Spring 2003: Contracts II Review Professor Stephens Exam: 3 hours; may be partially multiple choice based upon the facts given (similar to LSAT); tend to be argumentative – argue both sides of the issue; answer each subpart separately; looking for recognition and analysis of issues; give the appropriate party’s arguments when asked for them; regarding last semester – will not test knowledge of last semester; focus is on what we learned this semester, but some of last semester’s stuff will end up on it and be incidental to the main question; I. Remedies A. Expectation 1. what it would take to put in position had K been performed a. Measuring: loss in value [diff in value between what you received and what you should have received] + other losses [incidental (out of pocket damages) and consequential damages (losses sustained b/c of breach, pain and suffering, lost profits, must have been REASONABLY FORESEEABLE) – costs saved [expenses you saved b/c K was breached; e.g., not having to buy additional materials, not having to spend travel expenses) – loss avoided (able to get another opportunity b/c of breach or mitigated damages; got another job) = expectation damages b. When a K is defectively performed, then expectation damages means you are able to recover the cost to repair or replace the defective part or defective construction or part; cost of repair or replacement (1) K law is compensatory, but: (a) NO ECONOMIC WASTE: if cost of repair/replacement is grossly disproportionate to value (wrong pipe), then all you get the difference in value (between the wrong pipe and right pipe – if it is zero, then you get zero) i) If the K involves your personal taste or something that involves something of special value to you, you are entitled to cost or repair/replacement even if it is grossly disproportionate B. Reliance 1. Position when K made – status quo ante 2. Restores expenses put out in reliance C. Restitution 1. Benefit conferred 2. Benefit promisee conferred to promisor D. Limitation on Recovery of Damages 1. Avoidability: a. Can’t recover damages which could have been avoided: (1) Increase in damages – either party cannot recover a loss that could have been avoided by taking no further action; party cannot do something that affirmatively increases damages (2) Duty to Mitigate: party must affirmatively do something to decrease damages
b. Duty to do what is reasonable to do what is reasonable to mitigate loss (1) If it can be done on comparable K terms (2) If it can be done without causing undue burden, risk, hardship, or humiliation 2. Foreseeability: a. General Damages: Innocent party can only recover those damages which were reasonable foreseeable when the K was entered into; those which naturally and reasonably flow from the breach (1) What makes foreseeable: (a) naturally flow from the breach (b) if you bring those to the attention to the other party (let them know in advance if you do not get the part in time, it will incur damages) b. Special Damages: other party should have known these damages were foreseeable b/c it was brought to their attention 3. Certainty: a. Unless proven to a reas degree of certainty b. Ct cannot specualte, guess what the damages are, innocent party must prove what the damages are 4. Liquidated Damages Provisions: sets forth what the damages will be in event of breach; K parties can get together and eliminate cost, expenses and time in making sure all requirements are met by agreeing to liquidated damages in advance a. Only enforceable when: (1) @ time K was entered into, damages had to be difficult or impossible to estimate (2) Despite impossibility to determine, it must be a reasonable estimate of the anticipated losses (3) Must have in fact have a reasonable relationship to the actual harm; if grossly out of proportion to the real damages, then it is void II. Law of the K; Construction and Interpretation A. Parol Evidence Rule: absent fraud or duress or mutual mistake, all preliminary discussions, etc. all merge and are superceded by the final written K; final written K is the agreement of the parties; anything outside the 4 corners of the document (e.g., extrinsic evidence) 1. Cannot be used to modify, vary or contradict the K 2. Only applies to prior evidence a. Evidence after the K (subsequent) does not apply to Parol Evidence rule – otherwise you could not modify the K in the future 3. Can always be used to explain vague or ambiguous terms 4. Latent Ambiguity: If ambiguity is not apparent on its face (chicken is not a chicken) a. Parol Evidence can be used to determine whether there is a latent ambiguity 5. Can be used to fill in a gap in the K; address something the K does not address; fill in a missing term 6. Can be used to determine whether or not a K was actually performed (e.g., ID when there was fraud, duress, mutual mistake)
7. Can be used to identify trade usage (but usually trade usage is an implied term) some courts use parol evidence to get in trade usage to fill in gaps B. Implied Terms: 1. Unless K provides otherwise, the following are implied, “gap fillers:” a. Trade usage, industry practice b. Course of performance – how dealt with each other in this K c. Course of dealing – how dealt with each other in other Ks d. Reasonableness e. Good faith f. Fair dealing g. Best Efforts h. Reasonable efforts i. Right to terminate after a reasonable time and after giving reas notice j. Duty to cooperate with other party; duty to not interfere with, hinder performance of other party or make their performance more burdensome 2. Cannot imply a term when a matter is expressly dealt with in the K 3. Cannot imply a term when the implied term will be vague or ambiguous 4. Cannot imply something: a. not in contemplation of the parties b. that does not effectuate the intent of the parties 5. If they had thought about it , they would have made it an express term in the K 6. If ambiguity (term or K susceptible to more than 1 interpretation) after express and implied terms: apply a. Construe most strongly against the person who drafted K III. Performance and Breach A. Depends upon type of K 1. condition precedent a. If exists: event must occur before performance is due b. Must be strictly complied with c. Must be expressly stated d. If not met exactly in every respect, the other party is excused from performance 2. Mutual Condition Precedent: Quagmire a. Each party’s performance is a condition precedent to the other party’s performance b. Promise to give car if you pay me $500 – each has to perform @ same time 3. Implied Condition Precedent: When not express in the K a. Obligation to pay for services rendered in Ks which are supplying goods or services b. Constructive Condition: absolute compliance not required, only substantial performance (1) Obligated to pay when someone performs the “essence” of the K which is the purpose of the K (2) If not substantially performed, it is a material breach (3) If substantially performed, it is an immaterial breach
c. Sue In Restitution for Quantum Meruit: Not always fair, so upon partial performance and some unjust enrichment occurs, then ct will superimpose restitution – if a party does not substantially perform, they have to pay restitution for their benefit conferred [exception to quasi-contractual restitution which is in place when no K exists] (1) Get benefit conferred or [courts usually use this] (2) Value of services rendered = benefit conferred unless shown otherwise (3) Most courts use value of services rendered (a) One receiving benefit may say the value to them is lower d. Independent Condition Precedent: even if one side performs, the other side HAS to perform (as in leases b/c tenant has to pay whether or not landlord has repaired) B. Divisible Ks: 1. Occurs where a K can be divided into two or more parts and with respect to each sub part, each party received what it bargained for in that part (logs) 2. If divisible, whether or not there has been substantially performed, the receiving party has to pay for the portion of the K they received C. Entire K: 1. K to build a house, is not a K to build plumbing IV. Anticipatory Repudiation: Definite and unequivocal statement that a party cannot perform a future task under the K A. Can get damages when: 1. If a party absolutely and clearly under no circumstances states explicitly that they will not perform, one can: a. Wait around to see if other side is going to perform or change their minds (1) Can wait until you change your position in anticipation of their repudiation b. Treat the K as immediately breached c. Excuses the non-breaching party from performing V. Defenses: A. Basic Assumption/Essence of the K 1. Mutual Mistake a. If both parties are mistaken about the basic assumption of the K, then the K is voided and performance is excused by both parties unless the K provided for that risk B. Frustration of Purpose: 1. Event occurs which frustrates the party’s principal purpose of the K and is known to the other side, performance is excused 2. Must show: a. Must be total; K must have no value to P b. Non-occurrence of that event was not a basic assumption of the K (or was not foreseeable) c. No caused by the person alleging the frustration of purpose d. Occurrence of the event was not an assumed risk under the K C. Impossibility of Performance: Performance by both sides excused 1. Impossible when absolutely impossible under any set of facts 2. Act of God/Climactic conditions 3. Other side prevents performance
4. When performance is illegal and violates the law 5. When depends upon the continued existence of a person or thing and the person or thing perishes or person becomes disabled 6. Commercial impracticable: unexpected unforeseen event occurs which makes performance only able at excessive expense VI. Who has right to bring action for breach? A. Innocent Party B. 3rd Party Beneficiary: if the purpose of the promisee in obtaining a promise by the promisor was to confer a benefit on the 3rd party or discharge a duty, then the 3rd party may also bring an action; Promisor can then be sued by: 1. Creditor 2. Donee C. Restatement on 3rd Parties: if both parties intend for 3rd party to benefit fro K and 1. Performance by promisor would satisfy promisee’s obligation to 3rd party 2. Circumstances indicate that promisee intends to give benefit of performance to 3rd party, then they are intended beneficiary, the 3rd party can sue on the K D. Difference between Restatement and Common Law: 1. Restatement = both parties must intend for 3rd party to benefit 2. Most courts want to see promisee to know 3rd party was intended to benefit – intent is presumed on the part of the promisor E. Rights of 3rd party may be modified, extinguished 1. K prohibits it 2. Before notice of modification, 3rd party brings suit on the K 3. Before notice of modification, 3rd party detrimentally relies on K 4. If suit brought – then 3rd party stands in the shoes of the promisor and promisor can assert any defenses usually available VII. Assignments/Duties: A. Rights and duties of a K are assigned to someone else B. Rights = Assignment 1. K rights are freely assignable 2. Other side does not have to consent to assignment 3. Extinguishes rights of assignor, only assignee has a right to sue for breach 4. Assignor does not retain any right C. Duties = Delegation 1. Duties can be freely delegated without consent by other side, BUT: a. Delegator’s duties are not extinguished with the delegation, so he can still be sued b. If duty is a personal duty it cannot be delegated (1) Where looking to individual’s specific still, judgment or talent or ability D. Cannot be done if assignment or delegation increases duties, risks, or costs to other contracting party E. What if the K prohibits assignment/delegation? 1. Courts say if it is prohibited, then if one happens, it is a breach, but it does not invalidate the assignment or breach 2. Only enforced when it is clear that the parties intended that “any assignment or delegation will confer no rights or duties on the assignee or delegatee”