Contracts Professor Scott Brewer Fall 2007 Contents What is a Contract? Rules and Rationales The Monge Trilogy Monge v. Beebe Rubber Co. (Termination by bad faith, malice, or retaliation = breach of K) Howard v. Dorr Woolen Co. (Court adds public policy prong to Monge rule) Cloutier v. Great Atlantic (Court applies Howard rule and finds breach of K) Consideration Hamer v. Sidway (Uncle and nephew; consideration by foregoing a legal right) Dougherty v. Salt (Aunt and nephew; recital of value not consideration) Baehr v. Penn-O-Tex (Detriment not bargained for; no consideration) Pennsy Supply v. American Ash (Promise and consideration induce each other) Plowman v. Indian Refining (Past action, moral obligation are not consideration; going to office is a condition on a gift) Promissory Estoppel Kirksey v. Kirksey (Widow relied on promise, but no promissory estoppel rule) Wright v. Newman (Promissory estoppel enforces promise where not bio. father) Allegheny College v. Nat’l Chautauqua Bank (Donation to college; court found consideration, promoted idea of P.E.) Maryland Nat’l Bank v. UJA (Donation was a gift; no detrimental reliance) Katz v. Danny Dare (P.E. used to enforce pension) Shoemaker v. Commonwealth Bank (Mortgage and home insurance; P.E.) Restitution/Unjust Enrichment/Quasi Contract Credit Bureau Enterprises v. Pelo (Committed man must pay restitution) Commerce Partnership v. Equity Contracting (Contractor might get restitution) Watts v. Watts (Facts suff. for unjust enrichment or other claims; good opinion!) Promissory Restitution Mills v. Wyman (No K to pay for past care of son; only moral obligation) Webb v. McGowin (Man saved coworker’s life; K to continue paying man) Offer and Acceptance Izadi v. Machado (Gus) Ford (Dealership’s ad is an offer) Normile v. Miller (Buying a house; “qualified acceptance” is new offer) Brower v. Gateway (Shrinkwrap terms enforceable, but unconscionable) Petterson v. Pattberg (Strict interp. of offer & acceptance in unilateral K) Cook v. Coldwell Banker (Offeror bound by substantial performance by offeree) James Baird v. Gimbel Bros. (Late acceptance; no P.E. where offer for exchange) Drennan v. Star Paving Co. (P.E. basically extended to pre-acceptance reliance) Pop’s Cones v. Resorts Int’l Hotel (P.E. extended to pre-offer reliance) Berryman v. Kmoch (No option K b/c no consideration; narrow P.E. rule) Uniform Commercial Code §2-207 Poel v. Brunswick-Balke-Collendar (Mirror image rule; “battle of forms”) Dale Horning v. Falconer Glass Ind. (Provision of K would cause hardship) Brown Machine v. Hercules (Offer expressly limits acceptance to terms of offer) Harlow & Jones v. Advance Steel (Oral agreement before forms) Statute of Frauds Crabtree v. Elizabeth Arden (Signed and unsigned writings together satisfy SoF) McIntosh v. Murphy (Promissory estoppel in spite of not satisfying SoF) Alaska Dem. Party v. Rice (Promissory estoppel in spite of not satisfying SoF) Principles of Contract Interpretation Joyner v. Adams (Court uses meaning of “innocent” party; similar to R.201) C&J Fertilizer v. Allied (Burglary; reasonable expectations of insured honored) Parol Evidence Rule Thompson v. Libby (Log sale; completely integrated, so no parol evidence) Hershon v. Gibraltar (Extrinsic evidence only to establish or resolve ambiguity) Sherrodd v. Morrison-Knudsen (Dirt-moving contractor; parol evidence can’t show fraud directly contradicting written contract) Implied Terms and the Obligation of Good Faith Wood v. Lucy (Endorsement deal; implied promise to make reasonable efforts) Donahue v. FedEx (Implied duty of good faith limited in at-will employment) Warranties Bayliner v. Crow (No express warranty, and no implied warranties of merchantability and fitness for particular purpose) Caceci v. DiCanio (Implied term of skillful home construction) Duress and Undue Influence Totem v. Alyeska (Cargo hauling; economic duress) Odorizzi v. Bloomfield (Teacher; undue influence) Fraud, Misrepresentation and Non-Disclosure Park 100 v. Kartes (Hastily signed lease agreement; court found fraud) Hill v. Jones (Termites; duty to disclose in home sales) Unconscionability Williams v. Walker-Thomas (Court adopts unconscionability as a defeator) Higgins v. Superior Court (TV show arbitration provision unconscionable) Adler v. Fred Lind (Substantive unconsc. enough; no procedural unconsc.) Mistake, Changed Circumstances, Impracticability and Frustration Mel Frank v. Di-Chem (Hazmat ordinance. didn’t frustrate all purposes) Lenawee v. Messerly (Both parties innocent; risk allocated by as-is clause) Wil-Fred’s v. MSD (Subcontractor estimate wrong; unilateral mistake) Modification Alaska Packers v. Domenico (Performance already owed is not consideration) Public Policy Derico v. Duncan (No license to make loans; loan contract void b/c statute designed to protect public, not just collect fees) Hiram Ricker v. SIMS (Lapsed licenses but court doesn’t enforce add’l penalties by voiding contract) Riggs v. Palmer (Boy kills grandfather; court doesn’t let him inherit) Material Breach; Constructive and Express Conditions Jacob & Youngs (Pipe not from Reading; contractor substantially performed) Oppenheimer v. Oppenheim (Substantial performance not for express conditions) Morin v. Baysone (Aluminum walls; satisfaction of obligor as condition) Computing Value of P’s Expectation; Restrictions on Recovery of Expectation Damages (foreseeability and mitigation) Roesch v. Bray (Difference between market value and contract price awarded) Hadley v. Baxendale (Damages not natural or foreseeable not awarded) Rockingham v. Luten Bridge (Duty to mitigate; P should have stopped building) More Damage Computation; Efficient Breach HCEB v. Lukaszewski (Teacher breached; school entitled to salary difference) Nonrecoverable Damages; Reliance Damages Wartzman v. Hightower (Flag-pole sitting; reliance damages appropriate) Walser v. Toyota (§90 gives courts discretion to limit recovery to reliance costs) Specific Performance City Stores v. Ammerman (Specific performance appropriate in store lease case) Rules and Rationales Legal Argument Premise 1: Under a valid legal rule in this jurisdiction*, all (relevant) instances of facts [P] result in legal consequence [Q] Premise 2: I can sufficiently prove facts [P] Conclusion: I‟m entitled to legal consequence [Q] *Requires identification of authoritative source of law and authoritative rule w/i source Reasoning by Analogy An analogy has a source and a target, which have at least one shared characteristic. Hypo 1: “Do what I‟m doing.” Source(s): Brewer‟s act. Target: Your act. Shared characteristic(s) (F): Standing and patting Brewer‟s head. Inferred characteristic (G): Meaning of “do what I‟m doing” (said by Brewer) Analogy warranting rule: An expression of the logical relationship between possessing the shared characteristic and possessing the inferred characteristic. “All things that are F are G,” or “Some F are G.” Analogy warranting rationale: The rationale justifies why a particular shared characteristic is the relevant inferred characteristic. Disanalogy In disanalogy, you identify an unshared characteristic and argue that the unshared characteristic is sufficient to defeat an analogy between the source(s) and the target. A disanalogy warranting rule justifies the result in the source(s), but gives you a different result in the target case. “Classical” v. “Romantic” (or post-classical) rationales for American contract law Two types of rationales: Reasons for adopting a rule (fairness, economic efficiency, judicial administrability) Reasons for following a rule (predictability, constraint of officials) Three overlapping, overarching issues in contract law 1.) Autonomy vs. heteronomy – whose judgment of preference, policy or principle is to be given effect (the parties, trial court, appellate court, legislature, etc.)? 2.) The fact of unequal capacities – unequal access to good legal counsel, unequal bargaining power, etc. 3.) Allocation of risk – who incurs the cost if a promise is not enforced? Classical and romantic rationales for contract law are distinguished by systematically different treatment of these three overarching issues. Classical Rationales Romantic Rationales - Laissez faire – against - Communitarian – parties are part of government/court intervention a community whose members - Anti-paternalistic; not protective of should look out for each other weaker parties - Favors supervisory, “parental” - Parties are autonomous self-insurers authority and self-protectors - Parties are heteronymous guardians - The judge is a neutral referee who with (enforced) fiduciary duties should not intervene out of toward one another sympathy - Obligations can arise from benefits - Obligation is generally a matter of conferred (quasi contract or objectively provable, deliberate, restitution), or from reliance clear bargained-for promises foreseeably induced (including - Principal rationale for enforcing a bargained-for exchange and promise is that is was a bargained- promissory estoppel) for exchange - The judge is a roving fairness and - Principal rule for determining field-leveling commissioner whether a putative contract is an - Principal rationale is to do justice actual contract: consideration, in in the individual case terms of bargain theory - Principal rule: promissory estoppel Classical courts: Howard, Maryland Romantic courts: Monge, Cloutier, National Bank, Plowman, Berryman Allegheny, Wright, Katz, Shoemaker, C&J Fertilizer, Caceci Formalism - In order for a rule to have formal efficacy, it must have a clear literal meaning. - Some rules have a high degree of formal efficacy (i.e. Any person driving with a .01% blood alcohol level is driving under the influence.) Others have a low degree of formal efficacy (i.e. Any person driving in an unreasonably intoxicated state is driving under the influence.) - There are different rationales for adopting the different types of rules – for example, predictability and notice vs. flexibility and justice in an individual case. - Strict, literal enforcement of a rule is formalism. What is a Contract? “… nothing less than the whole body of applicable precedents suffices to define the term „contract.‟” Baehr, 104 N.W.2d at 664 Contract = an enforceable promise Unilateral contract = a promise in exchange for a performance Bilateral contract = a promise in exchange for a promise Master Rule for Contracts IF (there is offer and acceptance and consideration and no defeaters), OR (there is a promise and reasonably foreseeable reliance on the promise and actual reliance and injustice can be avoided only by enforcing the promise), THEN there is a legally enforceable promise. Defeators: Statute of Frauds (if it falls w/i SoF, no adequate writing, and no exception – such as §139), Undue Influence, Duress, Economic Duress, Unconscionability, Bad Faith (in certain situations), Mutual Mistake, Unilateral Mistake, Fraud The Monge Trilogy: At-Will Employment Prevailing rule of at-will employment: an employer may terminate an employee at any time, “for any reason or no reason.” Olga Monge v Beebe Rubber Company IF a termination by the employer of a contract of employment at will is motivated by bad faith OR malice OR based on retaliation, THEN it is not the best interest of the economic system or the public good and constitutes a breach of the employment contract. Robert R. Howard, II, Administrator of the Estate of Franklin C. Baldwin, et al. v. Dorr Woolen Company IF termination by the employer of a contract of employment at will is motivated by bad faith OR malice OR based on retaliation AND occurs because the employee “performed an act that public policy would encourage, or refused to do that which public policy would condemn” THEN it constitutes a breach of the employment contract. Where is the authority for this narrowing of Monge? Consideration Exchequer Chamber (1875): “A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.” This definition can be summed up as detriment to the promisee or benefit to the promisor. (Quoted in Hamer v. Sidway) Parsons: “In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise.” This definition moves toward bargain theory. Pollock: One party “limits his legal freedom of action in the future as an inducement for the promise” of the other party (Pollock). Rules relied upon by defendant in Hamer: IF the promisee is not harmed AND the promisor is not benefited, THEN the contract is without consideration. There is consideration ONLY IF there is benefit to the promisor OR detriment to the promisee. Hamer: IF there is forbearance to exercise a legal right AND the forbearance to exercise a legal right was at the request of the other party, THEN there is consideration. Dougherty: IF something is not regarded as consideration by both parties, THEN it is not consideration. Allegheny College rule for charitable donations: IF a promisee receives some of the money promised by a donor, THEN the promisee by implication promises to behave consistently with the goals that the promise was made to advance, AND the second promise is consideration for the first. Baehr v. Penn-O-Tex Oil Corporation There is consideration ONLY IF there is a contractual promise AND that promise is the product of a bargain. (A bargain is a negotiation resulting in the voluntary assumption of an obligation by one party upon condition of an act or forbearance by the other.) Pennsy Supply, Inc. v. American Ash Recycling Corp. of Pennsylvania IF the occurrence of the condition would benefit the promisor, THEN it is probably a consideration. IF there is no benefit to the promisor, AND the purpose of the occurrence of the condition is simply to enable the promisee to receive a gift, THEN there is probably no consideration. (See Kirksey v. Kirksey for an example of a condition on a gift.) Plowman v. Indian Refining IF something occurred in the past, THEN it is not consideration. Restatement (Second) of Contracts §71. Requirement of Exchange; Types of Exchange (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. (3) The performance may consist of (a) an act other than a promise, or (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation. (4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person. §79. Adequacy of Consideration; Mutuality of Obligation (1) If the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or (b) equivalence in the values exchanged; or (c) “mutuality of obligation.” Promissory estoppel: Restatement (Second) §90. Promise Reasonably Inducing Action or Forbearance (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforce- ment of the promise. The remedy granted for breach may be limited as justice requires. (2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance. (First Restatement of Contracts: “A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”) Maryland National Bank v. United Jewish Appeal: (Applies the First Restatement rule, so that even charitable organizations must show detrimental reliance.) Wright v. Newman IF there is a promise AND the promisor should reasonably expect that promise to induce action or forbearance on the part of the promisee or a third person AND the promise does induce such action or forbearance on the part of the promisee or a third person AND injustice would result from non-enforcement of the promise, THEN there is contractual obligation. (Rule as applied; rule as stated has normal I prong.) Katz v. Danny Dare, Inc. IF there is a promise AND there is detrimental reliance on the promise AND injustice can be avoided only by enforcement of the promise, THEN the promise is enforceable. (Note: Only actual reliance is required, not reasonable reliance.) Malaker, quoted in Pop‟s Cones, says that the promissory estoppel rule includes a “clear and definite” promise, expected reliance, actual reasonable reliance, and detriment (but no injustice prong). Shoemaker v. Commonwealth Bank IF the reasonableness of the promisee‟s reliance on a promise is in dispute THEN summary judgment on the issue of promissory estoppel is inappropriate. Scope of Promissory Estoppel James Baird: J. Hand uses promissory estoppel only for donative/gratuitous promises - Berryman also holds that PE does not apply in a bargaining context Drennan: J. Traynor extends the rule to cases of pre-acceptance reliance - Restatement §87(2) extends the rule in the same way as Drennan, by granting an option without consideration Pop’s Cones: The court extends PE to cases of reliance where there hasn‟t even been a firm offer. Restitution/Unjust Enrichment/Quasi Contract Express, Implied-In-Fact, and Implied-In-Law Contracts Express contract: oral or written agreement Implied-in-fact: an agreement is implied by the parties‟ actions Implied-in-law (a.k.a. quasi contract): a benefit conferred and accepted by one party, such that it would be unjust for that party to retain the benefit without compensation Restitutionary claims can arise through disputes over contracts. For instance, if one party only partially complies with his/her part of a bargain, the other party may be entitled to restitution rather than expectation damages. Restitution is not part of contract law, but the two overlap. Commerce Partnership 8098 Limited Partnership v. Equity Contracting Co. IF one party has given consideration for a benefit received from a second party, EVEN IF that consideration was given to a third party, THEN the second party cannot recover restitution from the first. Credit Bureau Enterprises, Inc. v. Pelo IF a party is not competent to refuse services AND the party benefited from the services THEN that party is liable under contract implied in law/quasi contract/unjust enrichment/restitution. Watts v. Watts (p. 273) Supreme Court of Wisconsin 137 Wis. 2d 506, 405 N.W.2d 303 (1987) Facts: The Wattses had a nonmarital cohabitation relationship for 12 years, during which Sue Ann Evans Watts gave birth to two children, raised them, performed domestic work, and worked for James Watts‟s business. When the relationship became intolerable, she moved out and he refused to share any of their jointly accumulated wealth. She sued, but the circuit court dismissed her case for failure to state a claim upon which relief may be granted. Plaintiff’s argument: Sue requested an accounting of James‟s assets and a share of the accumulated property on five grounds: (1) she is entitled to division of property under a statute governing division of property between married people, (2) “marriage by estoppel”: the defendant is estopped to assert a defense that they are not married against her statutory claim, (3) the defendant breached a contract, (4) she is entitled to restitution because the defendant has benefited from her services to the point of unjust enrichment, and (5) she is entitled to relief under the doctrine of partition, a statutory and common-law remedy for disputes over property held by more than one party. Holding: The court held that (1) the statute was not intended to apply to unmarried cohabitants, (2) “marriage by estoppel” should not be applied because the statute was not intended to apply to unmarried people (thus “we‟re not married” is a valid defense), (3) the plaintiff has pleaded sufficient facts to state a claim for breach of an express or implied in fact contract, and common-law resolution of a property or contract dispute between unmarried cohabitants is not contrary to public policy, (4) the facts are sufficient to state a claim for unjust enrichment, and (5) the facts are sufficient to state a claim for relief through statutory or common law partition. The case was remanded for further proceedings. Notes: Brewer likes this opinion!!! It is a clear example of inference to the best legal explanation. Promissory Restitution: also known as the “material benefit rule.” Restatement (Second) §86, Promise for Benefit Received: (1) A promise made in recognition of a benefit previously received by the promisor from the promise is binding to the extent necessary to prevent injustice. (2) A promise is not binding under Subsection (1) (a) if the promise 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. This type of promise is unenforceable under any traditional rule of consideration, because there is no such thing as past consideration. Mills v. Wyman IF there is a moral obligation to keep a promise AND there was a prior valid obligation that has been extinguished by the operation of positive law, THEN the promise is enforceable. (In Mills, there was no prior valid obligation.) Webb v. McGowin IF a promisee confers a material benefit on a promisor AND a promise is made in recognition of the benefit received, THEN moral obligation can be sufficient consideration for enforcement of the promise. (This is the “material benefit rule,” which was adopted by the Second Restatement in §86.) Offer and Acceptance: Restatement (Second) §24. Offer Defined An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. Restatement (Second) §50. Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise (1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. (2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise. (3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise. bilateral contract unilateral contract offer After engaging in preliminary One party makes an “offer to negotiation, one party makes “a exchange his promise of a direct, complete proposal that a future performance only in contract be entered into, providing return for the offeree‟s actual for an exchange of defined rendering of performance” performances” (KCP, 34). (KCP, 51). acceptance Contract comes into existence Contract comes into existence when return promise is made upon complete performance by the offeree of the act specified by the offeror alternatives A counter-offer or conditional Traditionally, the offeror had to contract acceptance terminates the initial the right to revoke his/her formation offer, constitutes a new offer, and promise at any time before the gives the original offeror a chance offeree completed performance. to accept and thus create a (Petterson v. Pattberg) different contract. Option contract: If the offeree/vendee gives the offeror some consideration (a sum of money, perhaps) to hold the offer open for a stated period of time, under the classical system the offer will be irrevocable during that period, as an “option contract” (p. 108). Restatement (Second) §45. Option Contract Created by Part Performance or Tender (1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offeror‟s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer. Restatement (Second) §87. Option Contract (1) An offer is binding as an option contract if it (a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or (b) is made irrevocable by statute. (2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. Bilateral Contracts Izadi v. Machado (Gus) Ford, Inc. IF a reasonable person would interpret and ad as an offer AND it is actually viewed as an offer by the purported offeree, THEN it constitutes an offer. Normile v. Miller IF an offeree renders a “qualified acceptance” of an offer, THEN the original offer is terminated AND the qualified acceptance constitutes a counteroffer proposed for the original offeror to accept or reject. Shrinkwrap terms (Brower v. Gateway) are inside a plastic-wrapped product a purchaser receives after ordering it by phone or Internet. After removing the wrapping, the purchaser can inspect the product and review the terms of the agreement inside, and can return the product within a specified time if he/she doesn‟t agree to the terms or isn‟t satisfied with the product. Clickwrap terms are presented in a box the consumer must scroll through, clicking “I agree” before completing a sale over the Internet. If the purchaser doesn‟t click “I agree,” the seller will not complete the sale. Browserwrap terms usually specify the terms of using free information on a website. The user is not required or even encouraged to look at the terms, but his/her browsing of the site constitutes agreement to the terms. Unilateral Contracts Petterson v. Pattberg IF an offeree has not completed performance of the act specified by the offeror, THEN the offeror may revoke the offer. Cook v. Coldwell Banker/Frank Laiben Realty Co. IF an offeree has substantially performed, THEN that substantial performance constitutes consideration for an option contract AND the offeror is bound by his/her promise/offer. Pre-Acceptance Reliance and Offeror’s Power to Revoke James Baird v. Gimbel Bros. Promissory estoppel requires P & R & D & I & ~X, where X is an offer for an exchange. (Parties in a bargaining context cannot benefit from PE; it is designed for gratuitous promises.) Drennan v. Star Paving Co. IF there is reasonable reliance by an offeree resulting in foreseeable prejudicial change in position, THEN there is an implied subsidiary promise not to revoke an offer for a bilateral contract, UNLESS the offer expressly provides for revocability OR the offeree shops around for a better offer OR the offeror made a bona fide mistake that the offeree should have realized was a mistake. Pop’s Cones v. Resorts Int’l Hotel, Inc. Restatement §90 + IF there is a statement of the probability of an offer AND injustice can be avoided only by the enforcement of that statement as a promise THEN the statement may be considered a promise. Berryman v. Kmoch IF there is no bargained-for consideration for an option contract THEN no option contract has been formed AND an offer may be revoked any time before acceptance. IF no option contract has been formed, THEN an offeree cannot reasonably rely upon the offer AND no injustice will result from non-enforcement of the offer. Also, the court uses a promissory estoppel rule that narrows the definition of injustice to something tantamount to fraud, and says that there are very few cases in which reliance could be reasonably expected. This is a classical court applying a romantic rule narrowly. The court believes that the actors in a bargained-for exchange should be aware of the classical rules and protect themselves under those rules. The problem of half commitment: Solutions for the half-committed party Suppose you are considering entering into a contract, but you want to have the ability to get out of it. What are your options under traditional rules of offer and acceptance (not promissory estoppel)? 1.) Make an offer for a unilateral contract and explicitly state that you can revoke your offer any time before acceptance via complete performance. 2.) Make an invitation for an offer for a unilateral contract where you are the offeree, so that you are not bound to perform. 3.) Make an offer for a bilateral contract with special conditions on the permitted manner of acceptance. (E.g. Brower v. Gateway, in which the computer purchaser must keep it for 30 days in order to accept; James Baird, in which the general contractor can only accept after the contract has been awarded.) Solutions for the fully-committed party Suppose you are certain you want to enter into a contract, but you know that the other party isn‟t fully committed, and you want to protect yourself from any losses that might result from the other party‟s decision not to commit. What are your options? 1.) As the offeree, you could request an option. Try to make the consideration be part performance, or a down payment that can be applied to the full price of what you‟re buying, so that there‟s no extra cost to you to get the option. 2.) As the offeree in a jurisdiction where substantial performance will be sufficient to compel enforcement of the promise (such as Cook v. Coldwell Banker), hurry to make substantial performance. 3.) As the offeree in a jurisdiction that uses §45, all you have to do is begin performance. 4.) As the offeror, you could withdraw your offer and make an invitation for an offer, suggesting that the new offeror ask for consideration that you have a good chance of being able to perform before the offeror is likely to revoke the offer. “Battle of the Forms” and Uniform Commercial Code §2-207 (original: Rules, p. 27; revised: Rules, p. 122) Poel v. Brunswick-Balke-Collender Co. of New York IF a purported acceptance contains different or additional terms, THEN it is a counter- offer, not an acceptance. (Common-law mirror image rule.) Dale Horning – UCC rule is 1.) IF there is an additional term, without the express consent of the other party AND 2.) incorporation of that term would result in surprise or hardship, THEN the term is a material alteration. The court treats surprise and hardship as questions of fact. Posner and Brewer think the rule is MA H or S, not (H or S) MA. The test is for unreasonable surprise, which if present, indicates a material alteration and therefore either surprise or hardship or both. Harlow & Jones – An oral contract was created before the letters were exchanged, so the letters were just confirmation. IF there has been an oral agreement, THEN terms in agreement are part of the contract AND terms in disagreement are ignored AND gaps are filled in by appropriate provisions of the UCC. Brown Machine, Inc. v. Hercules, Inc. An expression of acceptance is expressly made conditional ONLY IF “its conditional nature [is] clearly expressed in a manner sufficient to notify the offeror that the offeree is unwilling to proceed with the transaction unless the additional or different terms are included in the contract.” Original UCC §2-207 (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. Revised §2-207 - Not limited to contracts between merchants. - Does not allow the inclusion of terms that appear only in one party‟s records, even when they do not materially alter the agreement. - Seems to capture many of the aims of the old §2-207, in a much simplified format. The new §2-207(b) captures all the old provisions relating to agreement between the parties – the old §2-207(2)(a), (2)(c), and parts of §2-207(1) and (3). Statute of Frauds - Two questions to be asked: (1) Does this contract fall within the statute of frauds? (2) If so, is there an adequate writing? - The Statute of Frauds is a “defeater”; it can prevent the formation of a contract even when there is offer and acceptance and consideration. Restatement (Second) of Contracts §110 (Rules p. 188) – paraphrased: (1) Subject to the Statute of Frauds: a. Contract of executor/administrator to answer for a duty of the decedent b. Contract to answer for the duty of another c. Contract made on consideration of marriage d. Contract for sale of interest in land e. Contract not to be performed within a year (2) Governed by Statute of Frauds provisions of the UCC: a. Contract for sale of goods for $500 or more b. Contract for sale of securities c. Contract for sale of personal property not otherwise covered for $5,000+ (see §1-206 of the UCC) UCC §2-201. Formal Requirements; Statute of Frauds “… a contract for the sale of goods for the price of $500 or more is not enforceable … unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.” Restatement (Second) of Contracts §131. General Requisites of a Memorandum Unless additional requirements are prescribed by the particular statute, a contract within the Statute of Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged, which (a) reasonably identifies the subject matter of the contract, (b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and (c) states with reasonable certainty the essential terms of the unperformed promises in the contract. Restatement (Second) of Contracts §132. Several Writings The memorandum may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction. Crabtree v. Elizabeth Arden – Two rules: 1.) IF one or more writings contain all the essential terms of a contract, THEN the contract satisfies the statute of frauds, and 2.) IF some documents are signed and some are unsigned AND they all treat the same subject matter, THEN they can all be read together. Restatement (Second) of Contracts §139. Enforcement by Virtue of Action in Reliance (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does 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. (2) [Lists factors to be considered in determining whether injustice can be avoided only by enforcement of the promise. Rules p. 190] (This rule is endorsed in McIntosh v. Murphy and Alaska Dem. Party v. Rice) Principals of Contract Interpretation Raffles v. Wichelhaus (the Peerless case) – Two boats named Peerless sailed from Bombay, and one party apparently thought the goods would be on the October boat, while the other party believed they would be on the December boat. Because each party had a different understanding of one of the terms of the contract, there was no meeting of the minds and therefore no contract. Restatement (Second) of Contracts §201. Whose Meaning Prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof; it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made: a. That party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or b. That party had no reason to know of any different meaning attached by the other, and the other had reason to know of the meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent. *** A party may have reason to know and still be treated as innocent, if the other party actually knows.*** Joyner v. Adams IF one party knew OR had reason to know of the other‟s meaning of the disputed language, THEN the court must enforce the contract according to the “innocent” party‟s meaning. *** Under the Joyner rule, if both parties are at fault, neither one wins, even though they may be blameworthy to different degrees.*** C&J Fertilizer v. Allied Mutual Ins. Co. The reasonable expectations of the insured will be honored even though “painstaking study” of the contract would negate those expectations, particularly if the insurer knew that the insured would not have accepted the contract if the insured knew it was contrary to the expectation. (This is the reasonable expectations doctrine, which the court clearly wants to apply to insurance contracts of adhesion, but the overall scope of the rule is unclear.) The Parol Evidence Rule - The parol evidence rule determines whether terms neither express nor implied in writing, but purportedly agreed to orally, may be part of a contract. - Some classical courts allow extrinsic evidence of patent or latent ambiguity, but more rigidly classical courts require the ambiguity to be patent. o Patent ambiguities can be seen on the face of the writing (as in disagreements over the syntactic structure of a sentence); latent ambiguities arise only from context in which a term is used. - Classical courts want to ensure that written agreements will be reliable; romantic courts are willing to a certain extent to sacrifice this benefit in order to protect the underdog. Corbin/Restatement approach (§§209-217): Compared to the classical approach, this approach is much less restricted to the four corners of the document regarding both integration and meaning (allowing extrinsic evidence for latent as well as patent ambiguities). It is much, much more interested in finding out the actual intent of the parties than the classical approach. Hershon v. Gibraltar Bldg. & Loan Assoc. IF there is facial/patent ambiguity in a term, THEN extrinsic evidence is admissible to resolve the ambiguity. IF the proffered evidence of ambiguity varies, alters or contradicts the clear meaning of a written agreement, THEN the evidence is not admissible. Problem with the court‟s rule: The rule should be limited to contradiction, not variation or alteration. It seems impossible for evidence to simultaneously contradict the clear meaning and be construed consistently with the written agreement; however, it seems possible for evidence to vary or alter clear meaning and still be construed consistently. Contrast: Restatement (Second) §215 Contradiction of Integrated Terms. “… where there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing.” Thompson v. Libby IF a written contract expresses (1) an entire agreement (2) on its face, THEN parol evidence is inadmissible to contradict, vary, or supplement the terms of the agreement. Sub-rule: IF the evidence is distinct from the subject matter of the contract, THEN it is admissible as a collateral agreement. Sherrodd v. Morrison-Knudsen Co. IF (1) a contract is in writing AND (2) there is no mistake AND (3) there is no challenge to the validity of the contract AND (4) there is no allegation of external fraud THEN the writing supersedes any previous or concurrent oral agreement (parol evidence is inadmissible). Implied Terms and the Obligation of Good Faith Restatement (Second) of Contracts §77: Illusory and Alternative Promises - There is no consideration if the promisor “reserves a choice of alternative performances” unless all of the alternatives would have been consideration, or there is, or appears to both parties to be, a substantial possibility that the promisor might eliminate the alternatives that would not be consideration. - Ex. There‟s no contract when a promisor says, “Paint my house, and either I‟ll pay you or I won‟t,” unless there‟s a substantial possibility that the promisor will choose to pay. UCC §2-306(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. *** This rule derives from Wood v. Lucy, but that court only required “reasonable efforts,” rather than “best efforts.” *** Wood v. Lucy IF a contract is “instinct” with an obligation though imperfectly expressed, THEN a promise will be implied. Donahue v. Federal Express A contract imposes on each party an implied duty of good faith and fair dealing in its performance, unless it is an at-will employment contract. Warranties Express Warranties: UCC §2-313. [Lists how express warranties by seller to buyer are created- basically, any affirmation of fact, promise, or description of the goods that becomes a part of the basis of the bargain creates an express warranty that the goods will conform to the affirmation, promise, etc.] Implied Warranty of Merchantability: UCC §2-314. - Applies to sale of goods when the seller is a merchant of that type of goods. - Merchantability means, among other things: o The goods “pass without objection in the trade” [2-314(2)(a)] o They “are fit for the ordinary purposes for which such goods are used” [2- 314(2)(c)] Implied Warranty of Fitness for Particular Purpose: UCC §2-315. Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller‟s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose. Caceci v. DiCanio There is an implied term that a house is constructed in a skillful manner, free from material defects, regardless of the builder‟s knowledge of the defects and regardless of a standard merger clause. Bayliner Marine Corp. v. Crow IF there is [(1a) an affirmation of fact or a promise made by the seller to the buyer, OR (1b) a description of the goods] AND (2) it is made part of the basis of the bargain AND (3) it is not an opinion, THEN there is an express warranty. The court discusses other rules that are not part of the holding: 1.) IF goods would pass without objection in trade AND they are fit for their ordinary purpose, THEN there is no breach of the warranty of merchantability. 2.) IF a buyer makes known a particular purpose to the seller AND the seller knows the buyer is relying on the seller‟s judgment in selecting appropriate goods THEN there is an implied warranty of fitness for a particular purpose. Duress and Undue Influence Restatement (Second) §175. When Duress by Threat Makes a Contract Voidable (1) If a party‟s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. (2) If a party‟s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction. §177. When Undue Influence Makes a Contract Voidable (1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare. (2) If a party‟s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim. (3) If a party‟s manifestation of assent is induced by one who is not a party to the transaction [voidable unless other party gives value or relies materially]. Alyeska: (various economic duress rules) Rule applied by Alyeska court: If (1) one party deliberately commits a wrongful act and (2) has knowledge that the other party has no choice economically but to accept the offer, and (3) the other party involuntarily accepts the offer, then the contract is voidable for economic duress. - There is a debate about what the wrongful act could be: either causing the economic duress, or taking advantage of the other party‟s vulnerability by making offers in unjust conditions. Grimshaw rule: If (1) one party involuntarily accepts the terms, and (2) there was no reasonable alternative to accepting those terms, and (3) the circumstances are the result of coercive acts by the other party, then the contract is voidable for economic duress. - The Alyeska court seems to think that it‟s following the Grimshaw rule, but its rule is actually different. In Grimshaw, one party‟s wrongful acts have to cause the other party‟s economic duress. Williston rule: If a party has been a victim of a wrongful threat from the other party, and the threat deprives the party of his/her unfettered will, then the contract is voidable for economic duress. Restatement (Second): If (1) one party makes a wrongful threat and (2) the threat induces the other party to enter into a transaction without free will, and (3) the threat was intended or should reasonably have been expected to operate as an inducement for the other party to enter into the transaction, then the contract is voidable for economic duress. (Actual wording above.) Odorizzi v. Bloomfield School District Duress: IF (1) there is a threat of unlawful action, AND (2) the threat causes consent (3) through fear, THEN there is duress. Fraud: IF (1) there is conscious misrepresentation or nondisclosure of a material fact, AND (2) it was intended to induce reliance, AND (3) it induces the innocent party to enter the contract, THEN there is fraud. Undue influence (two possible rules): IF (1) there is excessive pressure by a dominant subject AND (2) excessive pressure is used to persuade “one who is vulnerable to excessive pressure,” THEN there is undue influence. IF (1) there is excessive pressure (objective) AND (2) there is undue susceptibility (subjective), THEN there is undue influence. Several factors to be used in testing for excessive pressure: an unusual or inappropriate time or place for the agreement, multiple persuaders, demand to finish at once, absence of advisors, restricted access to counsel. Fraud; Misrepresentation and Non-Disclosure Restatement (Second) of Contracts §162. When a Misrepresentation Is Fraudulent or Material (1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker a. Knows or believes that the assertion is not in accord with the facts, or b. Does not have the confidence that he states or implies in the truth of the assertion, or c. Knows that he does not have the basis that he states or implies for the assertion. (2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. §163. When a Misrepresentation Prevents Formation of a Contract If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent. §164. When a Misrepresentation Makes a Contract Voidable (1) If a party‟s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. (2) [Fraud or misrepresentation by third party; contract is voidable unless the other party gave value or relied on it in good faith.] Park 100 1st Rule: Duty to read: Both parties are required to know the terms of the agreement they are signing, and they cannot avoid their obligations for failure to read it. 2nd Rule: Two different versions of exceptions to the duty to read rule 1. If party A employs misrepresentation to induce another party B‟s obligation under an agreement, then party A cannot bind party B to the terms of the agreement. 2. If the guarantor has been induced to enter the contract of guaranty by fraudulent misrepresentations or concealment on the part of the guarantee, then the contract of guaranty cannot be enforced by the guarantor. 3rd Rule: IF there was (1) a material misrepresentation of fact by one party AND (2) it was made with knowledge or reckless ignorance of the falsity of the statement AND (3) it was relied upon by the other party AND (4) it proximately caused the injury to the relying party, THEN there is fraud. Hill v. Jones IF the seller of a home knows of facts materially affecting the value of the property AND those facts are not readily observable AND the facts are not known to the buyer, THEN the seller is under a duty to disclose them to the buyer AND the contract is voidable if the seller does not disclose. An alternative the court considered was the California rule: IF the seller of a home knows of facts materially affecting the value of the property AND those facts are known or accessible only to the seller AND they are not known to the buyer AND they are not within the reach of the diligent attention and observation of the buyer, THEN the seller has a duty to disclose AND the contract is voidable if the seller does not disclose. Unconscionability Restatement (Second) of Contracts §208. Unconscionable Contract or Term If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result. Williams: If there is unconscionability at the time a contract is made, the contract should not be enforced. Unconscionability includes absence of meaningful choice + contract terms that are unreasonably favorable to the other party. There are several factors to define the absence of meaningful choice. The rule for whether terms are unreasonable is whether they are unconscionable according to the mores and business practices of the time and place. (Circular reasoning.) Arbitration clauses were held to be unconscionable in Higgins and Brower v. Gateway. Williams v. Walker-Thomas IF there is [(1a) an absence of meaningful choice by one party OR (1b) gross inequality of bargaining power] AND (2) terms unreasonably favorable to the other party, then the contract/term is unconscionable. - This is an atypical approach to unconscionability, in that it doesn‟t discuss procedural/substantive. Higgins v. Superior Court IF there is procedural unconscionability (surprise and oppression) AND substantive unconscionability (one-sidedness), THEN a clause is unconscionable. - This is a typical approach to unconscionability. Adler IF there is substantive unconscionability (cost-prohibitiveness, time restrictedness, or one-sidedness) THEN a term is unconscionable. - Procedural unconscionability by itself may or may not be enough (the court doesn‟t decide that issue). Mistake; Changed Circumstances, Impracticability and Frustration §152. When Mistake of Both Parties Makes a Contract Voidable (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise. §153. When Mistake of One Party Makes a Contract Voidable Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in §154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake. §154. When a Party Bears the Risk of a Mistake - §154(a) says a party bears the risk when there is an “as is” clause or another provision expressly allocating the risk to that party. - §154(b) seems to allow a party to be unreasonably unaware of the limitations of his knowledge and still get the benefit of the mistake rules. - §154(c) allows the court to allocate the risk as the court believes is reasonable. Mutual Mistake Sherman v. Walker: IF the mistake of the parties goes to the whole substance (essence) of the agreement, as opposed to being a mere quality (accident), THEN rescission may be granted. - The judge says “the parties” would not have made the sale if they had known that the cow was pregnant rather than barren – this seems to be willful ignorance of the strategic behavior or deviance of parties. Lenawee adopts §152. Lenawee County Board of Health v. Messerly IF there is a mistaken belief relating to a basic assumption of the parties upon which the contract is made AND that assumption materially affects the agreed performances of the parties, THEN the court has discretion to grant rescission, UNLESS the party seeking rescission has assumed the risk of loss in connection with the mistake. Unilateral Mistake Williston’s rule (quoted in Wil-Fred’s): “unilateral mistake may afford ground for rescission where there is a material mistake and such mistake is so palpable that the party not in error will be put on notice of its existence.” Wil-Fred’s Rule: Four jointly sufficient conditions requiring “clear and positive” evidence – 1. The mistake relates to a material feature of the contract, 2. The mistake occurred notwithstanding the exercise of reasonable care, 3. The mistake is of such grave consequence that enforcement of the contract would be unconscionable, and 4. The other party can be placed in status quo (the same position as before the contract). In Wil-Fred’s, the court doesn‟t make the “unconscionability” requirement very strong. Impracticability and Frustration of Purpose - Impracticability: It becomes too unreasonably costly for the party to perform. - Frustration of purpose: One of the parties substantially loses an anticipated value. There is an interesting asymmetry in that the rules do not allow one of the parties to get out when there is a sudden rise in value instead of a sudden loss. - These doctrines are difficult to reconcile with the concept of contract as a form of risk allocation. Paradine rule: When the party by his own contract creates a duty upon himself, he is bound to make it good, if he may, notwithstanding any accident or inevitable necessity, because he might have provided against it by his contract. - Parties can pay a premium to condition their obligations to avoid certain unforeseen problems. - This is an extremely classical view. Krell v. Henry: If a deal loses all value to a party, because of an unanticipated change in purposes, then the contract is voidable. - This is a very vague rule, and it seems like it should be narrowed in order to maintain the viability of contracts as a system of allocating risk. Restatement 261 and 265 are the rules on impracticability and frustration. - 261 (impracticability) adds a caveat that helps to alleviate the problem of vagueness; the duty is discharged “unless the language or the circumstances indicate the contrary.” There is still a lot of room for variation between classical and romantic judges. - 265 comes up in Mel Frank v. Di-Chem – the court there held that the party‟s principal purpose was not frustrated. Mel Frank Tool & Supply, Inc. v. Di-Chem Co. IF there have been changed circumstances AND a party‟s principal purpose has not been frustrated by those changed circumstances, THEN the party‟s non-performance is not justified. Modification Pre-existing duty rule (Restatement §73): Performance of a legal duty owed to a promisor which is neither doubtful nor in honest dispute is not consideration. Alaska Packers: One rule with two narrowings of scope: IF party A agrees to give additional consideration to party B for B‟s performances of the exact services that B was already under contract to render, THEN the new promise is without consideration. Two “narrowings” of this rule: 1.) IF the parties agree to modify their contract, so that each party is giving the other party some additional consideration, THEN K. The new contract has the old terms, plus additional consideration from both parties. 2.) IF both parties agree to voluntarily rescind their promises and create a new contract, THEN K. The new contract can be completely different from the old. The rationale for the pre-existing duty rule is that the court is worried about the potential for extortion in allowing one party to induce the other party‟s reliance up to the last possible moment. Public Policy; judicial role: "cooperator vs. constrainer" of legislature The public policy doctrine refers specifically to cases in which a contract is made in derogation of regulations, where the regulations do not specify the effects of derogation on a contract, but do specify another penalty. Restatement (Second) §178. When a Term is Unenforceable on Grounds of Public Policy. (1) A promise or other term of an agreement is unenforceable on grounds of public policy if … the interest in its enforcement is clearly outweighed … by a public policy against the enforcement of such terms. (2) In weighing the interest in the enforcement of a term, account is taken of a. The parties‟ justified expectations, b. Any forfeiture that would result if enforcement were denied, and c. Any special public interest in the enforcement of the particular term. (3) In weighing a public policy against enforcement of a term, account is taken of a. The strength of that policy as manifested by legislation or judicial decisions b. The likelihood that a refusal to enforce the term will further that policy, c. The seriousness of any misconduct involved and the extent to which it was deliberate, and d. The directness of the connection between that misconduct and the term. Riggs v. Palmer If voiding a particular contract would clearly have been intended by the legislature, then such a contract is void for public policy. (Very old rule.) Derico v. Duncan (romantic) If (1) there is a statute designed for the benefit of the public and (2) the statute is not merely for revenue raising, and (3) an agreement does not comply with the statute, then the agreement is void for public policy. Ricker (classical) If the legislature did not expressly intend for contracts to be voided by a licensing statute, then the failure to follow the licensing statute does not void the contract for public policy. Cooperator v. Constrainer: Derico says the courts should be cooperators, expanding on the terms of the legislature, while Ricker says the courts are constrainers. Material Breach; Constructive and Express Conditions Conditions Three different mechanisms a party can impose upon another party to induce a performance: 1.) Duty – bargain for that performance to be part of the party‟s duties/obligations under the contract. Non-performance of a duty makes the non-performer liable for damages. 2.) Condition something that the other party wants you to do on their doing something you want them to do (i.e. I will pay on the condition that you deliver) 3.) Promissory condition – condition your obligation on the other party‟s performance, and make that performance a duty for the other party (i.e. I will pay on the condition that you deliver, and you must deliver or I can sue for damages) Difference between duty and condition: “I promise to buy 1000 bushels of wheat from you at $10/bushel, on condition that you deliver to my factory in Lowell.” - Non-occurrence of the condition (delivery) relieves the buyer from the duty to perform. “I promise to buy 1000 bushels of wheat from you at $10/bushel; you promise to sell me 1000 bushels of wheat at $10/bushel and deliver the wheat to my factory in Lowell.” - The seller has a duty to deliver the wheat; if the seller doesn‟t deliver, he has breached the contract. Restatement (Second) §234. Order of Performances (paraphrased) Unless the contract expresses otherwise, performances must be done simultaneously if possible; if one performance will take more time, that one must be done first. Jacob & Youngs: IF the parties have not expressly conditioned their duties under the contract, AND party A has substantially performed, THEN A‟s substantial performance constitutes satisfaction of the constructive condition on his duties, UNLESS A is a willful transgressor. 1. Determining whether an omission was significant to the parties or there has been substantial performance is a fact-intensive inquiry. a. Factors include the purpose to be served, the desire to be gratified, the excuse for deviation, and cruelty of enforced adherence. b. “Substitution of equivalents may not have the same significance in fields of art on the one side and in those of mere utility on the other. Nowhere will change be tolerated, however, if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract.” Oppenheimer & Co. v. Oppenheim, Appel, Dixen & Co. IF the parties have expressly conditioned their duties under a contract, THEN substantial performance does not satisfy the express conditions on either party‟s duties. (An express condition must be literally performed unless it is waived by the party requesting performance.) Morin: Restatement §228. Satisfaction of the Obligor as a Condition When it is a condition of an obligor‟s duty that he be satisfied with respect to the obligee‟s performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied. This doctrine relates to illusory promise – if the obligor can always claim not to be satisfied, and then not be bound by his obligation, satisfaction as a condition looks like an illusory promise. Two ways out of the problem of illusory promise: 1. Restatement §228 imposes an objective standard whenever it is practicable. If a reasonable person would be satisfied, the obligor must be satisfied. 2. A standard of good faith is imposed when it‟s a question of aesthetics – the obligor must report his satisfaction or dissatisfaction in good faith. Computing Value of ’s Expectation; Restrictions on Recovery of Expectation Damages (foreseeability and mitigation) Damages occur when there is an unjustified non-performance, aka breach of contract. Fuller‟s categories of interests served by damages: Expectation interest: The interest an injured party has in being put in as good a position as she would have been in if both parties had fully performed. Reliance interest: The interest an injured party has in being put in as good a position as the party was in before the contract was made. Restitution interest: The interest a party has in preventing unjust enrichment of the other party. Expectation interest: Restatement §347 lays out the formula for computing expectation interest: Expectation damages = loss in value + other loss – cost avoided – loss avoided (See Roesch v. Bray) Hadley/ Restatement §351 If consequential damages arising from breach are either general damages or special damages then the damages are recoverable. General damages are damages naturally arising from the breach in the usual course of things. Special damages are those reasonably supposed to have been in the contemplation of both parties at the time the contract was made as a probable result of the breach. Restatement §352 “Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.” Rockingham County/ Restatement 350: “Duty” to Mitigate “[D]amages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation,” unless the party has made “reasonable efforts” to avoid the loss. Roesch v. Bray Court‟s formula for an injured seller‟s loss in value: Contract price – market value of property at the time of breach = damages. (The seller only recovers when the contract price is higher than the market value.) Formula for an injured buyer: Market value – contract price = damages. (The buyer only recovers when the contract price is lower than the market value.) Hadley v. Baxendale IF two parties have made a contract which one of them has broken, THEN the other party can recover either for (1) a loss that “flowed naturally from the breach of this contract… under ordinary circumstances” OR (2) a loss that was a “reasonable and natural consequence of such a breach of contract” under “special circumstances” about which the first party had reason to know. More Damage Computation; Efficient Breach Efficient Breach: Society shouldn‟t punish people for breaching a contract when they find a better deal, as long as they‟re willing to pay for the consequences of the breach. - Efficient breach is usually an argument against specific performance. - Lukaszewski is consistent with efficient breach in that the court requires the teacher to pay for the consequences of her breach of contract. Handicapped Children’s Education Board v. Lukaszewski IF one party breaches a contract, THEN the other party should be compensated for the difference between what that party expected to receive and what that party actually received. (Provided that the party satisfies the duty to mitigate.) Nonrecoverable damages; Reliance damages Walser: The discretion to award reliance or expectation damages is delegated to the trial judge, even when reliance is the basis for enforcing the promise. Some jurisdictions limit damages to reliance when the basis of liability is reliance. Wartzman v. Hightower Productions, Ltd. From §349: IF anticipated profits (expectation damages) are too speculative to be determined, THEN monies spent in part performance or in reliance are recoverable, LESS any loss that the breacher can prove with reasonable certainty that the injured party would have suffered had the contract been performed. Specific Performance City Stores: IF a party has been placed under a duty to offer a lease to the other party, AND money damages for the lost right to enter into the lease would be incalculable and inadequate, THEN specific performance may be the appropriate remedy. In many settings, especially employment settings, courts have been unwilling to enforce specific performance – it‟s too close to forced servitude. However, courts are increasingly willing to enforce specific performance, especially in land cases.