Law School Outlines - ContractsII

1 I. SUPPLEMENTING THE AGREEMENT a. Implied Obligation of Good Faith i. Implied promises: In order for there to be a valid K, there must be a promise. Implied promises may provide consideration for K. ii. Implied Obligation to use Reasonable Efforts (Implied in fact) 1. Requirements: a. Exclusivity (note: not required in all courts today) i. Rationale: Acceptance of exclusive agency was an assumption of dutiesimplied promise, expectation of action. ii. Hypo: “Let me use your name on my watches and I’ll give you ½ the profits.” No K, namesake not boundillusory. b. Reliance on receipt of future profits i. Exceptions: 1. Relying party paid an initial fee (note: $1 not sufficient consid.) 2. Relying party received profit from and advance on profit. iii. Implied Obligation of Good Faith (Implied in law) 1. G.Rule: Parties to a K cannot interfere with the other party’s ability to enjoy the benefits of the K. To prove breach, must prove bad faith. a. Waiver of good faith i. Blanket waiver of bad faith not permitted. Rparties cannot possibly envision all scenarios of bad faith. ii. Specific waivers permitted. Rsuggests parties were aware of scenarios. 1. e.g. “we may refrain from x,y,z” or “we can reject film for any reason or no reason at all.” 2. Discretionary K’s (party has discretion to make choices affecting rights of the other) a. No categorical rejections. b. Honest dissatisfaction OK. party must be able to justify c. No inquiry into reasonableness of decision, particularly in artistic evaluation. 3. At-Will K’s: K’s without a specific duration, or K that provides for “permanent” emp. a. Exam tip! Exam will not say at-will. It will only be simple work, will not state a duration, or will be an attorney. b. No duty of good faith for termination of an at-will K. c. There is a duty of good faith for terminating in order to deprive of money earned i. e.g. Incentive pay. Money earned an employer undermines opportunity to get it (note: argument always easier when dealing w/$) d. There is duty of good faith for conduct during employment. i. e.g. Allowing the employee to do what they thought they would be doing when they accepted the position (e.g. no bathrooms) e. Exceptions i. Public Policy (note: point to a statute)(note II: courts reluctant to use PP) 1. e.g. Fired for whistle blowing. a. Could go either way. On one hand, no duty to report acts. On the other, some courts may recognize importance of whistle blowing. b. Statute: Legislature could pass statutes requiring or protecting. c. Note: Lawyers have a professional obligation. ii. Expressly incorporated good faith termination policy into manuals into company manuals 1. Must be expressly included 2. If not express, three circumstances: a. Manual has no disclaimer (e.g. may be fired w/no reason). Court will look to: 2 i. Language in manual that suggests promise or specific incorporation such that it is reasonable for EE to rely. ii. EE interaction and manual distributionDid this particular EE received manual? Was he notified of the policy? Was manual distributed? Did EE get it? How well was he aware of the policy? b. Manual w/disclaimer. Court will look to: i. Pattern or practice of ER applying termination procedure to all EE’s ii. Other policiese.g disclaimer in beg. of manual but later parts suggesting existence of policy. e.g. other books outlining grievance procedure. iii. Other assurances by ER 3. No manual, but strong policies or practices. Court will look to: a. Totality of the circumstances. iii. Additional Consideration 1. Must show additional hardship or additional benefit to employer. a. Not enough to do great work. 2. Must be substantial and far outside/above and beyond the bounds of what is normally done. b. Warranties i. Apply only to goods sold by/between merchants under the UCC, although many courts apply outside this context because they feel it is good law. ii. Express Warranties 1. Affirmation of fact or promise, or description, made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. a. Claim by manufacturer: Affirmation, description, modelmust go to specific model in question. i. The claim must be subject to some sort of truth (first class, A1, mint condition) don’t ell us much) ii. Cannot be “puffery” or mere opinion. Rit doesn’t relate to any specific characteristic (what does first class mean?). 1. Note: Some courts have held that these words mean something. iii. Characteristics of the parties/product 1. If seller not experienced with particular model, less likelihood of finding warranty. 2. If product is such that people know less about it, they are more likely to rely on affirmation of seller. b. Must be specific. c. Must be the basis of the bargain (there is disagreement regarding this element) i. Reasonable reliance. 1. e.g. if you tested the boat and it didn’t work as promised, how could its speed serve as bases of bargain. ii. Other courts apply an objective test. Rwe don’t want people saying things that are patently untrue. 2. Disclaimer of Express Warranties a. Yes. Must be specific and relate to model in question. iii. Implied Warranties of Merchantability 1. Requirements: a. Must be as such as would pass without objection in the trade: P must demonstrate: i. Standard in trade 3 ii. D failed to meet standard 1. A significant segment of the public would object. b. A not fit for the ordinary purposes for which such goods are used 2. Disclaimers a. Yes. Must specifically mention the word merchantability. Must be conspicuous. iv. Implied Warranty of Fitness for a Particular Purpose 1. Requirements: a. Seller must know, at time of purchase, buyers intended use. b. Reliance of sellers skills c. Buyers use must be different than the ordinary function i. e.g. buyer tells seller, “I’m going to be hauling lumber in the this truck.” d. Does not need to be defective 2. Compared to merchantability. M: No one would want. FPP: Doesn’t work for me. v. Implied Warranty of Habitability for New Homes 1. Old Rule: Caveat EmptorBuyer beware. 2. M. Rule: There is an implied warranty that a house that is newly constructed will be free from material defect. R. Reasonable expectation about the type of home that you are going to get. 3. Requirements: a. New construction only. i. R.--> Can’t hire an inspector until home is complete. R 2Barganing power. With new construction, builder is in a position of bargaining power. b. Seller doesn’t need to know about defect. R burden on party who can best inspect defect should one arise. 4. Waiver a. Buyer’s knowledge about defect may be regarded as waveryou had a reasonable expectation. Fact-dependent. R if you know about something, you have the ability to change the bargain. b. Latent/Hidden defects cannot be waived. c. “As is” waivers. Hard to support, courts don’t like blanket waivers. Best to put in bold, red type 15 point font. May be waived if waiver is specific and fully negotiated. II. AVOIDING ENFORCEMENT a. Minority and Mental Capacity i. Minority 1. Exam tip! If an age is mentioned on the exam, it likely raises an issue about minority capacity. 2. Q.1. Is the person a minor? a. Will depend on the jurisdiction. b. Exam tip! Make sure to do this first! 3. Is the K voidable? a. G. Rule: K is voidable if made during minority and is subject to be disaffirmed by the minor either before or a reasonable time after attaining majority. i. Only person with lack of capacity can choose to void. Seller cannot, after learning age, try to revoke sale. b. Possible exceptions: i. If P misrepresents his age, K is valid. 1. Seller has a duty to inquire. 2. Note: Some courts say strict liability 3. Note: Growing beard and wearing glasses probably not enough. ii. Necessities. Rwe want to encourage people to sell minorities things they need. 1. Question of necessity factual. What if you need a car to deliver pizza? iii. Willful destruction of goods 4 iv. Marriage: Will depend on jurisdiction. Some say suggests maturity. 4. What kinds of recovery are available? a. Old Rule: Majority must restore full value of anything received by minor. Minor must restore whatever in possession. If not in possession, too bad. b. Alt. Rule: Offsetting Rule: Recovery subject to deduction for use, depreciation, and willful or negligent conduct. If thing no longer in possession, minor doesn’t get $ back. Rensure people sell to minors and encourage minors on cusp of majority to understand their conduct. c. Requirements: i. Must pay cash/up front (otherwise would be out of pocket) 1. If damages more than amount owed to minor, minor not responsible for difference. Minor will never have to pay out of pocket. ii. K must be fair and reasonable iii. K cannot be the result of undue influence or ovverreaching. Rwe should no reward wrongdoers. 1. e.g. Majority overcharged for car. ii. Mental Capacity 1. Rule: K is voidable if made by someone incompetent and is subject to be disaffirmed. a. Test of incompetence: A time of K: i. Unable to understand the consequences of his actions (cognitive) ii. Unable to act in a rational manner (volitional) 1. Note: whether person is competent does not turn on other party’s knowledge. He either is, or is not incompetent. 2. Note II: The presumption is always that someone is competentburden on P. b. Recovery i. Rule: K is voidable only if there is full restoration of both parties (everything taken by incompetent is returned). ii. Exceptions: 1. Lack of good faith, or 2. Knowledge (knew or should have known) with regard to incapacity. K voidable notwithstanding fact that one cannot get full restoration. a. No duty to inquire b. Duty to inquire if there are red flags. b. Duress i. G. Rule: A K entered into under duress is voidable by the victim. ii. O. Rule: required unlawful threat. iii. M. Rule: improper threat that leaves you with no reasonable alternatives. 1. Duress is usually thought of in terms of effect. 2. If you are trying to do something for the purpose of humiliating someone, just to embarrass them, or to be spiteful, some courts will say this is improper. 3. Its not always what you say, but how you say it (e.g. saying with body guard behind) c. Undue Influence i. Exam tip! Not overlap between age and undue influence. Look for problem with weakened state through minority. ii. G. Rule: A K entered into under undue influence is voidable by the victim. iii. Requirements 1. Weakened state, or dominant relationship (either or). Shown by: a. Emotional distress or trauma. (e.g. signing immediately after funeral) b. Age (some courts) (e.g. elderly people tend to listen to phone scams). c. Physical condition. d. Note: u/i is generally subjective. But, it is possible that you have u/I without the knowledge of other party (objective) more difficult to prove. 2. High pressure 5 a. Factors i. Unusual inappropriate time ii. Unusual place iii. Demand for immediacy iv. Emphasis on consequences of delay v. Multiple persuaders on dominate side vi. Absence of third party advisors vii. Statements that there is no time to consult legal or financial advisor d. Misrepresentation*(didn’t talk about much – there’s a reason) i. Fraud 1. Elememnts: a. Must involve lies, and other party must reasonably rely. b. Misrepresentation c. Made with knowledge of falsity d. Intent to induce reliance e. Justifiable reliance f. Damage 2. Unwaiveable ii. Constructive Fraud 1. Must identify a confidential relationship a. ER/EE not enough. Must be the type of relationship that would induce reliance and would suggest that they would act in your best interest. Test: is this relationship one which would last notwithstanding employment. 2. Relationship induces reliance 3. Must demonstrate breach of duty e. Non-Disclosure in Home Sales i. G. Rule: K’s for houses voidable for non disclosure. ii. Rule: Where the seller knows of facts materially affecting the value of the thing which are not readily observable and are not known to the buyer, the seller is under a duty to disclose. 1. Compare with implied warranty of habitability. a. Habitability: house hasn’t been built yet. New construction only. Theory is that you don’t have the ability to inspect. Does not turn on constructor’s knowledgestrict liability. iii. Requirements 1. Seller is aware or knows something is wrong with the house a. Whether seller must have real or constructive knowledge depends on the circumstances. b. Can’t do blanket waiver – maybe specific. 2. The facts materially impact the value of the house. a. Subjective Test: Will it devalue to individual buyer (subjective devaluation) b. Objective Test (most common): A reasonable person/purchaser would want to know it when purchasing. c. Duty to disclose i. Must disclose even if buyer doesn’t ask. ii. Must disclose even if question is innocuous (e.g. does neighbor have a catcould say not material, but what if allergic. If asked, must say.) iii. Seller cannot evade or misrepresent the truth. iv. Cannot be wiaved. 3. Buyer has no knowledge of facts and can’t readily observe. a. Includes constructive knowledge (knowledge that reasonable buyer would take steps to learn it, or that a reasonable buyer would know). i. Buyer is expected to do due diligence. Some courts put duty on buyer, others will punish seller who lies. Courts must balance this duty. b. Reliance: To the extent that buyer has knowledge, they can’t rely on sellers information. 6 f. Unconscionability i. G. Rule: Unconscionable K’s are voidable by the victim. ii. General Idea: Unconscionability is considered either a last ditch effort or a catch-all. The terms must be so ridiculous as to be considered unconscionable. iii. The doctrine of unconscionability is P specific. K can be unconscionable for one person and not another. Keep in mind: 1. Person involved. Financial position, education. Is the person poor and has little purchasing options? Are they capable of understanding the terms? 2. Item that is purchased. Is it a necessity or luxury (note: some courts think overpriced luxuries are even more unc.). Necessity luxury question can play out in procedural and substantive. Problem: A fridge is a necessity but at what point does it become a luxury. 3. Location. (e.g. door to door saleslimit of choices) 4. Policy: Will it put seller out of business so poor buyer has nowhere else to shop? iv. Factors (look at as 2-part test, though many courts consider together) 1. Procedural a. Absence in choice: i. Adhesion K: boiler plate, take it or leave it. ii. RIf person had no choice, it would make no difference whether they understood the terms. iii. Considerations: Can P afford alternatives, are there options? b. Lack of knowledge of terms (matters, but ultimately a question of choice) i. Ultimately, this is not outcome determinative ii. Tension between knowledge and prevalence. c. Inequity in bargaining power i. Anyone in position of bargaining position would not consent. ii. Knowledge and financial position very importantreally about position in Markey place (education and income) 1. Seller does not have to know of financial position, but often they are assumed to. Case is stronger if you can show targeting. 2. If you are educated or have $, court will find a way. iii. e.g. Lawyer negotiating his K. Doesn’t matter as much the he is a lawyer, it matters more if the ER needs lawyers iv. Note: Once inequity established, choice less significant. 2. Substantive a. Grossly unfair termsgenerally completely ridiculous. i. Must prove that most would not consent to terms. ii. Financial position is also a consideration v. Unconscionability of arbitration agreements 1. Premise: Arbitration agreements are given favor by SC. 2. Substance: It’s not enough to say, it’s a horrible forum (no jury, not bound by precedent, lower settlement, cost prohibitive). Must show that costs or rights: a. COSTS: Costs are really high, or b. RIGHTS: By going into arbitration, you are giving up a substantive right. You’ll sill be heard, but at a cost, and without jury. i. Waiver of rights suggests 1) P didn’t know, 2) D did know, 3) why would P waive? 3. Procedure a. Bargaining power between ER/EE b. Employee has choice of where to work. Perhaps in tougher economic times it would be considered. c. If ER pays more in exchange for AA, additional consideration given. Unconscionability unlikely. 4. Ways to improve (not perfect): make sure not cost prohibitive, inform party of rights, give them additional consideration. g. Public Policy i. G. Rule: K’s that violate public policy are void parties end up where they started. 7 1. Note: This is most difficult method of avoiding enforcement. ii. Must point to a statute. 1. Note: Policies are supposed to be what people think. 2. e.g. K’s between H/W to provide service while sick where statute says service req. 3. e.g. Surrogacy K’s. Possibly invalid through adoption K’s. Concern: financial reward, surrogacy (as compared to eggs), waiting period after child born. III. JUSTIFICATION FOR NONPERFORMANCE a. Keep in mind: The sole reason behind K law is we don’t like people breaking promises. b. Chart Mistake Impossibility Impracticability Frustration Bilateral Unilateral Error of fact Change of circumstances Error must exist at time of K After K Formation Basic Assumption + Material Impact Basic Assumption of K No AOR No AOR: 1) Reasonable care, 2) Red flags Performance Impossible Performance Impractical Frustrates Principle Purpose Equities No Fault No AOR c. Mistake i. Bilateral Mistake: Elements (1,2 mistake and 3,4voidability) 1. Error of fact (mutual) a. Fact (identity) v. Value. i. Most courts will say mistake of value not enough. 1. If the mistake of fact affects the value, the mistake is separable and this is ok. 2. If the mistake is the value, this is a single element and is insufficient. b. Fact v. opinionopinions will not suffice (I think that house was built by V) 2. Error must exist at time of K a. If discovered beforeunilateral mistake. Seller has duty to disclose, buyer no. b. If error non-existent until after Kchange of circumstances (e.g. law passed setting requirements on septic tanks) 3. Basic assumption that materially impacts the value of the exchange a. It is not enough that it costs you a little bit. b. It must be cost prohibitive (e.g. costs to fix outweigh value) 4. Party seeking to void K cannot assume the risk a. Three ways to look at: i. Express AOR 1. As is clauses. 2. Right of inspection if inspection would have given greater knowledge. ii. K’s entered into with limited knowledge 1. To the extent that you tried to gain knowledge and reasonably relied, you don’t carry the burden. iii. Implied AORlook to industry standard. 5. Hypo’s ii. Unilateral Mistake 1. Elements a. Error of Fact at time of K. i. Errors of judgment: generally relief is refused. ii. Clerical or Mathematical errors: generally courts will consider. iii. Mixed-Errors of judgment based on error of fact courts may consider. Mistake Voidability 8 b. Basic assumption that materially impacts the value of the exchange i. Consider value of impact and parties involved. (e.g. bankruptcy may not be an issue for a multi-million dollar company) ii. Where the exchange becomes valueless, the value is materially impacted. This is true whether a multi-million dollar co or not. c. No AOR (2 views on who assumes) i. Reasonable care. Did mistaken party exercise reasonable care? E.g. inspecting, hiring an expert, reasonable reliance, discover mistake quickly (note, this could cut either way). ii. Red Flag. Should the non-mistaken party have been put on notice? Was the deal too good to be true? 1. Note: Non-mistaken parties have no duty to correct, however, by saying “maybe you should check your figures,” the burden is shifted. d. Equities i. Grave consequences on mistaken side 1. Must be significant. e.g. bankruptcy. ii. No change of position on non-mistaken sidecan be restored to status quodid non-mistaken party detrimentally rely? iii. Note: equities favor rescission (eliminate K, back where started) d. Changed Circumstances i. Note: rarely applied. Rpoint of K is to lock people in despite changes. ii. General 1. Similar to mistake, however, changed circumstances relates to something that happened post K. 2. Most cases turn on AOR. 3. Result: Party excused of duty to perform and from any liability associated with damages (to the extent of restitution)*** iii. Impracticability 1. After K formation an event occurs, the non occurrence of which goes to the 2. Basic assumption of the K, making a. Generally, change in market/unprofitability not enough. Rno assumption that market will not change. i. Exceptions in extreme circumstances. e.g. you are a cooking co in K w/spice provider. Spices made in NO. b. Foreseeability relevant. Rif foreseeable, then non-occurrence wasn’t a basic assumption. c. Must be shared by both parties 3. Performance impractical. a. How impractical? Courts generally unsympathetic to financial loss. b. Are there alternatives? 4. There can be no fault on moving party, and 5. No AOR a. To the extent that parties can foresee the occurring event, they bear the risk. i. e.g. If you create you bear causing health concerns to self (stress) b. Commercial expectation. c. Express iv. Impossibility 1. After K 2. Basic assumption 3. Performance impossible a. Must be no alternatives. 4. No fault 5. No AOR v. Frustration of Purpose 1. After K 9 2. Basic Assumption 3. Frustrates principle purposethe essence of the agreement a. Frustration must be substantial i. Incredibly difficult to fulfill obligations of K. Costing a lot of money is not enough. b. Mutual profitability cannot be principle purpose. Rthis applies to all K’s. e. Modification i. ExamTip! Unconscionability /Duress also applies to K modifications. ii. General 1. K’s modified through: 1) additional consideration, 2) promissory estoppel. iii. K Modifications made under duress are unenforceable. 1. Improper threat a. Threatening to breach is improper. i. If threat accompanied by a justification that would justify performance, then threat not improper (Note II: Bankruptcy not sufficient) ii. Bargaining power may mattercan they go through with it? b. It is not improper to capitalize on someone else’s misfortune. 2. No reasonable alternative (2 elements) a. Nowhere else to go. b. Possibility of harm caused if you don’t assent to terms of modification. (e.g. ford) 3. Protest (element specific to modification) a. Party under duress must put the other part on notice. i. Courts split whether notice is required for subsequent modifications under duress. ii. Note: Some courts consider good faith. 4. Resultperformance excusedconcerned with restorying parties to original position. a. ExamTip! Note overlap w/damages. iv. Oral Modifications 1. General rule: Oral modifications unenforceable under SOF. a. Exception: Promissory estoppel. i. Non-enforcing party must promise to put modification in writing and the enforcing party reasonably relies. b. Exception II: Goods accepted and received. 1. Note: They could still argue duress. 2. Clauses prohibiting oral modifications. a. Overcome by waiver through later conduct. i. Goods received and accepted without protest. ii. Goods received and paid for. iii. Note: even if provision says unwaiveable, this can be waived too, unless waiver is express stating its impact. IV. CONSEQUENCES OF NONPERFORMANCE. a. Material Breach i. Breach: Failure to perform when performance is due. ii. Types of breach 1. Partial/Substantial Performance/Trivial: Deemed immaterial a. Non-breaching party cannot refuse performance. b. Substantial Performance (substantial compliance with terms of K) cannot be material. 2. Material: Hinges on whether it is the essence of the K a. Factors (1st most important) i. Whether injured party will obtain the benefit ii. Availability of adequate compensation for lack of performance. iii. Extent of breaching parties part performance. iv. Hardship on party failing to perform. v. Intentionality vi. Uncertainty whether breaching party will perform to terms. 10 b. Entitles non-breaching part to suspend performance waiting until cure/total. i. Must give breaching party reasonable chance to make the cure. ii. Note: If you are wrong, you have breached. c. Substantially impairs the value of the K. 3. Total: material + no cure. a. Entitles non-breaching party to stop performance, and make alternative arrangements (e.g. entering into K otherwise impermissible) i. Note: A total breach is by its nature a material breach. b. Cannot be cured. 4. Note: Irregardless of distinction, there’s always a remedy. iii. Determining whether a breach is Trivial or Material. 1. Materiality generally hinges on whether it is the essence of the contract. 2. ExamTip! Focus on materiality with respect to the whole project. 3. Conditions a. Non-compliance with an express condition (expressly negotiated) is a material breach and the non-breaching party’s duty to perform never arises. i. Note: K’s must be commercially reasonableevery condition cannot be express. 4. Considerations: a. Express conditions b. Inferior quality i. If defect has impact on entire value then it is material. ii. If not material, will affect damages. c. Personal value d. Aesthetic/Artistic value e. Intentional/Bad Faith i. Courts split on whether affects remedy. Usually considered along with other considerations. f. Note: If factors don’t affect materiality, they will affect damages. iv. Determining whether Material or Total 1. Payments a. Missing a small payment for the first time probably doesn’t matter (trivial). After repetition; however, the non-breaching party is not getting the benefit of the K. If using the $ to pay debts, it may become total. i. Note: Overlap change of circumstances as reason for non payment. Probably won’t work. Debtor assumed risk of non-payment. b. Anticipatory Repudiation i. General: 1. Repudiation is not a breach, because performance is not due; however, it gives the other party the ability to treat your conduct as a breach. a. They can treat as a total breach and do something inconsistent with the K. 2. Note: This doctrine is disfavored by courts. ii. Two ways: 1. Clear manifestation of intent not to perform (unambiguous) a. This can be through words or conduct, so long as clear. i. Note: deadlines not always material. ii. Note: Its not enough to say you’re going to pay, if conduct shows otherwise. 2. Indicate that you will only perform on modified terms. a. Suggesting change or modification is not enough. b. It’s not enough to say you still want to do this, you must express a willingness to stick to original termsmust be a request, not a demand. 3. Caveat: Retraction of repudiation. OK unless: a. Non-repudiating party materially alters their position. b. Non-repudiating party gives notice that they intend to treat your actions as a breach. 11 i. Must be direct. iii. Demanding assurances for someone’s performance. 1. Entitles you to suspend performance until adequate assurance given. a. If they fail to assurefailure is a breach. b. If they provide assuranceyour obligation is re-triggered. i. After re-triggered, you can make further demands if there is a changed circumstance (e.g. you only ask for payment, they pay and then ask for a huge order. You can ask for proof of credit so long as reasonable). 2. Requirements: a. Reasonable ground for insecurity. i. Doesn’t have to be a breachjust reasonable. ii. If a breach, even if not material, you can demand assurance. iii. Concerns also apply (e.g. reliable rumors of bankruptcy) iv. Note: If insecurity existed before K, some courts will say you should’ve K’d around it. Other courts say, well, people change. b. Assurance demanded must be reasonable. c. If either requirement is not met, conduct can be seen as anticipatory repudiation. If incorrectbreach 3. Assurancesdon’t always have to comply, so long as assurance is adequate. c. Express Conditions i. Rule: Conditions make performance contingent on something. If condition not met, the other party’s duty does not arise until condition met. 1. Note: If condition not met, you must still give time to cure. ii. Types 1. Condition: Duty to perform does not arise until met (no breachnever materialized). 2. Condition precedent: If condition does not arise, neither party has a duty to perform. 3. Condition subsequent: Condition that cuts off an already existing duty (e.g. “if riot breaks out before 5th performance, no duty to continue). iii. Creation of conditions 1. Use of “Magic words” for creation of express condition: a. Unless & Until b. If and only if c. Provided that d. Note: Orally notified & Subsequently written conditions will not suffice. 2. Expressly negotiate iv. Conditions excused if… 1. Hindrance a. A party prevents a condition from coming about. b. e.g. Unreasonableness in objections: *Conditions subject to satisfaction i. Rule: Must be reasonable, unless artistic. 1. Note: You can contract away requirement of reasonableness (some courts disfavor) 2. e.g. Siding for warehouse. Sheets can’t be perfectly matchedwarehouse, artistic unlikely. Even then, impossible to make perfect. Maybe if building served artistic function: warehouse museum. 3. e.g. A watch is a watch unless you’re wearing it to the Oscars. 2. Breach 3. Anticipatory repudiation 4. Forfeiture (losses sustained from failing to meet condition) a. Requirements i. Substantial performance ii. Significant loss 1. Note: Option K’s a. Generally no forfeiture, unless you do something thinking you’ll be able to exercise the option. 12 b. e.g. Renew lease. Losing goodwill not enough. Improvements maybe c. Note: no duty to remind. If reminding of other things, may be abd faith. iii. Condition itself cannot be material (express may imply materiality) iv. Failure to comply not willful (can be negligent) v. Person on other side not harmed. 5. Waiver a. One party says they will not insist on conditions. i. Can be express or through conduct b. Requirements: i. Must be clear. ii. Condition itself cannot be material, unless add’l consideration given. 1. RIf material, you shouldn’t be able to waive. 6. Estoppelwaiver of material conditions can be valid if detrimental reliance shown. a. Requirements i. Reliance (detrimental) ii. Can be material 7. ExamTip! Events will be stacked – go through chronologically. If clear, but material, look for reliance. V. REMEDIES OVERVIEW a. Five Types (first three general): i. Expectation interests: The value of the expectancy which the promise created. 1. Objectput P in as good a position has he would have been had D performed. 2. e.g. K supposed to make $5M $5M ii. Reliance interests: Plaintiff has in reliance on the promise of D changed his position. 1. Objectput plaintiff in as good as position as he was before the promise made. iii. Restitution interests: Plaintiff has in reliance on the promise of the D conferred some benefit on D 1. Objectprevent the gain by defaulting promisor at expense of promisee. 2. Note: Usually kick in when K not enforceable. 3. e.g. K supposed to perform 5 and performs 3 can be paid for 3. iv. Specific Performance v. Agreed remedies b. General Rule: If possible, the court will compute and award damages so as to give P her expectation of fain under the K – the “benefit of the bargain” that P would have realized had the agreement been fully performed.” i. Expectation = Net expectationvalue of performance D promised less the cost of performance plaintiff has promised in return as the “price” of performance.” VI. EXPECTATION DAMAGES a. Defined: The amount you expect to receive if the breach had not occurred and the contract had been fully performed b. Limiting Principles i. Foreseeability (Hadley v. Baxendale [so long as reasonable and foreseeable they are recoverable.) ii. Certainty iii. Mitigation c. Computing the Value of Plaintiff’s Expectations i. General Measure = Loss in value + other loss – cost avoided-loss avoided ii. Plus side 1. Direct Damages (general): difference between the value of the performance you received and the value of what you should have received based on the contract a. Note: If its in the K, it will always count here. b. Examples i. Property: Difference between the contract price and FMV of property at the time of breach 1. If K value $76K, and FMV is $75K, you get $1K (note: nominal) ii. Services: Cost of obtaining equivalent services 13 1. If no equivalent, you can go with someone better if no reasonable alternative. 2. If you go with someone less $, no recovery. iii. Profits: Loss profits plus un-reimbursed expenses to date of breach iv. Defective Performance: 1. Ordinary rule: Cost of replacement or completion a. Exception: Diminution in Value i. Substantial performancemakes breach immaterial (can’t be essence of K) ii. Good faith Note: If intentional, will not get diminution even with substantial performance. Rdiminution is to lessen the load. iii. Economic waste: cost of complete is grossly out of proportion to difference in value (ready pipes). Note: If it costs so much to complete, it is further indication of materiality. 2. Consequential Damages (special): all other foreseeable damages that flow as a consequence of the breach. Must be: a. Reasonably Foreseeable i. What is reasonable is determined by the circumstances. ii. Anything not reasonable will count against you. iii. Note: You can recover for K’s entered into w/3rd party following breach b. Known and Communicated (therefore foreseeable) i. Must show not only that damages will occur, but that the breach will create the damages and that you have no alternatives. 1. Rthey are assuming the risk. ii. Note: Today there is no cap on communicated consequential damages. Rif they knew, they should have bargained around. c. Certaintycan’t be speculative. i. Must have certainty about: 1. Actions leading up to breach. 2. Money/damages arising from breach. 3. Note: Its simple, if its difficult to show… ii. New Business Rule: Traditionally, courts deny recovery for lost profits by new businessestoday, however, courts more willing to accept (industry standard, track record) iii. Note: If K subject to termination, this may affect certainty. iv. Where damages uncertain, court will give reliance damages instead. iii. Minus Side 1. Costs Avoided: total costs you save as a result of the breach (e.g. labor) 2. Losses Avoided (Mitigation): total amount you did or could have avoided as a result of the breach (e.g. selling extra plywood a. amount you did save by entering into a new contract, unless the new contract is not a mitigating one (loss volume) i. e.g. Homebuyer breaches. You make $ by operating daycare. b. the amount you should have saved if you could have entered into a new contract but did not d. Mitigation of Damages (also a limitation on P’s right to recover) i. Rule: Plaintiff cannot recover for those injurious consequences of the defendant’s breach that he could have by reasonable action avoided. 1. He must subtract portion where you did/could have mitigated. 2. Reasonable action: Court won’t require mitigation when it would be harmful. 3. If dealing with total breach, you have a duty to mitigate – you don’t otherwise. LIMITS ON RECOVERY 14 ii. Mitigation in wrongful termination of personal service K’s. 1. You must mitigate with the same company. a. You must accept a “substantially similar” agreementits not enough to have apprehensions about the job. b. Humiliation may count as a special circumstance making mitigation unreasonable. 2. You must mitigate by remaining in job market (can’t just sit/collectminute you’re outdamages stopped) 3. Burden on employer to prove that it is substantially similar or that there is a reasonable alternative elsewhere. iii. Mitigation of Lost Volume Sellers 1. Additional K’s entered into following a breach are not need mitigating if you could and would have done both at the same time. e. Non-Recoverable Items i. Attorneys’ Fees 1. Exceptions: a. Contract b. Statute c. Bad Faith. Runnecessary burdensome litigation. 2. Rundermining people’s ability/desire to bring cases. ii. Emotional Distress, unless: 1. Independent Tort, plus: a. Independent duty beyond K, and either: i. Negligence + physical injury, or: ii. Intentional + physical/emotional (split) 1. Intent must go to tort and injury. 2. “Special relationship” increases likelihood of success a. e.g Builder int’y using cheap material/crazy x-bf. 2. Breach of K where emotional distress is likely. a. Basic foreseeability rule inapplicable. Revery breach could cause. b. Most likely in K’s dealing with emotional or physical well being. i. e.g. breach of K to make accessible home (note: clearly material) ii. e.g. plastic surgery iii. e.g. Ffuneral context. c. Can K around, but most likely struck down. Rhard to determine, punitive. iii. Punitive Damages 1. RK damages designed to make people whole and not to damage. f. Theories of Recovery i. K law helps people recover for economic injuries. Not a moral system of punishment. ii. Net social gains. iii. Efficient Breach: If the cost of performance will exceed the cost of breaching and paying damages, you should breach. 1. Arguments for: a. The other party also benefits from getting compensated and hiring someone else. b. K law is not a duty to perform, but a duty to pay damages associated with breach. 2. Arguments against: a. Injured parties never get fully compensated (transaction cots, negotiating for substitutes, limitations of foreseeability & certainty, non economic damages. b. Undervalues the concept of a promise. VII. ALTERNATIVES TO EXPECTATION DAMAGES a. Reliance Damages i. Definition: Money spent in justifiable reliance on the contract 1. ReasonablenessExpenses and reliance must both be reasonable. ii. Two Scenerios: 1. Recover when expectation damages too speculative 15 a. The fact of damages and the amount of damages can each be speculative. The more speculative the fact is, the more likely it is a court will use reliance. 2. Court finds reliance damages more appropriate. Rreliance is an equitable doctrine. a. e.g. Conditions on K still need to be met, yet expenses made. Fact of damages speculative. b. e.g. Can limit to out of pocket expenses: Difference between what paid for and what worth. iii. Limitations (same 3): 1. Foreseeability (of reliance and expenses made thereof) a. Foreseeability of reliance by makes damages foreseeable [Hadley] 2. Certainty: If it is shown with reasonable certainty that the contract would have been a loss then must subtract that loss from the damages. a. Speculation about loss (e.g. no banks will finance) is insufficient. i. Note: This is nearly impossible. If capable of determining loss P the question would be expectation damages. 3. Mitigation a. Must provide breaching party equal opportunity to mitigate, so long as it won’t cost you. iv. Note: Court may place a cap on recovery 1. e.g. out of pocket expenses (diff. between what paid/worth) b. Restitutionary Damages i. Rule: Can elect restitution any time prior to the completion of the contract 1. Note: Some courts allow you to go for restitution and expectation. ii. Definition: Amount of benefit conferred on the breaching party 1. Not limited to contract price a. Determined by how much it would have cost breaching party to have done what you performed, or by how much your services increased the value. Noteif impossible to find a value, court may look to K. 2. Do not subtract losses sustained a. Rrestitution to put in place as if there’d been no breach. b. ExamTip! When K results in loss, this is the way to go. iii. Limitation: If you have fully performed and the breaching party’s only obligation is payment, then cannot elect restitution iv. Breaching Party: Can recover any benefit in excess of the harm caused, capped at the contract price. Rwindfall. 1. Exception: Intentional breach + Material Deviation from the terms of K. a. Some J’s consider bad faith (e.g. buying business, breaching, using trade secrets later) 2. K provisions making a deposit not recoverable in case of breach. a. Not automatically recoverable. b. Amount not binding. c. Amount cannot be out of proportion. 3. Note: This is an offsetting rule. P will never have to come out of pocket. v. Note: This doctrine is the most consistent with voidable K’s (undue influence, change of circumstances, minority, mental capacity, duress, etc.)*** c. Specific Performance i. Note: Courts traditionally reluctant. but becoming more flexible. ii. Requirements 1. Damage remedy is insufficient a. K damages inadequate where what K’d for is unique. i. e.g. People with unique skills (Jordan, Kelly). Can’t force specific performance, but can seek a negative injunction.*** ii. e.g. Land b. K damages may be impractical i. e.g. Lost profitstoo speculative to receive expectation damages. 2. Equities favor specific performance 16 a. Burden of supervision (court will have to oversee. e.g. was breach right in beg.?) i. e.g. construction cases. b. No undue hardship i. Losing $ not enough. ii. e.g. would force additional litigation (requiring mall owner to allow store, when K with other store in mall has right of first refusalwould cause hardship on 2 parties not part of lawsuit) iii. Limitations: 1. No specific performance for personal services a. 13th amendmentinvoluntary servitude iv. Negative Injunctions: precluding someone from performing services from someone else. 1. Damage Remedy Inadequate (e.g unique skill) 2. Either: a. Agreement Not to Compete i. Can be express or implied (e.g. can’t do both @same time) b. Necessary to prevent tortious activity (trade secrets) 3. Necessary to Prevent Irreparable Injury a. To the extent that you’ll be economically harmed by your employees working for a competitor, this is irreparable. 4. Note: Negative injunctions very difficult after K expires. d. Agreed Remedies i. Rule: Agreed Remedy will be construed as a liquidated damages clause if the agreed remedy is a reasonable forecast of the actual or anticipated harm caused by the breach (otherwise a penalty) 1. Should have a formula. a. The more difficult to come up with, the more flexible courts will be with reasonableness. The easier, the more stringent courts will be. ii. Other factors 1. It is usually not enough that to agree the damage clause represents a reasonable forecast. a. Court may invalidate if no connection to actual loss. 2. If actual damages are nowhere near forecasted damages it will work to your disadvantage, but some courts say so long as it was reasonable at time of K. Some will go with actual and strike down. 3. Courts will consider bargaining position. 4. The party seeking to overturn the damage clause bears the burden. 5. Disfavored by courts. Roppression, judicial function, overcompensation, pressure to stay in losing K’s. 6. Note: Gross receipts disfavored not reflective of actual earnings. iii. ExamTip! Agreed remedies clauses may be unconscionable! VIII. RIGHTS AND DUTIES OF THIRD PARTIES a. Rights of Third Parties as K Beneficiaries i. Requirements 1. “Effectuate Intent.” There must be an intent to confer a benefit coupled with an intent to confer an enforceable right on a 3rd party. a. Courts look to totality of circumstances (split) i. Some say must be intent by both p/r and p/e ii. Others say only p/e must have intent. iii. Others say p/e intends to confer, promisor must only have knowledge iv. RPR should know of obligation to a 3rd party. 2. Performance of K satisfied an obligation that the promisee has, or promisee intends to confer a benefit on a 3rd party ii. Creditor Situation 1. Citron loans to FFX. FFX(p/e) agrees to perform services to Quint (p/r). Quint agrees, in return, to pay $ owed to citron. 2. Third party steps into shoes of p/e. If p/e’s performance ineffective, p/r doesn’t owe anything to 3bp. 3pb must go against p/e because she originally owed the $. a. Rp/e because a surety and ensured that if p/r didn’t pay, she will. 17 b. If a novation (replacing one party w/another) , p/e’s liability cut off. iii. Donee Situation 1. FFX hires attorney to draft a will giving stuff to class. Atty crews up (p/r). 2. 3pb cannot bring suit against FFX (she is dead), but can against p/r. b. Assignment and Delegation of K rights and duties i. Assignment: Obligor and Assignor enter into K. Assignor transfers right/duty to assignee and the obligor must perform under K. 1. General a. There is a premise of free Assignability of rights. It’s a little tougher to assign a duty. b. You can’t assign the right to litigate. 2. Requirements: a. Intent to transfer the right. b. Assignor can’t retain control or power to revoke. i. Silence is construed as not retaining power or control. ii. If in same document you retain ability to revoke, is not valid. iii. RObligor must know who to pay and should be liable if not only in his control. c. Obligor must have notice i. Consent no requiredif refused, he’s liable. ii. Obligor may ask for adequate assurances. 3. Defective performance a. When assignee’s performance is defective the obligor can refuse to assign (e.g. Attorney (obligor) to pay doctor (assignee) on your (assignor) behalf out of settlement. b. When assignor’s performance is defective, the obligor can refuse to assign (e.g. A offers 10 to FFX to build dog house. FFX assigns proceeds to B. Dog house defective. B doesn’t get 10 because he’s subject to FFX’s defective performance) 4. Limits to Assignability a. Public policy b. Material impact on obligor (e.g. change duties, burden, return performance) c. Express K i. To K around assignment, you must be explicit and say: “any assignment is null and void and does not create rights and interests in other parties.” 1. Not enough to say “not assignable.” 5. Note: Asset sales will trip up assignment clauses, stock sales will not. ii. Delegation 1. Problem usually that obligee doesn’t want the performance by the delegee. 2. K’s not delegable a. K[s for personal services (Kelly can’t delegate performance to FFX) b. Under UCC: where the party has a substantial interest in having the original promisore.g. delegating to a competitor (courts split). Note: No change of circ. 3rd P Assignment Delegation PR PE Obligor Assignor Obligee v. Obligor v. v. v. TPB Assignee Delegate