CONTRACTS
Professor J.J. White, Fall 2003
Monday, Dec. 15, 8:00 AM - 1:00 PM, Hutchins 220 (520/03, 31060, E15918)
I. The Bargain Theory of Contract
A. Consideration
1. There must be a reciprocal promise for an executory (not yet
performed) contract to be enforceable.
2. Consideration indicates the intent of the parties to be bound.
3. Consideration must be bargained for to be valid. R. 71.
4. If the requirement of consideration is met, there is no additional
requirement of gain to the promisor or loss to the promise, equivalence
in the values exchanged, or ―mutuality of obligation.‖ R. 79.
5. Forbearance to assert or the surrender of a claim or defense which
proves to be invalid is not consideration unless (a) the claim or defense
is in fact doubtful because of uncertainty as to the facts or the law, or
(b) the forbearing or surrendering party believes that the claim or
defense may be fairly determined to be valid. R. 74.
6. There does not have to be performance to make a bargain, i.e. output
contract.
7. Option contracts
a. Restatement 87: An option is binding if it ―is in writing and
signed by the offeror, recites a purported consideration for the
making of the offer, and proposes an exchange of fair terms
within a reasonable time.‖
b. UCC 2-205: A ―firm offer‖ is ―an offer by a merchant to buy or
sell goods in a signed writing‖; it is not revocable for lack of
consideration; it must be ―for a reasonable time‖ not to exceed
three months.
c. CISG: ―an offer cannot be revoked if it indicates, whether by
stating a fixed time for acceptance or otherwise, that it is
irrevocable.‖
8. Default position of employment contracts is at-will; consideration
problem.
9. Moral consideration, where promisor acts from a strong sense of duty
toward the promise, and past consideration, where a promise is made
to recompense the promise for a benefit previously conferred, are
usually not enforced. Exceptions:
a. A promise to pay a debt barred by the statute of limitations.
b. A promise to perform a voidable obligation
c. A promise to pay a debt discharged by bankruptcy.
d. A promise made to a charitable organization.
e. A promise to settle property upon marriage.
Restatement 86:
(1) A promise made in recognition of a benefit previously received by the promisor
from the promisee is binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the
promisor has not been unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
B. Reliance
1. Equitable estoppel: When one party knowingly misrepresents material
facts that are then predictably relied upon by the other party, the
misrepresenting party is ―estopped‖ (precluded) from asserting facts
that contradict its misrepresentations.
2. Promissory estoppel: ―A promise which the promisor should
reasonably expect to induce action or forbearance of a definite and
substantial character on the part of the promise and which doees
induce such action or forbearance is binding if injustice can be avoided
only by enforcement of the promise.‖ Restatement 90.
3. Evolution of doctrine of reliance not reflected in section 90:
anticipatable reliance no longer need be ―definite and substantial,‖
courts may consider reliance by third parties; the remedy for breach
may be limited as justice requires.
C. The Restitution Interest
Liability may be imposed on a person who receives a benefit from another
even in the absence of a promise, on a theory of unjust enrichment or quasi-
contract. Usually requires that conferrer have an expectation of payment and
conferee know or have reason to know of that expectation.
II. Negotiation and the Contract
A. The Role of the Courts
Need of certainty in the transactions of commercial life demands a hands-off
approach versus equity of a particular situation.
B. Offer and Acceptance
1. Restatement definition of offer: ―the manifestation of willingness to
enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will
conclude it.‖
2. An offer with unresolved terms may be a binding offer, with
expectation that unresolved terms will be negotiated in good faith. See
UCC 2-305 Open Price Term and 2-311 Options and Cooperation
Respecting Performance.
3. Ways in which an offer can terminate (Restatement 36):
i. counteroffer
ii. specified or reasonable time limit
iii. revocation
iv. death or decapacitation
v. by condition
4. Meeting of the minds—Restatement 20: ―There is no manifestation of
mutual assent to an exchange if the parties attach materially different
meanings to their manifestations, and one party is unaware of the
discrepancy while the other party knows or has reason to know the
meaning attached by the other.‖
5. Mirror image rule—Restatement 59: ―A reply to an offer which
purports to accept it but is conditional on the offeror’s assent to terms
additional to or different from those offered is not an acceptance but is
a counter-offer,‖ and Restatement 61: an ―acceptance requesting a
change or addition in the terms of the offer‖ is not invalid ―unless the
acceptance is made to depend on an assent‖ to the new terms.
6. An offer is revocable unless it is a valid option contract.
7. UCC 2-206: Acceptance of an offer can be made in any reasonable
manner unless otherwise unambiguously indicated; shipment of goods
is an acceptance of an offer to buy goods unless there is seasonable
notification that it is only an accommodation; where performance may
be acceptance an offeror who is not notified of acceptance within a
reasonable time may treat the offer as lapsed.
8. The offeror is master of the contract (within reason). Restatement 30.
9. Restatement 62: When an offer is ambiguous as to whether a promise
or a performance constitutes acceptance, acceptance by performance
―operates as a promise to render complete performance.‖
10. Restatement 45: When an offer clearly envisions a unilateral contract
(invites acceptance by performance and does not invite a promissory
acceptance) an option contract is created when the offeree begins
performance, but the offeror’s promise is not enforceable until
performance is completed.
11. Restatement 43. Indirect Communication Of Revocation : ―An
offeree's power of acceptance is terminated when the offeror takes
definite action inconsistent with an intention to enter into the proposed
contract and the offeree acquires reliable information to that effect.‖
C. Negotiation and Closure
1. UCC 2-204
(1) A contract for sale of goods may be made in any manner sufficient to show
agreement, including conduct by both parties which recognizes the existence of such
a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even
though the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail
for indefiniteness if the parties have intended to make a contract and there is a
reasonably certain basis for giving an appropriate remedy.
2. Restatement 33:
(1) Even though a manifestation of intention is intended to be understood as an offer,
it cannot be accepted so as to form a contract unless the terms of the contract are
reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis for
determining the existence of a breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain
may show that a manifestation of intention is not intended to be understood as
an offer or as an acceptance.
3. Where an agreement is found to be enforceable although material
terms are not determined, there is a duty to negotiate in good faith.
UCC 2-305 gives guidelines for open price terms.
4. Pre-contract factors that may bind parties:
Always legal liability Sometimes Never
real option agreement to agree negotiations
firm offer section 90 reliance
promise about contract agreement in
formation (if done correctly) principle
D. Good Faith in Contract Formation
1. No implied duty of good faith in US during contract formation period
(see UCC 1-304, Restatement 205—obligation of good faith in
contract performance or enforcement).
2. European doctrine culpa in contrahendo makes parties liable for
damages for bad faith negotiation if it leads to a failure to contract.
Common law view is that parties entering negotiations in hope of gain
bear the risk of whatever loss results if the other party breaks off the
negotiations.
3. Parties negotiating in bad faith may incur liability under implied
contract or promissory estoppel.
E. Problems with Standard Form Contracts
1. UCC 2-207:
(1) An acceptance with different terms is valid unless conditional;
(2) New terms become part of the contract unless
(a) the offer expressly limits acceptance to its own terms;
(b) they materially alter it; or
(c) notification of objection within a reasonable time
(3) If parties behave as though they have a contract although their writings do not
establish one, the contract consists of terms on which the writings agree plus UCC
supplementary terms. (Knock-out rule)
2. Traditional mirror image rule held that the last shot wins.
3. UCC 2-204 (2): ―An agreement sufficient to constitute a contract for
sale may be found even though the moment of its making is
undetermined.‖
4. Integration clause—i.e., ―this document is the final expression of our
agreement‖—is not believable in a document that was not negotiated.
5. Traditionally courts interpret contracts against the drafter (contra
proferentem).
6. Reasonable expectations doctrine enforces what the non-drafting party
should have reasonably anticipated as the contents of the contract. (see
subsection (3) of 211 below)
7. Restatement 211. Standardized Agreements
(1) Except as stated in Subsection (3), where a party to an agreement signs or
otherwise manifests assent to a writing and has reason to believe that like
writings are regularly used to embody terms of agreements of the same type, he
adopts the writing as an integrated agreement with respect to the terms included
in the writing.
(2) Such a writing is interpreted wherever reasonable as treating alike all those
similarly situated, without regard to their knowledge or understanding of the
standard terms of the writing.
(3) Where the other party has reason to believe that the party manifesting such
assent would not do so if he knew that the writing contained a particular
term, the term is not part of the agreement.
F. The Statute of Frauds
1. UCC 2-201:
(1) Contracts for the sale of goods of $500 or more must be in writing and signed by
the party against whom enforcement is sought. Not invalidated by missing or
incorrect terms, but goods not included are not covered.
(2) Between merchants (see 2-104 (1)) if a writing is sent (a) within a reasonable
time and (b) it is sufficient against the sender and (c) the party receiving it has
reason to know its contents and (d) the receiving party does not object within 10
days, it is enforceable against the receiving party.
(3) A contract invalid under (1) is enforceable (a) where seller started a custom job
for buyer, (b) if party admits that a contract was made in court, or (c) if the
payment or goods have been accepted.
2. Restatement 110
(1) The following classes of contracts are subject to a statute, commonly called the
Statute of Frauds, forbidding enforcement unless there is a written memorandum
or an applicable exception:
(a) a contract of an executor or administrator to answer for a duty of his
decedent (the executor-administrator provision);
(b) a contract to answer for the duty of another (the suretyship provision);
(c) a contract made upon consideration of marriage (the marriage
provision);
(d) a contract for the sale of an interest in land (the land contract provision);
(e) a contract that is not to be performed within one year from the making
thereof (the one-year provision).
3. A contract that has only a very slight possibility that it will be
performed within one year such as a lifetime contract nonetheless does
not fall within the Statute.
4. ―The memorandum [to fulfill the Statute of Frauds] may consist of
several writings if one of them is signed and it is clear that they relate
to the same transaction.‖ Restatement 132.
5. Common law rule (Restatement 131): the writing must ―state with
reasonable certainty the essential terms of the unperformed promises
in the contract.‖
6. Traditionally, promissory estoppel could not be used to circumvent the
Statute; still controversial, but included in Restatement 139: a
―promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promise or a third person and
which does induce the action or forbearance is enforceable
notwithstanding the Statute of Frauds if injustice can be avoided only
by enforcement of the promise. The remedy granted for breach is to be
limited as justice requires.‖ UCC’s stance is disputed: reliance
proponents point to 1-103: ―provisions of the UCC are to be
supplemented by . . . estoppel,‖ while opponents read ―Except as
otherwise provided in this section‖ as limiting its application to 2-201.
Proposed revision drops this line.
III. The Content of a Contract
A. The Parol Evidence Rule
1. UCC 2-202: Terms on which the parties’ writings agree or which are
included in a writing intended as a final expression of their agreement
cannot be contradicted by evidence of a prior or oral agreement, but
can be explained or supplemented by
b. course of dealing
c. usage of trade
d. course of performance (see 1-303)
e. consistent additional terms unless the court determines that
the writing was intended to be complete and exclusive.
2. Intent of parties respecting completeness/finality of the agreement may
be shown by merger or integration clause or by omission of clauses
that one would expect to see.
3. Both completely and partially integrated agreements supersede
inconsistent terms of prior agreements; a complete integration
supersedes even consistent additional terms. (Restatement 213).
4. To determine whether an agreement is integrated and to what extent,
court may compare the writing with the prior negotiations; a rarely
used tactic except in the case of duress or fraud is to find the merger
clause unconscionable. But usually a merger clause that is agreed to
(cf. form contracts) is conclusive (Restatement 216).
5. Even an integrated document may be subject to an oral condition that
forestalls its enforceability.
B. Reformation
1. Reformation is available ―when a writing that evidences or embodies
an agreement in whole or in part fails to express the agreement
because of a mistake of both parties as to the contents or effect of the
writing.‖ (Restatement 155)
2. Court can withhold reformation even if appropriate for reasons such as
reliance of a third party.
3. Reformation is possible where it can be shown that the other party
induced assent by misrepresenting the writing. (Restatement 166)
4. Restatement 157 and 172?
5. Parol evidence can be used to prove a case for reformation.
C. Interpreting the Terms of a Contract
1. Where possible, courts interpret terms as consistent with each other (R.
202); if this is not possible, ―separately negotiated or added terms are
given greater weight than standardized terms or other terms not
separately negotiated.‖ (R. 203)
2. Where a public interest is affected, an interpretation is preferred which
favors the public.
3. Unless contrary to the plain meaning of the contract, an interpretation
given by the parties themselves will be favored.
4. The entire contract should be read as a whole and every part
interpreted with reference to the whole.
5. The contract must be interpreted in the light of the circumstances
under which it was made, including the situation of the parties at the
time, the necessities for which they naturally provided, the advantages
each probably sought to secure, and the relation of properties and
rights in regard to which they negotiated.
6. Specific provisions ordinarily will be regarded as qualifying the
meaning of broad general words in relation to a particular subject.
7. An interpretation which gives reasonable, lawful, and effective
meaning to all the terms is preferred to an interpretation which leaves a
part unreasonable, unlawful, or of no effect. (R. 203)
8. Contra proferentem: ambiguity in a contract should be construed in
favor of the party that did not draft it.
9. A course of performance, course of dealing, or usage of trade is
relevant in ascertaining the meaning of the parties’ agreement, may
give particular meaning to specific terms of the agreement, and may
supplement or qualify the terms of the agreement. (1-303 (d))
10. Except as provided in section (f) (course of performance showing
waiver or modification), the express terms of an agreement and any
applicable course of performance, course of dealing, or usage of trade
must be construed whenever reasonable as consistent with each other.
If such a construction is unreasonable, the preference should be:
express terms
course of performance
course of dealing
usage of trade. (1-303 (e))
11. Rule of eiusdem generis: when a general word or phrase follows a list
of specific persons or things, the general word or phrase will be
interpreted to include only persons or things of the same type as those
listed.
12. Rule of noscitur socii: the meaning of an unclear word or phrase
should be determined by the words immediately surrounding it.
13. If something is explicitly expressed in one part of a contract and not in
another, it may be inferred that the omission was intentional.
D. Implied Terms and the Implied Covenant of Good Faith
1. When a binding contract lacks an important term, ―a term which is
reasonable in the circumstances is supplied by the court. (R. 204)
2. UCC 1-304: ―Every contract or duty within the UCC imposes an
obligation of good faith in its performance or enforcement.‖ (R. 205
substantially similar)
3. UCC Comment: ―the doctrine of good faith merely directs a court
towards interpreting contracts within the commercial context in which
they are created, performed, and enforced, and does not create a
separate duty of fairness and reasonableness which can be
independently breached.‖
4. Two theories of good faith
a. The absence of various forms of bad faith, such as failing to be
sufficiently diligent, evading the spirit of the bargain, willfully
less fully performing obligations, abusing the power to specify
terms, abusing the power to determine compliance, and
interfering with the other party’s performance. (Summers)
b. The doctrine of good faith is focused on discouraging the
exercise of discretion for the purpose of recapturing
opportunities foregone or bargained away at the time of
contracting. (Burton)
5. Restatement: ―Good faith performance or enforcement of a contract
emphasizes faithfulness to an agreed common purpose and consistency
with the justified expectations of the other party; it excludes a variety
of types of conduct characterized as involving ’bad faith’ because they
violate community standards of decency.‖
E. Express and Implied Warranties
1. How are express warranties made? (2-313)
(a) Any affirmation of fact or promise made by the seller to the buyer which
relates to the goods and becomes part of the basis of the bargain
(b) Any description of the goods which is made part of the basis of the
bargain
(c) Any sample or model which is made part of the basis of the bargain
(d) It is not necessary to the creation of an express warranty that the seller use
formal words such as ―warrant‖ or ―guarantee‖ or that he have a
specific intention to make a warranty
(e) affirmation merely of the value of the goods or a statement purporting to
be merely the seller’s opinion or commendation of the goods does not
create a warranty.
2. You can’t disclaim a warranty once given (2-316). (Cf. 2-202; parol
evidence). If you give an express warranty under 2-313, disclaimers
are invalid (Magnuson-Moss Act).
3. Implied Warranty of Merchantability (2-314) unless excluded or
modified (see 2-316) if seller is a merchant.
4. Implied warranty by usage of trade unless excluded or modified. (2-
314)
5. Implied warranty of fitness for a particular purpose when seller has
reason to know of it and buyer is relying on seller’s skill or
judgment—unless excluded or modified. (2-315)
6. If words or conduct creating express warranty and words or
conducting tending to negate or limit warranty cannot be reasonably
construed as consistent, negation or limitation is inoperative. (2-316).
7. To exclude implied warranty of merchantability, must mention
merchantability, if in writing must be conspicuous (So written,
displayed, or presented that a reasonable person against which it is to
operate ought to have noticed it. 1-201 (10)). To exclude implied
warranty of fitness, must be by conspicuous writing. Except when:
a. Expressions such as ―as is‖ or ―with all faults‖ are used.
b. Buyer has examined or refused to examine the goods or
sample and ought to have seen the defects. (2-316)
8. Course of dealing or course of performance or usage of trade can
exclude warranties. (2-316)
9. Express warranties displace inconsistent implied warranties other than
an implied warranty of fitness for a particular purpose (2-317).
10. Implied warranty by seller that the title conveyed shall be good, and its
title rightful. (2-312-1-a)
F. Output and Requirements Contracts (and other exclusive dealings)
1. Output or requirements means ―such actual output or requirements as
may occur in good faith. 2-306 (1)
2. No quantity unreasonably disproportionate to any stated estimate or in
the absence of a stated estimate, to any normal or otherwise
comparable prior output or requirements. 2-306 (1)
3. An agreement for exclusive dealing imposes an obligation to use best
efforts by seller to supply the goods and by buyer to promote them. 2-
306 (2).
4. Good faith variations are permited even when they may result in
discontinuance. A shut-down by a requirements buyer for lack of
orders might be permissible when a shut-down merely to curtail losses
would not. 2-306, comment 2.
5. A sudden expansion of the plant by which reqirements are to be
measured would not be included in the scope of thecontract, but
normal expansion undertaken in good faith would. One of the factors
in an expansion situation would be whether the market price had risen
greatly in case in which the contract contained a fixed price. 2-306,
comment 2.
G. Modifications
1. Traditional common law approach: modifications required separate
consideration, not discharged by a pre-existing duty. (To prevent the
―hold-up game.‖) UCC 2-209: An agreement modifying a contract
needs no consideration to be binding.
2. If a party’s manifestation of assent is induced by an improper threat
that leaves no reasonable alternative, the contract is voidable.
Restatement 175. A threat by a party to a contract not to perform is
not, of itself, improper—it is improper if it amounts to a breach of the
duty of good faith and fair dealing imposed by the contract.
Restatement 176.
3. The test of good faith may in some situations require an objectively
demonstrable reason for seeking a modification. But such matters as a
market shift which makes performance come to involve a loss may
provide such reason even though there is no such unforeseen difficulty
as would make out a legal excuse from performance under sections 2-
615 and 2-616. (2-209 comment 2)
4. A promise modifying a duty under a contract not fully performed on
either side is binding if the modification is fair and equitable in view
of circumstances not anticipated by the parties when the contract was
made.‖ (R. 89D(a))
5. Statute of Frauds (2-201) applies to modifications, but promissory
estoppel may override it. Common law: the original contract cannot be
insulated from subsequent oral modifications.
6. A modification that does not meet requirements to be binding may
operate as a waiver; it applies until retracted by reasonable
notification, unless retraction would be unjust due to reliance. (2-209)
7. Substituted performance accepted by the obligee discharges the duty.
(Restatement 278). Or obligor and obligee may create an accord, a
contract to substitute performance. (R. 281)
8. UCC: A party may reserve rights to full performance by accepting
substitute performance with explicit reservation such as ―without
prejudice,‖ or ―under protest.‖ (1-308) Does not apply to an accord
(see 3-311).
IV. Legal Regulation of Contracts
A. Mistake of Fact
1. Failure of consideration—what you gave me is not what I
wanted—breach of contract.
2. Underlying principle: parties will do better in the long run if they
individually bear the responsibility of ferreting out the truth.
3. Bilateral mistake: both parties enter a contract under the same
mistaken belief (R. 152). Unilateral mistake: only one party enters
a contract under a mistaken belief (R. 153)
4. Only a mistake that goes to a basic assumption on which the
contract was made and has a material effect on the agreed
exchange of performances is relevant. A mistake solely as to
quality or value is collateral and does not justify rescission.
5. Rescission (termination) is not available to relieve a party who
bore the risk of the mistake’s occurrence.
6. Irrespective of actual fraud, if the other party knows or has reason
to know of the unilateral mistake, and the mistake, as well as the
actual intent of the parties is clearly shown, relief will be granted
to the same extent as to a mutual mistake.
B. Public Policy and Illegality
1. A promise or other term of an agreement is unenforceable on
grounds of public policy if legislation provides that it is
unenforceable or the interest in its enforcement is clearly
outweighed in the circumstances by a public policy against the
enforcement of such terms. (R. 178)
2. Contracts that further illegal activities are unenforceable.
3. An ancillary non-competition promise is unreasonably in restraint
of trade if (a) the restraint is greater than is needed to protect the
promise’s legitimate interest, or (b) the promisee’s need is
outweighed by the hardship to the promisor and the likely injury to
the public. (R. 188, Common Law Rule of Reason). (Stand-alone
non-compete contracts are presumptively invalid)
4. Public policy that individuals should not be compelled to enter
intimate family relationships.
C. Unconscionability
1. Where a contract or clause is found to be unconscionable, court
may refuse to enforce the entire contract, may enforce the rest of
the contract without the clause, or may limit the clause to avoid
unconscionability—not damages. 2-302 (1).
2. Parol evidence may be introduced to show that a clause is not
unconscionable. 2-302 (2)
3. The unconscionability must have been present at the time that the
contract was made, and not simply have arisen because of
unexpected circumstances; goal is not to disturb the contractual
allocation of risks.
4. Two elements of unconscionability (procedural and substantive):
―An absence of meaningful choice on the part of one of the parties
together with contract terms which are unreasonably favorable to
the other party.‖ Later courts have held that either one on its own is
sufficient.
V. Remedies
A. Expectation Damages
1. Restores plaintiff to where he expected to be had the contract been
performed. 1-305.
2. 2-714: Buyer’s damages for breach where goods have been
accepted = value as warranted – value as delivered.
3. 2-713: Buyer’s damages for non-delivery or seller’s repudiation of
contract = market price – contract price
4. 2-711: Buyer can purchase substitute goods to cover seller’s
breach; damages = cost of cover – contract price.
5. 2-708 (1): Seller’s damages for non-acceptance or buyer’s
repudiation = Contract price – market price
6. The injured party should not recover more from the breach than he
would have had the contract been fully performed.
7. Damages are measured by the value to the plaintiff of the promised
performance, not the cost of performance to defendant, unless it
will involve unreasonable economic waste or undue expense in
comparison to the relative economic benefit.
8. Idiosyncratic contracts, such as the eccentric who wants a lavender
house, are enforced (except where wasteful, as in Peeveyhouse).
9. Lost volume sellers: If the seller could have made a second sale,
then his resale of the goods in breach should not be subtracted.
Two prong test: capacity and ―wholly independent sales event.‖
Damages = profits for breached sale, using formula in 2-708 (2).
10. Expenses saved in consequence of breach must be subtracted from
the damages.
11. Incidental damages include inspection, transportation cost for
rejected goods, costs in connection with effecting cover, delay
costs, etc.
12. Consequential damages are for indirect results of a breach. They
are limited to loss resulting from needs that the seller had reason to
know about at time of contracting (foreseeability requirement) and
which could not be prevented by cover or otherwise. 2-715.
B. Mitigation
1. No duty to mitigate in 2-708 and 2-713 because the formulas
assume mitigation.
2. Consequential damages are subject to a mitigation requirement.
2-715 (2). ―Damages are not recoverable for loss that the injured
party could have avoided without undue risk, burden, or
humiliation.‖ But ―the injured party is not precluded from
recovery to the extent that he has made reasonable but
unsuccessful efforts to avoid loss.‖ R. 350.
3. Courts generally recognize an excuse of mitigation duty when
the breaching party makes assurances regarding forthcoming
performance, at least until it is no longer reasonable to rely on
them.
4. Seller must make a reasonable effort to resell goods identified
but not shipped or accepted at a reasonable price before he can
recover their price from a buyer in breach. Buyer gets the unsold
goods or gets credit for proceeds of resale. 2-709.
5. An effective (under 2-606) but wrongful (under 2-602) breach
negates seller’s right to action for price under 2-709.
C. Reliance Damages
1. Return to plaintiff of his outlay in performing the contract.
2. Party in breach can subtract loss that injured party would have
suffered had the contract been performed—caps reliance damages
at expectation damages. R. 347.
3. Rare; usually awarded when plaintiff cannot prove profits or losses
with reasonable certainty—this puts him in position he would have
been had contract never existed.
D. Restitution Damages
1. The part of the plaintiff’s outlay that actually benefited the
defendant.
2. Very rare; does not include profit so plaintiff will prefer
expectation damages if possible. Often used in quasi-contractual
situations.
3. May be measured by either the value to the other party of what was
received or the extent to which the other party’s property has been
increased in value; choice of measures is usually more generous to
the party not in breach. R. 371.
E. Specific Performance
1. Specific performance or an injunction will not be ordered if
damages would be adequate to protect the expectation interest of
the party. (R. 359).
2. Usually granted where there is sentimental value or in land
purchases.
3. Incompleteness or uncertainty of the agreement will not bar
specific performance where applicable.
F. Liquidated Damages and Agreed Remedies
1. Liquidated damages must be reasonable in the light of the
anticipated or actual harm caused by the breach, the difficulties of
proof of loss, and the inconvenience or nonfeasibility of otherwise
obtaining an adequate remedy. 2-718
2. A term fixing unreasonably large liquidated damages is void as a
penalty. 2-718
3. Where the seller justifiably withholds delivery of goods because of
the buyer's breach, the buyer is entitled to restitution of any
amount by which the sum of his payments exceeds the liquidated
damages or, in the absence of l.d., the lesser of 20% of total
obligation or $500—subject to offset by seller’s right to any other
damages and by any benefit buyer has received by reason of the
contract. 2-718.
4. Remedies may be added, substituted, limited, or altered by the
contract, but remedies thus provided are optional unless the
remedy is expressly agreed to be exclusive, in which case it is the
sole remedy. 2-719.
5. Where circumstances cause an exclusive or limited remedy to fail
of its essential purpose, remedy may be had as provided in this
Act. 2-719. Usually applies where seller has failed to repair or
replace as set out in limitation of remedies clause.
6. Consequential damages may be limited or excluded unless
unconscionable. Limitation of consequential damages for injury to
the person in the case of consumer goods is prima facie
unconscionable but limitation of damages where the loss is
commercial is not. 2-719.
7. Damages may be liquidated in the lease agreement only at an
amount or by a formula that is reasonable in light of then
anticipated harm. 2A-504.
VI. Conditions
A. Express Conditions
1. Where the language is ambiguous, courts will construe a promise
rather than a condition. R. 261
B. Implied or Constructive Conditions
1. Where there is an exchange of promises, one party’s repudiation of
a duty discharges the other party’s remaining duties. R. 253 (2)
2. Promises are mutually dependent if the parties intend performance
by one to be conditioned upon performance by the other; if they
are mutually dependent, they may be (a) precedent, to be
performed before a corresponding promise is to be performed, or
(b) subsequent, not to be performed until the other party has
performed a precedent covenant, or (c) concurrent, to be performed
at the same time by the parties, who are respectively bound to
perform each. There is a presumption that mutual promises in a
contract are dependent wherever possible, but the intention of the
parties is the controlling factor.
3. An anticipatory breach (prior to performance) may be express
(clear, positive, unequivocal refusal to perform) or implied
(conduct where the promisor makes substantial performance
impossible). The injured party can immediately seek damages for
anticipatory breach or can wait until the time of performance and
exercise his remedies for actual breach; if he disregards the
repudiation and treats the contract as still in force, and the
repudiation is retracted prior to the time of performance, the
repudiation is nullified.
4. When reasonable grounds for insecurity about a party’s
performance arise, the other party may in writing demand adequate
assurance of due performance and until he receives it may if
commercially reasonable suspend performance for which he has
not already received agreed return. Failure to provide such within a
reasonable time not exceeding thirty days is a repudiation. 2-609.
5. Implied condition that any material failure by one party gives the
other the right to suspend and eventually cancel the contract.
(Problem: what is material?)
6. It is a condition of each party’s remaining duties that there be no
uncured material failure by the other party to render performance
due at an earlier time—i.e. default on a payment in an installment
contract gives non-defaulting party right to stop performance on
the rest of the contract. R. 240
7. Repudiation will always be a total breach. Rendering performance
impossible is a repudiation.
8. After material breach, non-breaching party has a damage claim for
the breaches that have occurred; after total breach, he can get
damages for the injury. When there is a total breach, he gets
damages for everything, not just what is in the past. In a material
breach, he can only recover for what is in the past.
C. Impossibility, Impracticability and Frustration
1. Implied condition that gives right to stop performance without
breaking the contract when its performance becomes impossible,
impracticable, or frustrated.
2. Impossibility occurs where (a) an unexpected contingency occurs,
(b) the risk of which was not allocated either by agreement or
custom, and (c) the occurrence of the contingency has made
performance impossible.
3. Delay or non-delivery is not a breach where performance as agreed
has been made impracticable by the occurrence of a contingency
the non-occurrence of which was a basic assumption of the
contract or by compliance in good faith with a government
regulation, except where seller may have assumed a greater
obligation and subject to seasonable notification of buyer. 2-615.
4. Example of ―frustration of purpose‖: the king’s coronation was an
implied condition of window rental so duty to pay was discharged
when king’s appendicitis caused it to be canceled.
VII. Third Party Rights and Responsibilities
A. In General
1. Restatement: intended beneficiaries can enforce; incidental
beneficiaries have no legal rights
2. Third party beneficiaries of warranties, 2-318 (three alternatives)
3. In most states there must be privity for the benefit of a warranty,
even where there is specific language such as ―end-user.‖
B. The Assignment of Rights and Delegation of Responsibilities
1. Duties can be delegated unless otherwise agreed or unless the other
party has a substantial interest in having his original promisor
perform. No delegation relieves the delegant of duty or liability. 2-
210 (1).
2. Rights can be assigned unless otherwise agreed except where
assignment would materially change the duty of the other party,
increase his burden or risk, or impair materially his chance of
obtaining return performance. A right to damages under the
contract can be assigned despite agreement otherwise. 2-210 (2).
3. Unless circumstances indicate otherwise, a prohibition of
assignment bars only delegation of duties. 2-210 (4).
4. Assignee promises to perform assignor’s duties by accepting the
assignment of the contract, and this promise is enforceable by
either the assignor or the other party to the contract. 2-210 (5).
5. Third parties with enforceable rights are either creditor
beneficiaries (promisor’s performance will discharge some form of
legal duty owed to the beneficiary by the promise) or donee
beneficiaries (promisee’s contractual intent is to make a gift to him
or confer on him a right against the promisor). R. 133.
6. If a party’s assent is induced by fraud or material misrepresentation
by a third party, the contract is voidable unless the other party
relied materially in good faith. R. 164 (2).
7. UCC 3-305:
(a) the right to enforce the obligation of a party to pay an instrument is
subject to
(1) obligor’s defenses based on infancy, duress, lack of legal
capacity, illegality of the transaction, fraud, or insolvency.
(2) obligor’s other defenses under this article or defenses that
would be available under a simple contact
(3) obligor’s claims in recoupment against the original payee
under this transaction
(b) the right of a holder in due course is subject to obligor’s defenses in (a)
(1), but not (a) (2) or (a) (3).
C. Suretyship and Guaranty Contracts
1. Where the principal and creditor modify their contract without the
surety’s consent (except by extension of time for payment), the
compensated surety is discharged if the modification materially
increases his risk and is not discharged if the risk is not materially
increased but his obligation is reduced to the extent of loss due to
the modification. R. Security 128.
2. Surety has a right to the securities and remedies which the creditor
was capable of asserting against the debtor had the security not
satisfied the obligation.