Contracts Outline Spring 2008

8/2/2019 Contracts Outline Spring 2008

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CONTRACTS OUTLINE

Spring 2008, Professor Crespi1-103 if nothing in UCC.

I. ENFORCEABILITY DEFENSES

A. Statute of Frauds

UCC: 2-201 for any transaction for the sale of goods over $500 (proposed UCC $5,000)

2-201(1) Enforceable if there is:

(a)some sufficient writingto indicate that a contract for sale has been made

Courts are split as to whether an offer is a sufficient signed writing.

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

(b) signedby the party against whom enforcement is sought

1-201(39): Signed includes any symbol executed or adopted by a part with present intention to authenticate writing.

(c) not insufficient if it omits/ incorrectly states a terms.

Must include quantity and contract is only enforceable up to the quantity listed.

Can leave out the price

2-201(2):Merchant Confirmation Exception. Between merchants only.

If you put it in writing and there is no rejection in 10 days, then it functions as a signed writing.

Other party can send a rejection letter

Four issues: (1) What is a written confirmation? (2) Whats a reasonable amount of time? (3) Written notice of objection

within 10 days? 10days from what? Mailbox rule? What about a phone call? (4) Whats an objection to its contents?

2-201(3): Other Exceptions for contracts that do not satisfy 2-201(1) are valid if:

(a) Custom-tailored Goods

Use divisibility when possible.

Rush orders?

(b) Formal Admission (in court)

Admitting to a contract just waives your S/F defense.

(c) If payment has been made and accepted and goods have been received and accepted. Comment 2: Partial performance can validate the contract but only for goods which have been accepted or for

which payment has been made and accepted

Estoppel for S/F?

CL: Yes, if you can show reasonable reliance 87(2) & 90. Also S. 139 (definite and substantial character

UCC: UCC: Courts are split as to whether you can even use estoppel under the UC

Consider the 139(2)(a)-(e) to determine reliance.

Double Dipping Issues. 139 applies to the enforceability context, but 90 applies to the contract formation context.

Could you use both? The courts are split on this

CASES:

Monarco v. Lo Greco: Orange Orchard Case.

Holding: Led to 139. You can invoke estoppel when there is: (1) unconscionable injury or(2) unjust enrichment to the

other person. (He could not use quasi-contract was insufficient because the value of land was much more than the benefitconferred in his improvements.)

B. STATUTE OF LIMITATIONS COMMON LAW: Look to statutory limitations by jurisdiction. Generally around 4 years.

Tolling:

Incapacitation (coma, military service): courts are unwilling to do this, but will allow for it. (note: UCC 2-725 expressly

says it does not interfere with tolling)

Minority: minors have tolling until 18. (Some question into whether an adult responsible for them shouldve raised it.)

1 | C o n t r a c t s I I O u t l i n e S p r i n g


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Estoppel: Usually doesnt happen. Argument for special situations are addressed in tolling.

Revival Issues: S.82 for gratuitous promise to pay indebtedness.

UCC: 2-725

2-725(1): Length of S/L

Must be commenced within 4 years after the cause of action

Parties can reduce (minimum of 1 year), but not expand the time.

2-725(2): Commencing of the S/L

No discovery rule. Accrues when the breach occurs (regardless of lack of knowledge)

Exception: where a warranty explicitly extends to future performance (doesnt work for implied warranties)

To decide if it is an exception: look under 2-314, 2-315 for warranties.

Where a warranty explicitly (will work for blank years) extends to future performance clock starts when thing breaks,

then you have 4 years. (doesn't work for implied warranties).1. Implied warranties don't extend (SOL start on tender of delivery)

a. Example: Lifetime guaranty on a car, tried to get a repair after 5 years, court gave him theexception and said that it was an explicit statement for future performance. When worded as areplacement guaranty not good enough. Good argument is to say it wasn't a warranty and that it wasa promise to repair or replace. Dont' even call it a warranty.

b. Example:

i. Warranty said that for next 10 years I'll fix leaks1. After 5 years started leaking guy wouldnt fix and he sues.

2. Says sorry SOL has run, but then he argued that he said that he would fix it for10 years.3. Wasn't good. Has to say that this will work for 10 years to extend, not just

that it will be fixed it if it doesn't work.

i. Way around it?

1. Dont call it a warranty (too many rules), call it a promise to replace or repair.(repair or replacement guarantee that has been breached)

2-725(3): Refiling

If your claim is dismissed in a way that allows you to refile, you have six months to refile under a different liability

theory.

2-725(4): Defer to Local Law (1-103)

Preserves the local jurisprudence.

C. LACK OF CAPACITY DEFENSES (Minority and Mental Infirmity)MINORITY

Rationale: Encourage people to enter into contract with minors for necessary things. Protects minors from rash decisions.

Common Law:

RS. 14: Infants:

Voidable at the minors discretion.

The minor can raise the defense at anytime within reasonable time.

Can disaffirm it up to couple of months after turning 18 (depends)

Minor can ratify contract (by words, deeds, or lack of deeds). Cannot ratify until s/he reaches majority.

Irrelevant if minor misrepresents himself.

Exception: Necessities. (Keifer v. Fred Howe Motor)

Adult Certification doesnt exist. (Crespi-ism)

Remedies: Minors required to give back whatever benefit to the extent that it still exists. Most courts hold that the otherparty doesnt have to return cash payments, and for credit, then the credit is wiped clean.

UCC: Go to 1-103

MENTAL INFIRMITY

Rationale:

Common Law:

RS.15 Mental Illness or Defect

Voidable by the person.



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15(1)(a) Traditional cognitive test (lack of understanding)

15(1)(b) Volitional Impairment test (lack of self-control) and the other party has to have knowledge/reason to know.

Note: certification standard in most states.

15(2): if the contract is made fairly and other party has no reason to know of the impairment, then the crazy party is only

liable for the part that has been performed.

QUOTE: Mere craziness is not always enough to establish a capacity diminished to the point of inability to contract. As

noted by the Supreme Court of Arkansas, simply because a man is "filthy, forgetful, and eccentric, . . . believed inwitchcraft, and had dogs eat at the table with him . . . does not establish lack of capacity." So, thank Zenu that Tom

Cruise can still contract. Others:

Grief: Courts undecided.

Manic-Depression: (the man that bought the Gulf Course) No.

Voluntary Intoxication: Most courts allow it, but the defendant has the burden of proving that they were intoxicated.

(Plaintiff has to know.) Some courts say no because they dont want to encourage drinking.

More of a contract formation problem b/c no mutual assent.

UCC: Go to 1-103

D(1). FRAUD & MISREPRESENTATION RATIONALE: Want to encourage people to research their deals before entering into them. A duty to disclose everything you

know encourages people not to do research. Tension between Getting Disclosure v. Keeping Incentive to Research.

FRAUD RS.159-169

(1)False assertion

(2)The assertion is "fraudulent" (i.e. made with "scienter," which means either consciously false or made with reckless

disregard of the truth, and made with intent to deceive)

Note: hard to prove b/c can't know his state of mind. If the defendant denies it, then it can be hard to prove, so this is

where you go to the misrepresentation defense instead.

(3) the false assertion was relied upon

(4) the reliance was justified (by the non-reckless reliance standard)

MISREPRESENTATION RS. 159-169

(1)False assertion

(2)the assertion is "material"

Doesn't deal with the mental state as in fraud The assertion influenced the transaction

(3)the false assertion was relied upon

(4)reliance was justified (by the non-negligent reliance standard) *tougher standard

What is a "false assertion"?

Predictions?

Minority opinion: a prediction is an assertion like any other, but you should know better. Reliance on opinion-like

assertions is not justified reliance.

RS.2d $ 168, 169:

Non-verbal conduct?

Doesn't have to be an express statement:

Nodding your head. Silence. (Tell me know if there is something wrong with the car.)

Affirmative Concealment?

Ex. Has there ever been termite damage? The buyer never asks. The seller tries to conceal it to avoid the topic from

coming up.

Trying to improve your chances that the topic will not come up is an assertion.

Simple Non-Disclosure?

Simply not volunteering information.

Laidlaw v. Organ: no duty to disclose.

Exception: RS 161(a) You do have a duty to update.



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Exception: RS 161(d) Special relationship for fiduciary relationships (higher duty to disclose)

Exception: RS 161(b) and 168: Duty to disclose when you know the other party is making a mistake.\

Summary of Exceptions: (Treatise p.239) (1) relation of trust and confidence (2) need to correct (3) mistake in

basic assumption.

True but Misleading Assertions?

It is misrepresentation if it invites a false inference.

How Info is Acquired: Kronmen Problem

Deliberately Acquired Information Dont have to disclose

Casually Acquired Information Have to disclose as it facilitates informed bargaining.

CASES:

Laidlaw:No duty to disclose. (You cannot lie, but you dont have to volunteer info)

Swinton:No duty to disclose termites case.

Kannavos: Duty to disclose b/c they affirmatively misrepresented the situation.

D2. DURESS & UNDUE INFLUENCE COMMON LAW: DURESS RS. 175, 176

(1) a "threat"

Doesn't have to be in words

Polite, no threatening language -- "I predict you will not live 'til sunset if you don't buy this car." :o) ha ha

(2) the threat is "improper"

Threatening to withhold performance if you don't make the deal doesn't count.

Modern Test: liberalized. The threat only has to be improper -- includes unlawful and wrongful things, but there is a

broader class of threats that are considered improper.

Classical History: Threat needs to be "unlawful" and "wrongful" -- interpreted narrowly: couldn't threaten crimes

or torts, but all other threats were acceptable.

Restatement:

176(1)(a) -- crime or tort

176(1)(b) -- threaten criminal prosecution (I'll turn you into the police) -- blackmail. Even well-founded criminal

prosecution is not allowable.

176(1)(c) -- threat of civil process if the threat is made in bad faith (suit for harassment purposes). You can threaten

a legitimate suit. 176(1)(d) -- threat is a breach of duty of good faith and fair dealing under a contract with the recipient

Ex. You are in a contract with someone. During performance, the other person tells you they will breach unless

you renegotiate the terms now, or demand a new contract or you'll breach.

(3) the threat induces assent

It was a factor, but not the main factor -- courts typically do not think this was enough.

Use a "but-for" causation test. [differs from misrepresentation/fraud where it just has to be a substantial factor]

(4) the threat was serious and credible enough to justify the victim's assent

Accords with the court's expectation that you will disregard weak threats.

Modern: liberalized it by:

Parallel to the Thin Skull Rule. If the threatener makes a threat that a person of average firmness would've resisted,

it doesnt matter. We base it on whether the person felt threatened. Subjective test!!!

Threat of serious to your interest (not just major physical injury) Historically: had to show the threat created an objectively reasonable threat (a person of reasonable firmness)

DAMAGES: If you have not performed, you can get out of the Kx. If you have partially/fully performed, you can get

rescission. You cannot get quasi-contract because they have unclean hands. Some courts say both parties get restitution.Other courts say there is no Kx b/c lack of mutual assent.

COMMON LAW: UNDUE INFLUENCE RS. 177

Elements:

Relationship of Trust and Confidence

Ex. elderly person relying on your advice.



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They are suspending their critical judgment because they trust you.

NOTE: used to be more important because the duress defense was very narrow. Under modern law, the courts are

more liberal with duress, so another approach is not needed.

E. UNLILATERAL MISTAKE AND MUTUAL MISTAKE RATIONALE: We want people to do their research/ homework.

COMMON LAW: MUTUAL MISTAKE RS 152, 154

Mutual Mistake Elements (R.2d SS 152, 154)

Typical case: Sale of goods. Buyer and seller enter into Kx. Common understanding of the value of the good; roughly the

same understanding. They can discover after the contract was entered into (before or after performance), they find out it isworth much, much more than the parties envisioned. Ex. Picasso that was not a Picasso. Usually it is the seller that wants toavoid the contract. ELEMENTS:

(1)Both parties have the same mistaken belief as to existing facts

Doesn't have to be the EXACT same mistake. They just have to undervalue or overvalue it similarly.

(2) Mistake goes to a basic assumption of the Kx

Has to be the core items of the deal, not peripheral things.

(3) Mistake has a material effecton the exchange

Can it be a deal that you would've gone through with anyways, but not the awesome deal you thought it was? Here, the

mistake has to be more than a small mistake. Some courts hold that it has to have "but for" causation. More like super-materiality.

(4) The riskof mistake is notallocated to the person seeking avoidance

Most difficult issue. See section 154 for when a party bears the risk of mistake. You just have to show that the risk was

not allocated to you.

RESTATEMENT: RS.2d $ 154--

(a) can contract who is allocated risk

(b) if you know that your knowledge is limited and you enter into the contract anyways, then the risk is allocated to

you. Section 157 will not bar you from doing this if done in good faith and in accordance with reasonable standardsof fair dealing.

(c) If the court thinks it is reasonable that you bear the risk of mistake, then you cannot avoid it/ raise the defense.

RS.2d 154(c)? "reasonable possibilities" -- How could the courts make a clear rule?

(1)Always to person seeking avoidance.

Harsh rule: You screw up, you live with it. If you are upset, be more careful next time and do more

research. (2) "Cheapest cost avoider/ cheapest insurer"

Economic p.o.v. rule: Mistake are bad/ cause problems. We would like to avoid cost effective mistakes.

Rationale: the parties did not expressly allocate the risk. If they had allocated the risk during negotiations,then the sensible thing would be to put the risk on the person who can better able to bear it (and then theysplit the costs). If not a mistake that anyone could avoid, then the cheapest insurer. This is a gap fillertheory (fill in gaps with whatever rational parties would've done if they had negotiated it). *Note: morecomplicated, have to replicate negotiations.

(3) Other Allocation Criteria

Look to case law [p.797]: (a) before/ after the contract; (b) expertness; (c) cost/value ratio

RESTATMENT: RS.2d 157:

Undoes 154(b) a lot. Only holds a party responsible when they act in bad faith.

CASES:

o The "Mislabeled Rare Book" Hypothetical: Usually the risk is allocated to the seller, the exceptions are for

when the buyer has much more information than the seller. [bumbling employee example vs. dishonest employeeexample --different]

COMMON LAW: UNILATERAL MISTAKE RS. 153

RATIONALE: Jurisprudence Problem: Marshall/Laidlaw case -- want to preserve the incentive for people to do research, get

information. Other Cases -- want to encourage to speak up when they see a mistake; want to encourage disclosure. [As a lawyer,you are more likely to win if you characterize the case as a unilateral mistake case.]



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NOTE: Most successful in contract cases. Modern courts usually dont look at whether they should know or did know, but

rather that there was a mistake, but the party still loses it deposit. [Treatise]

DEFINITION: One person is mistaken and the other party knows the truth. Only the party that wants to avoid the contract is

mistaken.

RESTATEMENT: 153: Same elements as Mutual Mistake: (basic assumption, material effect, if he does not bear the risk of

the mistake) of mutual mistake with an extra hurdle:

(1) the effect of the mistake makes the Kx unconscionable

(2) other party had reason to know (not actual knowledge) of the mistake

(3) the other parties' fault caused the mistake. CASES:

Painting Case [handout]: Hearde painting unknown by the seller, but the buyer knew it was worth more. The seller sold

for $100, the buyer was a sophisticated art purchaser (might not have known worth a million, but did know it was worth morethan $100).

Nolan Ryan Baseball Card Case: Problem: Allocation of risk. Storeowners are usually responsible for their employees and

monitor the people who work there. The kid was the cheaper cost avoider (could've spoke up about the price value). The kidknew the mistake (unconscionable). (Case settled out of court.)

How to Resolve? If you work to get that information, you may choose not to disclose. If you did not, then you must

disclose.

Painting Case: His knowledge of paintings was not casually acquired.

Baseball Card Case: This could be casually acquired.

Fraud by non-disclosure claim generally lose. Generally, no duty to disclose.

Jurisprudence Problem: Marshall/Laidlaw case -- want to preserve the incentive for people to do research, get

information. Other Cases -- want to encourage to speak up when they see a mistake; want to encourage disclosure. [Asa lawyer, you are more likely to win if you characterize the case as a unilateral mistake case.]

UCC & COMMON LAW: UNCONSCIONABILITY RS. RS. 208, UCC 2-302, 2-719(3)

RATIONALE: gives courts a mechanism to deal with outrageously unfair contracts. Great back up way to prevent fraud, duress

or misrepresentation. Polices procedural abuses.

Epstein doctrine: Need a doctrine for a person who has been defrauded or coerced but can't prove it. Epstein likes

unconscionability. Great back-up for courts, but you shouldn't hold contract to be unconscionable just because terms strike you as

unfair, would require judges to try and know too much about various industries. WHEN USE: Contracts of Adhesion Problems

UCC:

2-302: Aggressive Defense

Court can (1) strike the term (2) strike the contract (3) fill in with a new term

(1) Must be unconscionable at the time of the contract

(2) Not tight definition because: (1) if theyre wrong, they cant change it (2) it takes away discretion from the judges (3)

road map to bad guys, dont want the line to be that clear.

(3) Definition: (Websters) shockingly unfair or unjust This gives judges a lot of leeway.

(4) Official Comments: Procedural abuse + imbalance of bargaining levels must be greater than or equal to

unconscionability

2-719(3): REMEDIES

No limit on damages if it is unconscionable. Consequential damages for personal injury is prima facieunconscionable. Usually a retail case where there is a disclaimer not to cover medical expenses which would beunconscionable.

RESTATEMENT: RS. 208

Like 2-302: Court can (1) strike the term (2) strike the contract (3) fill in with a new term.

NOTE: Other statutes are more prohibitory and designed for specific consumer protection.

CASES:\

Williams v. Walker-Thomas Furniture Co.350 F.2d 445 [p.403]:



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Facts: She defaults on the stereo. Defendant tries to repossess the stereo AND everything else she'd ever bought from

them.

Holding: Where the element of unconscionability is present at the time a contract is made, the contract should not be

enforced.

Analysis:

DEFINITION OF unconscionability [p.405-6]

"Absence of meaningful choice"

OR a gross inequality of bargaining power

Contract terms which are "unreasonably favorable" to the other party Also consider the manner in which the contract was entered (Fullness of Disclosure Q's)

Consider obvious education or lack of it

Reasonable opportunity to understand the terms of the contract

Were the important terms hidden in a maze of fine print and minimized by deceptive sales practices?

Also: Corbin says test as being whether the terms are "so extreme as to appear unconscionable according to the mores

and business practices of the time and place."

JONES v. STAR CREDIT CORP, N.Y. Sup. Ct. 1969: Overpriced freezer Case.

COURT'S SOLUTION USUALLY: Typically, cost is not enough. Plaintiffs have the opportunity to check around.

However, the courts look at 3x/4x the fair market value as being too much; courts more likely to avoid/change terms then

RECOVERY: Typically courts allow you to recover all the amount paid and you give back the good. Usually, the courts

do not cancel the payments at that point.

Crespi prefers a quasi-contractual remedy. Reproduce a fair-price sale

REASONABLE EXPECTATIONS DOCTRINE 211(3)

WHEN USED: Usually for insurance contracts.

RESTATEMENT: Any fine print terms that were not discussed/brought to the attention of the other party do not go into the

contract. If you want the term, you have to tell people. Rationale: people have a right to reasonably expect that the terms of thecontract are what they discussed, and no sneaky backdoor clauses.

Therefore, this forces the party to disclose any terms they want into the contract.

Problem: When people have no meaningful alternatives OR that they just don't understand.

Other Solutions -- statutory provisions!!!

G. ILLEGALITY & PUBLIC POLICY CONSIDERATIONS RATIONALE:

Classes of Contracts with Limitations

(1) Contracts made unenforceable by statute

Examples: usury statutes, anti-gambling debt statutes

(2) The nature of the contract involves illegality

Example: Contract to require a party to do illegal/tortious conduct.

Courts are very harsh on these, but still do a balancing test.

(3) Contracts that are tainted by illegality.

Example: I want to sell Wal-Mart my crappy products, so I bribe someone. The contract with Wal-Mart is legal, but the

way that I got it is not legal. (Commercial Bribery Cases)

Example: Not illegal to sell a mj pipe, but I know what you are going to do with it. Example: Builder builds house with illegal immigrants as employees.

(4) Contracts that seem to run contrary to other public policies.

Example: Contracts that indemnify against courts, surrogate motherhood, clauses with no tort liability.

COMMON LAW: ILLEGALITY RS

(1) Kx's Involvement "Necessary" Illegality

Illegality Example: Illegal alien works for farmer. Verbal contract to pay $x/ hr. At the end of the season, the grower refuses to

pay the worker.



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Should we enforce this? Balancing test:

Public policy is clear: immigration restrictions (discourage these contracts).

BUT Other penalties out there for illegal immigrants already -- criminal, deportation, etc. This is too much punishment,

we don't want high sanctions for this type of conduct.

(Look to what law already addresses this!!!)

OR Does this encourage growers to higher illegal aliens (courts will protect them from paying them)? [While you may

create a disincentive for the workers, you may be creating an incentive to the growers.

How do courts deal with this? (NOTE: none work in illegal worker case)

Use Divisibility. Contracts that are partially legal/partially illegal: courts can carve it up and use divisibility in order to limitthe consequences of the illegality in order to make the contract work. (In illegal worker case, it doesn't work.)

Modify the Offending term. If courts think it is more peripheral or unintentional illegality.

Refuse to enforce the contract (allowing the other party to raise a quasi-contract claim, but the problem is unclean hands

(unless it is the other party's illegality)).

(2) Kx's "tainted" by Illegality (Question: what are sensible limitations as to how near to the illegality the contract has to be?)

Illegal Post-Contractual Actions:

COMMERCIAL BRIBERY CASES:

ILLEGAL PROCUREMENT: Sirkin v. Fourteenth Street Store, 108 N.Y.S. 830 (App. Div. 1908)

FACTS: Three contract situation. Fourteenth Street Store hired McGuinness (purchasing agent). Terms of the

employment contract are 'no bribery', work in interest of the store. Sirkin wants to sell shirts to the store, so he

makes a deal with McGuinness 'I'll agree to bribe you if you will ignore the competition." The store finds out aboutthe bribe. Sirkin sues, store refuses to pay Sirkin, and McGuinness wants to keep the bribe.

Court held: Strong public policy against bribery. So, if the bribe comes to light, the contract that you entered due

to bribery will not be enforced. Even though the contract was not illegal, the procurement was.

Problematic Consequences of Decision: encourages stores to do this because they get to keep the shirts and don't

pay.

Note: Russian solution -- shirts go to the State

PERFORMANCE ILLEGALITY: McConnell v. Commonwealth Pictures Corp., 166 N.E.2d 494 (N.Y. 1960)

FACTS: Commonwealth want movie contracts. McConnell will get movie contracts for a percentage of the profits

(and an additional $10,000 and don't ask any questions). It is clear that he will be using that money to bribe otherproducers in order to get them to enter into contract with Commonwealth. The bribe comes to light.Commonwealth fires McConnell, but wants to keep the contract with the movie producer. Commonwealth sues forthe money --

Court held: the court confused this with Sirkin. This was litigating the contract between McConnell and

Commonwealth. (If the problem litigated had been between the movie producer and Commonwealth -- betterstanding.) How much illegality does McConnell have to do before problems with the contract with commonwealth.

KEY LANGUAGE: Court wants a "direct connection" between the illegal act and the contract. It needs to be

"gravely immoral and illegal conduct". It has to be "central to or a dominant part of the contract".

Problematic Consequences: Performance illegality is different.

Ex. You hire me to build a house. I park my cement truck to close to a fire hydrant and get a ticket. Do I not

get paid then because of the illegality? PROBLEM illustrates where is the line of illegality? How serious doesit have to be?

Ex. You hire me to build a house. I want to cut some corners. I tell the electrical wiring guy I will bribe him to

next inspect the house, then put in unsafe/cheap wiring. This could burn down the house. The bribe comes tolight. Most people would agree this is conduct we would want to discourage.

Ex. I am a housing builder contracted with you. I need an inspection certification and it looks like it will bedelayed. I bribe you to move me to the head of the list, but for a full, rigorous inspection. The bribe comes tolight. (Note: other builders are giving nice gifts, etc. in order to keep them in the forefront of the mind.)Harder case.

Ex. Builder has illegal workers who work on the house in violation of the Federal immigration laws. The

workers are still paid. This is a good case for divisibility. You can show me the illegal immigrants worked onjust PART of the house, then that work can be avoided. ???ask

I. SOVEREIGN IMMUNTIY



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Sovereign Immunity: government can discharge debts that others can't. No government agency can be sued unless it consents.

Basis for Doctrine:

(1) King is above the law and can do no wrong. Attribute of divine right.

(2) If the government is paying out judgments, it has to tax its citizens. So, government sovereign immunity is just a

guard against taxing themselves. (Protect the treasury from depletion)

(3) In a democracy, the government is representative of the people, so letting the people sue the government is the

people suing themselves.

Modern Trend:

Tort Claims: this makes sense. Sometimes there are tort claims for police officers, etc that can be problematic. Contract Claims: Immunity from contract breach seems unfair and illogical. In Texas, statutes adopted that Texas

waives any sovereign immunity for contracts.

Can always use a Constitutional Argument. Takings Clause/ no Due Process, etc.

J. DISCHARGE IN BANKRUPTCY BANKRUPTCY

Bankruptcy trumps the usual contract law and remedies.

Two major objectives of bankruptcy code:

(1) Orderly reorganization/liquidation of businesses Policy

Even if the company cannot pay their bills (operating costs) -- keep business open while we are deciding how to

restructure/ liquidate etc. If their was not bankruptcy code, the creditors would not have to hold off taking all their

assets. Prevents a rush to take everything they can. Sometimes, it is better to simply reorganize the company. (2) Fresh Start Policy (allows debtors a fresh start)

Three Way to deal with Bankruptcy:

(1) "Automatic Stay": once a company files for bankruptcy, everything stops so that everything can be resolved in

bankruptcy court. Note: if you represent a client who want to collect on their debts, then you need to quickly get ajudgment and get it executed (get the money). Even if you have the judgment, it stops as soon as bankruptcy claim filedYou have to have executed the judgment as well.

(2) Secure v. Unsecure Debts

Secure -- ex. mortgage, lien on car (collateral pledge). You can get that collateral first before the unsecured creditors.

Note: In a liquidation, courts allow the secured creditors to collect their collateral, then allow the unsecured

collectors to take what's left. In a reorganization, there is a negotiation.

(3) Discharge of Bankruptcy: start from scratch. BUT some types of debts cannot be discharged by bankruptcy:

student loans (at least government guaranteed loans, but maybe not private loans?). NOTE: RS. 82 & 83: Gratuitous Promises (against the background of preexisting debt discharged in bankruptcy) -- you

may still have to pay.

II. LAW OF CONTRACT ANALYSISA. Parol Evidence Rule RS. 209-214 RATIONALE: Doctrine designed to control juries. Juries will favor the underdog, leaving the more powerful parties vulnerable

This avoids getting into evidentiary issues.

DEFINITION: Given that a written contract was formed by agreement by the parties, what prior or contemporaneous

agreements that parties reached during negotiations also count as part of the contract? What is precluded from inclusion in theagreement?

Doesn't preclude evidence that attacks validity of contract. (formation, conditions precedent, CAN'T USE for Conditions

subsequent)

RESTATEMENT:

(1) Was the agreement an integration? RS 209(1) and (2)

Integration: a writing or writings constituting a final expression of one or more terms of an agreement. 209(2) says this

is determined by the court.

(2) Is it partial or complete? RS 210



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COMPLETE:

No contradicting (RS. 213(1)) or supplementing (RS 213(2))

Explaining is OK (can argue what you meant by the words -- can bring in other documents to show prior meanings)

(RS 214(c))

Parol vidence about formation OR enforceability issues is OK(RS 214(d))

Guidance as to Separate Kx's in OK

PARTIAL:

No contradicting

No supplementing is OK **different!!!(Gianni could bring in supplemental right to sell soft drinks)

Explaining is OK

Parol evidence about formation or enforceability issues is OK

Evidence as to Separate Kx's is OK

(3) What is the status of the parol evidence?

Contradicts? RS 213(1)

Supplements? RS 213(2)

Explains? 214(c)

Relates to formation or enforceability defenses?

Relates to defendants separation Kx?

UCC: 2-202 (codifies the restatement)

Evidence maybe explained or supplemented. It looks like the UCC says that you can supplement even with a complete integration, although the case law seems to come

out the same as the restatements.

CASES:

Gianni Rule: You only look at the words of the document to decide if its partial or complete. No evidence at that point.

Traynor Approach: Look at all the evidence first and then decide whether or not to allow it. Traynor upholds that you can

always introduce parol evidence in order toexplain the terms of the contract [p.562]. (From MASTERSON V. SINE, 436P.2d 561 [p.560]

CASES:

Bollinger v.Central Penn. Quarry Strippling and Construction Co. [p.567]

Agreement to use land to place gravel while working on the road. Oral agreement to replace topsoil. It was not in Kx,

BUT every other property owners Kx did include it.

KEY WAYS To get around PAROL EVIDENCE RULE: (1) written agreements only a partial integration and I want to supplement it

(2) complete integration and I only want to explain it

(3) separate contract

(4) reform the agreement on the basis of mutual mistake

(5) unconscionability

MERGER CLAUSESsee the significance of merger clauses below.

MERGER CLAUSES

Most courts will consider it a complete integration w/o question. Although, it is not always determinative because one party can

claim that they did not see this in fine print at the back of the contract. However, it is highly probative evidence that the intentwas to preclude any prior agreements.

ARGUMENT: Enforceability defenses -- one party tells the other there are other terms and doesn't mention that there is a

merger closeyou can attack it as an unconscionable abuse of the bargaining process which would allow supplementation

COLLATERAL AGREEMENTS

(Mentioned before -- seller promises to remove unsightly buildings when brought property, they argue that they are separate

deals, but the court found for the seller.)



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For evidence of a contemporaneous oral agreement to be admissible (1) the agreement must in form be a collateral one; (2) it

must not contradict express or implied provisions of the written contract; (3) it must be one that the parties would not ordinarilybe expected to embody in the writing.

So evidence is allowed if similarly situation parties would not ordinarily be expected to include it in the written instrument.

Evidence is not allowed if one would ordinarily expect the type of term to be included in the written integration.

B. Subsequent Modifications of Contracts RS. 89 Classical doctrines: the R.2d S. 73 pre-existing duty rule limitations on the enforceability of contractual modifications

Modern doctrines: the R.2d S. 89 position, and UCC S. 2-209(1)

RESTATEMENT: Section 89:

Broader -- you make a gratuitous promise and then revoke it before they have a chance to rely on it. Here, it is broader -

the courts will enforce it even before reliance under 89(a).

89(c). Even if you have reliance, you can modify that contract to the extent that justice requires. But, it has to be a

material change.

THIS IS LIKE S 90.

NOTE: Most courts only go as far as S 89, not UCC.

COMMON LAW: The most recent modification trumps for subsequent oral modification.

UCC 2-209:

2-209(1): no consideration needed to be binding.

2-209(2): Between merchants Rule: If a merchant and non-merchant, the clause has to be a separate form or evidence

that they showed them what the clause meant. If its two merchants, the clause can be buried in the fine print.

2-209(3): Look to 2-201(1) You have to satisfy the statute of frauds.

2-209(4): If you agree to modify even though you have a no oral modification clause, you can still waive your rights to

written modifications (and allow oral modifications).

MODIFICATION BY CONDUCT: By not complaining about the first shipment, then you have waived your

rights. So, advise clients to send a letter of complaint.

2-209(5): You can retract the waiver if you do it fast enough by reasonable notification unless the retraction would be

unjust.

Effects of no oral Modification clause

Clause trying to limit modifications unless signed by both parties and in writing.

Precludes oral modifications and modifications by conduct.

Parties trying to put own SOF into the contract.

1. Unenforceability at Common Law

a. Court will often ignore these clauses.i. Some courts will allow the clause to hold up unless someone relied on the promise, but most courts just

outright ignore them.b. Rationale:

i. No matter what you and the other party agree to yesterday or how solid the commitment, if both of youwant to change it you can change the rules today. Court basically defers to last word. In essence your oralmodification acts as voiding the no oral modification clause.

ii. Fear that these clauses could be used abusively. Put them in fine print so other party doesn't see, and thenyou make all these crazy promises that you know you don't have to fulfill.

1. No Oral modification clause under UCC Section 2-209(2) with Section 2-209(4) and Section 2-209(5)a. 2-209(1):

i. Agreement modifying a contract within contract needs no consideration to be modified. Initially forminga contract requires it. Once you are there a mere gratuitous promise will be a modification that is valid.

b. 2-209(2) says:

i. If you put one of these clauses in the contract, it is effective.

ii. Merchant to Merchant If merchant enters into contract with non-merchant he may take advantage of theguy, so require merchant to get special signature by non-merchant to acknowledging clause.

iii. This doesn't apply to merchant to merchant.iv. What about two non-merchants: Doesn't do anything.

a. 2-209(4) and (5)

i. Kind of undid what they did in 2-209(2)



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ii. 2-209(4)

1. You have contract with oral modification clause. After you enter into that contract, one of theparties contacts other and offers to orally modify and other says ok, so they orally modify it.

2. "Even though there is oral modification clause, if someone approaches you with one, and you playalong with it, you have waive your rights to invoke no oral modification clause."

b. Need to make it clear in your modification that this agreement is intended to leave in force all previous agreementsin the previous contract.

c. Comprehensive modifications are dangerous, and can be seen as complete integration and wipe out old terms you

didn't intend to wipe form the deal. Last agreement gets parol evidence protections. Not the previous one.

INTERPLAY OF CONTRACTUAL MODIFICATION WITH PAROL EVIDENCE RULE: If the modification(s) are big

enough, you can argue that it is a new final agreement if the new agreement is an attempt to cover everything.

C. Interpreting Contract Language: Ambiguous Contracts (1) Vagueness:

Ex. "Large load of firewood," a color

(2) Ambiguity of Term

(3) Ambiguity of Syntax

(4) Gaps in Coverage

Restatements SS 201-204 (fixing a misunderstanding, instead of mutual mistake)

201: Whose Meaning Prevails

201(1): If two parties have their own weird, private understanding, then we allow that (NOT a reasonable person

standard, we defer to the subjective minds of the parties.) Ex. They contract for "white" meaning "black." The courtsuphold it (but usually in ct. they have diff meanings). Courts dont like this.

201(2): Who could've seen it coming (trying to stay quiet rather than speaking up)? -- If you are the one in the position

to see it coming, then the other guy gets his meaning.

(b)when nobody knows, but one party should have known/ in a better position to know, then that party does not get

their meaning.

201(3): Nobody's fault -- (except as stated in this section: both parties agree, or one party duped the other), then neither

party is bound by the terms.

202: Rules in Aid of Interpretation

202(1): Contract considered in context.

202(2): "Writing is interpreted as a whole" --- you can look at other sections of the contract for definitions or clues tothe meaning.

202(3): Assume that words are being used in the usual way, unless there is a specific term defined. Technical terms are

given that interpretation for that business.

202(4): One way to understand what the words mean is to look at their conduct to help determine what they meant by

the words. If you have a contract that has repeated occasions for performance (in the course of performance) -- if oneparty is acting a certain way and the other party does not complain, then you interpret the language to make that ok (i.e.anything that is being done in a harmonious way ought to be part of the Kx.)

203: Standards of Preference in Interpretation

203(a): Interpret the language to have reasonable, lawful meanings.

203(b): "Express terms" are at the top of hierarchy. So, if in one part of the contract the parties talk about rights and

duties and another part they talk broadly and generally, then the more specific terms govern the broader terms.

Hierarchy of interpretive guidance: (1) expressly in the contract,

(2) what their conduct in saying (course of performance),

(3) earlier performance in other contract (course of dealing),

(4) other people in the business (usages of trade))

204: Supplying an Omitted Essential Term

When there is a gap?? Parties never thought/discuss it. If there is a gap that is not so big that it fails for indefiniteness,

then you fill it in a reasonable way. Look at the conduct of the parties and try to come up with interpretations that fitwhat you see.

CASES:



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Chicken (UOT) , ship (Nobodys fault), coin with woman (better position to know becaue he doesnt speak language)

PLAIN MEANING RULE (Cousin to Parol Evidence Rule)

Classical formulation: The classical rule is a lot like the Gianni rule -- very preclusive, literalist kind of rule. WHAT IS IT?

Court looks at the contract and the meaning seems nice and clear, then it bars the use of any intrinsic evidence. (Unlike parolevidence rule where it doesn't apply, you cannot even explain here.)

GENERAL RULE: If the contract is "plain on its face", then you CANNOT bring in any more evidence. Don't probe into the

intent of the parties even to explain.

CASES:

Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.: Modern Application [p.592]: Under Traynor, no plainmeaning rule. KEY: **The test of admissibility of extrinsic evidenceis whether the offered evidence is relevant to prove ameaning to which the language of the instrument is reasonably susceptible. [p.593] (He overrules the plain meaning rule.)

Note 3, page 596: Judge Alex Kozinski (9th Cir.) opinion: economy of resources approach. (If we go with Traynor's

position, that opens the door to huge, expensive disputes.) It is not worth the trouble and unpredictability.

Problem, page 598:Steuart v. McChesney (Pa. 1982): Tied market value to county assessment value and the county never

updated the records. Court used the plain meaning rule!!

UCC: INTERPRETIVE HIERARCHY, UCC 1-205, 2-208

Bulleted list in RS 203

(1) Express Terms UCC 2-208(2) & 1-205(4)

(2) Course of Performance: 2-208(1)(definition)

2-208(1): comes close to a definition. -- if you perform in a certain way and the other party acquiesces or doesn't complain,only look at the conduct under this contract to help understand the deal you thought you had.

NOTE: This section has been repealed in 29 states that as of July 13, 2007, have enacted the 2001 text of Article 1. [p.42]

For course of performance, you need repeated occasions (at least 2).

(3) Course of Dealing: 1-205(1)

1-205(1) definition: a sequence of previous conduct between the parties to a particular transaction which is fairly to beregarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

Prior contract show course of dealing. The contracts need to be similar. One prior contract will not be enough need manyor one contract for several performances.

(4) Usage of Trade

1-205(2): any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justifyan expectation that it will be observed with respect to the transaction in question.

(5) All other interpretative Guidance

RESTATEMENT: 202, 203(b) [list]

GAP FILLERS

Gap-filling: implied-in-fact and implied-in-law terms distinguished, mandatory implied terms

RS S 204: If the gap is too big, then there is no contract or you have to go to quasi contract. (Courts do not like to do this.)

Parties prefer to work it out.

"Implied-In-Fact" Gap Fillers

Attempt to determine the actual intentions of the parties. Gap will be filled with the court's interpretation of your

intentions (not necessarily what are good rules of lawjust what the parties intended). (This is your contract and you

did not make yourself clear, but we will look to the spirit of the contract and stretch the language of what you did say tocover what you did not.)

"Implied-In-Law" Gap Fillers

As a matter of law, we will apply a term because it seems like a good, fair term for parties. Based on general social

policies

Mandatory Implied Terms: UCC gap-fillers: SS. 1-203, 2-306(2), 2-314, 2-315

UCC:

1-203 Imply Obligation of Good Faith



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2-306(2): Imply Best Efforts. You enter into an exclusive dealings contract, and then you do nothing. The

contract never says that I have to work hard to get you endorsement (sititng by the pool). This provisionprovides an implied duty that you will use your best efforts.

2-314: Implied Warranty. (unless there is another deal, i.e. as-is, then these are the warranties that are implied)

2-315: Implied Warranty. (unless there is another deal, i.e. as-is, then these are the warranties that are implied)

CASES:

Eastern Air Lines, Inc. v. Gulf Oil Corporation case; UCC SS. 1-203, 1-201(19), 2-103(9)(b), 2-306(1)

NOTE: you have a duty of good faith at all times. It is an override (as well as gap filler).

2-103(b): Special duty for merchants. Have to be honest in fact and observe reasonable commercial standards. Muchtougher standard than merely being honest. (Here, they are both merchants, clearly.)

This is a requirements contract where eastern agrees to buy all oil from places from airports with Gulf Stations. Gulf

agrees to always have fuel for them there. (Standard industrial req't contract).

Under 2-306: the requirements need to be within the reasonable range that everyone is expecting.

PROBLEM: Gulf says you are acting in bad faith (manipulating the terms in an unreasonable, unfair way).

STATUE ANALYSIS:

Eastern has duty of good faith. Gulf says its honest, but unreasonable (under merchant standard.)

How to decide if fuel freighting is in line with reasonable commercial standards? Courts look at course of

performance, and course of past performances/ conduct, usage of trade. Then, the courts look at the hierarchy torank those sources of info. Court looks: (1) no express terms (2) you never complained in the Course ofPerformance (3) never complaining in the course of conduct (4) everyone does this in the usage of trade ---

everything points to Eastern Airlines' win. (Easy case.) [More interesting case -- usage of trade says it is bad faith,but the course of performance is in line with what they should do.]

Nanakuli case (see also the handout that I have given you here) [p.651]

FACTS: Nanakuli has a requirements contract to buy all the asphalt from Shell instead of other companies and Shell has

to supply it all. Shell's contract price is the posted-price.

Nanakuli claim: Nanakuli makes a bid to the government, and when they figure their bid they make a bid based on

asphalt price. Then, after the contract the asphalt price goes up, then they have to eat the rise in $. The industry hasprice-protection: whatever the price was the day that you committed to the state contract, that will be the price that wecommit to. (But, there is nothing in the contract that says this.) [Should Kx be interpreted to have an exception to theposted-price.]

Shell's Claim: Express Terms. The contract does not expressly include a price protection term.

ISSUE: Should "posted price" be interpreted to include "price-protection"?

ANALYSIS:

Nanakuli Theories: (1) price protection is in the contract because it is implied in fact from the intent of the parties.

(2) price protection is included as a matter of law (public policy).

Theory 1: Implied in fact./ Trade Usage Argument. (Parties legitimately intended to include price

protection)

TRADE USAGE:

Shell's Argument: Everything depends on how you define the trade. The trade we are in is just asphalt

trade business. Who is in the asphalt business (just Shell and Gulf.) They want to define it as twoguys and we do not give it, so half the people don't do it, it can't be trade usage.

Nanakuli claims the trade is people who sell rocks, pebbles, etc. (Therefore, 19 out of 20 give price

protection and Shell is the only one that doesn't). **Court sides with Nanakuli.

Nanakuli: Trade usage is implicitly implied in the Kx (everyone knows this.) If you did not intend to

keep it, then you would've said something.

COURSE OF PERFORMANCE: Nanakuli says you always gave us price protection before. Shell says that it was okay and we were

being nice guys when it was a small deal, but not on a big deal like this. Q: one time waivers orcourse of performance.

Shell did it before AND did it during the contract.

[EXPRESS TERMS: argument doesn't work. It is a waiver or modification. ]

Court looked to 1-205(3): Default rule: when express terms contradict course of performance, then

express terms control. BUT 1-205(3): Posted-price is only qualifying the term. It is not a contradict.The statute says you can qualify the term (you can argue that it may change the language some, but itis a minor qualification.)



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Theory 2: Implied in law

Shell has a duty to act in good faith in accordance with reasonable standards because they are a merchant.

Not interpreting "posted price" as including a limitation to price protection is unreasonable. Therefore,regardless of intention, you are out of line with the rest of the industry, so you lose despite intent. [Ct. App.said the jury could've embraced this theory.

III. JUSTIFIED NON-PERFORMANCE:

Doctrine of Conditions and Related IssuesA. Express, Implied-in-Fact, and Constructive Conditions GENERAL EXPLANATION: When conditions arise:

(1) Express conditions. I promise to do x if something occurs. [Old term: dependent covenants]

(2) Implied in fact Conditions. Contractual language is not clear, but looking at the context and the evidence of intent of the

parties, then you can imply those conditions.

(3) Implied in Law Conditions. There is nothing in the contract making it conditional, no evidence of intent, but the court

feels as a matter of law (based on social policies) that it should be in the contract.

Rationale:

Conditions As Tool of Risk Allocation Between Parties: (1) It allows you to shift the risk of certain events to other parties.

(2) Allows parties to have flexibility to allow for circumstances where they want to perform the obligation. Restatement:

RS 225(1): Performance of a duty subject to a condition cannot become due unless the condition occurs or its non-

occurrence under a contract become due.

Conditions defined in RS 224: A condition is an event, not certain to occur, which must occur, unless its non-

occurrence is excused, before performance under a contract becomes due.

Typical Language that Creates Conditional Duties:

I promise to do x for you on condition that something first occur.

I promise to do x if something occurs.

I promise to do x subject to something else occurring.

HYPOTHETICALS:

Q1: "A promises to pay B $500 in exchange for B's promise to paint A's house, and A's promise is made on condition that B

paint A's house on or before April 1."

Expressly conditional (on condition that) [dependent covenant]

Note: If A sues B for breach on April 2nd, B has not breached the contract to paint the house. B has only breached the

condition for payment. B only breaches if he never paints the house. If B paints it later than April 1st, then A doesnthave to pay, but B can sue under quasi-contract for unjust enrichment.

Q2: "A promise to repair B's car. In exchange, B promises to mow A's lawn. Each party's obligations are unconditional."

Unconditional [independent covenant]

Any party can sue for damages if someone breaches, but, because its unconditional, all parties still have to perform.

Remedy, therefore, is only in court.

Asymmetrical Relationships.

Q3: "A promises to repair B's car. In exchange, B promises to mow A's lawn. Each party's obligations are conditional

upon the party complying with his obligations."

Conditional [dependent covenant] If the other party does not perform, then you can sue AND you have the right to terminate your own performance. Who

has to perform first, though, is unclear.

Q4: "A promises to pay B $500 in exchange for B's promise to paint A's house on or before April 1st"

Not Express Conditions, so rely on implied in fact conditions.

How do the courts determine it when there is little/poor evidence?

DEFAULT RULE (CONSTRUCTIVE CONDITIONS OF EXCHANGE/ KINGSTON DOCTRINE): Unless there

is evidence to the contrary, you can presume a conditional relationship. (Court usually decide as a matter of law,that they will regard it as conditional and assume that each party intend to say I promise to dox on the condition that



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you do x.) *NOTE: Kingston Doctrine has a substantial compliance standard. (Express conditions are strictcompliance)

Typically, for gap filling, courts want to imply that there is a conditional relationship.

B. Substantial Performance/Material Breach Standard (Kingston Doctrine) KINGSTON DOCTRINE RS. 237-238

Substantial Compliance Standard

If there is substantial performance (from no breach to non-material breach), then you have to perform, but you can sue for the

little breaches. If there is less than substantial performance (material breach to total breach), then you do not have to perform, and you may

sue.

Potential Problems: One party claims the other breached, but the courts determine that it is non-material.

EXCEPTIONS:

Time Conditions: Even if they are express, the court will apply a substantial compliance standard unless you can pove there

is some reason why the date is essential.

Construction Contracts: Even if there a express condition that it follows the blueprints perfectly, this is impossible, so the

court applies a substantial compliance standard (Plante v. Jacobs, Jacob v. Youngs)

No breach non-material breach material breach total Breach______________________________________________________________________________________________________

Full Performance Complete Non-Performance

Substantial Performance Less than Substantial PerformanceBreach does not justify non-performance Breach Does Justify Non-Performance

Breach justifies a lawsuit Breach Justifies a Lawsuit

RESTATMENT: 237, 238

237: Kingston Doctrine: A condition of your obligations is that the other guy does all his obligations. If he has fallen

materially short, you can call off the deal. Performance can be terminated if the other person fall materially short.

238: Concurrent Conditions/ Simultaneous Exchange

Deals with a concurrent condition. (Everything is being exchanged at one time.) If one person is not ready to doeverything right then, then you don't have to do what you are supposed to do.

UCC:

BUYER AND SELLER CONDITIONS UCC: 2-507, 2-511

2-507: The buyer payment is conditional on the seller's delivery of the goods. *unless otherwise agreed in the Kx.

2-511: The seller's delivery is conditional on the buyer's payment. *unless otherwise agreed in the Kx

PERFECT TENDER RULE:

UCC 2-601: (seems out of place in the UCC). Provides for a hair trigger rule for rejecting goods. The buyer may (a)reject the whole (b) accept the whole (c) accept any commercial unit or units and reject the rest.

THE "CURE" PROVISION: Go to 2-508

(1): BEFORE THE DEADLINE: Seller has to give the buyer a chance to fix the goods before the deadline is up.The seller doesn't have to fix it, but the buyer has to give him the chance to. [No mailbox rule. It has to be therebefore the deadline.]

(2) AFTER THE DEADLINE: You get more time if (a) acting in good faith/trying to perform, then you get

"reasonable" time. It is tied to when the buyer needs the item. It can't inconvenience the buyer more than a little.

2-612: imposes a divisibility. For installment contracts, we will treat them as separate contracts and imposes a

divisibility by statute rather than giving the judges discretion. *substantial compliance standard/

Installment contract: a contract with multiple shipments and multiple payments.

2-612(3): If it is the type of contract that cannot be divided, then this statute doesn't apply.

2-612(2): Imposes a substantial compliance standard. If the seller does not substantially comply, then the buyerMAY reject it.

2-612(1): If not material and it can be divided, then the statute imposes a divisibility standard.

NOTE ON TEST: the UCC substitutes the Kingston doctrine. For UCC issues, you have to apply the UCC

statutes. (Points docked for using the Kingston Doctrine for UCC problems)



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Condition Precedent and Conditions Subsequent

Conditions precedent: a conditions that when it occurs, triggers a duty

Conditions subsequent: duty terminating events. Once that condition is met, then there is not more duty.

CASES:

Luttinger [p.665]: Conditons in contract (1) buyer gets financing (2) defendant gets the rest of the money. If thew buyer

doesnt get financing, then the defendant has to return the deposit.

Here, plaintiff did satisfy the duty of good faith and due diligence requirement and therefore, did not breach (even

though he did not get the loan).

DETERMINING MATERIAL BREACH

Restatements

241: Circumstances Significant in Determining a Failure is Material

(a) extent to which the injured party will be deprived of the benefit which he reasonably expected (How big in

comparison to what guy wanted?)

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be

deprived (Other remedies?)

(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture (how screwed will guy be

that has failed to fully perform?)

(d) the likelihood that the party failing to performance or to offer to perform will cure his failure, taking account of all

the circumstances including any reasonable assurances. (considering everything, is guy likely to fix the breach andcome through?)

(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with the standard of

good faith and fair dealing *willfulness is important!!

UCC:

UCC 2-609: Forcing a material breach with a letter seeking declaration to perform

If the other person is making you nervous (signals from others, non-material breach -- think they may not perform), you

can send them a written letter saying they need to declare themselves "will you perform or not?"

If they do not reply in 30 days after sending the letter, then you can consider it a material breach.

You can say, until I hear from you, I will not pay you. You can suspend your performance.

SATISFACTION CONDITIONS

Three tests: (1) objective (2) subjective (3) middle ground

Type of test depends on the nature of the performance.

Objective: Reasonable Person Standard (painting a barn)

Subjective: That Specific Persons Standard (art)

Middle Ground: Good Faith Standard

RESTATEMENT: 228

There is a presumption for objective criteria standard, but it can be overcome by clear contractual language.

For matters suitable to objective assessment, there is a reasonable person standard.

For matters suitable for subjective assessment, there is a good faith standard.

RESTATEMENT: 229: Excuse of a Condition to Avoid Forfeiture

Courts will not give a right to terminate performance even if its an express condition if it is too harsh on the other party.

Techniques to Get Around Forfeitures:

(1) Read it as not conditional language when possible.

When they see where the doctrine of conditions is heading, they can read it as not being conditional language. Read it as

unconditionallanguage. (You can only sue for the difference.)

(2) Read contract as imposing a conditional relationship, but interpret it in a way that the condition has already been

satisfied. (Interpret the scope of the conditions differently)

Ex. Satisfaction conditions: "satisfied" means a reasonable person has been satisfied, and he would be.



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(3) For implied in law conditions, the Kingston Doctrine says close is good enough. So, if you can show a non-material

shortcoming, then that would avoid the forfeitures.

(4) For time/ construction Kx, courts have built in the substantial compliance standard (for being a little late or a little

off of the condition).

(5) Hair Trigger Waiver Doctrine. If my performance is not enough to satisfy the condition, but you did not terminate your

performance immediately, then you have waived your rights to terminate your performance. (Wasting resources).

Courts usually only do this with minor conditions.

(6) Finding an earlier breach.

Ex. Luttinger case -- the court could've said you breach your obligation of due diligence up front, so you alreadybreached.

(7) Divisibility. Divide one contract up into numerous contracts. Pair up the performances.

Ex. You can have a contract with duties between both parties. You can argue that if the reciprocal duty for A was not

performed by B. My conditions are impliedly connected

BUTunder divisibility, the court will pair up the performances and instead of one contract, we have many contracts.

Ex. One sale of good contract and five shipping contracts.

(8) (SEE ABOVE) RS. 229 --"court may excuse the non-occurrence of a condition" if that would cause disproportionate

forfeiture.

Courts will not give right to walk away even with express conditions if the results are too harsh on the other party.

(9) Quasi contract.

UCC: 1-203 Obligation of Good Faith

1-201(19) defines good faith.

Good faith implies reasonable commercial standards between merchants. (????)

Objective standard are built into the UCC.

C. Divisibility Issues

REMEMBER: Divide one contract up into numerous contracts. Pair up the performances.

RESTATMENT

R.2d S. 240: Part Performance As Agreed Equivalents

UCC

2-612: Installment Contract Breach

CASES:

Johnstown

Penn. Exchange Bank Case: Limitations of Divisibility. The court will do a fact sensitive inquiry to determine if it makes

sense to divide up the performances.

K&G Construction Co. v. Harris [p.727]: The contract calls for progress payments. You can argue that it is many

contracts. Contract #1, send in, pay on the 10th. Contract #2, etc. etc. Could it be divided up into a series of contracts?Therefore, the SC has done everything up until then. August 10th links back to the other time. SO, he'd only have to not payon Sept. 10th. (It may not make sense to divide it up because it is one big job, but he can argue it for paying.)

D. Waiver Issues

You waive your rights if you do not do it quick enough. Examples:

Minors

K & G Construction: SC could say, when I ran the bulldozer into the wall, that was unworkmanlike performance. You

could've told me to stop then and call the deal off. HOWEVER, you allowed me to keep working for 2 months, stringingsomeone along is like a waiver. (Pretty good argument).

Hair Trigger Waiver Doctrine: If my performance is not enough to satisfy the condition, but the other party does not

terminate performance immediately, then they have waived their rights to terminate performance.

Anticipatory Repudiation Waiver: UCC 2-611:



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E. Anticipatory Repudiation UCC:

2-610: Anticipatory Repudiation

If the anticipated breach willsubstantially impairthe contract. The aggrieved party can:

(a) wait a commercially reasonably time for performance

(b) resort to a remedy (even though he said hed wait)

(c) suspend performance as justified non-performance

Its a catch 22: if you suspend performance to soon may be sued if court finds that other buys repudiation wasn't material. But if

you wait too long, then you may waive your right to justified non-performance.

IF YOU DONT KNOW if they will breach, you can ask for Adequate Assurances.

UCC 2-609: You can demand in writing adequate assurance and suspend your performance for reasonably time. The

other party has 30 days to reply.

RS. 253(1): same as 2-609 [RS.250: Definition of Repudiation]

R250: When a statement by the obligor indicates to the oblige that he will commit a breach prior to the date of

performance, the repudiation acts as a breach, and the oblige can sue for damages. (to justify non-performance the

possible breach must be material)

If you want to retract your repudiation,

RS. 256: you can as long as the other party has not materially relied on that repudiation.

UCC 2-611: you can retract until the other party changes their position.

NOTE: you dont have to tell them that you relied, it is the repudiating partys duty to determine if you relied.

COMMON LAW:a. 253(1)

Where guy repudiates a duty, this alone gives rise to a claim to damages for a total breach.

a. 253(2)

One parties repudiation discharges other parties performing duties. (if it is non-material breach then you

can't stop performance)

Duty of good faith is an implied conditions, so when it is breached the linkage between this duty and the

other guys duty is not an express relationship. SO HAS TO BE MATERIAL.

Breach by repudiation has to be proven to be material to justify non-performance.

What does it take for it to be material?

If you repudiate a duty, that breach is a material if you breached a duty itself, if not paying you the money I owe you

would be material then repudiating that duty would be material.

b. Exception when you cannot sue immediately on repudiation:1. When you are in a contract with someone and you have done everything and the other guy has doneeverything except for a payment, and then he calls you up and repudiates, you can't sue right away; you have towait until he actually misses the payment.2. If he owes you more than just single payment then you can, but if it is a series of payments and that is allthen you have to wait till he actually breaches.3. Crespi's overview:

a. Awkward exception: landlord tenant relationship like me, I call and say I'm broke and going to not payanymore, normally landlord could sue but now he has to wait till I miss each payment to sue. You wouldrather sue right now for all the money.

b. Why don't they allow you to sue for all damages?i. They want to prevent a windfall where other guy comes out ahead.

4. Pretty narrow exception and most people contract around it by putting acceleration clause.c. 2-610: No exception under the UCC.

F. Prevention of Performance General Rule: There is an implied duty of good faith. That includes (1) Duty to Cooperate (2) Duty to Not interfere with the

other party.

QUESTIONS:

What if you prevent performance? (See Peck you cannot prevent the performance)

What if you prevent performance as a practical matter?

What if you merely hinder performance? (See Iron Trade)

Rule: Hindering is OK, so long as you do not prevent performance



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Does the severity of hindering matter?

Does your knowledge and/or motive matter?

Peck (full prevention)

Essentially made it impossible for him to perform, and then sued him for breach. If you do this then it is justifiable non-

performance.

Full prevention will render non-performance justified.

How close to that can you come? (hinder)

Iron Trade (hindering)

Doesn't render their performance impossible but just makes it difficult. How far can you go?

Hindered performance enough to where guy was now going to lose money.

In this case, they didn't even know they were hindering him. Had no intent; weren't aware; had no motive.

Court said that his non-performance was not justified. (too bad)

If your motives were to enter into a contract with someone to hurt them then the court would likely say that that is

interference that would justify non-performance.

A party may not breach a contract simply because it is difficult for him/her to perform his obligations on the contract .

G. Assurance of Performance (Adequate Assurances Doctrine)

IF YOU DONT KNOW if they will breach, you can ask for Adequate Assurances. NOTE: There must be reasonable grounds for insecurity. THEN

UCC 2-609: You can demand in writing adequate assurance and suspend your performance for reasonably time. The other

party has 30 days to reply.

UCC 2-610: have your lawsuit rights, but to terminate performance repudiation has to be material.

Can retract repudiation up until point that other party relies.

RS. 251 : when there is reasonable grounds that obligor will commit a breach that would allow for the obligee to sue for

damages, the obligee may demand adequate assurances.

If the obligor fails to provide assurance within reasonable time, the obligee can terminate his performance and sue for

breach. (to terminate performance the potential breach must be material)

What are Reasonable Grounds for Insecurity?

If you demand to early, then can be in trouble for violating the duty of good faith.

CASE: Brookhaven Case.

What are adequate assurances?

Be careful not to demand too much.

How far beyond contractual assurances can you go?

1. If there are no reasonable grounds for insecurity the other guy can then ignore it and also he may sue you for breachof duty of good faith for making trouble.1. 2-609(2) (between merchants)

a. Determined according to commercial standards in that industry.1. How much can you demand?

a. Have to find a sweet spot where you get additional assurance that isn't over the top yet more than originalcontract.a. It is clear that if you demand too much and the guy doesn't agree then that is not a repudiation. Carefully

measure a demand.1. Pittsburgh Des Moine Steel case:

a. Didn't have reasonable groundsa. Or; asked for too mucha. Therefore non-performance was not justified

1. What would give you enough assurance that would also make them feel comfortable?

IV. EXCUSED NON-PERFORMANCEA. IMPOSSIBILITY DEFENSE



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It has to be really impossible to do. (The item has to be destroyed and irreplaceable.)

UCC: Modern UCC S. 2-613 application

This allows for the excuse of the seller. ONLY a default rule. A buyer can put it in the contract that the seller has to replace

the goods you can contract around it.

These goods already exists -- they can be identified.

The goods are destroyed w/o fault of either party.

Then, the seller is off the hook for delivering the goods.

NOTE: There is no excuse for the buyers (i.e. someone embezzles his $$)doesn't seem like there is a parallel for buyers

losing their money.

RESTATEMENTS: RS.2d 262-264

B. IMPRACTICABILITY DEFENSE Judge Wrights 3-step analytical framework:

1) Expected or unexpected contingency?

It has to be unexpected. (What percent chance would be too much? Crespi thinks that it is likely enough to be a reallypossibility, then you need way, way less than 50% possibility.)

2) Risk allocated to party seeking excuse?

Foreseeability or even recognition of a risk does not necessarily prove its allocation [p.809]. We want to see more than

evidence that you know about the risk, but that you've accepted that risk. Just show that you werent allocated the risk.

3) Performance rendered commercially impracticable?

"To justify relief, there must be more of a variation between expected cost and the cost of performing by an availablealternative than is present in this case, where the promisor can legitimately be presumed to have accepted some degree ofabnormal risk and where impracticability is urged on the basis of added expense alone." [p.810]

RESTATEMENT:

261: Discharge by Supervening Impracticability

Very very similar to 2-615 to tract it more closely.

Where, after a contract is made, a party's performance is made impracticable without his fault. Etc.

UCC 2-615: Excuse by Failure of Presupposed Conditions.

Same elements

Intro: Except so far as a seller may have assumed a greater obligation(allocation)

(a) if performance as agreed has been made impracticable by the occurrence of a contingency

Official Comments:

(1) Uses "foreseen" instead of Wright's "unexpected": we need to look at why the prices went up and how that

changed the world.

(8) you can have an express risk allocation in the contract.

(Q: What if the impracticability was temporary? You cannot do it now w/o extreme costs, or you could do it in 2

weeks when the Suez Canal reopens. Courts will apply the excuse defense for a period of time or divisibilityreadinglike two separate contract where the first three were ok, but the last two have a temporary excuse defense

for the two weeks. Use divisibility to make NOT ALL the contract impracticable. TEMPORARY/ PARTIALIMPRACTIBILITY.)

C. FRUSTRATION OF PURPOSE DEFENSE ANALYSIS:

1) Expected or unexpected contingency?

1. If you did not know and you couldnt know, then well treat your supervening knowledge like a supervening event.

2) Risk allocated to party seeking excuse?

3) Was theprincipalpurpose actually/substantially frustrated?

1. Dont have to show all purposes frustrated, just the main one and it must be substantially frustrated.



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Elements required to show frustration of purpose

a) Supervening act or event leading to the frustration;b) At the time of entering into the contract the parties did not reasonably foresee the act or event occurring.c) Risk not allocated to party seeking excuse

1. Economic efficiency/cost avoider.2. Go back in see what the parties would have done had they put it in contract

d) Purpose of the contract has been completely or almost completely destroyed by this act or event; ande) The purpose of the contract was realized by both parties at the time of making the contract.

RESTATEMENT 265: Discharging by Supervening Frustration (principle purpose language in there) UCC: Doesnt have it. Go to 1-103 to RS.2d 265

Excuse defenses seem to be implied in law conditions (supervening event is condition).

Broader Risk-Allocation issues:

Risk allocation issues: What if they thought about it, but no one talked about it because they thought it wouldn't happen, so sligh

a chance?

Approach 1: Never. You have to take care of putting in the contract terms you wanted.

Approach 2: Always. People aren't going to put in remote conditions. How can you discuss floods, wars, etc. Let's just say

we will excuse it every time.

Approach 3: Sometimes.

Consider the circumstances.

Do a balancing test.

Broader Risk Allocation issues for 3rd Approach: (1) Foreseeable? Rely on the foreseeability of the event. Just foreseeable enough that a reasonable person could think that

they may happen.

Problem: most things are foreseeable. So, if you deny the excuse based on foreseeability or reasonably foreseeability, it

would be close to never.

Unfair because, typically, it is foreseeable to both parties.

(2) Economic Efficiency/ Cheapest Cost Avoider?

Under this approach, risk is allocated to which of the two parties is in the better position to better prevent the event OR

who is in a better position to insure against it. (The cheapest cost avoider)

Rationale: two rational parties will try to minimize the cost and maximize the profit.

(3) AND FOR ANY DEFENSE: Optimal Default Rule Analysis

You want to replicate the hypothetical burden of the parties which would put the burdens of risk on the cheapest cost

avoider.

Consequences of Application of Excuse Doctrine: What rights and duties are created by an excuse defense?

For the excused party: Main consequences:

(1) No further duties for performance (you get to stop and it is not a breach of contractit is excused non-performance

for this supervening event. [NOTE: The excuse could be temporary instead of permanent)

(2) You are still liable for prior breaches.

(3) Has a quasi-contract claim for what you did up to the point when the event happened that excused the performance

after that.

For the other party:

(1) cannot sue for damages

(2) can terminate own performance. By justified non-performance doctrine.

(3) Has quasi-contract rights for all the things that have happened up until the supervening event.

BASIC IDEA: Parties have to settle up that value of what each did for the other guy before whatever happened.

GAP FILLING ISSUES

Ayres & Gertner

Why? Transaction costs

1) Information costs figuring out exactly what will happen, then

2) Negotiation costs contracting who will deal with what



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Not worth it to deal with the costs?

Common gaps:

Gaps in conditionality what happens if one party doesnt perform (independent or dependent

covenant) this is easy, but a lot of parties dont address thisGaps with regards to excuse defensesGaps as to remedies, because parties typically dont address breach

How to fill gaps:

1) go back to contract formation law if its too indefinite, theres no Kx clearly, you didnt

specify agreement enough this would make you put in the clauses (but this is soexpensive!)

2) fill in the gaps, but whats the proper role of judge?

a) retrospective focus focus on the two parties in dispute, general rules are for

legislators dont think about what incentive structures your decision is creating for

future parties this is the traditional view of the judiciary

b) like legislators how your ruling is going to influence future parties

Things to remember:

1) Parties can always figure this out themselves, so courts are a little more aggressive indeciding things, because those parties always have escape clause

1) Optimal default rule/hyptothetical bargaining rule approach fill in gaps with what they wouldhave put in had there been no transaction costs

So, what youre going to get is

Skinny Kx leave the rest to the courts if it comes up

UCC embraces this approach (its full of default rules) what would parties agree to?(generalization of this principle)*has some mandatory gap-fillers (good faith, etc.)

What would parties typically negotiate?Allocation of risk (a lot of gap-fillers deal with this)

2) Ayres Should courts fill gaps with tailored default rule or with untailored default rule (onethat sort of fits in most circumstances)

to create optimal incentives for perspective parties, then you obviously want tailored

Are there efficiencies created by judges filling gaps with something you know one/bothparties dont like?

Q: Does this mean tailored default rules, or untailored default rules? Which is more efficient in terms of facilitating low-costcontracting?

tailored are fairly expensive

If we pick an untailored default rule, which one do we pick? Its clearly a much cheaper rule

occasionally use a tailored rule?

Kingston doctrine untailored

Q: Might a penalty default rule actually create more efficient incentives for prospective contracting parties, under somecircumstances?

Is it worth the cost of forcing all parties to put terms in?



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V. REMEDIES FOR BREACH OF CONTRACT

Expectation Damages: look to see where party would have been had other party not breachedand look where he is because of the breach, and his expectation damages will be the difference.

must subtract avoided costs: R 350(1) one cannot recover damages that could have beenavoided without undue risk, cost, or humiliation.

Foreseeability: R 351(1) damages are not recoverable for loss that the breaching party didnot have reason to foresee as a probable result of the breach when the contract was made.

Uncertainty: R 352 damages are not recoverable for loss beyond that the evidencepermits to be established with reasonable certainty.

Reliance Damages:Goal: protecting the promisees reliance attempt to put the party back in the position in whichthat party would have been had the contract not been made.

1) essential reliance preparation for and performance under the contract in question

2) incidental reliance preparations for collateral transactions that a party plans to carry outwhen the Kx is performed.

The reliance interest is usually smaller than the expectation interest, because, while theexpectation interest takes account of the injured partys lost profit as well as reliance, thereliance interest includes nothing for profit.

Reliance is usually supposed to cause fewer proof problems.

Restitution Damages:

Goal: the prevention of unjust enrichment attempt to put the party in breach back to where itwas had the Kx not been madeOrdinarily smaller than either the expectation or reliance interest

Punitive Damages:Some courts require it to be linked to a tort

Other courts are not that strict (there just needs to be poor behavior)

Why would you use one kind over another?As a p, you generally want expectation damages, because they are largerA lot of courts wont go higher than expectation dam,agesOne type of damages might be easier to prove (thats typically the only reason youd argue foranother type of damages)

--

R.2d 347expectation damages:Loss in value + any other loss, including incidental or consequential avoided cost

R.d2 349reliance damages:Alternative to 347 expenditures made in preparation or performance or in performance anyloss that the party in breach could prove the injured party would have suffered had the contractbeen performed (avoided cost?)

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