parties’ writings fail to establish a K.

2. What terms apply?a. Those on which the parties’ writings DO agreeb. UCC “gap fillers”

3. Under the UCC, a K may exist even though all of the K’s terms are not determined. A K doesn’t fail for indefiniteness if a reasonably certain basis for granting an appropriate remedy exists

Analysis: 1. An oral K existed before the forms were ever changed. The conduct of the parties in ordering the steel and producing the sales confirmations were evidence of this. The fact that certain terms (the shipping dates) were not ironed out does not make a difference. 2. The court asserted, “what could be more indicative of intent to form a contact

that payment on one side and shipment on the other?” Where the written stuff doesn’t match up, the court will fin in the gaps.

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Takeaway: Under the UCC, conduct by both parties which recognize existence of a K issufficient for a K

__________________________________________________________________________________________________

ConsiderationConsideration: is the most important quality a private undertaking must have to merit enforcement by public institutions. Aka – the price of enforceability in the courts.

Matter of law, not fact. Purpose is to show parties intended to enter into a K. Used to refer to a “bargain” – an exchange of promises. Today, consideration also may be

used more broadly to refer to any factor that makes a contract enforceable (justifiable reliance on a promise)

Adequate Consideration Forbearance/waiver of legal right (Hamer) Relieving offeror of legal obligation (Pennsy)

Not Adequate Consideration Motive (Love & Affection) Nominal Consideration (but allowed in

option K) Mere Recitation of Consideration Gratuitous gifts Conditioned gifts False recitals Past performance Testamentary Gifts Illusory Promises Promissory Note Preparation of Performance Moral Obligations Anything un bargained for,

unsubstantial, un-exchanged, or anything no meaningful between the parties.

Types of Consideration: Benefit-Detriment Test (Hamer v. Sidway) Bargain for Exchange (Pennsy Supply) Negotiation (Pen-o-Tex)

Types of Consideration

UCC “Gap Fillers”Under the UCC, when contractual terms are not expressed, the default terms of “gap fillers”… fill the gap. UCC gap fillers are:

1. Course of performance: how parties have already (so far) acted in the course of this dealing

2. Course of dealing : How parties have acted in prior dealings (typically)3. Trade usage: How members of the particular industry typically act.

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1. Benefit-Detriment Test – Hamer v. SidwayEach party is still a promisor and promisee

i. Facts: Uncle promised nephew money to refrain from certain vices. Nephew refrains from those vices. Uncles dies before paying. ii. Analysis: Because Nephew Story had a legal right to perform the vices, his forbearance of that right in exchange for $5000 was a detriment. Nephew suffered a legal detriment. iii. Takeaway: B-D Test

1. Benefit for the promisor OR2. Detriment to the promisee3. Both are not necessary

2. Bargain-For Exchange

Consideration equivalent to a bargain under this approach. A bargain is an exchange of promises, acts, or both, in which each party views what she gives as the price of what she gets. This bargained-for price may include not only promises and acts, but also promises to forebear and actual forbearance from performing acts one is legally entitled to perform.

a. Reciprocal Inducement: (Pennsy Supply Inc. v. American Ash Recycling Corp. of Pa)** the promise induces the detriment and the detriment induces the promise**

i. Facts: π was paving driveway for school. ∆ supplied a certain waste material as an aggregate for free. ∆ gave aggregate for free to avoid disposal costs. Paving starts to crack and the π has to fix it and dispose of the aggregate. Π sues ∆ to recover the costs.

ii. Rule: “the promise must induce the detriment and the detriment must induce the promise”

iii. Notes: 1. Consideration is a matter of LAW decided on by JUDGES; NOT a matter

of FACT2. The “Tramp Example” (pg. 83): Consideration vs. Conditional Gift

a. Setup i. A philanthropist promises a tramp (homeless person) “If

you go around the corner to the clothing shop there, you may purchase an overcoat on my credit”

Rule: Consideration may consist of either some right, interest, profit, or benefit accruing promisor, OR some forbearance, detriment, loss of responsibility given, suffered, or undertaken promisee.

Restatement § 71: To constitute consideration, a performance or a return promise must be bargained for

Restatement § 72: A performance or return promise is bargained for if it sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise

Restatement § 79: If the requirement of consideration is met, there is no additional requirement of (a) a … benefit to the promisor or a … detriment to the promisee

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ii. In order to obtain the coat, the tramp must walk around the corner.

b. However, under all three tests for consideration, this probably doesn’t constitute consideration.

i. The promise of the coat is not made because the philanthropist wants the tramp to walk around the corner

ii. This is known as a conditional gift: walking around the corner is necessary before the promise can be received.

3. Negotiation (Pen-o-Tex Oil Corp; Newman & Snell’s Bank v. Hunter)a. Rule: Consideration consists of deliberation. Analysis turns on whether

promises/performances are bargained for (negotiated) (Pen-o-Tex Oil Corp)b. Newman & Snell’s Bank v. Hunter

i. Facts: Bank sued widow to enforce widow’s promise to pay dead husbands debt; in exchange, Bank gave widow the promissory note of her late husband. Bank was only liable if she voluntarily obligated herself to pay the debt.

ii. Holding: The widow was not obligated because the note was worthless, and therefore, the bargain lacked consideration

iii. Analysis: Because the promissory note was a virtually valueless piece of paper,

1. the widow did not suffer a detriment by surrendering it, and 2. the Bank was not benefited by receiving it

iv. Arguments: 1. Benefit-Detriment Test

a. Was the note actually valueless? Sure, it may not have meant much to the Bank, but, didn’t the widow value it?

b. The Bank had a legal right to hold on to the note, so wasn’t its surrender literally a forfeiture?

2. Bargain-For Exchange a. The Bank’s performance of surrendering the note was induced

by the widow’s promise that she would settle her late husband’s debt. Right?

3. Negotiation a. Bank and widow reciprocally negotiated ending in an

agreement, evidencing deliberation v. Overall Legal realism shows that judgment for the Bank could have been

rationale under any of the above tests. The court felt that denial of recovery was appropriate on the grounds of lack of consideration (could have been based on other defenses in equity such as undue influence or wrongful disclosure)

The Function of Legal Formalities

Evidentiary Function: Provides evidence of the contracts (1) existence AND (2) terms.

Cautionary Function: Evidence an intention to be bound. Provides a check against hasty action

Channeling Function: Channels into court the types of cases the court wishes to hear; and channels away from the court the types of cases the court doesn’t want to hear.

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Examples of Not Consideration1. Doughtery v. Salt

a. Facts: An aunt left a nephew a promissory note for $3000 at her death for being a “good boy.” She said in the note that “value had been received.”

b. Issue: Is there consideration to make the promissory note enforceable?c. Rule:

i. Mere recitation that consideration has been received is not sufficient to satisfy consideration requirements (false recital of consideration)

ii. Motive (love, affection, etc.) is not sufficient for consideration either iii. This was just an executory gift – to be executed in the future

d. Note: A note, without more, is NOT a contract2. Batsakis v. Demotsis

a. Facts: ∆ gave Greek $25 during WWII when ∆ was in Greece in return for a promise to pay back $2000

b. Rule: A promise is enforceable even if the consideration is not proportionate. The courts will not weigh each party’s performance under the K. The fact that there was a bargained-for exchange is enough. not unconscionable

c. Holding: There was a promise here, $25 in exchange for $2000 later, was not nominal because there was a bargained-for exchange and a manifestation of mutual assent. The poor lady valued $25 at the time she wanted to get out of the country more than she valued the $2000 at a later, safer date.

3. Plowman v. Indian Refining Co. a. Facts: ∆ fires π, but promised to continue paying ½ wages. Later, ∆ stopped making

payments. b. Rule: the promise to continue payments was a “gratuitous arrangement without

consideration” not a binding contract. Instead, the ∆’s promise to pay was revocable at the ∆’s will.

i. Pre-existing duty rule: something already done cannot constitute consideration for a later promise

ii. Moral consideration does not constitute consideration where there is no legal duty.

iii. Condition to the Gift: Because the π’s had to suffer the detriment of walking into town to pick up the gifts does not suffice to serve as consideration. The act of walking into town was a condition that had to be met before π’s could receive the gift (Tramp example)

Bargain Promises 1. General Rule – Bargain Constitutes Consideration – A bargain is an exchange in which each party views his promise or performance as the price of the others promise or performance.

a. Equal Value not Required (just not Unconscionability) b. Exceptions – Bargains that are not Considerations

1. Nominal considerations – transactions that are bargains in form but not in substance

ex: father sells daughter house for $1. Clearly neither view the house as being $1, but rather the transaction has only the form of a bargain – a form adopted for the obvious purpose of making Father’s donative promise legally enforceable. The purported consideration (the bargain) is not real; its nominal.

2. Promises to surrender or forebear from asserting a legal claim that is unreasonable

3. Apparent bargains involving an illusory promise; and

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4. Bargains in which one party promises to do only what she is already legally obliged to do.

__________________________________________________________________________________________________Pre-Acceptance Reliances

1.

James Baird Co. v. Gimbel Bros. Inc. (1930)a. Facts: ∆ hears of a highway department bid and sends offer to supply linoleum to 20

contractors who are likely to be awarded the project. ∆’s offer asked for prompt acceptance after the bid was awarded. The amount ∆ accounted for was wrong, so the bid placed by π was wrong. ∆ realized the mistake and attempts to revoke the offer before the project is awarded to π, but fails. Π subsequently accepts the ∆’s offer

b. Π arguments: a. Bi-lateral enforceable contract: π’s use of the ∆’s bid constituted acceptance

Fails: mere use of bid is not acceptanceb. Promissory Estoppel fails. Offers are not meant to be relied upon until there is

acceptance. Promises, however, can be relied upon. c. Options Contract Fails: no evidence to show that this was agreed upon by the

parties (no consideration) c. Notes:

a. Remember: Bids are offers capable of acceptanceb. Hand distinguishes offers and promises:

i. Offer: although an offer may contain a promise, the promise does not exist until consideration is received (i.e. until accepted)

ii. Promise: one may rely on a promise without expecting something in return (consideration; acceptance)

iii. Therefore, promissory estoppel applies to promises, not offers. iv. Older view, where some cases have allowed an offeror to revoke a firm offer

notwithstanding the offeree’s reliance. However, most of these are older cases and probably would not be followed today.

2. Drennan v. Star Paving Co.

Limiting the Power to RevokeOptions Contract: § 25 – An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer

§ 87(1) – Requirements (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 in a statute

Promissory Estoppel: §90 Promise Reasonably Inducing Action or Forbearance (1) A promise which the promisor should reasonably expect to induce action or

forbearance on the part of the promisee or a third person and (2) Which does induce such action or forbearance (3) Is binding if injustice can be avoided only by enforcement of the promise(4) The remedy granted for breach may be limited as justice requires

Offertory Estoppel §87(2) – An offer which the offeror should reasonably expect to induce action or forbearance of such a substantial character on 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

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a. Facts: ∆ subcontractor gave a mistakenly low estimate bid for paving services to π general contractor. The π used the ∆’s bid in its own bid (to owner) and π was awarded the contract. ∆ tried to revoke the offer. (Essentially same facts as Baird)

b. Analysis: i. No bilateral, enforceable contract ii. §90 (promissory estoppel) does not work because the ∆ made an offer not a

promise. iii. No consideration to support the making of an option contract.

c. Rule: Using powers of equity to combine option contracts (§45) with promissory estoppel (§90) to make offertory estoppel (now § 87(2))

i. Offertory Estoppel 1. An offer, reasonably expected to induce detrimental reliance from the

offeree before accepted, and 2. actually induces the offeree to rely to his detriment, 3. makes the offer binding as an option contract to the extent

necessary to : avoid injustice d. Note:

i. James Baird (Traditional Rule) v. Drennan (Modern rule): Modern Rule wonii. Offertory Estoppel usually is applied to only general contractors and

subcontractors situations iii. “Estoppel” (Mac Def.) “one party, for reasons of fairness, is forbidden by the

court to say what’s true”iv. A firm offer is irrevocable if the offeror should have reasonably foreseen that the

offer would induce reliance by the offeree prior to acceptance, and such reliance occurs.

3. Berryman v. Kmocha. Facts: Berryman prepared an option contract for Kmoch. Option contract stated to leave

option open for 120 days for “$10 and other valuable consideration.” Kmoch never paid the $10. Berryman revoked offer by selling the land to someone else before the 120 days were up. Kmoch had tried to line up potential investors.

b. Issue: i. Did Kmoch’s preparatory work – lining up potential investors – suffice as

consideration to make the option contract enforceable?ii. If no, can the π successfully argue that the preparation was sufficient obtain a

remedy under promissory estoppel?c. Holding & Analysis: No & No

i. Consideration: Kmoch’s preparatory work does not constitute consideration sufficient for the option contract (the following are not distinct reasons – some mesh together)

1. Illusory Promise: Kmoch’s actions were voluntary. The agreement did not impose a legal duty on Kmoch – was not inducement for Berryman’s promise. If a party’s promise to perform is voluntary, the promise does not constitute valid consideration (pg. 125)

2. Confuses motive with Consideration: Kmoch’s motive to sell the land to investors once Kmoch purchased the land is not consideration. Selling the land was Berryman’s motive for entering into the K. It was not the action that induced Kmoch to enter into the K.

ii. Promissory Estoppel: Kmoch’s reliance on Berryman’s promise was unreasonable. (i.e. B-man could not have reasonably foreseen that Berryman’s promise would induce Kmoch’s detrimental action

d. Notes:i. Promissory estoppel: Freestanding remedy or substitute for consideration?

1. Promissory estoppel is NO LONGER a substitute for consideration2. Promissory estoppel is now a freestanding equitable remedy

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3. The difference:a. When PE used to be a substitute for consideration; allowing to

receive the benefit of the bargainb. Now PE only allows the promisee to regain out of pocket expenses.

__________________________________________________________________________________________________Firm Offer – UCC

Firm Offers ( § 2-205 UCC) only between merchants….

CONDITIONS THAT MUST BE MET: 1) written and signed 2) irrevocability stated 3) for the sale of goods 4)by merchants

Firm Offer “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 a period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror”

1. Offer by merchant assuring that offer will be held open2. Signed writing

a. Will be help open for that time (up to 3 months)3. But if no time is stated

a. Will be held open for a “reasonable time” (up to 3 months)

Provision must be separately signed by the offeror Applies only too options offered by merchants Applies only to purchase/sale of goods Opposite of common law: allows for option K without consideration

Firm offers only last up to three months! However, if there is valid consideration, it operates the same as it does under the common law, and therefore, may be for as long as the parties agree.

UCC Definitions for Firm Offer

Merchant: (UCC § 2-104) a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction…”

Goods (UCC § 2-105) all things which are movable at the time of identification to the contract…”

Signed (UCC § 1-201(39)) includes any symbol executed or adopted by a party with present intention to authenticate a writing

Written or Writing (UCC 1-201(46)) includes printing, typewriting, or any other intentional reduction to tangible form

Reasonable Time (UCC 1-204) (2) “[If not expressly stated in the agreement,] a reasonable time for taking action depends on the nature, purpose, and circumstances, of such action

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Elle Klein Fall 2015 __________________________________________________________________________________________________

Battle of the Forms1. Common Law (Restatement):

a. Princess Cruises, Inc. v. General Electric Co. i. Facts: Princess hires GE to make repairs on its ship. Battle of the forms ensues

with differences over liability of GE. GE sends last form stating no liability. GE performs repairs and Princess pays. Repairs were made negligently

ii. Issue: Which terms apply (more specifically, does the CL or the UCC apply)iii. Rule: Services provided the “predominant thrust” of the Kiv. Notes:

1. Mirror Image rule: (restatement § 59) A reply to an offer that purports to accept to terms of the offer but contains different OR additional terms, act as a counter offer

a. Classical Rule: contracts must be identical b. Modern Rule: Minor variance is okay (doesn’t act as a counteroffer)

2. Last shot Rule: a. The last form sent (the “last shot”) in a battle of the forms before

performance begins will control the Kb. The performance by a party acts as an implied acceptance

3. Mixed Contracts: UCC or CL when K is both goods and services a. The “predominate thrust” or the “essential element” of the Kb. Suggested factors:

i. Language of the contractii. Nature of the business of the supplieriii. Intrinsic worth of the materials.

2. UCC § 2-207 a. Brown Machine, Inc. v. Hercules, Inc.

i. Facts: 1. Brown Machine brings an indemnity action (third-party action) against

Hercules 2. 1975 – Brown Machine sends Hercules a quote for a machine3. Nov. 1975 – Brown sends original proposal Boilerplate & includes

indemnity provision 4. Jan. 1976 – Hercules sends Brown machine a written purchase order,

which: expressly limited acceptance to the terms stated in the purchase order and did not contain the indemnity provision

5. Jan. 1976 – Brown machine sends Hercules an order acknowledgement, which contained the same terms as Brown Machine’s earlier original proposal (including the indemnity provision)

6. Feb – Hercules responds with a letter, advising Brown Machine that except for a description of the machine, “all other specifications are correct”

7. April – Brown Machine ships the machine and Hercules pays for it. 8. Later… Hercules’s employee gets injured and sues Brown machine. Brown

Machine settle. Brown Machine brings indemnity action against Hercules for settlement amount.

ii. Issue: Was the indemnity clause part of the contract between the two parties?iii. Court found that:

1. The initial quote did NOT constitute an offer (it was a proposal/solicitation/invitation) Izada

2. Hercules’s purchase order was the offer. 3. Brown Machine’s order acknowledgement constituted an acceptance, and

not a counter offer because it did not limit acceptance to its own terms

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4. Brown Machine’s indemnity provision did not automatically become part of the contract because of § 2-207

a. Hercules’s offer (purchase order) limited acceptance to its terms (§2-207(2)(a)

b. Brown Machine’s indemnification provision constituted a material alteration (2-207(2)(b))

5. Notes :a. Quotes are not offers. They are proposals or solicitations of offers,

except for in rare circumstances where they are very detailed. b. For the purposes of UCC §2-207, silence does not constitute

consent.

How to Answer a Battle of the Forms UCC QuestionsSection (1)

1. Determine who made the offer2. Does the offeree respond with

a. A definite and seasonable expression of acceptance OR b. a written confirmation sent with a reasonable time?

Reasonable time: depends on the nature, purpose, and circumstances of such action UCC § 1-205(2)Seasonably: action taken at or with the time agreed or it no time is agreed at or within a reasonable time UCC § 1-205(3)Written or writing: includes printing, typewriting, or any other intentional reduction to tangible form. UCC § 1-202(46)

3. If yes, then §2-207 is invoked, and the offeree’s response acts as an acceptance, even if there are different or additional terms than those in the offeror’s offer UNLESS:

a. However, if the offeree’s response conditions assent on the different/additional terms, then there is no acceptance; instead there is a counter offer.

Section (2) 1. If the parties are not both merchants, then common law

a. Additional terms act as proposals (which must be expressly accepted) b. Different terms

i. Are treated as additional terms ii. Are disregarded, and instead the offeror’s terms are used ORiii. “Knock out” Rule the different terms “knock” each other out, and the court

fills in the terms using gap fillers **majority rule**2. If the parties are both merchants, then

a. Additional terms become part of the K (w/o express acceptance), UNLESS:i. The offeror expressly limits acceptance to the terms of the offer;ii. The additional terms “materially alter” the contract; OR iii. The offeror objected to the additional terms or objects within a reasonable time

after receiving notice of the terms b. Different terms: **

i. Are treated as additional terms If not expressly limited acceptance, don’t materially alter, and offeror doesn’t give notice of objection (or w/I reasonable time)

ii. Are disregarded, and instead, the offeror’s terms are used OR iii. “Knock out” Rule the different terms “knock” each other out, and the court

fills in the terms using gap fillers **majority rule**Section (3)

1. The conduct of both parties that recognizes the existence of a K is sufficient to establish a K, even though the parties writings are insufficient to establish a K.

2. If this happens, the terms the court will use are those a. On which the parties agree on in their writingb. UCC Gap Fillers and Default Terms

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Elle Klein Fall 2015 ** The UCC 2-207(2) does not provide any additional guidance about the effect of different terms. Courts have struggled with it and three broad terms have emerged…

When the writing of the parties is silent, the court may use:1. Default rules

a. § 2-305: open price term (see note 3 on pg175)2. Gap Fillers

a. Course of performance b. Course of dealingc. Trade usage (Course of Trade)

__________________________________________________________________________________________________

Incomplete Bargains: Intention to be Bound

1. Generallya. Where parties appear to have completed their bargaining to reach an agreement, but

the agreement ends up being incomplete. Matters are postponed for future agreement.b. Two types:

i. “Agreement to Agree”: The C/L says if anything is left for future agreement, there is no K. But the UCC provides exceptions (e.g., UCC § 2-305)

ii. “Formal Contract Contemplated”: Courts are more flexible in making these enforceable (e.g., letters of intent)

2. Walker v. Keith – Agreement to Agree a. Facts : Lease contained option contract to renew, with rent to be determined later. b. Issue : Was the price provision, which allowed the parties to agree to price later, so

indefinite and uncertain that the parties could not have agreed?c. General Rule (common law): Contracts where the parties fail to agree on a specific

price (or method of calculating a specific price) are unenforceable for uncertainty and indefiniteness.

d. Analysis:1. Terms of a contract typically have to be definite and certain so that

courts:a. Can determine if a breach has occurredb. Can determine what remedy to provide

e. Notesi. Remember the UCC doesn’t require a price provision (UCC 2-305), so long as

parties intended to agree.

3. Quake Construction, Inc. v. American Airlines, Inc. –Letters of Intenta. Facts : Quake submitted a bid to Jones for construction work. Jones orally notifies

Quake that has been awarded the bid. Jones does not give a written K, but sends a letter of intent (LOI) to Quake to get subcontractors. LOI contained a cancellation clause, reserving the right to cancel the LOI. Jones subsequently revoked the offer.

b. Issue : Whether Jones’s LOI is enforceable even though it contained a cancellation clause.

c. Rule: LOIs are binding if parties (objectively) intend to be bound by them. d. Method

i. First look to the writings to tell if the parties intended to agree.ii. If writings are ambiguous as to party intent, look to "parol evidence" to

determine parties’ intent.

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Parol Evidence- “extrinsic” evidence (written or oral) of agreements or negotiations between the parties not included in the K.

e. Analysis:i. On its face, the letter looks unambiguous because of the cancellation clause. It

becomes ambiguous because of the actions of Jones in telling Quake and others that Quake got the K.

ii. The fact that a LOI says it’s nonbinding is not dispositive, it is merely evidence of intent.

iii. Letter referred several times to the execution of a formal contract by the parties, thus indicating the parties’ intent not to be bound by the letter.

f. Takeaway: An agreement contemplating the execution of a formal K may be contractually binding if the parties so intend. This intention is a question of fact.

g. Notesi. The rule that parties may be bound contractually even though they contemplate

further negotiations is accepted by both the UCC (§ 2-204(3)) and the Restatement (§27).

__________________________________________________________________________________________________

Electronic Contracting

1. Three Types of Electronic Contracting Terms:a. Shrinkwrap: Purchaser placed an order either by phone or mail without discussion of

the specific terms of the transaction (except perhaps price and delivery date). The seller’s terms are placed inside the box and sent to the purchaser. Purchaser only sees the terms when the wrapper is removed. Usually, the purchaser is deemed to have accepted by retaining the goods beyond a specified period. The offer occurs not when the purchaser places the order but when the seller ships the merchandise. Acceptance occurs after the purchaser fails to return within the time allotted in the terms.

b. Clickwrap: Purchaser make a purchase online and clicks the “I agree” button to show assent to the Seller’s terms. Difficult to argue that they have not agreed because the terms are available for review, and require mandatory assent, before purchase. The agreement is signified by an affirmative act rather than a passive act like in Shrinkwrap cases.

c. Browsewrap: This type is different from the previous two because usually no purchase is made. A user is browsing a site for information and the website provider wants to protect itself by imposing terms of use. It does so by including the terms of use somewhere on the website and indicating that by using the website, user agrees to those terms.

2. Brower v. Gateway 2000, Inc.a. Brower purchased Gateway computer. Computer came with shrinkwrap terms, which

contained an arbitration clause requiring arbitration in Chicago, Illinois, and correspondence in Paris, France. Brower had problems with computer. Gateway seeks to have the case arbitrated.

b. Issue: Whether Brower is bound by the arbitration clause since he did not return the computer within the time specified by the shrinkwrap terms.

c. Brower’s three arguments for unenforceability:

i. §2-207 : Fails because the court doesn’t believe that there was a “material alteration” (an additional term) of an oral K. The offer was the shipment of the merchandise, and the acceptance was keeping the merchandise for more than 30 days. Note: the order and payment did not constitute a K. Instead, an

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enforceable K was formed only with the consumer’s decision to retain the merchandise beyond the 30-day period specified in the agreement.

ii. Adhesion : Fails because π 1. Could've made the purchase elsewhere 2. Could have returned the goods 3. Is not in a take-it-or-leave-it position

Adhesion Contract DefinedDefinition: A standard-form contract to be prepared by one party, to be signed by another party that is in a weaker position (who has less "bargaining power"). Think "Take it or Leave It" ContractAdhesion Contracts are still enforceable, but invite judicial scrutiny. (may be unenforceable under duress, Unconscionability, fraud, etc.)

iii. Unconscionability : Ultimately, champions the day. The court found the expense of traveling to ICC for arbitration unconscionable, and therefore, unenforceable. However, it's more important to know why the other two arguments failed. We cover Unconscionability later.

"Blue Pencil":To edit or change a contract that the court finds unconscionable or unenforceable

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Promissory Estoppel and Restitution

1. Generallya. These equitable remedies are available even if there is no contract. (therefore, these

remedies are outside or beyond the laws of contract) b. This chapter is about doctrines rooted in equity.

2. Fuller’s Three Bases for Enforceability a. Private Autonomy Contract (not in equity)

i. negotiated exchange arrived at through offer and acceptance and consideration. ii. The law views private individuals as possessing power to affect, within certain

limits, changes in their legal relations. (Private agreement – Classical Contract Law).

iii. Least urgent need for remedy – only have to prove one party did not perform.

iv. Remedy: Benefit of the bargain (Aristotle's distributive justice)

b. Reliance – Promissory Estoppel (equitable) i. The breach of a promise might detriment to one who has changed his position in

reliance on the expectation that the promise would be fulfilled. (enforcing a promise not supported by consideration—so not a contract)

ii. Remedy (Equitable Rights): Avoid injustice. Put back in position before promise occurred (Aristotle's "corrective justice"). Generally limited to out-of-pocket expenses. The wording of § 90 and the fact that it is an equitable remedy gives court considerable flexibility.

c. Unjust Enrichment – Restitution (equitable)

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i. Where a promise is breached and one party is enriched at the expense of the other party. The promisor gets and retains a benefit unjustly. The two parties have not entered into an enforceable agreement.

ii. Remedy: Quantum meruit; Restitution (Aristotle's corrective justice)iii. Most urgent b/c of double wrong:

1. unjust detriment to party in reliance; and2. unjust enrichment of the other party.

Also known as a windfall

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Promissory Estoppel1. Generally a. Restatement § 90 - (1) a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does include such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. b. Element:

i. promise is madeii. promisor should have reasonably expected the promise to induce action or

forbearance by the promisee (foreseeable) iii. Promise induces justifiable action or forbearance by the promisee (reasonable) iv. Promise is binding if injustice can be avoided only by its enforcement

2. Use Modern promissory estoppela) Reliance

a. No longer needs to be “substantial” or “detrimental” must be REASONABLE (on the part of the promisee) and FORESEEABLE (on the part of the promisor.

b) Remedy – out of pocket expenses: put the promisee back in the position party would have been in if promise was never made.

d. Protection of promise reliance. Here, we are no longer concerned with a bargained-for exchange. Sometimes an undertaking, even though not an enforceable contract, may still be enforceable in equity.

Estoppel Defined: one party is prohibited from telling the truth because of fairness and equity.

Remember the difference between a conditioned promise and consideration for an offer: conditional promise : if breached, recovery is promissory estoppel and you are limited to

equitable remedies – only out-of-pocket expenses. promise supported by consideration : the promise becomes binding in contract and the

remedy is a legal remedy –non-breaching party gets the benefit of the bargain.

Condition Defined (Rest. § 224): an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

3. Kirksey v. Kirksey (1845)a. Man’s brother passed away so he invited his brother’s widow to come live with him.

Man encouraged widow to leave her home and come live on his land. Widow did so

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and he subsequently kicked her out.b. Issue: Does the widow's detrimental reliance provide sufficient consideration to form a

contract?c. Ruling: No. Man wins because the promise was unenforceable due to a lack of

consideration. d. Notes

i. Promissory Estoppel as a substitute for consideration1. The dissent proposes that reliance should be a substitute for consideration

to support the promise and therefore create an enforceable contract. 2. THIS IS NOT WHAT PROMISSORY ESTOPPEL DOES TODAY.

a. Reliance is not seen as a substitute for consideration (thus creating K rights)

b. TODAY: reliance (P/E) is a freestanding doctrine of equity: remedy is typically out-of-pocket expense.

3. This case was decided BEFORE P/E was available.

4. Greiner v. Greiner (1930)a. Mom's husband died and did not provide for sons in will. Mom wanted to provide for

her son, the defendant. Mom promised Defendant-son a plot of land and to move a house on it. Mom also promised a deed. Son moved from where he currently lived to the house. Mom never gave deed and then later sought to eject son from the property.

b. Issue: Should Mom’s promise to hand over the deed to her son be enforced?c. Yes, because

i. The promisee’s reliance was reasonable and foreseeable. ii. injustice can only be avoided by enforcement of the

promise. d. Note: This case comes AFTER the enactment of §90.

Charitable Subscriptions Defined: an oral or written promise to do certain acts or to give real or personal property to a charity for a charitable purpose McWilliams: “a promise not supported by consideration”

Usually, a promise to make a gift is not enforceable unless it is supported by consideration – so when we talk about § 90 we are talking about an exception to this rule based in equity.

1. King v. Trustees of Boston College.a. MLK deposited some of his papers with the bailee, Boston University. MLK said in a

letter that the papers are to remain his legal property. However each year MLK would apportion some papers to become the absolute property of BU. At his death all deposited papers would become the absolute property of BU.

Bailment Defined: “established by delivery of personality for some particular purpose, or on mere deposit, upon a contract, express or implied, that after the purpose has been fulfilled it shall be redelivered to the person who delivered it, or otherwise dealt with according to his directions or kept until he reclaims it.” (p. 232)

Bailee is held to a standard of "scrupulous care."

b. Issue : Was there a promise by MLK to transfer title to his papers to BU, and if so, was that promise supported by consideration (contract) or reliance (§90)?

c. Holding :

** SWAPS CONSIDERATION FOR RELIANCE** Traditional Approach

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i. No K because jury found that there was no K.1

ii. Evidence to show that BU went beyond bailee duties, which constituted reliance (or consideration, see footnote 1)

d. Rule: In Massachusetts, consideration is required to bind a promise to make a charitable subscription. (For Exam: Restatement § 90(2) does not require consideration for charitable subscriptions!!!!)

e. Analysisi. The court first considered whether Dr. King made a promise to BU: The court

determined that two sentences about intent to transfer title through subsequent installments and ownership at death could be construed as promises.

ii. Then, the court decided the promise was supported by reliance (or consideration).

iii. The fact that the library went well beyond its bailment obligations could constitute reliance or possibly consideration.

f. Misc.i. When one party is a charity, normal rules get diluted on account of public

policy. ii. “Home Cooking”: State judges will tend to reach conclusions that are

favorable to their home states 2. Katz v. Danny Dare, Inc.

a. Company wanted Katz to retire. Initially, Katz did not want to. Later, Company offered a large pension so Katz agreed. Company testified that Katz would have been fired if he did not accepted pension. Company stopped paying.

b. Issue: Does P/E make the pension plan enforceable?c. Holding: Yes.

i. This court held that the trial court misapplied the law when it held that Katz was required to show that he gave up something to which he was legally entitled before he could enforce the promise of a pension plan. (Not legally entitled to job = at-will employee)

ii. The test is NOT whether he gave up something to which he is legally entitled but whether there was a promise made upon which Katz detrimentally relied.

iii. Reliance need not be equivalent to consideration. (This is not the Plowman case.)

Employment At-Will Doctrine: Notwithstanding a contract stating otherwise, an employee or employer may terminate employment at any time, for any reason, or for no reason.

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Restitution1. Generally

a. Also known as: implied-in-law contact, quasi-contract, quantum meruit, unjust enrichment, constructive contract.

b. Note: the remedy for this equitable doctrine is usually referred to as “quantum meruit” c. Purpose: to prevent one side from receiving a “windfall”d. Based on “unjust enrichment” – party’s performance (detriment) unjustly confers a

benefit to another party. If the benefited part retains the benefit, the party is “unjustly enriched”

e. Fuller:

1 Although the court found that the jury could have found that BU provided consideration by acting beyond the obligations of a bailee’s duty of “scrupulous care.”

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i. Restitution is the most urgent case for a remedy. DOUBLE WRONG. ii. Restitution can operate without consent, without promise, and even, in some

circumstances, without consent/will of benefitted party.

Implied-in-fact Contracts o If the promise of the parties inferred from their acts or conducts, or from words that

are not explicitly words of agreement, the contract is said to be implied in fact. Although implied, such contracts are true contracts. The mutual assent is inferred, but it is real, not fictional.

Ex: Auctioneer knocks price for vase down to $190. Bidder raises hand. Auctioneer knocks down gavel. Auctioneer and bidder have an implied-in-fact contract.

o A type of enforceable contract. o Inferred in part from parties conduct, not just their words.o Has contract remedieso No express promise found, but if court finds that the parties intended to contract

with each other, it will imply facts sufficient to create a contract. o The facts of the case can only be explained by finding a contract between parties.

VS.

Implied-in-law o Where one party is required to compensate another for a benefit conferred in order

to avoid unjust enrichment, rather than because there has been an actual or implied-in-fact promise to pay for the benefit.

Ex: doctor sees pedestrian laying in the street unconscious and renders medical services. When Pedestrian recovers, Doctor bills Pedestrian.

o Not real contracto Basis is unjust enrichment, not assent. can lead to restitution

2. Credit Bureau Enterprises, Inc. v. Pelo.a. Pelo was committed to a hospital after threat of suicide. Pelo objected, but still

received, treatment/medicine. Magistrate subsequently ordered his release. b. Issue : Should a Pelo who was involuntarily committed to Credit Bureau’s hospital have

to pay Credit Bureau for medical services received?c. Holding : Yes.d. Rule :

Restatement of Restitution § 116:A person who has supplied things or services to another, although acting without the other's knowledge or consent, is entitled to restitution therefor from the other if

(a) he acted unofficiously AND with intent to charge therefor, AND(b) the thing or services were necessary to prevent the other from

suffering serious bodily harm or pain, AND(c) the person supplying them had no reason to know that the other

would not consent to receiving them, if mentally competent; AND(d) it was impossible for the other to give consent OR, because of

extreme youth or mental impairment, the other's consent would have been immaterial.

Officiousness Defined: interference in the affairs of others not justified by the circumstances under which the interference takes place. (Restatement of Restitution § 2 cmt. a.)

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Ex. Violinist plays music outside your window and asks you to pay for the benefit you enjoyed (p. 266).

e. Notesi. Contracts implied in law are not legitimate contracts, and therefore, contract law

does not apply to them. but restitution could?ii. Restitution does not necessarily require: consent, promise, willingnessiii. Judge Posner : Restitution promotes economic efficiency. The rescuer does what

the injured person would have asked for if the injured person had been able to ask.

iv. Remedy: “reasonable value” = “market value” (almost every time)

3. Commerce Partnership v. Equity Contracting Co.a. Facts : Commerce P’ship contracted with a general contractor to provide improvements

to property. Equity was a subcontractor hired by the general contractor. Equity completely performed it’s duties under the contract, but because the general contractor filed for bankruptcy, Equity was never paid. Equity brought suit against Commerce P’ship, seeking payment owed to Equity by general contractor.

b. Issue : Can a subcontractor recover from an owner in restitution for payment owed by a bankrupt general contractor?

c. Holding : Yes. p. 271 Note 1.d. Rule : Equity can recover from the Commerce P’ship if Equity can prove that the

Commerce P’ship unjustly enriched itself by not paying consideration to the general contractor—this would be element 4, below.

4. Elements of a “quasi-contract”π has conferred a benefit on the ∆;∆ has knowledge of the benefit;∆ accepted or retained the benefit conferred; and the circumstances are such that it would be inequitable for the ∆ to retain the benefit without paying fair values for it.

5. Watts v. Watts (1987)a. Quasi-wife was persuaded by her quasi-husband to quit her job and move in with him.

The two began living a “marriage-like” relationship. Quasi-wife performed many services as a wife and opened a business with quasi-husband’s sister. The two subsequently split and quasi-husband barred her from the business.

b. Issue : Can quasi-wife bring a suit for property division based on restitution if the parties were never married?

c. Holding : Yes.d. Rule :

i. Division of Contract by Parties1. Quasi-wife can win on restitution argument only if sexual relations were

not the sole consideration of the parties’ contract. 2. Here, the conduct of the parties demonstrated that the parties intended to

share the assets equally: by creating joint bank accounts, making joint purchases, filing joint income tax returns, and listing themselves as husband and wife on legal documents.

ii. Unjust Enrichment1. Court cites 3-part test, which is substantively similar to 4 elements,

above.2. Out of fairness, court creates a new rule: unmarried cohabitants may

make restitution claims where one of the partners attempts to retain an unreasonable amount of property acquired through the efforts of both.

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e. Meretricious defined: involving an unlawful sexual connect “sexy contracts”

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Promissory Restitution1. Generally,

a) Promissory Restitution is a doctrine that applies to promises made after performance: receiving a benefit promising to pay for it later (no bargained-for exchange)

a. Liability in the absence of bargain-for exchange. You’re held liable for a breach even though there is no consideration. Plaintiff can get remedies without a contract because they’ve detrimentally relied on the defendant. Reliance must be foreseeable and reasonable.

b) Exceptions to the Plowman Case (Past consideration/Pre-existing duty rule)c) Material Benefit Rule Restatement § 86: Promise for a 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 promisee 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

2. Mills v. Wyman (1825).a. Wyman’s 25-year-old son was on a return voyage from sea and suddenly became sick

and poor. Mills gave boarding and nursing to the son to help him recover. Wyman wrote a letter after all expenses had been incurred and promised to pay Mills for such expenses in taking care of his son.

b. Issue : Is the promise by the father to pay for the benefits received by the son binding?c. Holding : No.d. Rule : Moral obligations, without adequate consideration, cannot bind a party to a

promise made after another party’s performance. i. This was a gratuitous act, not a promise, by Mills. Remember it was not Wyman

who received the benefit or accepted it.e. Note: Express promises to perform preexisting obligations (which are now inoperable)

can be revived; for example: debts barred by the statute of limitations, debts incurred by infants, debts of bankrupts.2 (Bottom of p. 288)

2. Webb v. McGowin (1935)a. Webb fell out of a building to avoid dropping block on McGowin and seriously injuring

him. Webb was seriously injured in the process. McGowin promised to pay Webb a stipend and did until he died.

b. Issue : Did Webb’s act of saving McGowin’s life provide adequate consideration to make the promise enforceable?

c. Rule : A moral obligation is sufficient if the defendant received a material benefit. Saving another’s life constitutes a material benefit (wages, etc.). Defendant’s subsequent promise to pay for the benefit implies that he requested it to begin with.

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Statute of Frauds – Restatement1. Generally

a. The Statute of Frauds (SOF) prohibits the enforcement of certain contracts that are not in writing, notwithstanding exceptions.

i. Memorialized in writing by the “party to be charged”

2 Restatement §§ 82(2), 83, and 85, respectively

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ii. In short, a contact is “within the Statute” it is unenforceable against a party who has not signed a written memorandum containing the contract’s material terms, unless some exception takes the contract out of the statute of frauds, in which the case is enforceable.

b. Purpose: i. to prevent fraud and perjury by persons who might falsely claim that the K was

made, when it was not. Its about equity and justice ii. The SOF is more of a judicial channeling tool than a doctrine of uniform results,

so it is flexiblec. Fuller’s formalities functions fulfilled: ALL evidentiary, channeling, cautionary d. Key issues for courts:

i. Did the parties intend to be bound?ii. If they did, the court will try to find a way to get around the SOF

e. Its use in Courtsi. SOF is an affirmative defense against contract enforcement that ∆ must assert ii. If π satisfies the SOF, it doesn’t mean the π wins, it just means that the case

doesn’t get dismissed.

The writing must specify with reasonable certainty: 1. The contract’s subject matter 2. Parties Identities 3. Promises, by whom and to whom, and essential terms and condtions4. Signature of the party to be charge Mnemonic: SIPS (Subject, Identities, Promises, Signatures)** UCC SOF the only essential terms is quantity

1. Does the Contracts fall within the SOF (must be memorialized by writing): iii. Contracts for the sale of interest in land (lease too) iv. Contracts for the sale of goods $500 or more v. Contractions in considerations of marriage vi. Suretyship contracts

vii. Contracts that cannot be performed within one year of making (aka – take over a year)

Analyze a SOF case

1. Does the contract fall within the SOF? (McWilliams only hold us responsible for knowing Restatement § 110(d) and §110 (e)

2. Is there a “writing”? 3. Is it signed by “the party to be charged”/the party “against whom

enforcement is sought (the ∆)”?4. Is the writing sufficient?

a. Reasonably identifies the subject matterb. Sufficiently indicates that a K entered between the parties or offered by the

signer (∆) to the other party c. States essential terms of unperformed promises with reasonable certainty

5. If not, is there an exception of substitution that would make the contract enforceable? (e.g. Promissory estoppel, restitution)

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1. Begins the day the contract is made 2. Statute is not applicable if performance within one year is possible

although unlikely a. If it is humanly possible to perform the K in 1 year, it is outside the

scope of SOF. courts typically will only say that an agreement falls within the SOF id performance is literally impossible within 1 year.

2. Is there writing?Several writing (§ 132): multiple writings that clearly indicate that they relate to the same transaction are all considered a single “writing” or a single “memorandum” so long as one of the writings is signed. “Written” or “writing” includes printing, typewriting or any other intentional reduction to tangible form

3. Is the writing signed by the Defendant? (§ 134) - Signature: any symbol [or marking] made or adopted with an intention, actual or apparent, to authenticate the writing as that of the signer. -Signatures could include: email, fax heading, business card, letterhead,etc.

4. Is the writing sufficient? The writing muse: - Reasonably identifies the subject matter of the contract - Sufficiently indicates that a contract was made between the parties or offered by the signer (the ∆) to the other party (the π) and - States with reasonable certainty the essential terms of the unperformed promises in the contract. 5. If the answer is no to any of these questions, is there an applicable exception? (§129, 139, restitution)- § 129 Specific performance for contracts regarding interests of land: What this means is that a court will give the interest in land over to another party instead of just being monetary value of that interest in land.

Policy: Because each particular interest in land is unique, courts are willing to allow a righteous party to benefit from that land

- §139 Promissory Estoppel: Essentially makes it clear that promissory estoppel is not eliminated by the SOF (in other words, a party can prevail under the doctrine of PE even if there is no signed writing) justifiable reasonable reliance - Restitution: -Remember that it is valid, even though its not specifically laid out in the Restatement

-McWilliams: restitution is not about enforcing a K, it is about preventing unjust enrichment

1. Crabtree v. Elizabeth Arden Sales Corp (signed, sufficient writing) a. Crabtree entered into negotiations with Elizabeth Arden about employment. Different pay

levels would take place over 2 years. Multiple signed writings. One unsigned memorandum had the term of years of the contract. The other signed writings only had pay increases.

b. Issue : Can an unsigned memorandum stating the duration of employment be read together with another signed writing to satisfy the SOF?

c. Rule : Yes. The ‘writing’ requirement may be met by several documents both signed and unsigned and their relationships may be established by oral (parole) testimony.

d. Analysis i. Is the purported contract within the SOF?

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1. Yes, b/c it would take more than 1 year to fully complete performance. Crabtree claims this contract is 2 years of employment.

ii. Is there a sufficient writing signed by the “party to be charged”? Issue in this case1. Writing: We have a memo written on a telephone message pad and 2 payroll cards. 2. Signed by ∆: Arden signed the payroll checks.3. Sufficient: Alone, these writings are not satisfactory, but taken together, they satisfy

the requirements of § 131(a)-(c)e. Notes

i. Parol Evidence may be presented to support the connection between the memos. ii. If this were flipped around and Arden was trying to enforce the contract, would it be

enforceable?1. No, because Arden signed the documents, not Crabtree

2. Alaska Democratic Party v. Rice (SOF does not eliminate PE/ PE as an exception to SOF) a. The Party promised the Rice a job. With no formal agreement, The Party promised Rice

a 2-year contract. Rice quit her job in MD and moved to AL. The Party revoked the promise.

b. Issue: Can the promise be enforced even though it did not satisfy the SOF?c. Analysis

i. Within SOF? The contract was for at least 2 years, so it would be impossible to complete within 1 year of the making of the contract.

ii. Sufficient, signed writing? No.iii. Exception or Substitute?

1. Rice must resort to one of the exceptions. 2. Rice uses § 139 (is extremely similar to § 90): It provides an appropriate

balance “between the competing considerations supporting strict enforcement of the Statute on one hand, and prevention of a miscarriage of justice, on the other. (p. 325)

iv. Despite failure to comply with SOF, Rice prevails because she showed there was no other remedy available, and that The Party should have foreseen reliance, there was reasonable reliance, and injustice could only be avoided by enforcement of ∆’s promise. (Court’s factors for injustice avoidance on p. 326).

d. Notes: i. Promise is only enforceable were Injustice can be avoided by enforcement of the

promise…p326 ii. PE isn’t a substitute for consideration, it is a free standing remedy based in

equity. iii. Contract damages are distributive giving someone something they didn’t have

beforeiv. PE is corrective justice. giving something back that someone lost

Statute of Frauds – UCC

UCC § 2-201(1)A contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party to be charged (or his agent). A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

UCC § 2-201(1): A purported K satisfies the SOF if, if a. K is for the price of $500 or more. b. There is a writing that sufficiently indicates that a K has been made btw the parties

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c. Writing is signed by the party to be charged (the Defendant or his agent) d. Includes a quantity , and

UCC § 2-201(2): Merchant’s Exception Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received.

SOF is satisfied ifa. both parties are "merchants"b. a writing in confirmation of the contract is sent within a reasonable timec. the writing is sufficient against the sender d. writing is received by someone who has reason to know its contents Unless: written notice of objection is given within 10 days of receiving the writing

UCC § 2-201(3): Three More Exceptions(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

a. Specially manufactured, not suitable for others, substantial beginning of manufacture before repudiation received; orb. Party to be charged admits in court or pleading – enforceable up to quantity admitted; orc. Part performance – with respect to goods for which payment has been made and accepted or which have been received and accepted

a. a. specially manufactured goods, of which could not be sold to another. b. b. if Defendant admits that a K exists, the statute of frauds is satisfied. (even if by

accident) c. c. If payment has been made and accepted or the goods have been received

and accepted.

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Principles of Interpretation

The Parol Evidence Rule: When a writing is intended by the parties to be the final and complete expression of the agreement of the parties (a “complete integration”), then prior or contemporaneous evidence that is extrinsic to the K (“parol evidence”), will not be admissible.

Interpretation: the process by which a court gives meaning to contractual language when the parties attach materially different meaning to the language.

Construction: judicial role in determining the legal effect of that language. Sometimes the terms “interpretation” includes a word “construction”

Integration: Complete integration: a writing that is intended to be final and exclusive

expression of the agreement of the parties (p388)Partial Integration: a writing intended to be final but not complete because

it deals with some but not all aspects of a transaction between parties (p388)

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For the problems with interpretation…

1.J

oyner v. Adams a. Dispute arising over when a price-escalation provision began. The two parties had

differing opinions of what it meant to “develop” land (whether or not that meant actually constructing the buildings or just preparing the land for the construction) (ambiguity). Joyner filed this suit seeking the escalated rent because Adams had failed to construct buildings.

b. Issue: What did “develop” mean in the contract, and whose construction of the word should control?

c. Holding: When parties disagree about the meaning of a provision, if the court finds that:

i. one party knew (or had reason to know) the 2nd party’s meaning, andii. if the 2nd party did not know (and did not have reason to know) the 1st party’s

meaning, iii. THEN the court should enforce the meaning as understood by the “innocent

party” (here, the 2nd party)d. Ruling:

i. The Court reversed and remanded the trial court’s judgment awarding plaintiff based on the rule that ambiguity in contract terms must be drafted against the party who drafted the contract.

ii. Although this rule is still used, these parties were at arm’s length and were equally sophisticated. (this rule is usually used in adhesion Ks or other similar Ks)

iii. The Court reverses and remands for findings of fact as to whether either party know or had reason to know of the other party’s meaning.

e. Notes:

The 1st step is to determine whether the writing is intended to be a final expression of the parties’ agreement and, if so, whether it is a complete or partial statement of the contract’s terms.

Three Approaches:1. Subjective : If the meaning of a writing was ambiguous, then there was no meeting of

the minds. 2. Objective : (Williston – “plain meaning rule” or “four corners” approach): courts

should not give writing the meaning the parties intended, but instead, interpret in accordance with the standard of a reasonable person familiar with the circumstances.

3. Modified objective : (Corbin – Restatement § 201(2)):a. If the parties attach the same meaning to a provision, THEN that meaning

will governb. If the parties attach different meanings to a provision, and one party knew

or had reason to know of the meaning attached by the second party, and the second party did not know or have reason to know of the meaning attached by the first party…THEN the second party’s meaning governs.

c. If the parties attach different meanings to a material term of the contract, and at the time the K was made, neither party knew or had reason to know of the other party’s meaning, THEN no contract exists because of absence of mutual assent.

Note: The Modified Objective Approach is the rule found in the Restatement. This is the common law on the exam. But MacDaddy wants you to know the Four Corners Approach.

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i. Trade usage seemed to have decided this case. Each had a different idea of what develop meant.

1. The ∆ had no idea that the term meant something other than what was common trade usage, but the plaintiff did

Rules of Aid of Interpretation: Rest. (2d) § 202 a. Words and other conduct are interpreted in the light of all the circumstances, and if

the principal purpose of the parties is ascertainable it is given great weight.b. Writing is interpreted as a whole, and all writings that are part of the same

transaction are interpreted together.c. Unless a different intention is manifested,

i. Where language has a generally prevailing meaning it is interpreted in accordance with that meaning; (retains objective theory where parties agree)

ii. Technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

d. Where an agreement involved repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in interpretation of the agreement.

e. Whenever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with an relevant course of performance, course of dealing, or usage of trade.

Standards of Preference in Interpretation: Rest. (2d) § 203 1. an interpretation which gives a reasonable, lawful, and effective meaning to all the terms

is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.

2. Express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade.

3.

Specific terms and exact terms are given greater weight than general language;4. Separately negotiated or added terms are given greater weigh than standardized terms or

other terms not separately negotiated (Boilerplate terms)

Prof. Patterson’s Principles of Interpretation (pg. 358-59)

The meaning of a word in a series is affected by others in the same series

Adhesion Contract Defined: No agreed-upon definition. General characteristics of Adhesion K:

Use standard-form documents “Take-it-or-leave-it” basis Only one party drafted the form The drafting party participates in the numerous transaction of the type The adhering party enters into few transactions of the type (at least, in comparison) The adhering party’s principal obligation is to pay the drafting party money.

Hierarchy: Express terms Course of Performance Course of dealing Usage of Trade

** Last three are “gap fillers”**Course of performance – how parties have already acted in the course of this dealingCourse of dealing – how parties have acted in prior dealingsUsage of trade - how members of the particular industry typically act.

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A general term joined with a specific one will be deemed to include only things that are like (of the same genus as) the specific one (lists are usually exclusive)

If one or more specific items are listed, without any more general or inclusive terms, other items although similar in kind are excluded. (lists that contain something like “without limitations” are non-exclusive)

An interpretation that makes the contract valid is preferred to one that makes it invalid. If a written K contains a word or phrase which is capable of two reasonable meanings, one

of which favors one party and the other which favors the other, the interpretation that is less favorable to the one who drafted the contract is preferred. (This is because the drafter has more bargaining power than the other party)

A writing or writings that form part of the same transaction should be interpreted together as a whole: every term should be interpreted as a part of the whole and not as if isolated from it. (i.e.: words should mean the same thing throughout the the contract)

If a term or provision is ambiguous, the court should look to the purposes of the parties entering into the K.

If a specific provision is inconsistent with a general one, which includes the specific one, then the specific provision will be construed to be an exception to the general provision

Handwritten or typed provisions control printed provisions Interpretation of favor in public policy/interest is preferred

__________________________________________________________________________________________________

The Parol Evidence RuleRestatement §209-218

a) Generally, the PERa. Is generally though of as a substantive rule of contract law, not a rule of

evidencei. Meant to preserve the integrity of written Ks

b. Has implications with channeling, cautionary, and evidentiary function of a K.

c. Only applies on evidence prior or contemporaneous to the written contracti. When the parties to a K have expressed their agreement in writing and

they intend for that writing to be a complete and final version of their agreement, the rule prohibits the introduction of evidence of prior understandings or negotiations between them to vary or contradict the written version of the K.

d. The rule prevents either party from introducing evidence of terms, alleged to have been agreed upon, but nevertheless included in the final written (completely integrated, final expression) version of K.

i. Only applied to complete integration contracts – both parties intended for it to be a final expression.

e. Does not create a requirement for a writingf. Oral and written evidence of parol g. Policy:

i. Promotes commercial certaintyii. Permits parties to finalize their agreements iii. Facilitates parties in performing contractual obligations confidently

b) Integrations – General a. Complete Integration

i. No parol evidence is admitted that is within the scope of writing

Hierarchy: handwritten type written or person computer boilerplate Also, later provisions trump earlier provisions

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b. Partial Integration i. Parol Evidence relating to an integrating term is excluded ii. Parol Evidence supplementing or explaining the writing to the extent that

it is not integrated. The evidence must:1. Be consistent with the integrated terms, and2. The evidence cannot contradict or vary integrated terms, can only help explain

c) Two different approachesa. Traditional – Willistonian

i. “Four Corners” approach: integration is determined by looking to the “four corners” of the writing without looking into extrinsic evidence

ii. Merger/integration clause: 1. Clauses that state the writing is intended to be final and complete; all prior

understandings are deemed to have been “merged” into or superseded by the final writing

2. When found in a writing, merger clauses are usually dispositive. (relating to or bringing about the settlement of an issue or the disposition of property.)

b. Functional – Corbinian (Modern)i. Intent of the parties is most important. Consideration of the context

surrounding the execution of the K is helpful in discovering the parties’ intent

ii. Merger clauses are not dispositive iii. Criticism: to admit all of the evidence would allow the exact kind of

evidence that the PER is supposed to exclude. This problem is solved by allowing the judge to hear the evidence outside the evidence of the jury

en camera.

1. Thompson v. Libby (Traditional Approach)a. Thompson and Libby entered agreement for the purchase and sale of logs. No written

term pertaining to warranty of the quality of the logs existed in the parties’ written, executed agreement. Thompson sued when Libby refused to pay for the logs.

b. Issue: Is oral evidence pertaining to the existence of an additional term admissible when the parties adopted a completely integrated writing?

c. Holding: No. For total integrations, parol evidence cannot be used toi. contradict/vary the terms contained in the writing. ii. Add additional termsiii. Prove that the contract was incomplete

d. Notesi. Collateral Agreement Rule : When parol evidence of a collateral agreement is

offered, the collateral agreement must be for an agreement distinct from the instant agreement.

ii. Fraud is an exception to everything, essentially.

2. Taylor v. State Farm Mutual Insurance (Modern Approach)a. Taylor was involved in an automobile accident. Signed a release agreement from all

“contractual rights…causes of action” subsequently with State Farm. Taylor tried to sue State Farm for bad faith, but State Farm claimed suit was barred by release agreement.

b. Issue : Can Taylor present extrinsic evidence to interpret release agreement?c. Rule : The Court adopts Corbinian view -- allows Parol Evidence, which showed that the

language used in the document was ambiguous.

NOTE: Marty Mac will tell you whether the use the modern PER or the traditional PER on the exam. Remember, both approaches are still good law. If he doesn’t tell you, analyze under both,

McWilliams’s like the Corbianan approach

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d. Analysis i. To apply the PER, the court considers all evidence to determine its relevant to

the parties’ intent. (evidence for the purpose of interpretation, not contradiction)ii. Then the court applies the PER to exclude evidence that contradicts or varies the

discovered meaning of the writing.e. Notes:

i. Hearing evidence as to the intended meaning does not defeat the purpose of the parol evidence rule because hearing the evidence in camera does not contradict or vary the terms, but instead helps discover their meaning.

ii. Ambiguities1. Traditional Approach: Parol Evidence may not be offered for

terms/provisions that are plain and unambiguous on their face.2. Modern Approach: The judge may hear Parol Evidence, in camera, to

determine whether a term/provision is unclear or ambiguous.*Oh no! This allowance permits consideration of the type of evidence that PER sought to prohibit!

Release Defined: K in which one party surrenders rights [s]he may have in exchange for consideration.

__________________________________________________________________________________________________

Implied Terms a) Generally,

a. Implied terms a set of legal obligations that a court enforces in addition to those terms which are agreed upon.

1. A court places a K on the parties even though the parties didn’t agree to it.

ii. Implied-in-Fact Terms: Terms that the court finds to be in the parties’ agreement by virtue of the parties’ words or conduct, although the term is not expressly stated.

iii. Implied-in-Law Terms: Terms the court finds to be implied in the parties’ agreements because of the rule of law, not because the parties agreed to include the term.

1. Imposed onto the parties by the court. 2. Policy: K law is private law, but here, we see public institutions

imposing on private law, limiting the right to negotiate. Public institutions decide to include provisions into private agreement that the parties did not agree to

3. Sources of implied-in-law terms:a. Statuteb. Common Lawc. Judge implies terms in the particular case

4. Majoritarian Default Rules (Default Rules defined – an implied term that the court inserts into an agreement that the parties probably would have made had they bargained over the issue.)

a. Terms that the parties probably would include in the agreement of the negotiated terms

Under the UCC § 2-202 Parole Evidence- Ambiguities can be filled with “gap fillers”

Exceptions to the PER on page 390-393

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b. Parties may negotiate to exclude these terms from the agreement.

c. Policy These terms increase efficiency by decreasing transaction costs, permitting parties to save time by not negotiating for these terms in every agreement.

5. Mandatory Default Rulesa. These terms are in every contract; the parties may not negotiate

to exclude from the agreement. 6. “Gap Fillers” – A standard term legally implied into a K to supplement

or clarify the agreement’s express language.

b) Implied Obligations a. Wood v. Lucy, Lady Duff-Gordon (1917) (Cardozo) (Common Law)

i. Lady Duff-Gordon hired Wood and gave him exclusive control over her endorsements, subject only to her approval. Wood made endorsements without Lady Duff’s knowledge. Wood claims that no contract existed for lack of consideration because his promise did not require him to do anything (illusory promise).

ii. Is the exclusive contract over Lady Duff’s endorsements unenforceable because of insufficient consideration?

iii. Rule: 1. The court implies a promise of reasonable efforts in cases

where the contract calls for exclusive dealings. 2. Without an implied obligation to use reasonable efforts, Wood’s

promise would be illusory because he would not be bound to do anything.

3. Common Law: Where a contract is exclusive, there is an implied duty to use reasonable efforts (Wood v. Lucy, Lady Duff-Gordon).

4. UCC: Where a contract for a sale of goods is exclusive, there is an implied duty to use best efforts.

Reasonable Efforts vs. Best Efforts Reasonable Efforts (Restatement) (Objective) – Efforts that would be used by a reasonable

person under the circumstances. Best Efforts (UCC) (Subjective) – Best efforts of the party in question.

a. Leibel v. Raynor Manufacturing Co. (1978)i. Raynor Co. manufactures garage doors, operators, and parts. Leibel is a dealer

of these parts. Leibel and Raynor Co. enter into an oral agreement by which the Raynor Co. would supply Leibel with products at a factory-distributor price, in return Leibel would then sell Raynor Co.’s products exclusively. Leibel borrowed substantial sums of money and took numerous steps to prepare for the distribution. After 2 years of decreasing sales, the Raynor Co. notified Leibel that the relationship was terminated and it would do business with another dealer.

ii. Issue : Was Raynor Co. required to give reasonable notice of the termination of the contract even though the contract was terminable at will?

iii. Rule : UCC § 2-309(3) (Mandatory Gap Filler):1. If K DOES NOT have an agreed-upon provision for termination:

reasonable notification is implied.2. If K has DOES have an agreed-upon provision for the termination:

agreed-upon event for termination is valid, unless the result would be unconscionable.

iv. Notes:

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1. Economic Efficiency and Fairness: Most parties would voluntarily choose such terms for the contract. pp. 445-46 Note 1.

2. Examples of Majoritarian Default Rules:(remember that these can be negotiated around if the parties so choose)

a. UCC 2-309(a)-(b)i. If time for shipment/delivery is not specified, reasonable time

is impliedii. A K for successive performances with an indefinite

duration, is valid for a reasonable time, and can be terminated at any time by either party.

iii. UCC 2-308: Delivery Placeiv. UCC 2-310: Time of Paymentv. UCC 2-509: Risk of Lossvi. UCC 2-513: Buyer’s Right of Inspectionvii. UCC 2-306: Requirement of Best Efforts in Exclusive Dealings

3. Examples of Mandatory Default Rules(Cannot be negotiated around by the parties)

a. UCC 2-309(3): Reasonable Notice of Terminationb. UCC 2-719(3): Contractual Modification or Limitation of Remedyc. UCC 1-203: Good Faith

2. The Implied Obligation of Good Faith (and Fair Dealing)a. Generally included in every contract under both the Restatement and UCC (both

goods and services)UCC § 1-203. Obligation of Good Faith

Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Restatement (Second) of Contracts § 205. Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

Good Faith Defined “honesty in fact in the conduct or transaction concerned” (UCC § 1-201(19)) Absence of bad faith

Bad Faith Defined “Overreaching” Undermining the reasonable expectation of the K without breaching the K Frustrating the purpose of the K without breaching Even if the K permits the ∆’s discretion, a bad faith claim can be made if the ∆ acts

a) Unreasonably, arbitrarily, or capriciouslyb) out of a bad motive

Bad Faith Test (Summit Bank):a) acting in a way that deprives the other side of the reasonably expected fruits of the Kb) Party must have acted out of a bad motive

***********McWilliams really liked this quote: [When] one party’s actions were such as to undermine the ‘spirit’ of the contract—either by enabling that party to realize gains that in making that contract he had implicitly agreed to surrender, or by unfairly denying the other party the fruits of the contract that she reasonably expected to receive.

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b. Seidenberg v. Summit Bank i. Seidenberg sold business to bank, but got to keep position as agree in the

contract. Seidenberg claims that Summit Bank intentionally refrained from helping the business prosper. Business declined and the Seidenberg was ultimately fired. Seidenberg argues that bank let business suffer so it could fire him and replace him with the bank’s people.

ii. Issue: Can evidence be introduced proving bad faith or would that violate the parol evidence rule?

iii. Rule:1. The PER does not exclude evidence pertaining to bad faith. Good faith

is an implied term in every K. Therefore, evidence relating to this term would not add or vary the K, and thus does not upset the PER.

2. Two-Prong Bad Faith Analysis:a. One party must act in a way that deprives the other side of

the reasonably expected fruits of the Contract; andb. That party must have acted out of bad motive.

c. Locke v. Warner Bros, Inc.i. Clint Eastwood facilitated deal between Locke and Warner Bros pursuant to a

settlement agreement. Warner Bros paid Locke for a “non-exclusive first look deal” where Warner Bros got to approve or reject any directing deal before Locke could go to another studio. Warner Bros also gave Locke a “pay or play,” allowing it to either use Locke’s services or pay her a fee. Warner Bros paid Locke $1.5 million for her commission, but never used her services. Witnesses testified that Warner Bros never intended to use Locke’s services.

ii. Issue: Did the contract include an implied obligation that Warner Bros would employ honesty and good faith when determining whether to use Locke’s services?

iii. Rule:1. Contracts that confer one party with discretionary power have an

implied term of good faith and fair dealing.2. Contracts conditioning that one party be satisfied with the other’s

performance must employ that satisfaction with honesty and in good faith.iv. Analysis:

1. Courts will not second-guess creative decisions, courts only ensure that the decisions were honest and would not injure the other party’s expected fruits under the contract.

2. By refusing to even look at Locke’s projects, Warner Bros. acted in bad faith.

Rule for Satisfaction Clauses – Clauses that require the satisfaction of a party. Objective Standard (presumed by court unless strong, precise language indicates otherwise): Requires party be satisfied to the satisfaction of a reasonable person under the circumstances. Subjective (Artistic) Standard (requires strong, precise language):

-Party may exercise satisfaction to the party’s subjective pleasure.-These clauses are “non-justiciable,” proscribing the court from reviewing the

satisfaction.-Court will not scrutinize creative decisions, but whether they in good faith considered it.

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-However, subjective dissatisfaction must be a sincere expression of dissatisfaction.Must prove that there was a process in determining satisfaction.

**Because Good Faith is an implied term of every K (for our purposes), Good Faith cannot contradict express terms in the contract. I.e., one is obligated to act in good faith to carry out the express terms of the contract.

__________________________________________________________________________________________________

WARRANTIES

1. Generally (Know UCC §§ 2-312 through 2-316)a. Background

i. Caveat emptor (“let the buyer beware”):1. Based on presumption that the buyer best knows what she wants2. Cost of assessing suitability of product was on the buyer

ii. Unfortunately, stuff “got real” since the 19th century: 1. as products became more complex, the average person was no longer

best fit to protect themselves against product defects. 2. The burden switched from the buyer of a product to the manufacturer,

retailer, producer, and seller of a product.2. Types of Warranties

§ 2-312 Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement Title conveyed in a transfer must be good, and its transfer must be rightful Title Transferred should be free of any pending security interest or lien or encumbrance

that the buyer has no knowledge of.

***§ 2-313 Express Warranties by Affirmation, Promise, Description, Sample***1. Express warranties by the seller can be created by any of the following:

a. Affirmations of fact or promise that becomes part of the basis of the bargain.b. Descriptions that becomes part of the basis of the bargain.c. Samples that become part of the basis of the bargain.d. Models that become part of the basis of the bargain

2. A statement purporting to be merely the seller’s opinion or commendation of the does not create a warranty. This is mere “puffery.” (good exam word)

3. Requirements of an Express Warrantya. 1 of 4 methods used by the seller: affirmation of fact or promise; description; sample

or model; andb. Reliance: the representation becomes part of the basis of the bargain; i.e., the buyer

relies on the representation.

***§ 2-314 Implied Warranty: Merchantability; Usage of Trade***1. Implied Warranty of Merchantability is implied in a K for the sale of goods if the seller is a

merchant with respect to the goods in question.2. “Merchantable”

a. Goods are “merchantable” if the goods are of goods arei. Of good quality, andii. Fit for the ordinary purposes for which they are used. (p. 499)

b. Goods are “merchantable” if the goods

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i. “pass without objection in the trade and are fit for the ordinary purposes for which such goods are used.” Bayliner, at p. 503.

c. A list of factors for the minimum requirement demanded by merchantability can be found at UCC § 2-314(2).

Merchant Defined (again) (UCC § 2-104(1): a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.

§ 2-315 Implied Warranty: Fitness for a Particular Purpose1. Elements that create IWFPP

a. The seller knows (or should know) that the purchaser is purchasing the products for a particular purpose, and

b. The buyer relies on the seller’s skill or judgment to select/furnish such goods, c. Then, there is an implied warranty that the goods are fit for that particular purpose.

2. Notesa. IWFPP can still be breached even if the goods are in perfect condition; does not require

defective condition.b. IWFPP is not limited to merchants.c. Knowledge: the Seller must know or have reason to know that the buyer is purchasing

the goods for a particular purpose.d. Reliance: The Buyer must actually rely on the seller.

§ 2-316 Exclusion or Modification of Warranties1. Subsection (1)

a. To negate or limit an Express Warranty, the disclaimer must be able to be read consistently with the terms creating the express warranty.

2. Subsection (2) a. Implied Warranty of Merchantability, disclaimer must

i. Mention “merchantability”ii. In the case of a writing, the disclaimer must be *C*O*N*S*P*I*C*U*O*U*S*

b. Implied Warranty of Fitness for a Particular Purpose, disclaimer musti. Be in a writingii. Be conspicuous

UCC offers language that excludes all IWFPP: “There are no warranties which extend beyond the description on the face hereof.”

3. Subsection (3) a. Notwithstanding Subsection (2), all implied warranties are excluded

i. When the seller uses expressions like “as is,” with all faults,” or ii. other similar language that calls the buyer’s attention to the exclusion and

makes plain that there is no implied warrantyb. Notwithstanding Subsection (2), all implied warranties than an examination would have

revealed are excluded, if before entering the K, the Buyer i. examined the goods or the sample or model as fully as the buyer desired, orii. Refused to examine the goods.

c. Notwithstanding Subsection (2), implied warranties can be excluded or modified by course of performance or usage of trade.

4. Subsection (4) : Remedies for a breach of warranty can be negotiated around in accordance with the provisions of UCC Article 2.

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Elle Klein Fall 2015 Bayliner Marine Corp. v. Crow

a. Bayliner sold Crow a fishing boat. Before purchasing it, Crow asked how fast the boat could go. Bayliner showed Crow a prop matrix, which said how fast a boat of a particular size could go. Bayliner also showed Crow a brochure that said the boat delivers the kind of performance necessary to fish offshore. Crow purchased the boat, although it was of a different size than the one described in the prop matrix. Despite numerous repairs, the boat would not go faster than 25 mph.

b. Issue: Did Bayliner breach any express or implied warranties?c. Holding: Crow lost on both arguments (the existence of express and implied

warranties).d. Analysis:

i. Prop Matrix did not create an EW because the specifications in the prop matrix were different from the boat Crow bought.

ii. A commendation does not amount to an express warranty.iii. Implied Warranty of Merchantability: requires the π to show a standard of

merchantability. Here, Crow testified himself. He should have got an expert witness.

iv. Implied Warranty of Fitness for a Particular Purpose: requires the π to show that π conveyed his particular purpose for the boat to the seller. Here, Crow did not. He might have gotten way with this if Crow had not specifically testified to 30 mph.

Caceci v. Di Canio Construction Corp. (implied warranty of habitability)a. Married couple entered into a contract with construction corp. for the construction of a

home. Construction corp. negligently constructed the home so that the kitchen floor began dipping 4 years later. Made attempts to repair it, but ultimately failed. Couple got someone else to perform the repairs.

b. Issue: Was there an IW in the K that the construction co. would construct a house skillfully without defects?

c. Rule: i. An implied warranty of habitability exists in the construction of every

home between the builder-vendor of the house and the purchaser of the house.

ii. The two parties who bargain over the construction of the home are not equals: the buyer enters the bargain before the construction, so it’s impossible for the buyer to inspect defects. The buyer must rely on the builder-vendor to build a house reasonably fit for the purpose for which it was intended (habitability).

iii. The reasonable expectation is that the house will be built free from material defect and in a skillful manner—the house must be habitable.

iv. This implied warranty exists in every contract for the construction of a home.__________________________________________________________________________________________________

AVOIDING ENFORCEMENT MUFFIN I.D. (MISTAKE; UNCONSCIONABILITY; FRAUD; FRAUD (SOF); INCAPACITY; ILLEGALITY;

DURESS)1. Generally

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a) Doctrines allowing a party to avoid performance under facially valid contract because of public policy considerations that particular flaws in the bargaining process undermine the fundamental presumption that rational parties, having relatively equal bargaining power, bargain at arm’s length in their respective self interests before voluntarily entering into binding agreements.

Contract liability is: strict liability is “[l]iability that does not depend on actual negligence or intent to harm, but that is based on the breach of a[] duty.”3

Does not require fault Does not require harm

1. INFANCY/MINORITY

1. Generallya. If someone does not have the capacity to contract, then the contract could not have

been formed by rational parties bargaining at arm’s length in their respective self-interest.

b. This doctrine rebuts this irrefutable presumption that certain types of parties (e.g., infants) are too disadvantaged to negotiate on a level playing field.

Restatement (Second) § 14: Infants Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday. Infants can only assume voidable Ks up until one day before the infant’s 18th

birthday. If an infant fails to render the contract void within an reasonable time after reaching

the age of majority, the contract becomes enforceable (like a normal, binding contract).

2. Dodson v. Shrader (1992)a. 16-year-old pays cash for man’s pickup truck. 16yo did not misrepresent his age, and

man did not inquire. The truck started having problems (for example, the engine exploded). Man brought an action to rescind the contract. After filing the complaint, the truck—parked in 16yo’s front yard—was damaged by a hit-and-run driver.

b. Issue: Can the 16yo rescind a contract and receive the full value of the truck because he was not of the age of majority at the time of the contract’s formation?

Rescind Defined: an equitable remedy under which both parties reverse performances made under the K. Parties re-exchange considerations. Parties are placed back in the position they were in before the K took place.

3 Black’s Law Dictionary

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c. Holding: Here, rescission was inappropriate because it would not make both parties whole: 16yo wants to give the ruined truck back in exchange for the money he paid for it.

d. Rulei. Traditional Rule : States that the K is void when it is to the infant’s prejudice,

enforceable when it’s to the infant’s benefit (in the case of necessaries); and voidable, by the infant, when the benefit or prejudice of the K is uncertain.

ii. The Modern Rule : (Majority Rule) K is voidable by infant before or after attaining the age of majority.

1. Policy: protects minors—because of their lack of judgments—from squandering wealth by entering into improvident Ks with “crafty adults who would take advantage of them in the marketplace.”

2. Limitation: The infant is liable for the reasonable value of necessaries. Recovery in these cases is based on restitution, and not on K remedies.

a. If the K is to the infant’s prejudice , the K is void.

b. If the K is to the infant’s benefit (in the case of necessaries) then the K is a valid, enforceable K whether the minor likes it or not.

c. If the nature of the K is unknown (unsure if it is to the infant’s prejudice or benefit), then the K is voidable at the infant’s election .

iii. Benefit Rule (Minority Rule): Upon rescission, recovery of the full purchase price is subject to deduction of the minor’s use of the article. Here it is the rental value of the truck. Deduct it to find use.

iv. Oregon Rule (Minority Rule): Recovery of full purchase price is subject to a deduction for

1. the minor’s use of the consideration received under the K, OR2. the depreciation or “deterioration” of the consideration in the minor’s

possession.

The Modified Oregon Rule (adopted by the court):

There must be Fair and reasonable Terms Payment by the minor on the purchase price Use and possession of the goods purchased (by the minor)

There must not be Overreaching (bad faith) Undue influence Unfair inducement of the minor to make the purchase

How to Calculate Recovery:Minor’s Recovery = Purchase Price – (Use + Depreciation + Willful/Negligent Damage)

Words... and their respective definitions

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Voidable : K can become void at the election of one of the Parties. Innocent party may enforce the K, but K cannot be enforced against the innocent

party. Voidable Ks may be ratified by the party with the power to avoid the K (i.e., the

innocent party) once the reason for such avoidance no longer exists (e.g., the party reaches the age of majority).

Void: No K ever existed. It may look/seem like a K existed, but it did not. Unenforceable by either Party.

Necessaries : Things necessary to live usually food, clothing, shelter, (and perhaps medical services), etc. Example4: If a sick minor goes into a drug store and the pharmacists sells him a

bottle of Aspirin for $50, the minor is only liable for the reasonable price of the Aspirin (only responsible for the reasonable price of the necessary).

Use: Rental value. Depreciation: Market value decrease due to conditions such as use or age of article.

2. MENTAL INCAPACITY

Restatement (Second) § 15. Mental Illness or Defect :1. A person incurs only voidable contractual duties by entering into

transaction if by reason of mental illness or defecti. [Cognitive Test:] He is unable to understand in a reasonable

manner the nature and consequences of the transaction, orii. [Volitional Test:] He is unable to act in a reasonable manner in

relation to the transaction and the other party has reason to know of his condition.

2. Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. IN such a case a court may grant relief as justice requires.

Note: Whether a person is mentally incapable for the purpose of avoiding performance under a contract is a matter of fact for a judge to decide.

3. DURESS 1. Generally

a. A K may be voidable if one party’s manifestation of assent was obtained by improper threats or coercion from the other party (or by a third party).

b. Traditionally, this rule applied only to the act/threat to personal injury or property, but it now includes the act/threat of economic duress.

4 Under Newer Traditional Rule

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c. Note: a mere threat to refuse to enter a K, or to agree only to terms disproportionately unfavorable to one party is not duress because there is no duty to enter into a K.

d. Once again, duress rebuts the presumption that during the K’s formation , the K was entered into voluntarily , at arms-length, and for the parties’ respective self-interests.

Duress Defined (Restatement (FIRST) of Contracts § 492(b)): any wrongful threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended or should reasonably have been expected to operate as an inducement.

Rest.2d § 174: When Duress by Physical Compulsion Prevents Formation of a Contract. If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.

Rest.2d § 175: When Duress by Threat Makes a Contract Voidable.(1) If a party’s manifestation of assent is induced by an improper threat by the other

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

(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith AND without reason to know of the duress either gives value OR relies materially on the transaction.

***McWilliams’ 5-Part Test for Duress5:

1. One party (the victim) assents involuntarily2. No other reasonable alternative is available to the victim

a. A lack of reasonable alternativei. The victim must be left virtually with no choice but to agree

to the other party’s terms. ii. There must be no adequate alternative if the threat were

carried out.3. Circumstances were the result of coercive action (Causation

element)4. Improper Threat

a. Threat does not need to be illegal: moral or legal wrongfulness will suffice. (See Restatement § 176 for determining when a threat is “improper.”)

5. Foreseeability by ∆—∆ knows that they have control—AND the inequality in power is purposely exercised

[Duress, Generally (cont’d)]

e. Early Common Law only allowed avoidance by duress when the threat was sufficient to overcome the will of a person of “ordinary firmness” and courage—e.g., fear of loss of

5 Derived from the Restatement. The book says that there is a 3-part test (p. 541), but the book lies.

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life or limb, mayhem, or imprisonment, etc. The doctrine now includes .

f. Distinguish: Traditional duress was viewed under an objective standard. Modern Duress is shifted toward a more subjective standard. Now you know . . .

Mayhem Defined: The crime of maliciously injuring a person’s body, esp. to impair or destroy the victim’s capacity for self-defense.6 7

6 Black’s Law Dictionary. 7 Note also that in the movie Chinatown, Jack Nicholson’s character’s nostril was sliced by some bad dudes. Last year he said this would be on our exam, but today he didn’t say that so never mind.

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Elle Klein Fall 2015 2. Totem Marine v. Alyeska Pipeline (1978)

a. Totem contracted to transport pipeline construction materials from TX to AK for Alyeska. Totem charged a barge and an oceangoing tug to perform the contract. When Totem began performance, it discovered it had around more material to ship from TX than expected, causing Totem to incur a month’s delay. The extra load slowed the vessels, so Totem chartered a second tug. Alyeska delayed signing the amendment to cover the cost of the tugboat, which delayed its passage. Alyeska then off-loaded Totem’s vessels in CA (stopping short of AK) and terminated the contract (fired Totem). Totem submitted invoices of nearly $300,000 and needed immediate payment to avoid bankruptcy, but Alyeska delayed payment. Aleyska offered a settlement of $97,000. Totem accepted the cash and signed a settlement and release to avoid bankruptcy. Totem and its creditors later sued Alyeska, seeking rescission of the settlement under the doctrine of economic duress. The contract in question is not the performance of the contract, it’s the enforceability of the settlement and release.

b. Issue: May a π render a K void under the economic duress doctrine if π could previously have sued ∆ for the money ∆ owed to π?

c. Holding: Yes. Totem could elect to void the K under the economic duress doctrine because, although it could have sued Alyeska earlier, filing suit at that time would have practically ensured Totem’s bankruptcy; i.e., Totem had no reasonable alternative but to submit to Alyeska’s terms or otherwise face bankruptcy.

d. Rulei. Contracts made under economic duress are voidable rather than void, and are

deemed binding unless disaffirmed, and may be expressly or impliedly ratified by the purported victim.

ii. Economic duress is also determine under Marty-Mac’s 5-part test (from Restatement § 175), above.

e. Notes:i. Posner : you don’t have to cause the bankruptcy, you have to force the other

party to enter into the K because of the impending bankruptcy.ii. Economic duress does not arise merely because π was a victim of a wrongful act.

π must have had no reasonable alternative but to agree to the ∆’s terms. Recourse to litigation might not be a reasonable alternative in some situations because of the inherent delays in collection through litigation.

4. UNDUE INFLUENCE 1. Generally

a. Definition: Persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment. P. 550.

b. Undue influence typically involves:i. Use of excessive pressureii. By a dominant party in overcoming the will (e.g., by exploiting a known

weakness) of a iii. Vulnerable (servient) party.

2. Odorizzi v. Bloomfielda. Odorizzi was arrested for homosexual activities. He resigned from his position as an

elementary school teacher after administrators stated that if Odorizzi refused to resign, he would be dismissed and the charges against him would be publicized. The charges were later dismissed. Odorizzi sued to rescind his resignation because it was obtained by duress and undue influence.

b. Issue: May a threat of termination and exploitation, made to obtain a resignation, constitute undue influence?

c. Holding: Yes.

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d. Rule: Undue influence, unlike duress, involves persuasion that is coercive in nature, characterized by high pressure that works on mental, moral, or emotional weaknesses.

e. Analysis:i. There was no duress because the School District had a legal right to threaten to

dismiss Odorizzi, and might even have had a positive duty to do so. So long as the School District acted in good faith, it could properly start dismissal proceedings, regardless of the impact on Odorizzi’s reputation.

ii. A critical element of undue influence is a lessened capacity of one party to on a level playing field. It involves an unfair advantage attributable to an that exists in the parties’ bargaining power.

f. Typical Characteristics of Undue Influence (p. 552):The more of these factors present and the degree to which the factors assert themselves make a finding of undue influence more likely:

i. Discussion of the transaction at an unusual or inappropriate time.

ii. Consummation of the transaction in an unusual place.

iii. Insistent demand that the deal be done at once.

iv. Extreme emphasis on serious consequences of delay

v. The use of multiple persuaders by the dominant side against a single servient

party.

vi. Absence of third-party advisors to the servient party.

vii. Statements that there is no time to consult advisors.

5. MISREPRESENTATION

Misrepresentation—two types: (1) Material Misrepresentations; (2) fraudulent misrepresentations1)Fraudulent Misrepresentation—AKA: Intentional Misrep., Tortious Misrep., Fraud, Deceit.2)Material Misrepresentation—AKA: Negligent Misrepresentation, Innocent Misrepresentation

1. Generallya. Restatement §§ 161–73b. Contract and Tort:

i. In Contract: 1. Remedy of Rescission

a. p. 556 a judicial return of the parties to the status quo that existed before the contract was formed

b. Equitable remedy wrongdoer and injured party return to the other any money or property received from the other

2. Sometimes rescission is undesirable. For examplea. You may want to keep the consideration.b. If the consideration no longer exists, it cannot be given back.c. If the party wants the cold hard $$$, they can bring the claim in tort

(and receive punitive damages!!!)ii. In Tort

1. Remedy of (actual and statutory) damages plus punitive damagesc. Fraud can be used as

i. A mechanism to hold a contract unenforceableii. A mechanism to enforce rescissioniii. A mechanism to obtain (punitive and other) damages

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Katie’s No-Fear Method for Approaching Misrepresentation Problems

1. § 164(1): Fraudulent or material misrepresentations that the recipient is justified in relying upon are voidable by the recipient.

2. § 162: Is the statement Fraudulent or Material?A Misrepresentation is Fraudulent if the maker intends his assertion to induce a party to manifest assent and the maker

(a) knows or believes that the assertion is not in accord with the facts, OR(b) doesn’t have the confidence that he states or implies in the truth of the

assertion, OR(c) knows that he does not have the basis that he states or implies for the assertion.

A Misrepresentation is Material if it would be likely to (a) induce a reasonable person to manifest his assent (Objective), OR(b) if the maker knows it would be likely to induce the recipient to do so

(Subjective).

3. § 161: Did the Defendant fail to disclose a fact? Does nondisclosure/silence amount to an assertion? 5 situations when it does:

(a) The Maker knows that disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material.

(b) The Maker knows disclosure would correct the other party’s mistake as to a basic assumption on which that party is making the K, AND nondisclosure of the fact amounts to a failure to act in good faith and fair dealing.

(c) The Maker knows that disclosure of the fact would correct a mistake of the other party as to the contents/effect of a writing, that lays out some/all of the agreement.

(d) The other person is entitle to know the fact b/c of a relation of trust and confidence (e) When required by statute or regulation.

d. Opinionsi. Definition: An assertion is an opinion if it expresses only a belief, without

certainty, as to the existence of a fact or expresses only a judgment as to the quality, value, authenticity, or similar matters. §168(1)

ii. Rules p. 5661. Classical Rule

a. A statement of opinion could not be fraudulent based on the view that morals of the marketplace required a certain degree of leeway for “puffing” (expression of exaggerated opinion with intent to sell a good or service)

2. Restatementa. A statement of opinion amounts to misrepresentation of fact if the

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

iii. Opinions can be actionable if: p.5661. Fiduciary relationship person giving the opinion stands in a relationship

of trust and confidence to the recipient2. is an expert on matters covered by the opinion3. given to someone who is particularly susceptible to the misrepresentation

2. Syester v. Banta

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a. Mrs. Syester, an elderly widow, bought dance lessons from Dance Studio (defendants) over several years. Mrs. S paid a total of approximately $30k for over 4,000 hours of lessons (roughly 3 lifetime memberships). Mrs. S used less that 10% of the hours she purchased and sued for damages caused by defendants’ misrepresentations. At trial, Mrs. S’s former dance teacher testified that her level of dancing ability required 200-400 hours of instruction and that she could not improve much because she was 68 years old. Mrs. S signed a release, accepting $$, which defendants then used as a complete defense. The jury found for Mrs. S and awarded her $14,300 in damages and $40,000 in punitive damages. Defendants appeal.

b. Analysis and Holdingi. Defendants’ conduct was beyond the limits of propriety:

1. Sold lessons that they knew Mrs. S would never be able to use2. Falsely represented that Mrs. S was improving and had the potential to be

a professional dancer3. Induced Mrs. S to enter the settlement agreement by use of manipulation

and isolation from outside counselii. Elements of Fraud in Iowa p. 563 (varies by state/jurisdiction)

3. Hill v. Jonesa. The Hill Family (buyers) contracted to buy a residence from The Joneses (sellers). The

sellers provided a termite inspection report that stated the property was free of termite infestation. Before closing, the buyers inquired about a ripple in the wood floor that they believed to resemble termite damages, and the sellers said it was caused by water damage. The buyers dismissed the concern believing that a termite infestation would arise in the pest report. After moving in, the buyers learned of past termite infestations by third parties. Buyers sued for rescission of the contract. Sellers disclosed that the prior owner had the house treated for termite with a guarantee from the exterminator. The termite inspector used for the presale inspection claimed he should have been told about the history of pest infestation.

b. Issue: Does the seller of a residence have a duty to disclose facts of past termite inspection to a buyer?

c. Holding: Yes.i. Non-disclosure is normally non-actionable.ii. However, a seller has a duty to disclose latent facts unknown to the buyer that

materially affect the value of the property.

4. Park 100 Investors v. KartesPark 100 prepared a lease agreement for the Karteses, who wished to lease commercial space for Park 100. The Karteses signed the lease, which contained no provisions pertaining to the personal guaranty of the lease. Park 100’s agent told the Karteses that they had to sign more lease papers as they were leaving for a wedding rehearsal. Given the urgency, the Karteses signed the document without reading it. This document contained a personal guaranty clause. The Karteses later discovered that they were personally liable for the lease and disavowed the guaranty. After the Karteses sold their interest in the company to a third party, the third party defaulted on the lease, and Park 100 sued the Karteses under the guaranty clause.

a. Holdingi. Park 100’s agent’s statements that the documents containing the personal

guaranty were “lease papers,” and that the Karteses were unable to enter the building until the papers were signed, were misrepresentations of material facts.

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Materiality Defined: “A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.” p. 572


ii. Agent knowingly made these false representations, and the Karteses reasonably relied on the statements to their detriment.

iii. General Rule: Parties are responsible for reading the document before manifesting their assent to the terms therein, and cannot avoid liability by claiming ignorance of the terms. (See Eurice & Bros.)

1. Notwithstanding, when a party employs misrepresentation/fraud to induce a party to enter into an agreement, the agreement is voidable by the induced party.

b. Notesi. Two types of Fraud: p. 583

1. Fraud in the Execution party is deceived as to the nature/contents of the writing

2. Fraud in the Inducement party knows the nature of the writing, but signs it pursuant to a misrepresentation

5. UNCONSCIONABILITY

1.

Applying the Testa. Restatement § 208 Unconscionable Contract or Term

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

1. Upon finding of Unconscionability, the Court may:a. Refuse to enforce the contract b. Refuse to enforce the provision

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Test for Unconscionability“Unconscionability has generally be recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” (p. 588)

UCC §2-302 official commentThe principle is one of the prevention of oppression and unfair surprise AND not of disturbance of allocation of risks because of superior bargaining power.

(1) Procedural : Party is induced to enter contract without meaningful choice, defect in the bargaining process

(2) Substantive : Contract (or its terms) are unreasonably unfair. Usually unreasonably favorable to one party (so much so that is “shocks the conscience” of the court) p. 590

Note: Unconscionability prevents oppression and unfair surprise and does not prevent disturbance of allocation of power (e.g., unequal terms or bargaining power do not warrant application of the Unconscionability doctrine).

How Courts Apply the Unconscionability Elements (p. 590-91 n. 1)(1) Most courts require a sufficient showing of both procedural AND substantive

elements.(2) Some states use a “sliding-scale approach”: if one prong is stronger, the other

prong can be weaker.(3) Some states find either procedural or substantive unconscionability alone to be

sufficient.


c. Limit the application of the unconscionable portions to avoid an unconscionable result

ii. Most courts use the two-part test cited in the Williams case (p. 586)1. An absence of meaningful choice on the part of one of the parties

(procedural), AND2. Terms that are unreasonably favorable to the other party

(substantive)

b. UCC § 2-302 Unconscionable Contract or Clausei. Official Comments (to the rescue)

1. “The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.”

2. “The principle is one of the prevention of oppression and unfair surprise AND not of disturbance of allocation of risks because of “superior bargaining power”

2. Williams v. Walker-Thomas Furniture Co.a. Mrs. Williams agreed to a standard-form contract for credit sales that provided that (1)

all credit transaction of the buyer were to be lumped into one account and each installment payment was to be spread pro rata over all items purchased (even if purchased at different times) until all items were paid off; and (2) if Mrs. Williams defaulted, Walker Co. could repossess all items. Mrs. Williams bought several items on separate occasions and failed to make sufficient payments on the most recent item (stereo). Mrs. Williams was on welfare, separated from her husband, and the caretaker for 7 children. Walker Co. brought an action to repossess all items purchased on credit.

b. Holding The Add-On Clause was unconscionable.c. Rule

i. Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. (p. 588)

d. Analysisi. Here, any meaningful choice by Mrs. Williams is negated by the gross inequality

of bargaining power. The manner in which Mrs. Williams entered into this contract is also relevant to this determination (McWilliams: Court’s policing of normative contract behavior).

ii. The gross inequality of bargaining power between her and Walker Co. made it possible for Walker Co. to exploit Mrs. Williams by providing standard-form, preprinted contracts that contained unreasonable provisions.

e. Notesi. Corbinian Test: whether the terms are so extreme as to appear unconscionable

according to the mores and business practices of the time and place—others say it is what which “shocks the conscience”

ii. Add-On Clause: An installment contract clause that converts earlier purchases into security for new purchases.

6. PUBLIC POLICY Generally

a. While there is usually a strong public policy to enforce contracts, a court will refuse to enforce a contract if enforcement is repugnant to the court—if it violates or contravenes

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some other PP. b. Contracts involving illegal activities are not enforceable.

Valley Medical Specialists v. FarberVMS hired Farber, a doctor who performed a specialized procedure only performable by certain hospitals with the requisite equipment. Farber entered an employment agreement containing a 3-year restriction prohibiting him from competing within 5 miles of any of VMS’s offices (restrictive covenant covenant not to compete). Farber left VMS and started practicing medicine within the prohibited territory. VMS sued for injunctive relief. Issue: May a restrictive covenant in a doctor’s employment contract be enforced if it lasts for 3 years and covers any practice of medicine within a large, defined territory?Rule:

v. Traditionally, common law refused to enforce covenants not to compete, seeing such agreements as restrictions on trade. Restraints found in employment or partnership agreements, were enforceable. However, restrictions on physicians were considered in light of the impact on public interests.

vi. The Modern Rule makes covenants “not to compete” invalid unless they protect a legitimate interest beyond the employer’s desire to protect itself from competition. One legitimate interest is the limitation of secret information that the employee acquired in the course of employment.

vii. A covenant not to compete is unreasonable, and thereby not enforceable if:1. Restraint is greater than necessary to protect the employer’s legitimate

interest (the scope of the restriction is measured by duration and geographic area) OR

2. The hardship to the employee & the likely injury to society outweigh the employer’s interest.

d. Holding: The restrictive covenant was not enforceable because it was excessive.i. The Employer’s Interest:

1. Retain customer base —weighed against—

ii. Employee’s and Society’s Interest?1. Personal bond between doctor and patient2. Patients’ freedom to choose doctors of their choice3. 3-year, 5-mile prohibition on all types of practice was greatly excessive

__________________________________________________________________________________________________

JUSTIFICATION FOR NON-PERFORMANCE Mistake, Changed Circumstances, and Contractual Modifications: These doctrines focus on the subject matter/content that renders a contract unenforceable (before we were talking primarily about the process of negotiation/contracting)

MISTAKE

1. Generally (§§151–158)a. M

istake

is an equitable doctrine that may warrant rescission by a court.

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Mistake defined: A belief that is not in accord with the facts. §151. The mistake must relate to a fact. Must be at the time of the contract’s formation. This is different than a prediction, the fact must actually exist.


b. Main themes: First, the mistake must relate to a fact in existence at the time of K (cant be an error is business judgment or incorrect prediction). Second, the mistake must be with respect to a material aspect of the contract and have a significant effect on the agreed exchange of performance. Third, the aggrieved party neither assumed the risk of the mistake not would it be fair or appropriate to allocate it to her.

MUTUAL MISTAKE 2. Lenaw

ee

County Board of Health v. Messerlya. The Pickleses bought a 3-unit apartment building from the Messerlys under a land-

purchase contract. Soon after, the Board of Health condemned the property because the Messerly’s predecessor in title, Bloom, installed an improper septic system. The Board of Health obtained an injunction against the Messerlys and the Pickleses, prohibiting human habitation until the property conformed with the applicable sanitation code. The parties’ contract provided that the Pickleses had examined the property and agreed to accept it in its present condition. The Pickleses refused to make payments, and the Messerlys filed a cross-complaint for foreclosure, sale, and deficiency judgment. The Pickleses counterclaimed for rescission, alleging failure of consideration.

b. Analysisi. The parties were both mistaken in their belief that the property could be used as

an income-generating rental property.ii. Although the mistake in this case clearly satisfies the test, rescission is not

appropriate because the Pickleses purchased the property “as is” pursuant to which they assumed the risk of the present condition of the property. §154(a)

c. Holding “The Picklesses are not entitled to the equitable remedy of rescission.”

3. Sherwood v. Walker (The “Barron Cow Case”)a. Parties agreed to the sale and purchase of a cow—Rose of Aberlone—which was

thought to be barren but she was actually pregnant with a calf. The seller sought to rescind the contract. The court allowed the rescission because the mistake of the parties went to the whole substance of the agreement. The pregnant cow with the calf would have been worth a lot more than a barren cow. The agreement would not have

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Restatement §152(1) Where a mistake of both parties at the time a contract was made as to the

basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract was voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154.

Material central to the party’s decision to enter into the contractBasic Assumption The basis of the bargain. Something material that the parties considered when negotiating and agreeing to the agreement.

Restatement §154A party bears the risk of mistake when

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

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

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


been made if the parties knew the cow was pregnant. The mistake affected the very nature of the consideration rather than merely its quality. The thing bought and sold had in fact not existed.

b. Notesi. A mistake that affects the “essence of the consideration” may justify rescission,

while one that involves the quality or value of the consideration may not.ii. Note 6 p. 673

1. Mistake in written expression: if a mutual mistake is the failure of the writing to state accurately the parties’ actual agreement, the court will likely grant reformation so that the contract captures the parties’ intent.

2. Equitable relief in mistake cases grants court great discretion to exercise creative ingenuity in fashioning a well-suited remedy for any particular circumstance.

iii. Mistakes as to Value:1. Without more, if parties are mistaken as to the value of the bargained-for

considerations, the courts are unlikely to void the contract.2. Courts do not like to inquire as to the wisdom of the particular bargain.

UNILATERAL MISTAKE

1. Wil-Fred’s, Inc. v. Metropolitan Sanitary Districta. Wil-Fred’s submitted a sealed bid to Metropolitan to do rehabilitation work at one of

Metropolitan’s water reclamation plants. Wil-Fred provided a 100K security deposit. Wil-Fred won the bid—bidding more than 300K less than what Metropolitan estimated the job would cost. Wil-Fred learned that its subcontractor made an error in the calculation, and the subcontractor withdrew, leaving Wil-Fred unable to complete the work at the bid price. Wil-Fred attempted to withdraw, but Metropolitan rejected. Wil-Fred then sued, seeking preliminary injunction and rescission.

b. Rule Rescission is appropriate for an unilateral material mistake so palpable that the party not in error [should be] put on notice. Restatement (First) §503.

c. Notesi. It is very unusual for a party to receive a remedy for unilateral mistake.ii. An error in business judgment is not a mistake for which relief is normally

granted. Most cases that give relief for unilateral mistakes give it for clerical and mathematical mistakes, not for mistake of judgment.

CHANGED CIRCUMSTANCES 1. Impracticability §261, Frustration of Purpose §265, Impossibility §§262–63

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Restatement § 153When Mistake of ONE Party Makes a Contract VoidableSee above, and:

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

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

Underlying Principle: Performance of an obligation under a contract may be excused if the performance has been rendered impossible or impracticable by the occurrence of an event whose non-occurrence was a basic assumption on which the contract was made.


FRUSTRATION OF PURPOSE; IMPRACTICABILITY

Impracticability: Remember that these two doctrines have the same elements, BUT they are not the same

actions; i.e., you can bring both claims to court, but in the analysis, the court would use the same elements.

What might fall within impracticability: severe shortages of raw materials or supplies caused by the following, which create a marked increase in cost or prevents performance altogether:

a. War, embargo, local crop failure, unforeseen shutdown of major sources of supply, or similar circumstances.

b. Changed market conditions are never a basis for impracticability. Frequently, even natural disasters and war aren’t sufficient to satisfy these 2 doctrines Occurrence must take place after the formation of the contract. Contrast with Doctrine of

Mistake: Mistake relates to fact at the time of the formation of the contract.

1. Karl Wendt v. International Harvester Co.a. Wendt had a dealership agreement with IH, a manufacturer of farm equipment.

After a downturn in the market, IH sustained large losses and sold its business to Case Co. When it purchased IH’s assets, Case did not acquire IH’s franchise network. Case granted dealership to approximately 2/3 of IH’s former dealers, but Wendt was in an area that conflicted with existing Case dealer and so he did not receive a Case dealership, Wendt sued IH for breach of the dealer agreement. IH asserted the defense of impracticability of performance.

b. Issue: Does a dramatic economic downturn constitute impracticability that excuses performance? Or frustration of purpose?

c. Holding: No.i. Impracticability

1. Impracticability requires more than a lack of profit, but it can include a shortage of raw materials due to war, embargo, or local crop failure.

2. The critical issue is whether the supervening event is such that the non-occurrence of that event was a basic assumption on which both parties made the contract.

3. The continuation of the existing market conditions is ordinarily not such an assumption.

a. Mutual profitability

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Elements of Frustration of Purpose/Impracticability:(1) Substantial Reduction of the Value of the Contract

“performance is made impracticable”“A party’s principal purpose is substantially frustrated”

(2) Because of the occurrence of an event, the nonoccurrence of which was a basic assumption of the contract

(a) The occurrence must be unforeseen at the time of the contract.(b) Some courts require it to be unforeseeable at the time of the formation of the contract.(c) Just because the event was unforeseen/unforeseeable does not mean it was a basic assumption of the contract

(3) Without the occurrence being attributable to the party; AND(4) The party seeking relief does not bear the risk of occurrence of the event either under the language of the contract or the surrounding circumstances

Mnemonic: RUDE (Realized purpose; Unforeseeable; Destroys Purpose; Event Supervenes)


ii. Frustration of Purpose1. This doctrine attempts to fairly apportion risk between the parties in

light of unforeseen circumstances (as the parties would have had the necessity occurred to them).

2. Frustrating event IH’s decision to sell its farm equipment assets and go out of business.

3. Here, lost profit due to the economic downturn is not adequate. The parties would not have agreed to discharge IH’s obligation if IH simply lost its profits. IH would have negotiated with Wendt for a mutual agreement for termination as per their agreement.

d. Note 7 p. 688i. Judge Posner’s “Superior Risk Bearer” Argument

1. In the absence of a contractual provision, the risk should be assigned to the party who is in the best position to prevent the event from occurring, or if prevention is not passible, to minimize the consequences at the lowest cost, typically by purchasing insurance. Foreseeability combined with ability to prevent loss.

IMPOSSIBILITY 1. Typically,

performance must be literally objectively impossible, not just subjectively impossiblea. Objective impossibility: “no one can do it”b. Subjective impossibility: “I cannot do it”c. Performance is not excused if it just becomes more difficult or expensive or just

because the contract loses value to the party in question.

MODIFICATION

Modification is a contract, in itself, to reallocate the risks and costs of an already-existing executory contract. All rules of contract apply.Why do we care?

If contractual protections are illusory, people will be reluctant to make contracts. If people aren’t confident in the enforceability of their contracts (if they can be easily

modified), they will be reluctant to enter them and the economy will die.

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Impossibility Defined: When a person or thing necessary for performance of the agreement dies or is incapacitated, is destroyed, or damaged, the duty of performance is accordingly excused

Modification Unenforceable: Preexisting Duty Rule: A pre-existing duty cannot serve as consideration for a new agreement—merely promising to perform an existing obligation will not serve as valid consideration for additional/different performance from the other party.

Exceptions:o Mutual Release If the old contract is mutually rescinded and a

new contract is entered into using only the former preexisting duty then it is enforceable

o Employee Contractso Unforeseen Circumstances (almost impracticability)o Reliance

Modification Enforceable: A modification may be enforceable if the new agreement varies in any way from the old. (New consideration)

Modification in Nutshell: Common law requires new consideration for modification (§73, §89) UCC does not require new consideration for modification (UCC §2-

209)Policy: People modify contracts in commercial law/sales all the time.

Elle Klein Fall 2015 1. Alaska Packers v. Domenici

a. Seamen-fishermen refused to continue work at sea unless they get additional money. The work was hard! Superintendent signed an agreement to pay the additional money because he could not get substitute workers (They are at sea.) At the end of the season, the Co. paid the seamen according to the original agreement. Seamen sued in admiralty for the additional money. The court found for the seamen, Co. appealed.

b. Issue: Was adequate consideration given by the seamen to the company in exchange for the raise?

c. Holding: No.i. The supervisor’s consent to the demands of the seamen was without

consideration because it was based solely on an agreement to render the exact services they were already under contract to render. A party cannot refuse to perform under a previous contract, and thereby coerce a promise from the other party to pay more for the same services that it is already required to do. Such a promise would be unsupported by consideration.

1. Preexisting obligation cannot constitute consideration. Merely promising to perform an existing obligation will not serve as valid consideration

2. Main point of this case: modification of a contract requires consideration to be enforceable

d. Other issues in this case:i. Agency Issue

1. An agent can bind his principle in contract to the extent that the agent is authorized to do so

2. Can be based on:a. express authority given by the corporationb. apparent authority

ii. Duress1. Economic duress performed by the seamen2. But, the facts of this case occurred before the economic doctrine of

duress was developed

THIRD PARTIES: ASSIGNMENTS AND DELEGATIONS

IN GENERAL

Privity of contract: Relation between two parties that is created by a contract and recognized by law.Rights and duties usually only extend to parties in the contract.

In a contract, each party gives a duty, and gets a right. Parties to a contract cannot create duties in a third party, just rights. Rights are ASSIGNED and duties are DELEGATED.

Assigning Rights: When you plan on giving a right to someone who is not in contractual privity.Delegation of Duties: When you plan on delegating your duty to someone not originally in contractual privityThird Parties: Person who are not in privity with the parties to the contract. Normally, they have no rights or obligations with respect to the contract.

CLASSIFICATIONS OF BENEFICIARIES

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1. Intended v. Incidental Beneficiaries : To enforce the promise, the 3P involved must be more than a mere “incidental beneficiary”

a. Difference Restatement §302i. Intended Beneficiary: A 3P to whom the contract benefits, and to whom the

contracting parties intended to give a benefit.ii. Incidental Beneficiary: A 3P to whom the contract benefits, but to whom the

contracting parties did not intend to give a benefit.2. Factors to Consider:

a. Is the performance rendered directly to the 3P?b. Do express provisions of the contract purport to create rights in the 3P?c. Is the 3P explicitly named in the contract?d. Is there a close relationship between the promise and the 3P?

3. Rights of 3Ps as Contract (Intended) Beneficiaries a. Contracts can affect parties that are not privity to it. Two persons may validly

contract for a performance to be rendered to a 3P. The question normally raised is whether the 3P—who is not in privity to the contract and gave no consideration for the promise—may enforce the promise made for his benefit.

i. Common Law Rule: 3P may not enforce the promise since he was not in privity.

ii. Modern Law Rule: 3P may normally enforce the promise made for his benefit.4. Whose intent rules?

b. Three different approaches:i. Both parties’ intent rulesii. Promisee’s intentiii. Promisor must know or at least have reason to know of the promisee’s intent

to benefit the 3P, even if the promisor has no particular desire to confer a benefit on or create an obligation to the 3P. (Vogan)

5. How to Show Intent:c. Must first look to whether the contract expressly provides evidence that contract is

intended to benefit 3P.d. Only if the contract is silent regarding the parties’ intention, the court may then

look to the totality of the circumstancesi. language, background, fairness, practicability

6. Vogan v. Hayes Appraisal, Inc.e. The Vogans were the third party beneficiary to the Hayes/Bank agreement to

appraise the building of the house.f. Issue

i. Was Vogan an intended third party beneficiary? ii. Did the Bank or Hayes manifest intention to make Vogan a beneficiary?

g. Rule:i. Promisor must know or at least have reason to know of the promisee’s intent

to benefit the 3P, even if the promisor has no particular desire to confer a benefit on or create an obligation to the 3P.

h. Holding: Yes.i. The files, invoices, etc. had Vogan’s name on it. Hayes knew or should have

known that the Vogans were intended to be benefited.ii. The language of the contract gives Hayes reason to know the Bank

contemplated that benefit as a motivating cause for entering the contract.iii. Benefit to a 3P need not be direct. Here, Hayes monitored construction so

that the Bank could loan money to the contractor to build a house for the Vogans—very indirect.

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ASSIGNMENTS & DELEGATIONS

7.

Herzog v. Iracea. Jones was injured in a motorcycle accident from which he received a settlement.

Jones assigned his settlement to his doctor. The doctor notified Jones’s lawyer of the intent of the parties. The lawyer received the settlement and gave it to Jones instead of the doctor. Jones spent it instead of paying the doctor back.

b. Rule/Analysis:i. An assignment assigned by an assignor to an assignee automatically and

immediately extinguishes the right previously held by the assignor. There is now a DUTY to pay the doctor and not Jones. Their duty to the doctor remains even though they paid Jones, therefore they are liable to the doctor who can directly enforce his right against the lawyers (obligors).

8. Sally Beauty Co. v. Nexxus Products Co. (UCC case)a. Sally merges in contract with Best (mergers and acquisitions) who has a contract

with Nexxus. Sally wants to enforce Nexxus’s duties under Best’s contracts. Nexxus refuses to continue performances, and Sally sues for breach of contract.

b. Issue:i. If an assignment is made to a party’s competitor, is the assignment voidable?

c. Rule:i. UCC §2-210

1. A duty of performance cannot be assigned to a direct competitor without consent (to the extent that the oblige has substantial interest in not seeing that person perform the duty)

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ASSIGNMENTS OF RIGHTS Assignment of a Right (Restatement § 317): An act or manifestation by the owner of a right (the assignor) indicating his intent to transfer that right to another person (the assignee). p. 766

Assigning a contractual right creates in the assignee a new right, and automatically and immediately extinguishes the assignor’s rights previously held.

A contractual right can be assigned unless: (Restatement §317)1. Substitution of a right to the assignee would materially change the duty of the obligator,

or materially increase the burden or risk imposed by the contract, or materially impair his chance of obtaining return performance, or materially reduce value to him

2. forbidden by statute3. precluded by the contract

Normally, court do not enforce non-assignability clauses due to public policy in favor of assignability.Typically interpreted as prohibition of delegation of duties.The law does not like restraints on alienation.

DELEGATION OF DUTIES

Delegation of a Duty (Restatement § 318): A transaction by which a party to a contract arranges to have a third party perform the party’s contractual duties.

A contractual duty can be delegated unless contrary to public policy or the terms of the promise (non-delegation clause). A promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised (non-delegable duty).

Example: A Van Gogh painting painted by someone else.

Neither delegation of performance nor a contract to assume the duty made with the obligator by the person delegated discharges any duty or liability of the delegating obligor. (Unless there is a novation.)

Novation (Restatement § 280) A substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty.


2. Rationale: Performance may be much different than what was originally bargained for. (Will Sally distribute Nexxus’s products in a manner similar to Best? Probably not.)

a. There is a presumption that Sally will not use best efforts (which is required by the UCC—Remember?)

d. Holding Nexxus can repudiate the contract.9. UCC allows assignment unless the assignment would:

a. Materially change the other party’s duty;b. Materially increase the risk the K imposes; orc. Materially impair the other party’s chance of receiving return performance d. Mnemonic: DRIP (Duty, Risk, Impair, Performance)e. Exceptions: personal services, rights under furture contracts, requirements/output

Ks

CONDITIONS!!!!!

1.

Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.a. Sub-tenant sought to sublease its space in a building to a 3P (defendant). The

landlord included a non-assignment clause in the lease with subtenant, so the parties to the sublease needed the landlord’s approval. The landlord agreed to waive the non-assignment clause if certain conditions are satisfied:

i. Two Conditions in this case:1. signature of landlord by a certain date (fulfilled)2. consent of landlord in writing to perform work (not satisfied completely

telephone call, not in writing)b. Defendant 3P wants to repudiate the contract due to non-performance of second

condition. Sub-tenant sues.c. Issue:

i. Can Condition #2 be fulfilled by substantial performance?

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The McWilliams Maxim—Please Memorize This.There is no remedy until there is a breach.A breach is non-performance when performance is due. (there must be a duty to perform—Restatement § 225)Performance is due when all conditions thereto have been fulfilled. (Restatement § 225)A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract become due. (Restatement § 224)

Non-occurrence can be excused by:1. waiver (by the non-breaching party)2. disproportionate forfeiture (BP will be excused by the court, unless the condition was

material to the agreement.)

When does a condition exist in my contract?Condition Flavors

1. Express conditions expressed in “unmistakable language” or “apt and certain words”

2. Constructive condition3. When unclear, courts prefer interpreting conditions as “mere promises” to limit

disproportionate forfeitures.

Forfeiture Defined (Restatement § 229): the denial of compensation that results when the oblige loses its right to the agreed exchange after is has relied substantially, as by preparation or performance on the expectation of that exchange


d. Rule:i. Generally, an express condition must be actually, literally performed

because it was part of the negotiation. (like it says in the provision)ii. A constructive condition may be satisfied by substantial performance,

and does not have to be literally performed.e. Analysis:

i. Here, the unmistakable language of the contract was clear, leaving no doubt about the parties’ intent to form an express condition.

ii. Sub-tenant did not show that the non-occurrence of the condition would cause a substantial forfeiture.

1. Instead claims that the condition should be waived or its enforcement should be estopped because there was substantial compliance.

2. BUT, the doctrine of substantial performance is inapplicable to express conditions. Sub-tenant could only obtain waiver of the non-occurrence of the condition to avoid forfeiture.

2. Jacob & Youngs, Inc. v. Kent (Nonperformance Material Breach) a. Jacob & Youngs contracted to build a residence for Kent. The contract specified that

a certain brand (Reading) of pipe be used. Jacob & Youngs used a different type of pipe equivalent to the type specified. When Kent discovered the mistake, he realized that the cost of replacing it with the correct pipe would be astronomical: the entire structure would have to be reconstructed. Kent refused to pay for the work.

b. Issue:i. Is Kent excused form paying because Jacob & Youngs failed to use the exact

brand of pipe specified under the contract, and instead, used a functionally equivalent pipe, when non-payment would cause Jacob & Youngs to suffer a forfeiture? (And a really, really big one—the cost of a whole house!)

c. Rule:i. To create an express condition, parties must use “apt and certain

words.”ii. If BP makes an innocent and trivial breach of a venial express condition,

the NBP is still obligated to perform if nonperformance would cause a disproportionate forfeiture to the BP.

1. This is a partial breach.2. The NBP may claim damages for Difference in Value. (See bottom of

p. 808)iii. However, if the condition is material (Does its non-performance frustrate the

purpose of the contract?) OR if it is created by “apt and certain words,” the NBP is relieved from its obligation (may repudiate the contract).

1. The NBP may claim damages for Cost to Completion.d. Holding:

i. Here, the Reading pipe was an express condition created by apt and certain words. (According to Prof. McWilliams, your authors disagree.)

ii. The detriment to Kent for Jacob & Youngs’ failure to use Reading pipe ($0) is “grievously disproportionate to the oppression of forfeiture” to Jacob & Youngs if Kent does not render performance ($3500).

1. Therefore, Kent must render performance and pay.e. Notes:

i. Other Grounds Under Which NBP Can Recover Note 8 p. 814

Remedies

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Analyzing Remedies:Ask the following in this order:

1. Do the parties simply want to modify an incorrect written agreement to reflect their actual agreement? Reformation

2. Do the plaintiffs want to return the parties to the position they were in before the K was formed, as though the


Four Basic Types of Relief for Breaches: 1. Damages (most common)2. Specific Performance 3. Rescission and Restitution 4. Reformation

Equitable relief – specific performance or injunction for when money damages would provide an inadequate remedy

Remedies at law (money damages)o Expectation damages

Put the π in the position she would have been in had the ∆ performed. (1) out-of-pocket costs & (2) profits they would have made

o Reliance Damages : As good a position as she was in prior to making the K. (1) out of pocket

o Restitution Prevents unjust enrichment Returns to the π who has partially performed the value of the performance he

has rendered to the defendant Substantial Performance – π may sue for expectation damages for partial performance,

but the ∆ may counterclaim damages from incomplete performance Duty to mitigate – π must make reasonable effort to avoid damages. Liquidated Damages –

o A provision in a K that setting the amount of damages in case of breach by one of the parties

Computing Expectation Damages Goal is to put the π in the position she would have been in had the K been performed by

the ∆. ** “benefit of the bargain”** General Measure = loss in value + other loss (incidental + consequential) – cost avoided

– loss avoidedo Restatement §347 o Loss in valueo Other loss:

“incidental” additional costs incurred after the breach in a reasonable attempt to avoid loss

“consequential” you loss other profits because of ito Cost avoided: the cost the non-breaching avoided by not having to performance o Loss avoided: the stuff that you would have used in the breach contract that you

can now use in another contract Roesch v. Bray -- When a purchaser defaults upon a contract for the sale of real estate,

the seller may recover the difference between the contract price and the market value of the property at the time of the breach

Restrictions of Expectation Damages Hadley v. Baxdale (1854) - Facts: plaintiff sued for lost profits because the ∆ didn’t get

the steam engine for their mill back when they said they would. The π paid for its carriage and it was delayed by some neglect

o Where two parties have made a K which one of them, has broken, the damages which the other party ought to receive in respect of such breach of K should be such as may fairly and reasonably be considered either arising naturally or may reasonably be supposed to have been in the contemplation of both parties, at the time they made the K, as the probable result of the breach of it.

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Analyzing Remedies:Ask the following in this order:

1. Do the parties simply want to modify an incorrect written agreement to reflect their actual agreement? Reformation

2. Do the plaintiffs want to return the parties to the position they were in before the K was formed, as though the


If there are special circumstances, the π must expressly state them to the ∆ otherwise the ∆ is not liable

Comes down to foreseeability, certainty, and causality Avoidable consequences: the π does not have a “duty to mitigate” but they may not

recover for those injurious consequences of the ∆’s breach that the π herself could by reasonable action have avoided.

o Rockingham County V. Luten Bridge Co. (1929) – kept building the bridge anyways.

Specific Performance City Stores Co V. Ammerman - The ∆ needs Tyson’s Corner (gas station) except the

zoning was wrong. The ∆ asks the π for a letter, which the π writes. The zoning board changed the zone. Then the ∆ fails to give the π a site to build. Π thought they had a deal and wanted. Instead of issuing monetary damages, Court order specific performance for the lease to be enforced.

Limitations on the use of equity (specific performance):o Money damages must be inadequate to protect the injured party o The contracts terms must be definite enough to allow the court to frame an

adequate order; ando The courts task of enforcing and supervising the relief must not be unduly difficult

Usually for land provisions and unique chattel Courts don’t use specific performace for personal service contracts

Agreed Remedies – Liquidated DamagesThree elements of valid liquidation clause:

1. The clause must be reasonably forescast the probably loss due to breach 2. Harm caused by breach must be difficult to calculate 3. Parties must tailer the clause to the K’s circumstances

Mnemonic – CiDeR (circumstance, difficulty in calculation, reasonable forecast)- No duty to mitigate under a liquidation clause

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