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 quasicontract. 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 real option firm offer promise about contract formation (if done correctly) 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. Sometimes agreement to agree section 90 reliance agreement in principle Never 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. (2314) 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. 2306 (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 2615 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. 2210 (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.