Pepperdine Law-Contracts Outline

1 Outline of Contracts II Prof. McDonald—Spring 2006 I. Defenses to Contract Enforcement—Public Policy Considerations (legislative & judicial) A. Legislation-PP embodies in certain laws and regulations *if a tort or crime, then PP per se and easily seen, no analysis needed 1. In General: a. Will k hurt society? Most often this deals w k or performance of k being a crime or tort. Sometimes can be for k that seems to be inconsistent w/legislation b. 2different ways of denying enforcement due to public policy: i. the entire contract ii. a part or term of the k will be taken out c. Courts have two principle concerns: i. enforcing of contracts that violate laws ii. society’s general interest in the enforcement of contracts (1) but people want to rely on ks (this is in competition) 2. Rstmt 178 Calls for a Balancing Approach-presumption of k enforcement, if k isn’t tort or crime 178(1) ask… a. is there legislation that addresses the lack of enforceability of k b. have to find that the public policy not to enforce K clearly outweighs the society interest in enforcing k (biased in favor or society’s interest) 178(2)-factors to consider the strength of enforcement for societ. int.: a. ask how strong the party’s expectation that a partic. K would be enforced…how clear k in violation of pp and regulations b. any forfeiture that would result if enforcement were denied: i. if k in violation of pp-no remedy no restitution ii. exception-restitution if party would suffer a disprop. forfeiture in relation to pp involved iii. society has a special interest in the k 178(3) factors in determining strength against public policy i. how strong is public policy embodies in particular law a. look @status of the law b. look 2 actual legislation ii. if you don’t enforce the k, will it have significant impact on the public policy trying to be enforced a. Bovard case-D signed a promissory note to buy company that made jewelry and drug paraphernalia. Then d failed to pay on it. Drug paraphernalia is not expressly against the law but is inconsistent w/law. 2. Contracts with Special Strong Presumptions of Enforceability 2 a. Licensing and Permitting Regulations i. Rest. 181-if trying to deny enforcement based on LorP: (1) did the licensing requirement have a regulatory purpose (for health or welfare of public rather than monetary purposes)…if no, k is good, if yes, look to b (2) interest in the enforcement of the promise is clearly outweighed by the pp behind the require. (if yes, go to normal 178 balancing analysis) b. Innocent Seller Exception i. merchant in no position to assess the position of the buyer, 2 exceptions where court won’t enforce k: (1) if a seller affirmatively aids in the improper purpose (2) seller knows improper use involves grave social harm B. Judicially Created Policy 1. Non-Compete Agreements-to keep from unduly restraining trade *usually to protect employer from employee opening similar business a. Restatement 187-188-based on reasonableness i. Is the k ancillary to a legitimate economic transaction? (1) if yes go on to next situation (2) naked restraint of trade is held to be unreason. ii. Does the P have a legitimate interest to protect? a. employer can protect the employee’s misappropriation & use of legit. business assets (1) trade secrets-something the business keeps as confidential & has economic value (2) customer good will-the relationships the employee gained while on the job iii. Rst. 188-Restrictions in non compete agreement are reasonable to protect legal interests? a. Do the restrictions seem to be unreasonably broad (1) nature of restriction (2) time & space b. Undue hardship on: (1) defendant or public interest b. Remedies for Non Compet Agreements i. Rule of Reasonableness: unless bad faith on the part of employer, the ct will enforce covenants not to compete that are reasonably necessary to protect employers interests and without imposing undue hardship on the employee when P interest is not adversely affected. (1) Hopper case-P was hired as a vet by D. D signed a concommpet agreement to not practice small animal medicine within 5 miles of the vet for 3 years. When vet heard she was starting her own 3 practice he reminded her of her NC and she said it didn’t mean anything and she started her own. 1. Takeaway: NC analysis a. Ancillary-YES employer wanted to protect business b. Leg. Interests to protect? YES customer lists, pricing techniques, etc. c. Restraints reasonable to protect interests? -YES i. TYPE-couldn’t practice small animal medicine but plenty of large animals to work on. ii. SCOPE was for 3 years, but ct felt 1 yr was more reasonable bc of high customer turnover and practices change so fast. ct felt that the geograph. area was fine bc 5 mile radius wasn’t very populated anyways 2. Agreements Impairing Family Relations-means unenforceable k a. unduly restrains the right to marry i. naked restraint-won’t be enforced ii. legitimate need to restrain the right to marry-court will do a balancing test b. Unreasonably detrimental to existing marital relationship itself i. Spousal support agreements-@commonlaw tradit. Duty to adequately support one’s spouse as long as separation not imminent (1) main prob.-those entered into before marriage (2) those entered into agreements during marriageloooke @w/a skeptical eye ii. Prenup. Agreements-enforceable as long as procedural (full disclosure) and substantively (weight of actual agreement fair) (1) now only look @procedural-process (2) decline prenup if incentive to get out of relat. iii. agreements between unmarried cohabitants, enforced if: (1) they’re in writing (2) no consideration of exchange based on sex c. Promises that were made in regard to child custody i. won’t be enforced unless in best interest of child II. Remedies for Breach of Contract A. Equitable Remedies/spec. perf.-general rule today is that it is still considered an extraordinary remedy even though cts are becoming more inclined to use it 1. Requirements for Specific Performance a. 1st threshold-prove that monetary damages or legal relief would be in adequate to protect a parties expectation interests b. 2nd threshold-other potential discretionary or platical limitations i. Availability of restitutionary award-by making breaching party pay for the benefits they received , that would be an adequate award of damages 4 ii. Terms must be sufficiently certain to order specific performance c. Restatement 360-factors to determine if monetary damages are enough i. difficulty of determining damages w/out reasonably uncertainty ii. need to be able to obtain a suitable substitute performance-services or goods are unique (classic ex. Land) (1) availability of good/service-possible scarcity (2) time is of the essence-may need perf. Immediately iii. unduly burdensome on p to find a replacement or suitable subst. iv. likelihood that damages aren’t going to be able to be collected d. Klein case-Universal negotiated w D to purchase a jet. Universal intended to resell that jet to Klein (P). The parties involved agreed to a price . P gave Universal a deposit to give to D. At the pre-purchase inspection, cracks were found on the turbine blades and D agreed to pay to repair them. D withdrew the plane from the market two days after the agreement to sell. P demanded delivery and D refused. D claimed that there was only a mere discussion. P sued for breach of contract and specific performance. i. Rule: specific performance is inappropriate where damage are adequate (1) to get sp. Performance Klein would have to prove $$ inadequate (2) court said there were enough comparable jets available 2. Other Discretionary and Practical Limitations on Granting Specific Performance a. Certainty of terms-needs to be clearer for specific performance than for regular damages, reasons: i. if a court can’t figure out what the k obligated the def. to do, very difficult to offer specific performance ii. invokes power of the court-if def. doesn’t go through w/sp. perf. could get contempt from the court b. Difficulty of supervising and enforcement-burden to the court i. exception-public interest/need (ie k for public works) c. Equity/Public policy-sp. Performance is a remedy of equity-must have clean hands to be awarded sp. perf., ct feels entitled to govern over ks when party getting raw deal; also could be based on mistake or undue hardship d. Personal service ks i. court won’t usually grant specific performance ii. may be forced by injunction not to perform for competitor iii. general rule: courts hesitant to offer sp. perf. on construct. cases B. Legal or Monetary Remedies 1. 3 Main Interests of Injured Party to Protect and Measure Damages By (Rstmt 344) a. expectation damages-puts injured party in a position as if the promise completed b. reliance damages-puts injured party in position as if promise was never made c. resitutionary damages-makes the party pay for any unjust enrichment bestowed on injured party 2. Measurement of Expectation Damages a. Rstmt 347 Formula and Typical Components of Buyer and Seller Damages i. Restatement 347 formula, injured party: a +b –c-d=expectation damages a=value of any performance contracted for you did not receive b=other losses caused by that breach c=cost avoided or should have avoided for not having to perform d=losses that the def. can show beyond mere cost of performance 5 ii. Typical components of seller damages a=money they didn’t receive bc of buyer’s breach b=incidental expenses; ie seller having to wherehouse wrongfully rejected goods c=performance costs(will be $0 if you’ve already built the machine d=any other losses that a seller might avoid bc doesn’t have to give the machine to the buyer; ie. Resale proceeds iii. Typical components of buyer’s damages a=value of thing they are seeking measured by fair market value b=consequential damages=substute transaction costs or lost profits c=payment still remaining-if you’ve paid nothing this is k price d=”a” component you were able to avoid if able to engage in substitute transaction ----HYPO----K PRICE = $1000 Sellers cost = $900 Sellers profit= $100 SCENARIO 1 If it is on day 1 before the seller incurred costs, then the expectation damages would be 100. The K price is 1000 The costs avoided were 900 1000 + 0 -900 – 0= 100 damages SCENARIO 2 If the K is breached after all of the manufacturing and performance is done 1000 + 0 – 0 – 0 = 1000 damages SCENARIO 3 If the contract was breached after delivery 100 delivery 1000 contract 1000 + 100 -0 – 0 = 1100 damages SCENARIO 4 Breached after delivery 100 delivery 1000 K 900 cost Resells it for 500 1000 + 100 – 0 – 500 = 600 damages iv. Laredo Hides Case-Laredo (P) contracted with H & H (D) to buy all of the hides produced by D from March to December 1972. Deliveries were made in March but P's check for the second delivery was delayed in the mail. D demanded payment immediately and P failed to pay. D cancelled the contract and P was forced to purchase hides from other sources at a cost of $142,254.48 more than the cost from D. P spent an additional $3,448.95 for transportation. P sued D for the additional costs. (1) Rule: when a seller wrongfully cancels a k, the buyer may cover, the buyer may sue for the difference in cost of obtaining the goods elsewhere in addition to normal damages awarded v. Vitex case: When overhead expenses are not affected by the performance of a particular contract, such expenses should not constitute a performance cost to be deducted when computing lost profits b. Special Considerations re Lost Volume Sellers 6 i. 3 requirements a seller needs to prove for lost volume treatment (1) seller would have made both sales anyways (sales capacity & mkt demand) (2) seller could have manufactured/supplied both sales (3) it would have been profitable to have sold both ii. Diasonics case-Davis (P) had to breach purchase k w/Diasonics, and when Diasonics resold the equipment, Davis sued to get its full deposit back (1) Rule: a seller who wishes to resell goods after a buyer breaches a given k can seek damages equal to the difference between the k price and market price at the time and place for tender under UCC 2-708; but must meet lost volume seller criteria iii. Lost volume seller entitled to: lost profits of k + any profit made on resale c. Special Considerations re Losing Contracts i. if you would have lost money on performing a full k, and k is breached in the middle, your expectation damages would be lowered ii. ex. Flour mkt prob-contracted to purchase flour for $1.4 million, buyer made a $500k payents, seller broke the k by failing to deliver the flour although mkt price had dropped to $1.1 million. Is buyer entitled to restitution of $500k? (1) A + B -C -D= $1.1 mill + $1.1 mill -$900k-$1.1 mill= $200k (lower expect. damages) iii. Can use restitutonary damages instead of expectation damages here…you would just get back the $500k deposit regardless of what the mkt is like iv. Restatement 373(1) (1) On a material breach by the other party, the injured party is allowed get restitutionary damages for any benefit he has conferred on the other party...pursued when more than expectation damages-to punish breaching party rather than the injured party (2) Limitations on injured sellers (a) if you’ve already fully performed, just entitled to benefit of the bargain of expectation damages v. US v. Algernon Blair-When Blair refused to pay crane rental costs, Coastal Steel terminated its performance and sued to recover for labor and equipment it already had furnished; trial ct denied recovery claiming Coastal would have lost $$ if k was fully performed, App. Ct reversd and granted restitutionary damages (1) Rule: If you make a K that you will end up losing money on, then you should hope that the other breaches before the K is fully performed so you can get FMV (restitutionary damages) and not lose money 3. Measurement of Reliance Damages a. The basic principle is to make them whole or to reimburse them (the exception is in a losing K) b. If expectation damages are the standard, why would we use reliance damages? i. expectation damages seem excessively disproportionate in relation to the loss or bc of the nature of the breach ii. difficult to ascertain expectation damages iii. k too indefinite to enforce, but damages given on a promissory estoppel basis iv. policy or equity concerns c. Restatement 349-calculating reliance damages *Reliance damages=losses incurred in reliance on the promise less (-) any k loss that would have occurred on full performance i. Reliance damages cannot exceed expectation damages 7 ii. Generally in a loosing k the expectation and reliance will be the same iii. If the k is a profitable one, then expectation damages would always be more 4. Limitations on Recovery of Contract Damages 3 limitations on recovery of k damages 1) avoidability/mitigation-can’t recover damages a party should have mitigated 2) foreseeability 3) ascertainability a. Avoidability or Mitigation of Damages i. General Principle (Rstmt 350) a. Damages allowed except, Limitiations: (1) no duty to mitigate if to do so the injured party would have to under go undue burden to help w/situation (2) duty to mitigate is simply a duty to make reasonable efforts to mitigate-don’t need to undergo humiliation (3) risk b. Injured seller: If you engage in a reasonable substitute transaction, you are entitled to the difference between the k price and mkt value: (Two components to reasonableness) (1) you make a reasonable resale-reasonable price (2) can’t wait too long in order to engage in resale transaction c. Rockingham case-injured seller that should have mitigated. Seller told to stop producing bridge but didn’t listen If party refuses to listen, then look @what he should have done (1) Assume 18,000 contract price for bridge, and 16,000 to build bridge. Expectation damages are the $2000 profit. We will deduct what the contractor/seller could have reasonably avoided but did not. They would get profits as well as mount of materials. Therefore, in this case would get 4000. i. Looking at the formula: A + B -C -D 1. A = value of performance (18K contract price) 2. B = incidental and consequential 3. C = cost avoided by stopping performance (in this case 0 b/c didn't stop performance but we look to mitigation rule, which asks what costs should have been avoided by the contract, which turn out to be 14,000) 4. D = other losses avoided 5. ED = $4000 6. The duty of mitigation puts a gloss on what C and D are in the formula, meaning what should have been avoided if they would have mitigated. d.. Injured buyer in sale of goods situation (1) entitled to purchase price for cover transaction (2) injured buyer has option of covering or taking damages based on difference in FMV and k price at notice of delivery 8 (3) If buyer chooses to cover (purchase k-k price) they have to act reasonably $100 $110 $120 $130 1/01…………..2/01……………….2/15…………………….3/15 K K Delivery cover purch. K breach -assume 2 weeks is a reasonable period to cover A=value of the goods on the date of k delivery=$110=FMV B=substitute transaction=$120 C=cost avoided=$100 D=$110; substitute transaction made him whole $110+$120-$100-$110=$20 -assume buyer waits until 3/15 to engage in substitute transaction, and does cover purchase on 3/15 A=$110, B=$130, C=$100, D=$110 Damages =$30….but the UCC wouldn’t allow this because the buyer waited too long, instead would give other option of damages of FMV on the day of the breach minus the k price=$110-$100=$10…this is much lower, gives incentive to use a reasonable period to cover ii. Common Mitigation Scenarios and Corresponding Rules x. Breach by Buyer Before Completion of Construction or Manufacturing (1) You must cover-ie if building a machine & told to stop (a) you have to stop performance (b) you need to sell of the extra parts (c) if done building, the elements most affected by duty to resell is D in the formula (2) Exception, p. 493-UCC 2-704(2)-if you are a seller and you are building a machine, in the middle of performance when the other party breaches, you don’t always have to stop xx. UCC Mitigation Incentives in Rising and Falling Markets (1) if you are in a falling market, most likely looking for resale damages (2) in a rising market, the seller would not have any damages-would just sell to someone else for a higher price xxx. Mitigation by Employees and Other Service Providers (1) humiliation factor usually comes into play in situations in which the person who breached want you to come back and mitigate (a) ex. An employer wrongfully fired you and in order to mitigate your damages wants you to come back and work for them (2) Corporate exception to the humiliation rule: if you are a staff employee & your company has a big k w/another company tat you are working on and the two employers have a fall out, you will have to work to mitigate it bc it didn’t directly affect you xxxx. Disproportionate Cost to Complete/Repair in Construction Contexts 9 (1) if cost of repair or completion is grossly disproportionate to the loss in value from the breach, limited to loss in market value (as long as non material & non intentional) (2) this will help prevent the use of efficient breach to make $$ off injured party (3) economic waste (a) the cost of performance is the proper measure of damages if this is possible and does no involve unreasonable economic waste (b) dimunition in value caused by the breach is the proper measure if construction and completion in accordance w/the k would involve unreasonable economic waste Non willful Willful Non-material Jacobs & Young-loss in value Peevyhouse-efficient breach theory-loss in value Material Fairness & justice based on case circumstances Groves-cost to complete or repair *more courts follow Peevyhouse, but if material breach, always cost to complete or repair b. Foreseeability of Damages (1) when do you measure foreseeability? At the time of the k, would a reasonable person have foreseen or known @, use time of k formation (2) Hadley case-P had D ship a broken mill shaft to get fixed. D promised to deliver the shaft the next day. D had no idea that the mill would be shut down until the new shaft arrived. D was negligent and didn’t deliver the shaft on time and the mill was shut down for an extra 5 days. The messenger didn’t deliver the shaft as quick as promised so they lost profits and employees wages. The court wanted the breaching party only to be liable for what they could have foreseen what there actions would cost. The court defined foreseeability in 2 levels: (a) Direct damages-those that anyone should know would arise naturally from a breach (b) Indirect/special/consequential damages-are those that arise from special circumstnces (c) The ct saw this case dealing w/special damages-how would a messenger know that the mill didn’t have a back up shaft and how is a messenger to know that the mill isn’t shut for other reasons (d) the messenger would have had to be on notice about repercussions of being late (e) computing the damages in Hadley-Hadley court we had 2 components of expectation damages--loss of value of performance not received & the 300 lbs in lost profits *the 300 lbs weren’t recoverable cause they weren’t foreseeable and therefore damages were limited to the price that the mill paid for the messenger service i. Majority Approach (Hadley approach)-damages are not recoverable for loss that eh party in breach did not have reason to know as a probable result of the breach when the k was made. It breaks down into 2 components as the Hadley case did; Loss may be foreseeable as a probable result of the breach… (1) in the ordinary course of events OR (2) as a result of special circumstances beyond the ordinary course of events that eh party in breach has reason to know (Rstmt 351) follows Hadley but 351(3) gives courts a tool to police Fx (1) a ct may limit damages for fx loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or 10 otherwise if it concludes that the circumstances justice so requires in order to avoid disproportionate compensation (2) On exam you could say; Under the facts of this case these damages were clearly fx under the Hadley test but should we make the county be liable for context of damages in this case. Can be debated under standard of rest 351(3) (3) 351(3) achieves the same result as Tacit agreement ii. Minority Approach-Tacit Agreement test-addition to Hadley (1) Losses must be fx(Hadley) but also they must have tacitly agreed to be liable for those losses. So not only just fx either as arising naturally from a breach or from a special circum but that they agreed to assume risks for those losses iii. Recovery of Emotional Distress Damages (Rstmt 353) (1) usually unforeseeable that someone would receive emotion damages when a k is violated (2) Two exceptions: (a) Fx of serious emotional distress if the breach caused bodily harm (b) Emotional damages are Fx when there is a k where the breaching party should have know there would be a serious emotional disturbance due to the subject matter of the k c. Ascertainability of Damages (Rstmt 352) i. damages must be unavoidable and foreseen and the party has to be able to show an ascertainable amount of the damages they are seeking (1)Restatement 352-in order for a jury to award damages to an injured party there has to be sufficient evidence to show value of monetary loss w/reasonable certainty; so there is no speculation or guesswork in deciding amount (2) How do we measure the value of the performance we didn’t receive? (a) ask what we were supposed to receive and what you did receive; it’s the difference…use FMV to est. these amounts (3) Exceptions: (a) some ks won’t have a fair mkt value readily available-then would have to determine what was their intrinsic loss (b) there is a FMV but the personal worth is much larger then the FMV would have given it-allowed as long as it’s not undue recovery for being sentimental (c) consequential damages-loss of future profits (i) use comparable businesses to determine profits-size of business, type of business, location, etc. (ii) also have to look at reliability of data d. Recovery of Punitive Damages (Rstmt 355) i. Punitive damages are not recoverable ii. Only allowed when breach itself constitutes a tort and that tort is one that constitutes punitive damages iii. Another exception: some states allow when it’s a bad faith breach it tort-usually for insurance companies when they need to pay and didn’t iv. Historically used in employment disputes-not really used anymore 5. Liquidated Damages (Rstmt 356(1)) A. Parties have agreed in advance-they have liquidated or agreed on damages; often fight over whether they should have to pay B. K damages are meant to compensate the injured party, and not punish the breaching party; liquidated damagescan’t be forced C. Rest. 356: Damages by either party: the reasonableness of the liquidated damages provision as compensation must be assessed: 11 (1) comparing amount of liquidated damages to actual loss that resulted (2) even if unreasonable when compared to actual loss, give a second look (at the time of the k formation) (3) must be assessed for ascertainability-if damages are difficult to measure and prove, then injured party given more latitude to estimate damages caused (4) the easier they are to prove, then injured party not allowed to recover (a) the two looks under 356 are: (i) actual damages from breach How difficult are the damages to ascertain once breach occurs? (ii) reasonable forecast of damages @k formation? How difficult were the damages to forecast? D. Liquidated damages are the result of a good faith effort to estimate in advance the actual damages that would probably result from a breach. The reasonableness standard has been used to determine the validity of stipulated damages clauses. E. Example: Gustafson v. State: (1) Liquidated clause stating that contractor would have to pay $210 per day for every day he was not finished on time. When he finished 67 days late, the state sued for $14,070 n damages. The judgment for state was sustained bc presumption of reasonability for difficulty in ascertaining damages (public highway-hard to determine what the value is) F. Reasons for liquidated damages: (1) to control the risk if there is a breach (2) time and expense of litigation ------------*k formationlegitimate defensesif not, what is the remedy? -only get into defense and remedies when there is an alleged breach…. Overview of what’s to come Must determine whether there was a breach or not 1) What performance was required? Ch. 6 a. What the terms of the contract are i. Term in dispute before k formation, agreement in writing, but term in dispute discussed during negotiations or contemporaneous not found in the k itself: parol evidence rule ii. If a party wanting to add a term after the k has been written: No oral modification clauses b. Meaning of k terms i. Reference to rules of interpretation c. Missing or omitted k terms i. implied terms-gap fillers 2) When performance required? Ch. 7 3) Was the performance excused? Ch. 8 3 Types of Disputes-under what performance is required 1) Terms 2) Meaning of the terms 3) Missing terms --What are the terms of the K— I. Parol Evidence Rule (PER)-when a k is in writing, the PER places limits on one party’s ability to subsequently claim and offer evidence that the parties also agreed on other contract terms not contained in the writing (i.e., terms extraneous to the writing) 1) If agreement took place at time of K signing or before that’s not in the K, then PER applies. (a) Parties will introduce intrinsic and extrinsic evidence to support their claim. (i) Intrinsic-evidence of what parties agreed to that can be found within the 4 corners of the document. 12 1. arguments about what is in the doc itself (ii) Extrinsic-evidence they are offering that is not in the doc. 1. The most common is the prior negotiation evidence. (What they discussed during negot.) 2. Course of dealings, commercial usage evidence, course of performance-(how they acted when they started), 3. Trade usage-(what is done in industry usually) 4. Facts and circumstances surrounding the K. 2) Analysis of PER-employ this analysis always when a party claims to have a side agreement at time of k or before existing outside of writing. (1) Is there a writing that the parties intended to be a final (integrated) expression of an agreement? (iii) Look at extrinsic or intrinsic evidence to decide these. 1. If no the PER does not apply. 2. If yes then ask question 2. (b) Does the writing look final and thorough and specific (c) Was it executed and signed by both parties (d) Even if writing appears preliminary or formally adopted by only one, did both treat it as a final expression of their agreement? a. Look at extrinsic or intrinsic evidence to decide these. (2) Is the writing completely or partially integrated? (Would you expect the writing to be in there looking at the K). (a) If complete then no parol evidence is admissible. (b) If partial integration then look at question 3. (i) Traditional 4 corners test. (only intrinsic evidence) 1. Does it seem complete on its face? 2. Would the term have naturally been included had it been agreed upon? (ii) Modern Contextual test. (looks at extrinsic and intrinsic evidence) 1. Was there a good reason the term wasn’t in the writing. (iii) UCC has a presumption in finding Rx 1. Would the terms have certainly been in the writing had they agreed upon it. a. If probably not then we would see it probably being a partial integration. (3) If the writing is a partial integration, is the term consistent or inconsistent with the writing. (a) If consistent then the evidence is admissible to the fact finder (b) If inconsistent then it is inadmissible. 4) Giannie Case-P claims he was promised in oral negotiations that he would be able to sell pop exclusively in the building. His lease was being renegotiated because D didn’t want him to sell tobacco anymore. P was an immigrant and had witnesses to help him with negotiations and with the K. P and D signed K which didn’t have this oral agreement in it. In K they talked about tobacco not being able to be sold and how he could sell soft drinks. RULE: If a writing constitutes a complete agreement between the parties, parol evidence is not admissible unless there is fraud, accident, or mistake 5) PER Analysis a) 1st question was there an integrated final expression of a writing? i) Yes (1) (even if it was just a letter, and it was treated as a K then that would be an integrated final expression of a writing) b) 2nd question-is it partially or completely integrated i) They used the min. 4 corners approach here. (Minority) (1) Ct said that they addressed the soda sales in the subject and also addressed that the tobacco not being sold, so a Rx person would expect their to be an exclusivity clause in the K if they agreed on it. Since it wasn’t then it must have been left out on purpose. c) No need to ask 3rd question now. i) PER applies here. 13 (1) Most courts use the modern contextual approach because Gianni would have had a better chance to prove this was only a partial integration because if you look at all the factors, he was giving tobacco sales up for nothing more and his rent was going up and he was an immigrant and maybe didn’t understand and had a witness. (2) Note-Even if there was a letter signed stating the Soda exclusivity for P, it still wouldn’t matter probably. PER is for any kind of agreement. 6) Masterson Case-married couple owned a ranch and deeded it to H’s sister and her husband. The couple reserved an option to repurchase the ranch within 10 yrs. Couple got divorced and H went bankrupt. W and the H’s trustee tried to exercise the option, but the sister and husband claimed that it had been agreed that the deed was to stay in the family so they wanted to introduce evidence that the trustee could not exercise option. Ct. agreed that the PER did not apply and that evidence should be allowed to be entered. a) RULEbb Analysis i) 1st question was there an integrated final expression of a writing? (1) Yes-the deed and the repurchase option. ii) 2nd question-is it partially or completely integrated? (a) They used the modern contextual approach (Majority) (b) It is partially integrated because (3 reasons by traynor) (1) The option K doesn’t imply it contains the complete agreement. (it is silent about its completeness) (There is no merger clause stating this a complete and final expression of the party’s agreement. (i) Merger clauses are strong evidence that it is complete, but it doesn’t per se make it a full integration. (2) It is tough to put all terms in a deed, it makes sense that not all terms are in there if it is treated as the K. (if a huge K then maybe different but this is a deed) (3) Family transactions are more informal because they trust each other so a good argument to be partially integrated. b) 3rd question-Is the term consistent or inconsistent with the writing of the agreement? i) It was consistent because it kind of supplemented or added to the K. ii) Traynor said even if the evidence contradicts an implied term of the K, then it doesn’t matter, as long as it doesn’t contradict an express term. 4 main exceptions to PER (when it applies) 1) Collateral /Separate Agreement “exception” to a completely integrated agreement a) Where the alleged prior agreement refers to an agreement where the parties have exchanged separate consideration beyond what is found in the writing itself. i) Ex.-in Gianni, if he would have alleged that he agreed to pay 5,000 dollars a year for the exclusive rights to sell soda pop. ii) If you don’t have strong evidence of a complete integration or a merger clause, then that collateral agreement is going to come in any because it was a separately negotiated agreement therefore it is partial.-it would come in anyways so this isn’t a true exception unless there was something like a merger clause, which would make it a true exception. This is a limited exception because it the factfinder can only hear this if it is consistent with the writing. 2) Reformation of a mutual mistake in expressing (or writing) of the agreement. a) Evidence shows they did agree on it, but they didn’t put it in the K. b) The court will then correct the writing to have it show what was meant. (1) Bollinger Case-(P) entered into a contract with Central (D) for D to deposit all the waste from a turnpike construction project on P's land. D was to cover the turnpike waste with topsoil from P's land, but that requirement was left out of the written contract. P did not realize that the topsoil clause was left out of the contract when it was executed. D initially covered the waste with topsoil, but refused to continue that conduct alleging that it was not required under the contract. P sued for reformation of the written contract to reflect the actual agreement. D contended that no mistake had been made 14 (2) RULE: When a mutual mistake is made in the preparation of a written contract, the court may reform the contract to reflect the true agreement between the parties. (It was obvious it was mistakenly left out). 3) Defense to K formation a) Unfair bargaining (fraud, misrep.), Public policy, Mistaken assumption i) Ex. Gianni asking court to get out of the K because landlord committed fraud and it will hurt his business. Then maybe he can get the evidence to the factfinder. 4) Condition to K validity-Something must happen for there to be a valid K. a) Condition= something that parties agreed has to happened before duties become enforceable. i) Ex. Agreed K will not be effective unless they can raise a million dollars of capital. ii) If they agree on a condition for the K starting, and the other sues you for the K when that condition didn’t happen, then the factfinder will allow it to go to evidence. b) this exception only applies to a condition on the K being affected and not any conditions in the K or under the K -----Situations where PER is inapplicable-----c) Multi-contract transactionsii Separate but related contracts. d) An alleged oral or informal agreement after the writing was signed i) This is a subsequent agreement to the final writing. ------Subsequent Agreements-----(K modifications that are not in writing (2-209)) e) No oral modification clause. (must be in writing and signed) i) TRADITIONAL-K can be modified even if there is a “no oral mod. clause.” ii) MODERN TREND and UCC-no oral modification clause is enforceable. f) If it was enforced but there was reliance on the oral K modification, then in all instances the party that relied can be reimbursed, they can’t continue to rely on it and get damages, once they know though. PER is not used in determining mistake of a K when determining whether mutual mistake, unilateral, (later) *If you a merger clause w/a no oral modification clause -a zipper clause-you have closed up the writing to not allow any prior or contemporaneous outside agreement, whereas no oral modification clause allows for no oral agreements after k entered in to -----WHAT DO THE TERMS MEAN----INTERPRETING THE K------------g) Vague= unclear or non-precise terms h) Ambiguity-a word is precise but can have more than one meaning. i) How can courts resolve the dispute of these things ii) Goal in K law is to protect parties’ expectations. (1) When parties entered into K what did they intend those terms to be. i) 3 DOORS OF 201 i) 1st situation-same meaning at signing, and evidence shows this, and then one claims a different meaning (1) 201(1) SHARED MEANING RULE-(a) If parties get into dispute about meaning of K language and evidence shows parties shared the same meaning about what that term meant at the time the K was entered into, then the court will enforce that meaning, even though the parties may claim they meant a different thing. (Evidence must show the parties shared the same meaning at K formation.) ii) 2nd situation-parties have different meanings at time of K formation. (2) 201(2)-FAULT OF 1 PARTY (a) If one of the parties knew or should have known about the meaning of the term that the other party was using, then we are in a fault situation. (1 party is at fault) (3) 201(3)-NO FAULT & MATERIAL TERM (a) If it was an honest and a Rx mistake of a material term, then we have a failure of MA and the K will be voided under 201 (i) If parties had partially performed then they will grant restitution. 15 6) Frigaliment Case-D (seller) had K to sell chicken to P (buyer). D believed that any type of chicken would meet the contract specifications on weight and quantity, including "stewing chickens." P believed that "chicken" meant a young chicken, suitable for broiling and frying. e) RULE: A party who seeks to interpret a contract's ordinary terms in a narrower sense than is used in everyday trade has the burden of proof to establish that meaning ii) Ct felt that the shared meaning rule did not apply because they didn’t’ both mean the same meaning by the word chicken. iii) Judge said this is a door 2 situation. The seller thought that chickens meant chickens and the buyer was saying chicken meant a narrower, discrete definition so the buyer wasn’t using the prevailing meaning so the burden shifts to the buyer and they should have known that the seller would use the standard generic term of chicken. f) When 1 party wants a narrower version of a term, they have the BOP to show that the other party knew the narrow meaning. 7) Raffles Case-seller of cotton contracted with the buyer to deliver cotton on a ship called peerless from Bombay. There were 2 ships named peerless that would leave from Bombay. One in Dec. and one in October. The one in Oct. came and the buyer said he thought they were talking about the December shipment on the other peerless ship. e) RULE: If neither party knows or has reason to know of an ambiguity, then each party's actual meaning will be assigned to that ambiguity. f) The court said this was a door 3 problem. There was no MA because they both had different meanings It was a Rx mistake on a material term so there is no MA and K is voided AIDS OF INTERPRETATION Intrinsic Aids of Contract Interpretation---kick in if there is a dispute • Basic principle: unless the parties have indicated otherwise, where a word(s) has a generally prevailing meaning there is a strong presumption that the parties have used it in accordance with that meaning. -Exceptions: if a word has a technical or special meaning in a given trade or locality that the contract is concerned with, the presumption is that the word is being used in this sense. o Also, parties can agree on certain meanings either orally or by written definitions or “incorporations by reference.” -"expression of one thing is exclusion of another:" if list specific items, then intend to exclude similar unlisted items. -"of the same kind:" if list specific items followed by more general term, general term only includes items similar to specific ones. -"It is known from its associates:" the meaning of a word may be gathered from its accompanying words. • Absent clear evidence to the contrary, words and phrases are construed to have the same meaning throughout a contract. • if contract terms cannot reasonably be construed as being consistent with each other: • Specific terms trump more general language. • Negotiated terms trump standardized ones • handwritten terms trump typewritten terms which trump pre-printed terms • General rules of contract "construction" based on considerations of fairness or public policy. All other things being equal: • An interpretation resulting in a "fair bargain" is favored. • The interpretation most consistent with public policy is favored. • An interpretation against the drafter is favored, particularly for standardized contracts. • If drafter caused dispute then he should be held accountable. FOR PRIOR NEGOTIATION EVIDENCE 16 e) PER -filter when evidence is offered to prove additional terms of the K which are outside of the K. ii) PURPOSE-to keep party form admitting unreliable evidence. 2) PLAIN MEANING RULE: filter to prove the meaning of terms which are in the writing. e) We favor the reliability of the written word when it comes to the plain meaning rule (we favor what the parties wrote in the K versus what they are claiming what those words meant if what they said is relatively clear in the K. f) WWW Case example of majority-P and D contracted to do a land transfer. P was worried that litigation pending on the land they were buying would not end before closing. P asked to have a clause put in so that they could get out of K if litigation wasn’t done. A clause was put in saying EITHER party could cancel if litigation didn’t stop. Land prices rose, and P accused D of not trying to end litigation so they could get out and sell to a higher bidder. P wanted the court to look at the fact that it was put in to protect P and D shouldn’t be able to get out even though it says either party in K. 4 corners test applied and there was even a merger clause. ii) RULE: : Extrinsic evidence may not be used to create an ambiguity in a written contract under PMR. g) Pacific Gas Case example of minority-P is suing D for damaging their turbine (25,000 damages) while fixing it. D agreed to do the work "at its own risk and expense and to indemnify" P against "all loss, damage, expense, and liability resulting from injury to property" or from any act of D connected with performing the contract. D said the words meant to protect a 3rd party for damages and P said indemnity meant for them. D refused to pay for the damage and P sued. D offered proof that the indemnification of property was supposed to be personal injuries to workers. D wanted to enter in prior negotiations of w ii) RULE: The test for the admissibility of extrinsic evidence to explain the meaning of a written instrument is whether that evidence is relevant to prove a meaning to which the language is reasonably susceptible ----------Analysis----------3) 1st distinguish whether you need to look at PMR or PER in deciding whether to allow PNE. e) Meaning of terms in writing or additional terms ii) PMR-(1) Is there an integrated writing? (Doesn’t matter if complete or not-only under PER does this matter.) (2) Is the K term clear and unambiguous? (i) Majority: all IE and EE except PNE a. Look at trade usage and market conditions, but can’t look at PNE (ii) Minority-looks at all IE and EE including PNE offered by parties. (b) If yes: then PNE is inadmissible (c) If no: then PNE is admissible to clarify the meaning of term. 2) Commercial Performance Evidenceee Different from PER and PMR because it does not act as a filter. All of this is admissible. f) Fact finder will hear it, it is just a question of what types of rules of interpretation will he apply to the evidence. ii) Trade usage-practices or methods of dealing that exist in a particular local or trade that the parties to the K are aware of, or should be aware of because they are so regularly observed. (1) If technical term , there is a presumption that the word is being used in its technical sense. (2) New entrant exception-In frigalement we saw that a new entrant to the trade will not be held to the trade usage unless it is so strong and universal that they should have known. (Half follow this). iii) COD-Pattern of dealings or understandings that the parties used in connections with similar contracts in the past. iv) COP-a pattern of performing the present K, that both parties knew about and accepted or acquiesced in. g) The rule/aide of interpretation that is applied to this areaiii Ask the question-can you Rx construe any applicable express terms, COP, COD, or TU as being consistent with each other? 17 (1) If YES, then that consistent interpretation governs. (2) If NO, then Express Term > COP > COD > TU (the greatest prevails) h) Hurst Case-K said 50 % of protein in horse meat, but the TU really interprets that at being 49.5% protein. Although 49.5% is not 50% but we would Rx round up from 49.5% to mean 50% so here we find a Rx consistent meaning of the express term of 50 and the TU of rounding up. ii) So this is a door 2 case. The buyer should have known that 49.5 would be rounded up to 50 and would be okay. FILLING GAPS/MISSING TERMS i) Terms can be missing for a variety of reasons ii) Forseeability may not be able to come up w/every single situation that may arise iii) Even if can foresee events that may come up in K, not going to have the resources to cover every single thing (1) You may want to strategically not mention every single term. ---------------MISSING TERMS-----------6) Rest. 204-When bargain is seen as definite enough to be a K, and the parties have not agreed to some terms, then a term which is Rx in the circumstances is supplied by the court. [1]-204 ANALYSISiii 1st can we solve it by interpreting the existing terms of the K using our rules of interpretation iii) If not then it becomes essential for the ct to supply a term that is Rx in the circumstances (1) What does “Rx in the circumstances mean?” (2 contetations). (2) Court will ask (a) What kind of term should I supply which is most consistent with the principal purpose of the parties that is manifested in the K? 1. Look for principal purpose of the K. K will start out with a recital clause telling the statement of purpose of K and parties sometimes. 2. If no recital clause then “What would be fair and just to supply here under the circumstances”. If no recital clause and hard to discern the shared principal purpose then figure out what would be Rx maybe by TU, COD, or COP. iv) Ex. If there was a missing delivery date we would use this analysis Commonly Implied Terms (duty of good faith, duty of best effort, duty of gd faith for termination rights): (1)---Duty of good faith is implied in all K whether stated in K or not. ---f) R 205-every K imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. ii) Must have good faith in both performing your own duty and also how you enforce your right under the K. iii) Aside from a preliminary negotiation to K, there is no duty of good faith in negotiation phase. iv) Can’t waive duty of good faith even if they state there is no duty in the K. g) Parties can define what good faith means in terms of their dealings under the K as long as they define it Rx. (can’t disclaim but can define what it means Reasonably) h) If they don’t define it, what does good faith mean? ii) Being honest and dealing in a fair way in both performing and enforcing the K (measured subjectively to parties) iii) A party has to refrain from thwarting the benefits of the K for the other party. The party has a Rx duty to cooperate with the other party in a Rx way so they can enjoy the fruits or benefits of the K. (1) Main limitation of these principals-good faith will never mean that a party has to do something under a K that is inconsistent with the express terms of the K. (just can’t deny the duty of good faith exists.) (a)---Good Faith in Performing---18 i) Dalton Case-student took ACT twice. He scored much better on the 2nd exam after taking a class. He was sick during the first exam. A handwriting expert said the 2 exams handwriting didn’t match. He said he had mono at the time of the 1st one. The test board didn’t really look at his evidence very fairly. D stated in the K they would consider all relevant information that P can supply related to that issue. The courts below found that D did not consider the relevant information furnished by D. K was silent of what the ct had to do with the evidence once they received it. ii) RULE: Ct filled the missing term of what the board needed to do with the evidence submitted by implying the duty of good faith and fair dealing and they interpreted the duty to require the bd to give some credit to the evidence before ruling whether his 2nd test was good or not. (1) They bd suggested in K or implied that if evidence would be submitted that they would look at the evidence fairly and they didn’t. (2) If ct looked at evidence and denied the score, the bd would have to show that they acted rationally and not arbitrarily. (3) The ct. wouldn’t make them accept the 2nd test, they just wanted to make them use good faith in considering it. It is the board’s decision after considering. j) Eastern Airlines Case-Gulf claimed that eastern wasn’t performing the K in good faith. Ct said the standards of fair dealing were that trade usage was one way they saw this as fair and they also looked at course of dealings (previous K’s ) and course of performance (what happened with this K) (1) RULE: So we can infer good faith from COD, COP, and trade usage in the industry. (Start with this and then look at R 204 if these don’t show what good faith is). (2) The parties had a good faith in performing the K and it was seen that eastern did fulfill duty of good faith. (3) UCC subjective standard of honesty and fact-is subjective state, but also have objective component-commercial industry standards of fair dealing (2)--Duty of Best Efforts— A. Whenever you have k for exclusive dealings, the party that is solely dependant on the other party’s performance, courts will apply best efforts on the part of the non vulnerable party to perform under the k 1) UCC-This ex express in sale of goods under UCC 2-306(2)-deals w/situations where a supplier is supplying goods to a reseller and says if either one of the parties have an exclusive obligation, then both have a duty of best efforts (supplier to sell, and the reseller to promote and sell the goods) 2) CL general principle-whenever you have a k for exclusive dealings or one party is heaveily dependent on the other party’s performance to receive the benefits from k, then the court will require duty of best efforts. But if lease provided for substantial minimum payments then duty of good faith and fair dealing would apply bc then they aren’t as heavily dependant on the other’s performance a. Ex. When k has provided for substantial minimum fixed payment hen courts will not imply duty of best efforts, but just duty of good faith b Rule: a party will breach a best efforts clause to maintain a high sales volume if he makes marketing and sales decisions based on profits w/out fair consideration on their effect on sales volumes i. a k clause requiring best efforts to ensure profist does not require the promisor to spend itself into bankruptcy in the course of performance 3) There is a difference between a duty of good faith and duty of best efforts a. duty of good faith-just requires honesty, fair dealing…may require sells efforts just short of that which would cause losses b. duty of best efforts requires more: make commercially reasonable effort to do what you agreed to do or what the k says you need to do…requires sells efforts even if loosing $$ up to the point just before bankruptcy (3) Duty of Good Faith as Applied to Termination Rights i. At-Will Franchise and Exclusive Distribution Agmts 19 a. How good faith may impose limits on the ability to terminate the franchise agreement where the agreement is silent on the duration of the k and how it’s terminated…courts read in an obligation b. when franchisee has made a substantial investment to serve the other party, when silent on k duration, reasonable period of time requied before termination c. reasonable time-time to recoup initial investment made d. Lockwill shoe case-manufacturer allowed to terminate bc agreement was going on long enough that the shoe seller had enough time to recoup his investment e. even when there has been enough time to recoup, good faith also imposes a requirement to give enough notice ii. At-Will Employment Relationships a. good faith also imposes limitation on employers ks w/employees and their right to terminate (no duty for at-will employees) b. what makes an employer/employee relationship different than a franchisee-distributor relationshipdon’t have big substantial initial investment in the arrangement; thus don’t need amount of time before termination to recoup investment c. do NOT have to give employe’s reasonable period of notice (i) practically, probably wouldn’t do their job as well; whereas franchisee has their own incentive to remain profitable regardless of ending relationship d. plainly opportunistic discharge-where employer believes they can save $$ by not paying employee commissions previously earned, another common ex. Hoping to not pay penchant benefits (i) discharge in bad faith, even for at-will contracts… (ii) court places limits on these-makes employer liable for damages e. 2 qualifications for employee bringing retaliatory discharge cause of action (Sheets) (i) had to be an employee that was qualified to have a view about the practices the employer was supposedly engaged in (ii) the violation of the practices at issue has to be fairly clearly illegal-violation of a statute or regulation (a) use tort for wrongful termination f. whistleblowers-employer’s limitations on being able to fire employees after blowing the whistle on the conduct of the company (i) this is where retaliatory discharge claims fall under now (ii) whistleblower statutes supersede tort for wrongful termination in many states 3. Use of Commercial Practices Evidence (COP, COD, TU) to Supply K Terms Remember: express terms>course of performance>course of conduct> trade usage a. IF party tries to persuade ct to apply term based on commercial practices evidence, but that terms would essentially add to the terms of the k or even quality of alter terms of k in some manner is that evidence admissible? (i) Yes, it generally will go to the fact-finder will be constrained by the consistency priority rule (ii) We ask the main question (same as the interpreting question)-can we make a reasonable interpretation of the k which would make the express terms of the k reasonably consistent w/whatever evidence is being offered (1) If so, then use the interpretation, EVEN to apply a missing term (2) If you can’t make the suggested term consistent w/the express terms of the k then use the consistency priority rules and the express terms trump (iii) Nanakuli Case-Rule: trade usage and course of performance will be implied into contracts if there is evidence that they are so prevalent that the parties would have intended to incorporate tem into the terms of the k (1) they used the total negation test-say that since it didn’t totally negate the term so it really isn’t inconsistent w/the express terms (it’s a stretch but the UCC allows COP, COD, and TU to be reasonable in light of k) (iv) Rule: on test, use the total negation test to try and make the TU, COD and COP not negate the express terms and be reasonable 20 (1) a standard merger clause isn’t going to be enough to negate COP, TU, and COD to negate express terms of the k (2) The merger must expressly state that COP, TU, and COD cannot be used to interpret terms of k or supply a missing term to the k Overview: Ch 7 When Performance is Required 4 Categories: 1) Express conditions 2) CCE-constructive responses to breach 3) Parties Responses to Breach –how to parties have to act when there is a breach 4) Anticipatory breach-the other party is anticipating breach bc of the other party IV. Disputes About the Non-Performance of Contract Terms A. Express Conditions 1. Definition, Effects and Interpretations of Express Conditions a. What is a condition? i. Rest. 224-an event that one or both parties have put in the k that has to occur before the parties’ duty of performance will arise ii. sometimes parties parties don’t want to perform under a k unless something happen iii. Another reason for putting a condition into a k is so if other party doesn’t perform, you don’t have to perform, lets you get out of the k b. If you have an express condition, it’s subject to strict construction i. condition must occur precisely as t’s called for in the k or the parties’ duty who is subject to that condition will never arise c. If a condition is put in a k and is solely for the benefit of one of the parties, the party whose benefit that the conditionis for is entitled to waive the nonoccurrence of the condition d. A condition precedent is a fact or event which the parties inent must exist or take place before there is a right to performance, and a k is not enforceable before all conditions precedent are satisfied e. Importance of dates in Ks-if there is a date and it isn’t met the court will decide if time was of the essence. (i) Unless k explicitly states that time was of the essence or the circumstances state that time was of the essence, then courts won’t say time is of the essence. Even if is says that time is of the essence, court knows parties use boiler plate forms, so they still have to decide whether it really was “time of the essence” ii. If court believes that time was not really important to the k then the court will construe it as a duty or promise and then it is just a breach, not a promissory condition, then can’t get out of the k, just get damages 2. Distinguishing Between Express Conditions, Promissory Conditions and Duties a. Two main differences between a n express condition and a promise (1) One gives the right to breach and discharge and the other doesn’t i. Duty or promise: if someone doesn’t fulfill their duty is’ a breach giving rise for damages (the other party might have to still perform if the breach isn’t material) 1-there is a preference for duty ii. Express Condition-they aren’t breached, they happen or they don’t 1-if the condition occurs then the other party who was subject to the condition has a duty to perform. Then if the duty isn’t fulfilled then it’s a breach 21 2-if the condition doesn’t occur then the party subject to the condition has their performance discharged so they can just get out of the k iii. Promissory condition-both a duty and a condition-someone promised to make a condition happen 1-if promissory condition doesn’t happen, then you have both a breach and a discharge 2-Ex. A trucker promises to get buyer’s goods to CA by May 1st (this is a promise). And the k expressly provides that the buyer will have no duty to pay trucker unless the goods arrive on time (condition) . So if this is breached they can discharge and sue for damages (2) One is measured by the standard of strict compliance when deciding whether the condition occurred i. a condition must have strict compliance ii. a promise is measured by looser standards-substantial performance b. Restatement 227(1)-if you are unclear about what you are dealing with (promise, condition, or prom. Condition) than an interpretation that prevents forfeiture of the parties is encouraged 3. Satisfaction Clauses-as conditions under express conditions a. party must exercise good faith b. ways of measuring i. subjective or objective-depends on the nature of the k ii. Rest. 228-if a k w/a satisfaction clause is ambiguous about whether it is an objective or subjective standard, then a reasonable standard (objective) is used (1) ex. Portrait of child should be subjective (2) work done around house is subjective-plumber’s work c. So in satisfaction clauses ask: i. Is it clear what standard? If so, and is subjective, good faith still must be used ii. If not, then we use 228 and apply an objective standard d. Third party satisfaction i. some of risk inherent in making the other party’s duty condition on its own satisfaction can be eliminated by making its duty conditional instead on the satisfaction of an independent third party, usually an expert of some kind ii. expert has to render opinion in good faith iii. reverse of regular satisfaction-preference for a subjective standard 4. Mitigating Doctrines re the Non-Occurrence of Express Conditions a. Excuse by Breach/Hindrance-courts excuse non-occurrence bc the duty of good faith and fair dealing wasn’t followed by the other. They caused the breach i. EX. I won’t look at portrait to see if I even like it to determine satisfaction. I just say I don’t like it and won’t pay for it being finished. I didn’t use good faith. (1) express term breached (2) the express duty of good faith & fair dealing breaches b. Excuse by Waiver i. if you have a condition that’s put in the k for the benefit of a party then they can waive that condition and enforce the k. the other party wouldn’t be able to waive the condition bc it wasn’t for their benefit ii. Ex. F you paint my house red, I will pay, but then they start to paint the house blue, I can waive the condition and make them keep performing &I will pay iii. Waiver happens in 2 ways: (1) express-expressly waives non occurrence of condition (2) implied-cts usually don’t find this unless non material breach 22 iv. If waiver occurs before condition was to take place then they can still retract that waiver unless the other party has relied on the waiver v. If waiver was after the condition had to be performed, you have 2 options (1) make an election to continue performing k (if we decide this then we are bound and can’t retract or discharge) (2) discharge the k bc the condition wasn’t met c. Excuse to Avoid Forfeiture-why courts would excuse the condition i. the occurrence of the condition has become impracticable (bc of events that have taken place) ii. Rest. 229-if the condtion is non-material and because it didn’t occur we are going to have severe or disproportionate forfeiture then the court can excuse it B. Constructive Conditions of Exchange (Implied Conditions)-only bilateral ks 1. Types of Independent and Dependent Promises a. Independent promises (CL)-if a party breaches, the pl can recover damages regardless of whether he has performed his end of the k b. Promises that are dependant on each other but 1 performs before the other -if a party causes a condition to fail, the other party is excused from performance altogeth c. Promises that are dependant on each other but both perform simultaneously -if one party is prepared to perform and the other party is not, the prepared can sue for the other’s breach i. in deciding which one 1-3, look @the reasonable intent of the parties ii. today we presume that promises are dependent on each other unless the k specifically says otherwise (opposite CL) 1-exception-Employee ks are usually independent promises. Must keep secrets confidential even if we break our employment k and fire you 2. Principles re Order of Performances a. Restat. 234-i. states a preference where the words and the circumstances are ambiguous states a preference for simultaneous performance, if they can be performed simultaneously (1) where all or part of the performance is capable of being performed simultaneously, it’s all due simultaneously-buyers partial payment is due when partial performance occurs ii. unless one of the promissor’s performance is going to take a period of time to be rendered, whereas the other party’s performance can occur instantly (1) Stewart case-in absence of agreement to the contrary, a court cannot imply a condition to make payments at reasonable intervals rather than upon completion of the k (this is the 2nd part of R 234) b. For Type 3 category (dependent promises performed simultaneously) i. usually sale of goods or land sale, there is a simultaneous exchange ii. Do you have to render your performance even though the other party doesn’t render their performance when performances should be simultaneous? (1) in order to hold the other party liable for not performing, you must either prove 2 options: (a) render your own performance (b) at least make an offer to tender your performance w/a present ability to make good on your offer to perform 3. Mitigating Doctrines re the Non-Occurrence of Implied Conditions a. Substantial Performance (with Perfect Tender Rule exception) for implied conditions i. In implied conditions occurring/not occurring, we’re talking @substantial performance ii. Substantial performance means there has been a non-material breach iii. Rest. 241-5 main factor in determining if a party rendered subst. perf. or not 23 (1) extent to which injured party will be deprived of what reasonably expected *** 1 is the most important factor (2) Extent to which the injured party can be compensated (3) Extent to which breaching party will suffer forfeiture (4) Likelihood the breaching party will cure his failure (5) The extent to which the breaching parties’ behavior comports w/good faith and fair dealing (a) first two factors deal w/the breaching party (b) if damages not easily compensated (2), we’re going to say this is a factor in non-substantial performance occurring (c)the more difficult it is to compensate damages=material breach/non substantial performance (2 is a corollary of 1) (d) (3)-(5) focus on the breaching party’s interest in the k (e) if acting in bad faith when the breach occurred, likely to find nonsubsttantia performance iv. Jacobs and Young case-the wrong brand of pipe put in house by contractor, no showing of bad faith…honest mistake, pipe of same price & quality; Factors of 241: (1) expectation of injured party (owner)-substantial performance-got pipe he asked for except wrong brand (2) extent that the injured party could be compensated-would have to pay $0, no damage here…there was substantial performance (3) extent of forfeiture that contractor would go through-wouldn’t get last payment of $3500 (about 5%)=this could go either way (4) likelihood to cure damages-put in right manufacturers’ pipenot likely, would be hard to do, favors non-substantial performance (5) contractor did work in good faith-yes, innocent mistake=substantial performance v. Guidelines to use if contractor has performed or not (1) structural defect-weighs in favor or non-substantial performance (2) defect s compromise 10% or more of the k price vi. Perfect Tender Exception-called strict compliance (1) during 19th century-rule developed that a buyer was entitled to reject goods unless the seller made a perfect tender (2) Sales of goods are measured in this way: risk of forfeiture is much less, because in most situations, its easier for a seller to mitigate forfeiture by resale of goods (3) if the seller has in anyway deviated from anything in the k (type of goods, quantity, shipment) then courts held that the implied condition of the buyer’s duty to pay has not been satisfied…buyer’s duty to pay is discharged (4) UCC softens this rule bc of the chance for abuse: (a) UCC provides a seller w/a right to cure any defect if the time for performance has not yet expired (b) Applying a standard of substantial performance rather than perfect tender in 2 main situations (i) if buyer formally accepts the goods, and after acceptance then attempts to revoke acceptance (ii) sale of goods k that calls for delivery of goods in installments/shipments vii. NOTE: when looking @cost to repair-see if it is grossly disproportionate (1) general rule-the injured party is entitled to the cost to repair/complete (2) In Plante case-owners recovery on the misplaced wall was the loss in value, which was zero (Jacobs & Young exception) (3) if a case of non-material breach and grossly disproportionate-Jacobs and Young exception applies-limit to loss in value 24 b. Divisibility-second mitigating doctrine i. Where a party has substantially performed at least part of the k and it makes sense to divide the k, parties can enforce that part ii. ASK: Can the k be reasonably apportioned performance into roughly equivalent equal exchanges of value? iii. If the k is severable, as opposed to entire, then payment may be requested for the measure of performance which was completed c. Restitution to Breaching Party-for unjust enrichment i. Restatement 374(1): Kirkland rule-allows breaching party to get restitution unless the breaching party is acting in bad faith ii. courts look to the concept of good faith (1) modern trend-give breaching party recovery as long as the breaching party was not acting in bad faith (2) old law-breaching party can’t get restitution iii. How do we measure benefit conferred? (1) cost avoided=fair mkt value of the contractor’s services iv. To the extent that the parties have agreed in the k that the seller should be able to keep the down payment as damages in case of damages, is the seller entitled to recover damages if the buyer breaches? (1) 374(2)-it depends: whether the seller getting to keep the deposit is a reasonable amount of liquidated damges instead of an unreasonably large penalty (2) only if the k provides for the seller to keep the k (liquidated damages clause) in the case of the buyer’s breach (3) when k is silent as to keeping he deposit when the buyer is in breach apply Kirkland rule/374(1)-as long as conduct is not in bad faith, buyer will be able to get back deposit C. Responses to Breach-if parties specify what a material breach would be ing ht k, then they are entitled to do that, this is just dealing w/when they don’t agree 1. Permissible responses to Material and Non-Material Breaches a. Non-material breach and there is SP-then it is a partial braeach and the other party must continue to their own performance and then seek damages b. If there is a Material breach/non sp, then the other party can choose 1 or 2 options i. call if a partial breach-and have breacher continue to perform & you perform; injured party can seek damages for the breach ii. Call it a total breach-and you must stop your performance and allow the breacher a reasonable opportunity to cure and if he doesn’t you can terminate the k and seek damages c. What does a reasonable opportunity to cure mean? -only have to give a reasonable period in relation to the k -if there’s clear repudiation by the breaching party, no use in giving the breaching party time to cure it Rest. 242-(3 main factors to consider) i. How material was the breach using factors fro Rest. 241 (1) we know it’s material, but how material (2) if its very material, not expected to give very much time for cure (3) likelihood breaching party will cure breach ii. Would the non-breaching party be prejudice by waiting a longer period of time to allow the breaching party to cure the breach iii. Does the k expressly make time of the essence in the parties’ performance 25 (1) if a boiler plat times is of the essence and the parties didn’t ace, then it’s just a factor and not dispositive (2) if not of the essence, give more time d. Reasons: i. to fulfill injured party’s expectation interest ii. want to give injured party an opportunity to hold the k together and not waste economic and judicial resources e. When non breaching party is wrong about it being material: i. IF you stopped performance thinking you are entitled to, you could actually end up being the breacher f. Set off damages-deducting maintenance charges from the rent i. CL jurisdictions are split if a party can use set off for damages ii. sale of goods-UCC-DOES recognize the right of set off g. Progress payments i. withholding progress payments in a k is considered a material breach unless progress payment withheld is clearly insignificant to total amt of k 2. Undue Hindrance or Prevention of Performance as Material Breach A. Hindrance a. When can you tell whether one party hinders the other party’s performance is a material breach of the duty of good faith and fair dealing? i. must be intentional and substantial interference b. 2 ways a party can hinder a party’s performance i. affirmatively or ii. by omission-failure to cooperate when that is necessary for performance B. Prevention a. actual prevention is always a material breach of the duty of good faith & fair dealing b. just making another party’s performance more difficult or expensive is not enough for the breach for the duty of good faith and fair dealing c. If the other party’s cooperation is necessary for your own performance & the cooperation is not given, that’s enough for a material breach D. Anticipatory Breaches 1. Effect of Repudiation Prior to Time for Performance a. injured party can sue for damages before actual time for performance has come b. if you’re in a k and the other side repudiates before their time of performance arises, under anticipatory breach k you can sue right away, as long as it doesn’t fall under the one sided contract c. Exception: one sided contract-anticipatory breach doctrine doesn’t apply in cases when the injured party has already performed its side of the k @the time the repudiation occurs i. practical importance of this full performance exception: doesn’t apply to a unilateral k bc there is no k until there is full performance d. if you have full performance by the seller and the buyer actually breaches on an installment payment, have to wait until each payment becomes due before you can sue i. this is for anticipatory and actual breaches e. anticipatory repudiation can only be demonstrated by an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so 2. Definition of Repudiation; Rest. 250 a. Express-clear statement by one party to the other party (has to be directly between the two parties) that it will commit a material breach of the k when its time for performance comes due i. statement that “will not” or “cannot: perform the material obligations of the k 26 b. Implied repudiations/by conduct-voluntary & affirmative act that prevents the other party’s performance to the k i. cannot create by omission ii. must be an act, can’t just be financial difficulties 3. Possible Responses to Repudiation (including Right of Retraction) a. Responses to Repudiation i. Treat the duty as discharged ii. if you want to try and hold the k together, you can wait until actual performance arrives to see if the repudiating party actually performs or not iii. can urge the repudiating party to detract repudiation and continue performance (1) limit on party’s ability to wait and see if repudiating party will peform-risk of being charged w/violating own duty of mitigation b. Repudiating party’s Right to Retraction R 256 (1)-Repudiating party can retract its repudiation except in 2 situations i. if the injured party has materially relied on the repudiation ii. injured party has notified the repudiating party that it accepts it as final (1) gives injured party clear guidelines R257-adds a corollary-if you’re the injured party and urging repudiator to continue performance, won’t infringe on /prejudice your rights as the injured party to consider repudiation as final 4. Demanding Assurances of Performance in Absence of Repudiation-constructive repudiation a. There is no repudiation that allows you take action but something has happened so the other parties’ performance doesn’t look probable b. Traditional CL-no right to demand assurance c. CL courts are split, but the Modern Trend is the same as 2-609, (2-609 is same as 251) d. UCC 2-609 (1) -i. if reasonable grounds for insecurity about performance arises, then the insecure party can… ii. suspend own performance and demand adequate assurances of due performance (1) insecure party hasn’t received consideration for that part of the k (2) can suspend performance and wait for other party’s performance if it’s commercially reasonable to do so (a) unreasonable to stop performance if maintaining performance would mitigate damages e. UCC 2-609(4)-Effects of (i) and (ii) i. if reasonable grounds have arisen and thus there is justified demand, and the other side fails to provide reasonable assurance in a reasonable time (30 days or less) then the insecure party can treat the failure to get assurance as a repudiation and can immediately treat the k as discharged and can sue on the k f. Majority: Reasonable grounds for insecurity has not arisen when the financial situation of the other company has not changed i. if nothing about the risk profile has changed since the party negotiated the k, most jurisdictions will take on the majority view point g. What are adequate assurances (2-609) i. shows they were actively involved in applying for other loans,; can get their party guarantees from affiliate companies h. What are reasonable grounds for insecurity about the buyer i. seeing the company keep failing on ks w/other companies --------------------V. Excuse of Non-Performance-3 main doctrines 1-mistake, 2-impracticability, 3-frustration of purpose 27 A. Mistake R 151-mistake is a belief by the parties not in accordance w/the facts -must exist at the time of the k 1. Elements of Mutual Mistake Defense-4 requirements R152-mutual mistake a. prove both parties shared mistake @t facts existing @the time the k was entered into b. basic assumption onto which the mistake was made c. mistake had a material affect on the exchange of consideration; showing a sever e detrimental affect of the value of the k to the claimant d party claiming the mistake didn’t bear the risk of it (R 154) i. R 154-bearing the risk-can happen in 3 ways a. a party does bear the risk of mistake when that risk is allocated to him by agreement of the parties b. or conscious ignorance-the party knows there is uncertainty w/respect to a certain condition of the k , but agrees to go forward anyways (1) Rest. 157-gives the buyer a break, just bc the claimant has failed to investigate the facts surrounding the transaction, won’t hold them liable as long as in good faith c. when the court thinks it’s reasonable for the claimant to bear the risk, allocates it; examples: i. if the claimant has special expertise in the area ii. there can be a local trade usage that allocates the risk Renner v. Kehl-a purchaser of real estate leases sought to rescind the sales k on the ground that, although the parries were under the belief the land was suitable for farming, the water wells on the land proved inadequate This is a mutual mistake case; Analysis: 1) mutual mistake-both thought there was enough water 2) basic assumption-was that there was sufficient water for growing jojoba 3) mistake was material bc the purpose for buying the land for to grow jojoba, no reasonable alternatives 4) claimant didn’t bear the risk a. did the k allocate the risk-No b. is the buyer aware that he only as limited knowledge but treats his knowledge as sufficient-buyer didn’t investigate before k entered in to, test wells not drilled until after k made, BUT Rest. 157 give the buyer a break as long as in good faith c. risk allocated by the court-buyer has expertise or TU? No -Remedies: trying to return parties to original position as if k had never occurred -look @the benefits netted on the other one 2. Elements of Unilateral Mistake Defense-5 requirements Rest. 152-unilateral mistake a. have to show a unilateral mistake b. basic assumption-same as mutual c. material affect-same as mutual d. claimant does not bear the risk-same as mutual e. (a) the effect of the mistake is unconscionable OR (b) the other party has reason to know about the mistake or was responsible for causing the mistake * this makes it harder to show than mutual mistake B. Impracticability and Elements of Defense (1) Generally… 28 a. Looking for someone claiming that an event that happened after the k was entered in to should excuse their performance, made it more difficult or burdensome to provide b. usually a Seller’s defense-that what they were supposed to give to the buyer under the k is a lot harder or more costly to give bc something that happened after the k was entered into made it that way i. it’s rare for a buyer to claim impracticability-would have to be a claim that the buyer’s obligation to pay became unduly burdensome/costly (2) Traditional rule-the seller would NOT be excused unless performance became impossible for 1 or 3 reasons: a. change in the law that made seller’s performance impossible b. k for personal services-if the person to provide those services either died or became disabled c. where the k contemplated that a specific thing was necessary to exist for the seller to render its performance and that thing was destroyed through no fault of the seller (usually act of God-fire, hurricane, etc.) i. Taylor v. Caldwell-music hall burned down through no fault of the seller (3) Impracticability (Restatement § 261)-same as UCC 1. Supervening event occurs making agreed performance impracticable a. Something happens after K formation which now makes a party’s performance more difficult /impossible to provide b. Agreed performance has become impracticable, no alternatives c. Impracticable – so difficult, burdensome, or unfair to perform that it overcomes the traditional presumption that a promisor normally bears the risk that events will change after the contract is entered into 2. Non-occurrence of event was basic assumption of both parties a. Both parties never contemplated what occurred b. What occurred must have been a fundamental condition for performance c. Should the risk be allocated to one party or both parties? i.Foreseeability of the event (more foreseeable – claimant bears risk) ii.Express or implied allocation of risk by the contract language (express warranty, price escalator clause) iii. Trade customs /practice; public policy; one party’s expertise 3. Impracticability was not fault of claimant a. Some way that claimant could have mitigated the risk i. e.g. claimant could have gotten insurance (4) Force Majeure Clauses-a party anticipates an impracticability situation or frustration of purpose and list what the possible events are a. if force majeure clause is clear & unambiguous, then it will apply b. if k doesn’t contain a force majeure clause or it’s ambiguous, then analyze under Restatement 261 C. Frustration of Purpose and Elements of Defense 1) In general a. tends to be a buyer’s defense 29 b. a claim by the buyer that some event occurred after the k was entered into that made the value of the k to that buyer substantially less than when the k was entered into c. Krell v. Henry-Krell rented a room in his hotel to Henry and both believed that the room would be used to watch the king’s coronation, but then the king got sick and the coronation was cancelled i. the purpose of renting the room was frustrated bc the coronation was cancelled, moreover, both Krell and Henry assumed that the coronation was the foundation of the k 2) Restatement 265-Frustration of Purpose -modern trend in CL courts and for UCC -if you have a force majeure clause-see if it excuses the buyer or not-if you don’t have one, or it’s ambiguous, go to R 265 analysis R 265: (1) supervening event occurred that substantially diminished the worth or value of the k to a claimant (usually the buyer) (2) Non occurrence of the event was a basic assumption on which both parties made the k (3) frustration of purpose was not the fault of the claimant -nothing the buyer could have done to prevent the diminishment D. Remedies if Performance Excused 1) When a party’s performance is excused for mistake, impracticability or frustration, what is the remedy the party will get: a. if the k is divisible into parts that were affected and were not i. will enforce the unaffected part and provide restitution for the excused parts, assuming one party was unjustly enriched b. if you’re talking about an indivisible k i. just look @the situation and see if unjust enrichment would occur if restitution was not granted VI. Contract Rights of Third Parties A. Third Party Beneficiaries -under traditional CL-didn’t recognize C as a third party beneficiary -a third party beneficiary has the right to enforce a k made for his benefit -the intent of both, not just one of the parties to a k determines whether a third party is to be afforded third party beneficiary status under a k -privity is not needed to recover damages by third party creditor beneficiary -expansion to allow donee beneficiaries right to enforce k -donee beneficiary-you are a third party where one of the terms of the k was to bestow you with a benefit 30 A(promisor)B(promisee) ↕ C (beneficiary) 1. Intended v. Incidental Beneficiary a. In general i. intended beneficiary-if you can qualify, can sue directly ii. incidental beneficiary-no right to enforce k What does it take to be classified as an intended beneficiary b. Restatement 302 i. C qualifies as a creditor or donee beneficiary ii. Show that promisor A shared B’s intent to make C a third party beneficiary, to allow C to sue A if A fails to perform the promise Factors to consider: (1) look @the k itself-express language that it’s supposed to benefit C (2) does the k call for A’s performance directly to render to C, if it requires direct performance, strong indication that A shared B’s intent (3) public policy reasons that apply to this situation 2. Other a. Effect of Intended Beneficiary Status on Related K Rights i. once C is designated as a beneficiary, both C& B could sue A, but A would only have to give one satisfaction/performance ii. c retains rights to sue either A or B iii. once C designated as a beneficiary: (1) the legal rights of B and C are not effected (2) A is allowed to assert any defense against C that it can assert against B b. Defenses of Breaching Party c. Vesting Principles-of 3rd party rights i. original k parties are allowed to withdraw k unless one of these three things happens before notice: (1) 3rd party, before receiving notice, has materially relied (2) 3rd party has brought suit on the k (3) asked for formal approval from the beneficiary B. Assignments and Delegations 31 1. Assignments-B transfers its right to receive A’s performance to C a. Requirements to Effect an Assignment i. need to have a manifestation of intent by B to effect a present transfer of its rights to receive A’s performance to c (1) present transfer? Manifestation of intent must also evidence B’s intent to terminate its rights under the k ii. words of assignment: B hereby sells, transfers or assigns its rights in the k to C (1) typical words, but not required b. Legal Effects of an Assignment i. if B affects the valid assignment to C, B has extinguished all rights, can no longer sue A ii. A is no longer liable to B, but is directly liable to C iii. if suit arose against A, A could bring up any defenses against C that it would have been able to assert against B c. Presumption of Assignability and Exceptions i. law encourages the assignability of k rights bc k rights are viewed as a piece of property and the law favors property rights being fully transferable ii. R 317 (2)(a)-assumption of assignability can be overcome if it would materially affect the obligation to B in an adverse manner, 2 main ways: (1) increase A’s burden or cost under the k (2) it would make the riskier in terms of getting paid (this would only happen if there was an assignment combined w/a delegation) d. Defenses of Non-Assigning K Party i. rule about boiler plate non assignment clauses (1) R 322-non assignment of the k-not enough-nonassiggnmen of k rights-a little better, if A incurs any damages from assignment, can sue B for damages ii. if there is a specific negotiation about assignment clauses (1) want to show it was important to you and make it clear, courts will then usually uphold the nonassiggnmen clause 2. Delegations-B delegates the duty it owes A to C; delegate duties a. Requirements to Effect a Delegation i. C has to manifest an intent to accept the delegation ii. the words and circumstances surrounding the k evidence a manifestation of delegation and acceptance b. Legal Effects of a Delegation 32 i. C becomes liable in k to either party if C fails to perform its duties ii. there can only be 1 judgment so whoever gets there first iii. A is obligated to accept performance from C if effective delegation, but b remains completely liable under the k secondarily c. Presumption of Delegability and Exceptions i. duties are generally delegable under 318(1) except for 2 main instances: (1) k iself in language can prohibit duties (a) if k can be read to expressly or impliedly to bar delegation, court will generally honor this (b) much easier to show than assignments ii. when a non-delegating party A has a substantial interest in the performance of the k by B and no other person (1) personal service k Q— -Force majure clause -donee beneficiary-are all 3rd party beneficiaries this? -defenses under 3rd party beneficiaries