Law School Outline - Contracts - Ahdieh2

Contracts Outline I-Introduction Contract  Promise  RE§ 2- a manifestation of an intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made The UCC is used to facilitate contract formation involving the sale of goods for more than $500. Terms not specified in a contract can default to the terms of the UCCthus making contracts more efficient to write and to adjudicate. The normal course of dealing and usage of trade in any industry are highlighted in the UCC RE §1-a promise for the breach of which the law offers a remedy or performance of which the law recognizes as a duty (§1 Restatement) UCC:    II- Enforcing Promises A. Intention to be bound: Objective theory of contract 1. Intention to be bound a. the maker of a promise may not expressly state an intention to be bound or may not even intend to be bound, but they may still be held to their obligation b. Standards of intent i. subjective standard- what did the individual signing or agreeing think and do? (old standard) ii. objective standard- what would the RP have thought? a. central tenet of classical contract law b. social goals served 1- less room for people to get out of contracts 2- encourages people to read what they sign (or hire lawyers) more socially efficient behavior c. was the promissor serious? If RP would not have known doesn’t matter [Lucy v. Zehmer, (VA 1954)] 1- still avoids way for people to get out of contracts 2- places burden on least cost avoider (joker) iii. a subjective element still survives in relation to promissee c. Ray v. Eurice Brothers (MD 1954)- anal engineer and ole boys constructors; you are bound by the contracts you sign whether or not you intended to abide by them d. Park 100 Investors v. Kartes (IN 1995)- video communications owner and shady realtor agent; realtor was determined to be acting fraudulently, Kartes acted with ordinary care and relied on misrepresentation so they were not held to what they had signed 1 - To discourage fraud and bad faith if promissee was tricked it is not a reasonable contract B. Enforcing Exchange Transactions: Consideration 1. what is consideration? a. Promise and intent is not enough, there must also be something to serve the function of distinguishing this promise from others not meant to be enforceable. Currently consideration is the most common and important doctrine which serves this purpose. b. any doctrine or process used to enforce promises is meant to fulfill the following functions: i. evidentiary function-evidence of existence and purport ii. cautionary function- check against inconsiderate action iii. channeling function- external test of enforceability 2. History of consideration: a. benefit/detriment theory of consideration i. Hamer v. Sidway (NY 1981) uncle promised nephew $ in exchange for giving up booze, gambling etc. for a # of years; after uncle’s death someone came to collect due to assignments from nephew. Court upholds promise under benefit/detriment theory 3. Bargained for Exchange (BFE) a. bargaining for the “if” b. First Restatement presented consideration as a bargained for exchange (BFE) rather than benefit/detriment and this is still the current standard (§71 2d Restatement) i. benefit/detriment test said to be too manipulable- though most cases will come out the same under new and old test ii. Main shift of results in new test is on margins of considerationi.e. promises in family setting or Newman v. Snells (MI 1928)widow got promissory note to husband’s debts and the bank sued for payment. No benefit to her in giving her note under benefit/detriment test so court said no consideration, different under BFE? c. language of detriment/benefit still exists, it just refers to legal rather than actual benefit or detriment, if person bargained for something it is assumed by the court to have a legal benefit or detriment for that person 4. Issues under BFE a. Bargain suggests intent i. Baehr v. Penn-o-Tex (MN 1960) gasoline station owner and creditor of leasee, sues for back rent when not paid. Court says no BFE (just promise) and forbearance (though acceptable in general under BFE) never requested hence no consideration b. bargain does not have to be the entirety of the cause of action (forbearance or performance) as long as it is part of it (and law does not second guess motives) 2 c. equivalency is not a concern under BFE (there are other doctrines that address extreme unfairness such as unconscionable or duress- address enforcement, but not whether contract exists) i. Batsakis v. Demotsis (Tex 1949) during invasion of Greece in WWII P. gave a note to def in which ahe agreed to pay him thousands of dollars in exchange for Greek $ then and there. The amount given was not equal to what she got but she knowing signed, so court said she got what she paid for. d. sham or nominal consideration not accepted (and gifts no consideration) i. Dougherty v. Salt (NY 1919)- Aunt gave paper to nephew redeemable after her death with “value received” written on it. However it was just a gift, no BFE in spite of words. ii. standard of nominal consideration arises only when gap is so extreme, promissee (as RP) must know it is nominal ($1000 for tv guide) e. consideration has to be determinate (specific) -court does not want to interpret overly what either side meant f. differences btw consideration and a condition i. conditional has no bargaining for the if, just a gift in particular situation (tramp and coat hypo) ii. conditional promises often have a temporal dimension (scheduling or timing aspect) whereas in bargains one party wants something any time before further action g. classical theory- mutuality of obligation required- under BFE both parties are bound or neither is bound C. Promissory Estoppel: Protection of Un-bargained for Reliance 1. what is reliance? a. sometimes consideration is underinclusive, there is no consideration but we think people should still be held to their promise--- the promissee should be able to rely on the promise i. Kirksey v. Kirksey (AL 1845) widow and children moved away from her home at invite of brother in law who promised to take care of them and then changed his mind. She sued and court found no consideration hence no contract, only conditional promise (This was still under benefit/detriment test, so may also have been an issue of gender bias) b. promissory estoppel was predated by equitable estoppel in which one party has made a misstatement of fact rather than a promise and is then stopped from changing situation or information (easement example) 2. requirements for PE (promissory estoppel) §90 of restatement a. promise b. a reasonable expectation that the promise will induce forbearance or action c. which does induce such action or forbearance 3 d. if injustice can be avoided only by enforcement (generally termed detrimental reliance) 3. Uses of PE today a. PE originally developed as an alternative basis of enforcement to BFE (Shield); a defense if contract doesn’t hold b. today PE is also used when there is no contract claim (sword) (see Shoemaker infra) c. Family promises i. Greiner v. Greiner (KS 1930) Mother promises land to son after father disinherits him at death. Son moves and lives on land for several years. When she changes her mid he sues and court uses PE to give him land. ii. Wright v. Newman (GA 1996) Man who is not biological or adoptive father is forced to pay child support because he knowingly signed birth certificate, gave child last name, and put himself forward as father for years, allowing mother and son to rely on him. Court finds PE as sub for consideration - here court found actions to constitute implied promise d. Charitable promises i. in reference to charitable subscriptions the restatement does not require reliance or forbearance in order to enforce PE--- however most courts still do ii. Allegheny v. National Chautauqua (NY 1927) woman promise $ to college for Christian education but changes her mind before her death Opinion by Cardozo- finds consideration (named memorial) but writes mostly about PE--- few facts for BFE but strong doctrine, tenous doctrine at time for PE but stronger facts (thaumatrope) iii. King v. BU (MA 1995) Coretta King sues BU for papers of Dr. King left in their care. They say the papers were given to them. Court determines there was a promise and there was reliance - With PE courts more interested in whether evidentiary, channeling, and cautionary functions are met e. PE in commercial contexts i. originally PE was confined to noncommercial sphere (except for employee benefit and pension cases) ii. now more common than before in commercial context iii. Katz v. Danny Dare (MS 1980) Man injured on job retires as they promise him a life pension. Company revokes years later when circumstances change and man sues on PE. Court finds in his favor; he did something he did not have to do based on their promise is the nature of detrimental reliancechange in action based on promise iv. almost any change in position based on reliance (even if it actually produces a benefit- can now be deemed relaince) 4 v. Shoemaker v. Commonwealth Bank (PA 1997) Homeowners sue mortgage co. after house burns down because when they let insurance lapse mortgage co. said they would get insurance and charge them for it. Homeowners claimed PE, contract said must obtain ins. but did not say how. Forbearance lacking if they could not have afforded ins.? D. Restitution (Unjust Enrichment) 1. what is restitution? - restitution is not actually the enforcement of a promise (except for promissory)as there is no promise in restitution the court finds one ex post facto a. the two central elements required for restitution are 1- enrichment of one party, 2- that is unjust--- basic question- if a person receives an unrequested benefit under what circumstances would it be unjust for that person to retain the benefit w/o paying compensation? b. implied in fact promise v. implied in law promise i. is a request in word or deed in implied in fact and the lack of either in implied in law. ii. If there is a request (fact), the benefit to either party does not matter as it is a contractual situation. The contract then determines a party’s rights or responsibilities. iii. Without a contract the issues of benefit arise because this would be the enrichment in restitution. c. like reliance restitution is both a measure of recovery and a cause of action 2. restitution in the absence of a promise a. Under classical contract law if one party received a benefit w/o a promise to pay there would be no obligation however restitution creates a legal basis for such a claim (equity doctrine). i. Credit Bureau v. Pelo (IA 2000) Mentally ill man is placed in hospital temporarily as state is afraid he is a danger to himself. He refuses to sign paperwork for his ins. to reimburse hospital. Court finds against him as actions were for his benefit and hospital expected to be compensated. b. generally the opportunity to decline is required (with exceptions such as above- where it was determined he was not capable of consent) c. officious intermeddlers whose interference in the affairs of others is not justified are not entitled to compensation for their services (good Samaritans may be justified but they will also not be compensated- presumption of gratuitousness, unless they are doctors or people who are generally paid for such services) d. Posner suggests that where transaction costs are high (neg would be difficult or impossible- it makes sense to allow for implied contracts in law; but where transaction costs are low the market will produce the best contract and so restitution should not be available). e. Often in family cases courts have found that services from one family member to another are presumed to be gratuitous. When they are not is 5 the measure of recovery the amount the defendant benefited or the reasonable value of the P.’ services? i. Watts v. Watts (WI 1987) Couple cohabited for many years had children, filed taxes together etc. When she left him he kept everything. Should she recover and if so how much? Court found an implied court of a personal and financial nature and called for trial on basis of unjust enrichment. In the end she received 10% of his assets from the period they were together. 3. promissory restitution a. Under consideration past consideration is no consideration (you can’t bargain for something with something that has already occurred). Restitution can create an exception when a promise post-dates actions. i. Mills v. Wyman (MA 1825) Dying man is cared for away from his family. After his death his father sends a letter promising to pay for past care. Court finds no legal obligation in this case. Points to situations where legal obligation would be created such as debts waived in bankruptcy, debts of minors, etc. and finds all have preexisting obligation that was merely reactivated by promise. ii. Webb v. McGowin (AL 1935) Man injures himself to save another from harm. Other man promises to make payments as man can no longer work and does so for 8 years. After death of saved man estate stops payment. Court holds man had material benefit and so estate should continue to pay, iii. material benefit followed by promise in this case created enforceable contract under promissory restitution. Restatement §86 b. The RE follows the Webb rule- though most courts follow Mills III- Reaching Agreement: The Process of Contract Formation A. Bargained for Exchange 1. Offer and acceptance (Restatement § 24) a. classical system i. manifest intent to enter contract ii. exchange of consideration (BFE) iii. RP for standard to be bound iv. equivalency of value not important v. obligation to read (except fraud or misrepresentation) b. process of offer and acceptance i. preliminary negotiations- communications about the type of exchange performances each side would be willing to make ii. offer- direct complete proposal that a contract be entered into, providing for an exchange of defined performances (must create in the offeree the power of acceptance) 1. court will often find prem neg when in doubt to prevent undue caution in prem neg 2. standard for determining when offer occurred is RP 6 3. an individual must be reasonably certain that an offer made was addressed to them. If there is reason to believe the offer was addressed to someone else the ind. may not have the power of acceptance. iii. power of acceptance- created in a party to which offer is addressed, if offeree manifests acceptance of the offer in a legally enforceable way, then at that moment a contract comes into being without further action on the part of the offeror. iv. counter-offer- if initial offer is not acceptable and offeree responds with offer of her own (acts as a rejection of original offer) 1. effect of rejection or counter offer- power of acceptance created by offer is terminated by the offeree’s rejection (as well as by offeror’s revocation). v. revocation- when offeror withdraws offer- can happen anytime before acceptance vi.- revocation is only effective when the offeree has notice of it (though it can be indirect notice) 1. Normile v. Miller (NC 1985) In real estate transaction P. made offer with a date of acceptance and def returned with counter offer. P. did not immediately respond thinking date of acceptance still applied. Def sold property to someone else and P. heard of this and took signed counter offer to realtor and sued demanding property. Court held that counter offer was rejection so date of acceptance was not still valid. Also if 3rd party informs someone of revocation, revocation still stands--- hence case doubly rejected. e. mailbox rule- acceptance is treated as effective as soon as it is dispatched- need for offeree to have a firm basis for action in reliance of effectiveness of acceptance once dispatched. c. the offeror is the master of his offer, and so can dictate the terms of acceptance d. silence as acceptance is generally not allowed RE §69- in this way the offeror is not the total master of his offer 2. Bilateral contracts a. bilateral contract- exchange of reciprocal commitments formed during the process known as offer and acceptance. i. This is the general standard in business transactions, multiple promises both ways. ii. The consideration involved is one promise for another. b. a question that often arises is was there a contract formed or were there just preliminary negotiations (did both sides make a complete promise)? i. Lonergan v. Scolnik (CA 1954) P. tried to buy a piece of land from def by mail from advertisement. During the process of sending info back and forth P. thought def had made an offer and so sued when someone else was sold the land. Def thought prem. neg still and told P. act fast or I will sell. Court found for def- no offer all neg. 7 3. Unilateral contracts a. unilateral contracts- offeror agrees to exchange promise only in exchange for complete performance of an action by offeree (rather than promise of future performance) b. classical standard i. most of the protection here lies with the offeror as he is only bound after complete performance. If he revokes before then under classical theory the offeree has no remedy ii. The defense to this was that because here is only one promise the 2d party is not bound to perform. Because the 2d party can change their mind at any time the promissor can also revoke anytime before full performance. 1. Petterson v. Pattberg (NY 1928) Def held a mortgage on property of P. He sent him a letter in which he offered him to pay it off by a certain date. Court held that this was a unilateral contract and so P. did not actually perform (he had money but it did not change hands). c. modern standard i. §45 of both RE limits the revocability of unilateral promises- giving the offeree an option to complete performance once it has begun- this has become the conventional rule and the classical standard is no longer accepted. This does leave a situation where one party is free to withdraw and the other cannot, but is considered fairer than the classical rule. d. The 2d RE §32provided that unless the language of an offer indicated otherwise it should be assumed that an offer may be accepted either by a promise or by performance. e. In the real world there are very few unilateral contracts- they are speculative contracts and there is no guarantee that the promise can be completed. f. If the fulfillment of the promise is entirely dependent on the conduct of the promissor a court could consider the promise to be an illusory promise. 4. Advertisements a. general rule is ad is not an offer b. how to determine when it may be: i- essential terms left out (often price) ii. course of dealing iii. customs of industry iv. how many people is it addressed to? v. RP standard c. ads offering a reward to anyone who completes certain actions can be construed as unilateral contracts. For this to be true there must be some language of commitment that is clear and explicit or an invitation to take action w/o further communication. i. Lefkowitz v. Great Minneapolis Surplus (MN 1957) P. responded to ad stating a certain day 3 $100 fur coats would be given away for $1; first come first served. When P. arrived he was told the ad 8 was for ladies only. Court held ad was an offer as it was specific and nothing was left for neg and that as he had fulfilled req B. Obligation in the Absence of Agreement 1. Limiting the Offeror’s power to revoke: Pre-acceptance reliance a. Under the traditional common law an offer is revocable unless and until it is accepted by the offeree (even when the offer itself states that it cannot be revoked). b. a promise to hold a contract open w/o consideration would always be a gratuitous promise and thus not enforceable c. The only way to make an offer not revocable for a period of time is if some consideration is given for that purpose. This would create a binding options contract. d. sham consideration (not acceptable in contracts generally) is often allowed in the creation of an options contract. RE §87 i. as it is under the umbrella of a larger contract the standard for consideration is more forgiving. ii. options often arise in commercial contexts and the courts generally want to encourage people to keep their business promises iii. the person giving the option is potentially getting a more serious contemplation of their offer- thus a BFE on both sides iv. a nominal options contract must be in writing v. the terms of the option contract must be equitable and for a reasonable period of time e. a purchased options contract with real consideration does not need to conform to the above standards. i. Options contracts purchased with real consideration do not have to be written ii. Terms and time limit are whatever the parties agree to just like with any other contract. iii. They are not terminated by the death or incapacity of the offeror iv. As the time is purchased the offeree can even reject the offer and then change their mind as long as they are within the stated time limit f. What about the offeree’s reliance on the offer- does this have any effect on revocation? Can liabilities exist apart from the effectiveness of the contract as whole? i. James Baird Co. v. Gimbel Bros. (2d 1933) L. Hand P. was a contractor bidding for job in PA. After the bid was sent out def realized there was an error and sent a telegram revoking the offered. P. had already submitted their bid. P. got the job and refused to accept the revocation. The court that the offer had been revoked before it was accepted hence there was no binding contract. g. However in the world of general contractors and sub-contractors this view has not prevailed. The almost universal rule is now that PE can be used to make an offer binding in the construction bidding 9 world. RE §87-2 (but this is only widely accepted in this particular business context) i. Drennan v. Star Paving Co. (CA 1958) Traynor - A general contractor was receiving bids from subcontractors immediately before placing his bid for a job. He was accepted and went to tell Star Paving. As soon as they saw him they revoked the offer. Court held that actions of P. induced actions of a definite and substantial nature in P. and had a stake in his reliance. The court held that therefore P. should at least have the option to accept the bid after receiving the contract. 2. Irrevocability by statute: the “firm offer” a. In the RE (§87 -1-b) in addition to being made temporarily irrevocable by consideration, and offer may also be made irrevocable by statute b. Often this statute may be the UCC as adopted by ind. states c. UCC 2-205 makes an agreement to buy or sell goods that irrevocable if: i. the offer is in writing and signed ii. terms of assurance (firm offer for given time period) must be signed separately when presented to offeror by offeree iii. option is for a reasonable period of time not to exceed three months iv. the offer is btw merchants d. Neither consideration or reliance is required under the UCC provision and it applies to both the buyer and the seller 3. Battle of the Forms- Common law a. traditionally contracts contained an accurate description of a particular exchange to which both parties were agreeing plus an identification of the principal risks entailed for one or both parties with specifications of the rights of those parties should the risks occur. b. in this context the common law developed the mirror image rule in the for the sale of goods contracts. c. mirror image rule- a varying acceptance is not an acceptance, just a counter offer. Therefore the terms of the original contract are void. Offer and acceptance must be identical for there to have been an acceptance that forms a contract. d. classical exceptions to the mirror image rule include: i. the acceptance attempts to make explicit something that was implicit in the original offer ii. acceptance suggests a new term w/o insisting on its inclusion iii. expression of dissatisfaction iv. offer is a binding option v. offer explicitly states it will stay open despite rejection (if that was part of the deal) vi. acceptance reserves the right to keep the offer under advisement vii. mere inquiry e. the last shot rule also applies under the common law- if the offeree changes the form and this becomes a counter offer, they are now the 10 offeror and get to dictate the terms- and so on- therefore the terms are based on who was the last offeree who responded with action- the other party’s terms determine the contract- whoever sends the last document before action commences determines the terms of the contract (usually favors seller) f. In the sale of goods at least four forms are usually exchanged and while the basic terms are discussed other general terms (boilerplate) will not be addressed and will vary from form to form i. buyers request for price quote ii. sellers quote iii. buyers purchase order (often considered the offer) iv. sellers confirmation or acknowledgement g. Two problems are created by using the mirror image rule in this context i. welsher problem- people try to get out of the deal, because if there is no mirror image there is no acceptance and hence no contract ii. battle of the forms- if each side has different terms- what are the actual terms of the contract? h. under the common law (services contracts, and real estate contracts etc.) this remains the situation i. Princess Cruises v. GE Co., (4th 1998) Princess sued GE for breach for repair and inspection services. Court agreed it was primarily a services contract and thus the common law applied. Hence GE’s acceptance changed the terms of the offer- hence was a counter offer. The original offeror can accept the counter offer by performance which Princess did. As GE’s final communication had a no additional damages allowed clause- only damages to the limit of the price of the contract- Princess could not recover for more than that amount. 4. Battle of the Forms- UCC a. Under the UCC 2-207 (to deal with welsher and battle of the forms issues) a purported acceptance is an acceptance even if it contains different or additional terms (as long as it is definite and seasonable) unless the acceptance is expressly conditional (infra) b. if the term changed is a basic term than there is no contract c. basic terms generally include price and quantity (also sometimes quality and delivery terms though these could also be material depending on industry) d. additional or different terms are to be construed as proposals for addition if one party is not a merchant, which must be explicitly agreed to (hence generally the terms of the offer govern) e. btw merchants such terms become part of the contract unless: i. they materially alter it, or ii. notification of objection to them has already been given or is given within a reasonable time after notice of them is received iii. the offer expressly limits the terms of acceptance 11 f. if changes to a contract are material the contract will still exist but the new terms may not become a part of the contract g. what if the acceptance is expressly conditional? i. if an acceptance is expressly conditioned of the buyer’s terms acceptance still occurs even if a change is made (this is generally the offer) 1. Brown Machine v. Hercules (MI 1989) Hercules sends a form which expressly limits the terms (court finds this to be the offer). Brown then sent an acknowledgment with new terms. Court finds that this is an acceptance not a counter offer as the terms added were not expressly conditional. As offer was expressly conditional new terms are not added. ii. if seller’s offer (usually the acceptance) is expressly conditional and buyer changes a term this creates a counter offer, even under the UCC iii. seller is expected to know that contract becomes binding based on actions regardless of terms h. if there is a change in basic terms or acceptance is made expressly conditional on terms and performance occurs anyway? i. UCC 2-207-3: In such a case the terms of the contract consist of those terms on which the parties agree, together with supplemental terms from the UCC i. the common practice in the real world is that most buyer’s forms expressly limit offer, seller’s forms make acceptance expressly conditional, and most contracts end up in 2-207-3 (only terms you agreed to and UCC default applies) j. written confirmations- this occurs when an oral contract is created on the phone and then a written acknowledgement is sent with terms i. if only the seller sends one, these terms will be added to the contract if they are not in conflict with other terms agreed to and are not seasonably objected to (btw merchants) ii. if both parties send the K consists of: 1- orally agreed upon terms 2- terms in agreement added (diff terms knocked out) 3- UCC gap provisions 5. Electronic Contracts a. When is the contract actually formed, over the phone or computer or when the package and terms arrive? b. the determination of when the contract is formed also determines what the terms are- are shrink wrap or click through terms the terms that govern or are they additional terms that for a non-merchant would require express assent? i. Hill v. Gateway (7th 1997)- Easterbrook Hill orders a computer over the phone and it arrives with a list of terms and conditions that will govern unless the computer is returned in 30 days. Court held 12 that many people order products with terms to follow and consumers are bound by them. Court held that the contract was not complete until the box arrived and was opened so the terms were not additional. P. claimed the terms were a written confirmation but court decided 2-207 did not apply. c. However the general rule does not agree with 7th- which terms seller as offeror (against common procedure) so they can be the master of their offer i. Klocek v. Gateway (KS 1999) Customer filed suit against Gateway who again claimed arbitration clause. This court rejected reasoning of above case and held that 2-207 did apply which were P. is not a merchant would allow new terms only where expressly agreed to. 6. Postponed Bargaining: Agreement to Agree a. under classical contract law - while parties could create a binding contract which was to be written down later- all terms had to be completely worked out . If any material terms were left out or not agreed on then there would be no contract. The promised written document had to just be a written statement of what had already occurred for there to be a contract to make a contract. b. In particular there could be no contract if the parties had not agreed on a price or at least a method for calculating the price. i. Walker v. Keith (KY 1964) P. had an option to extend lease with a rent to be determined (contract was intended). Question arose as to if the lease option provision was enforceable when it just said that the rental value was to be determined on business conditions. Court held it was unenforceable as which business conditions (national, local, personal) were not specified and rent was a material if not basic terms of a rental agreement. c. These ideas have been supplemented and modified by UCC 2-305 and RE §33 d. UCC 2-305 holds that even an open price term will not prevent enforcement of a contract for sale if the parties intended to be bound by the agreement e. RE §33 also expanded ideas of common law based on intention of parties- generally agreeing with the UCC, but limiting damages to reliance or restitution f. but then the question arises when was the agreement a part of ongoing negotiations and when does it form a binding contract? i. Quake Construction v. American Airlines (IL 1990) P. prepared a bid for AA as was orally notified they received project. Then when received a letter or intent detailing price, start and completion date etc. AA then terminated Quake. Court found letter ambiguous and sent case to jury for presentation of evidence of intent. g. incomplete bargains fall into 2 general categories i. agreement to agree- parties have agreed on some terms but not others 13 ii. formal contract contemplated- parties have reached agreement on principal provisions but have not yet executed contract h. both the UCC (2-204) and RE §57 recognize that parties may be bound when they have reached an agreement to agree in principle even though they contemplate further negotiations or the execution of a written contract. i. The majority opinion is that either the parties intended to be bound or they did not. However there is an alternative possibility that they agreed to negotiations in good faith but reserved the right to withdraw if agreement could not be reached. j. a number of courts have accepted this idea of a contract to bargain in good faith (which does not exist under the common law)- but when they do it is still necessary for the P. to establish a breach of this duty IV- The Statute of Frauds A. Scope and sufficiency of memorandum 1. what is the statute of frauds? a. the Statute of frauds is a process of meeting formalities i. it does not deal directly with fraud- rather it requires certain contracts to be in writing in order to avoid enforcement of spurious claims. ii. the statute of frauds requires both a signed writing and a signature of the def on the writing in order to be met (writing does not have to be signed by both parties- only def- whether buyer or seller is not important) iii. Equal dignity rule- in agency relationships (in which one person represents another) if the stat of frauds applies to a contract that has been signed by an agent then the agency relationship itself becomes subject to the stat of frauds. – A written memo of agency for such transactions must have been signed by the central party. 2. what contracts is it generally applied to? a. These are listed in RE §110 b. real estate transactions (mortgages, foreclosures, leases etc.) c. multi-year contracts (include an obligation which cannot be performed within one year of the contract- one year provision) i. courts tend to be lenient with this provision- generally contracts are not held to the stat if it possible but unlikely that performance will occur w/in a year ii. i.e. lifetime employment contracts- these are generally not held to the stat of frauds as it always possible that a lifetime will end within a year d. executor-administrator provisions e. surety provision (contract to answer for the duty of another) f. marriage provision g. sale of goods for $500 or more 3. how is it applied? 14 a. compliance with the stat of frauds will not alone make a contract enforceable- but a lack of compliance will make a contract unenforceable b. the stat of frauds does not mean there is no valid contract (that may or may not be the case)- where it exists the contract will just not be enforceable i. Winternitz v. Summit Hills (MD 1987) Tenant of convenience store tries to negotiate new lease with the owner and the ability to transfer the lease so he could sell his business. P went ahead and found a buyer and negotiated a price, but then landlord refused to grant new lease or transfer. Court found stat of frauds prevented enforcement of oral contract with agent, though contract did exist. P claimed part performance- as he had paid new rent, but court held part performance only applies for specific performance request- not damages (equity doctrine) c. once the stat of frauds is invoked the following ques arise: i. is this contract one of the types cover by the stat of frauds? 1. if no- the case continues with any relevant evidence 2. if yes next ques ii. is the stat satisfied (is there a written statement signed by the def)? 1. if yes- enforcement is not prevented and case continues 2. if no the case will end unless there something that may allow for an exception iii. is there an exception? 1- reliance 2- part performance 3- other? d. the entire contract does not need to be in writing for the stat to be metthe writing only needs to demonstrate that a contract was formed, provide the key terms, and be signed by the party being charged e. also the contract does not have to be in one writing. The acknowledgement of the existence of the contract, the key terms, and the signature may be spread over several documents- as long as they are clearly referring to the same subject matter i. Crabtree v. Arden (1953) Employee sued when promised raise was not forthcoming. There was no one contract. Each alone did not provide enough information but the court held there was a clear connection btw them and altogether they could be held to fulfill the stat of frauds req. f. both the RE and the UCC take a lenient view of what is meant by writing and of signature for the purpose of the stat of frauds (letterhead?email signature?) B. Part Performance and Promissory Estoppel Exceptions 1. part performance doctrine a. an exception to the stat of frauds from equity courts 15 b. continued today for specific performance but not used at law for damages (see Winternitz) 2. PE exception a. RE §139- supports PE as a way to avoid application of stat i. Alaska Democratic Party v. Rice (AK 1997) A new leader of the AK party offered her a job. She quit the MD job and moved back to AK. However based on the decision of others in the party she was not given the job. She had no written contract (job was for several years-so one year provision) and sued under PE. Court found in her favor based on req of §139. b. the first RE only allowed for a PE exception to the stat of frauds if: i. there was a written misrepresentation of fact ii. it was a true PE claim- written contract was promised but never delivered c. 2d RE suggests enforcement of an oral contract that would normally fall under the stat of frauds if there has been reliance upon that contract (see ADP above) d. courts have had a mixed reaction to §139- some refuse to recognize a PE exception at all, some use 1st RE, and some use 2d e. even if a court excepts §139 other remedies- such as restitution are 1st explored (as per §139). Also both reliance and injustice have to be found for §139. C. UCC Statute of Frauds 1. UCC 2-201 a. UCC retained the stat of frauds for sale of goods over $500 and added i. personal property not otherwise covered ii. security interests in personal property b. however the UCC reduced the amount of writing req to a bare minimum- only initials or letterhead are req for a signature. c. also all key terms are not required- only quantity is absolutely required (even price may be left out) 2. UCC Exceptions a. the UCC has a partial performance exception met by i. payment made and accepted ii. goods received and accepted b. however the UCC partial performance exception does not validate the entire claimed contract- just by unit of sale iii. Buffaloe v. Hart (NC 1994) Harts agreed to sell five barns to Buffaloe which he had been renting. He placed an add for sale of barns, he made improvements on barns, he reimbursed them for ins, he gave them the 1st depost- which they returned uncashed after several days saying the deal was off. They then sold the barn to the guy P had neg to sell to. Court said check was insufficient as P had signed it not def, but court found evidence of part performance and P was able to recover. 16 c. admissions exception- under the common law a def could admit to the existence of an oral contract and assert the defense of the stat of frauds. However under the UCC the admission of the oral contract is grounds for enforcement d. special manufacture exception- goods not suitable for sale in the seller’s ordinary course of business- for which there is a contract that is valid except for stat of frauds- will still be enforceable. V- The Meaning of the Agreement A. Principles of Interpretation 1. History a. for most of the 19th cent courts adopted a subjective approach to problems of interpretation. i. under the subjective approach if parties attributed different meanings to contractual language- no contract was formed. “meeting of the minds” required. ii. The underlying principle to this approach was the “untrammeled autonomy of the ind will” b. 1st RE presented the objective approach (Williston) i. under this approach conduct and language was to be interpreted as it would be understood by a RP familiar with the circumstances. ii. However sometimes under this approach a contract could be interpreted in a way that neither party had intended. c. Modern contract theory has adopted the modified objective approachRE §201 (Corbin) i. The mutual understanding of the parties controls even if it is different from the interpretation the RP would give to the contract. ii. If the two parties attach different meaning to the contract the agreement is to be interpreted in accordance with one party if the other party knew or had reason to know of the meaning of the former (least cost avoider- could have cleared up ambiguity) iii. if the court concludes that the parties attached different meanings and neither party could have known of the other’s meaning than Raffles results still follow- no contract w/o mutual assent 2. Interpretation under current theory a. whose meaning prevails? i. Joyner v. Adams (NC 1987) P had land that was rented to a developer for a fixed rate in exchange for “development” of the property in preparation for leasing. When the time came P demanded payment because there not buildings on all lots. Def claimed developed meant prepared for buildings, divided, sewer lines, etc. Court held def did not have a reason to know more than P and both parties agreed to language of contract- so P’s claim did not prevail. ii. RE §§202 and 203 deal with resolving contractual ambiguity b. construction against the drafter 17 i. there is a general principle in contracts that contractual ambiguity should be interpreted against the drafter. ii. some courts interpret this liberally, others only apply it in situations were the drafting party is solely responsible for the language (no give and take such as adhesion contracts) c. public interest preferred i. RE §203- a court should prefer and interpretation that makes an agreement reasonable, lawful, and effective to one that produces the opposite results. d. omitted terms i. if courts decide a material term is missing from a contract they may conclude there is no contract ii. however if there is evidence of intent to be bound, or performance and rescission is not possible the RE suggests a court should supply a reasonable term for what is missing e. ambiguity and plain meaning i. patent and latent ambiguity- patent ambiguity appears on the face of a document; latent ambiguity arises from the facts that makes the agreement uncertain though the language appears clear. ii. some courts (more classical) hold that the plain meaning of a contract should govern and that extrinsic evidence should only be allowed when there is patent ambiguity iii. under a more modern approach scholars and courts reject the idea that words can have only one precise meaning. Therefore evidence can be admitted based on either patent or latent ambiguity. f. contextual approach and trade usage i. the modern view of interpretation holds that a court should examine all relevant circumstances when interpreting a contract including preliminary neg, course of dealing etc. ii. evidence of trade usage can overcome even apparent plain meaning. iii. The UCC §1-205 holds that evidence of trade usage is always relevant and the RE §202 supports evidence of trade usage. iv. there are some scholars that object to an increased weight for trade usage as most contracts are written by lawyers not people in the trade v. the definition of terms provided by a statute or administrative regulations are not determinative of the meaning of such terms under the modern view g. Frigaliment v. BNS (NY 1960) An importer (P) and exporter (def) disagreed over the meaning of the word chicken in the context of their contract, the P maintaining it meant a broiler or fryer, the def that it meant any chicken including a stewing bird or fowl. The judge looked at: 1, the dictionary def 18 2. trade usage 3. general language 4. neg leading up to the contract 5. course of performance [there was no prior course of dealing btw vendors] 6. govt regulation terms (though not determinate) 7. the price of the goods in the contract 3. Adhesion contracts a. defining adhesion contracts i. an adhesion contract is a 1-standardized contract (boilerplate), 2-entered into in a situation with disparate bargaining power, and 3-a take it or leave aspect. b. reasonable expectations doctrinei. nonbargained for terms (i.e. an adhesion insurance contract) are seen from the reasonable perspective of the insured (the nondrafting party) even if the express terms are contrary to the interpretation ii. more than ½ of states have accepted some form of the reasonable expectations doctrine as applied to ins. provisions; though many have limited it by requiring some ambiguity before it can be applied iii. RE §237f- standards used to determine reasonableness of insured include bizarre or oppressive provisions, evisceration of nonstandard terms, terms the eliminate the dominant purpose c. C & J Fertilizer v. Allied Mutual (IA 1975) The P had ins for robbery that did not apply to inside jobs. The store was robbed and the inside doors showed damage, but the outer doors had been opened w/o leaving marks. The ins co denied coverage and the P sued. The court held that this was an adhesion contract with terms never agreed to and using the doctrine of reasonable expectations they found for P. B. Parol Evidence Rule 1. what is the PER? a. The PER operates to exclude evidence that would otherwise be admissible as probative of some fact at issue. One party cannot introduce extrinsic evidence that is not contained in the written agreement btw the parties where that evidence is offered to supplement or contradict the written agreement. b. it is considered a substantive law rather than a rule of evidence c. §§209-218 of the RE cover the PER d. the more detailed a writing is the more likely the PER is to be invoked or applied e. unlike the stat of frauds there is no requirement that an agreement be signed for the PER to be applied 2. integration 19 a. At the core of the PER is the idea that parties engage in negotiations and then produce a writing of the final terms. This writing is considered the best evidence of the contract. b. complete integration- a writing that is final and complete - if a contract is completely integrated than PER prevents bringing in contradictory or additional terms c. partial integration- a contract that is final but not complete - if contract is partially integrated PER prevents bringing in contradictory but not additional terms d. the classic approach- integration must be determined from the “four corners” of the contract w/o resorting to extrinsic evidence i. the presence of a merger clause conclusively determines that the writing was integrated (states on the contract that the writing is meant to be final and complete) ii. it encourages people to be careful in writing contractshence reducing litigation iii. many courts still adhere to the four corners approach iv. Thompson v. Libby (MN 1885) P sold logs to def thru an agent and a written document was executed. P brought suit seeking payment. Def claimed there was a warranty that had been made at the time of sale and then breached. Court found the PER applied and so evidence could only be presented about what the parties had meant, not bringing in new terms. e. modern approach- RE §210; looks beyond the writingthe integration should depend on the intent of the parties and courts the facts and circumstances of the contract as well as the writing i. under the modern approach a merger clause would not be determinative ii. the plain meaning of the contract would also not be determinate; the judge would have to look at additional evidence and determine what is interpretative and what is outside the agreement f. if a court decides an agreement is not integrated at all then the PER does not apply g. in Camera hearing- judge hears evidence and determines admissibility away from jury 3. Exceptions to the PER a. PER does not apply to evidence to explain the meaning of the terms used i. modern courts are more likely to allow evidence in this case to explain language that does not appear ambiguous- 20 ii. courts that subscribe to the plain meaning rule generally will not allow evidence if the meaning seems unambiguous b. PER does not apply to subsequent agreements c. PER does not apply to an oral condition precedent (i.e. if I get this loan) d. PER does not apply to evidence that would show that the agreement was invalid (i.e. fraud, duress, etc.) e. PER does not apply to right of reformation of the contract i. this only occurs when there has been a clerical error of some kind-- clear and convincing evidence of mistake is required. f. PER does not apply to a collateral agreement btw the parties (a separate distinct agreement) VI- Supplementing the Agreement A. Rationale for Implied Terms: Classical and Modern Principles and Implied Warranties 1. Implied by law terms a. made part of the agreement by operation of the rules of law rather than by the agreement of the parties themselves b. Some terms are implied by statute, some by the common law, and others because the court concludes its implication is appropriate c. These are generally considered to be terms the parties would have agreed to if they thought about it (default rules) d. In the absence of some of these terms there is no valid contract e. Wood v. Lucy, Lady Duff-Gordon, (NY 1917)-Cardozo Lady Duff gave Wood the exclusive right for one year to market her designs and endorsement of other people’s designs and in return they would each split the profit from these. Lady Duff argued that the agreement was not a contract because he was not obligated to do anything (no mutuality of obligation). Cardozo found that there was an implied contract as she gave him exclusive rights and would not have done so with no benefit to herself (hence it is not an illusory promise). 2. Implied terms and illusory promises a. under classical law a contract required mutuality of obligationotherwise the promise was illusory (no actual commitment) b. RE §30- whether a promise was meant to illicit a return promise is determined by the language and the circumstances of the contract c. Recent decisions continue to follow the principle recognized in Wood, that an implied obligation to use reasonable efforts will prevent a some what indefinite promise from being illusory. d. Category of illusory promises is left very narrow- sham bargain. In most cases courts find a way to enforce contract through implied terms i. (i.e.) Real estate purchases premised on finding financing- courts have said this is not an illusory promise, it is necessary and so there is an obligation on the purchaser to make efforts to get financing e. reasonable efforts- modern courts often use “instinct with obligation” to soften the rigid mutuality of obligation requirement 21 i. Parties frequently define an express obligation in terms of best efforts or reasonable efforts--- do the words imply a different level of obligation? ii. most courts use an objective standard in determining reasonable efforts f. termination clauses – need for mutuality of obligation i. if there is no limitation then this is indicative of illusory promise ii. this only happens if the termination right is interpreted to mean that the termination right is completely unfettered iii. The restriction can be very minor and yet still provide enough consideration--- termination for good cause is sufficient, or requirement of some notice. 3. Gap-filling provisions of UCC Article 2 a. Article 2 provides many terms that will as a matter of law be implied in contracts for the sale of goods unless otherwise agreed by the parties. b. §2-306 exclusive agency promises i. (2) best efforts (Wood rule) in exclusivity situation, implied in law promise on each side- one to supply goods and the other to sell them c. c. Leibel v. Raynor Manufacturing Co. (KY 1978) Parties entered into oral agreement to exclusive dealer- distributorship. Two years later Raynor sent him a letter saying the relationship was terminated. Raynor contended that as the term was indefinite either party could end it at any time. Court said no, UCC reasonable notice was required. d. §2-309 notice of termination- All terminations must be with “reasonable notice”. Therefore contracts are not illusory even if parties don’t put in any requirements for termination procedure. i. relevant factors in assessing reasonable notice of termination: 1. The distributor’s need to sell off its remaining inventory and the question whether it still has substantial unrecouped investment made in reliance on the agreement. 2. The determination whether notice is reasonable may also be affected by the terms contained in the parties’ present or prior agreement and by industry standards. ii. if the contract provides that reasonable notice is not required this will be upheld unless it is unconscionable (a very high standard in commercial dealings) iii. If there is termination on agreed event (i.e. lower profits for 2 years) then this is considered another form of notice and additional notice is not necessary. iv. The agreed upon event must be met by an objective standard (i.e. unsatisfactory performance--- much harder to judge that declining sales). 4. The effect of the UCC on distributorship agreements a. type of exclusive agency promise 22 b. As Leibel demonstrates, such agreements today are likely to fall within the general scope of Article 2, If so the implied obligations found in UCC §2-306 and 2-309 should eliminate most problems of lack of consideration or lack of mutuality. A distributorship contract of indefinite duration, however, will still be subject to termination at-will with reasonable notice. B. Implied Obligation of Good Faith 1. The obligation of good faith a. Good faith covers situations in which one party to a contract claimed to be acting in ways either expressly permitted or at least not forbidden by its terms, but the other party complained that such conduct was somehow improper and actionable. Courts then apply the notion of “good faith” as an aid to decision. b. The UCC §1-203 holds that every contract or duty within its scope imposes an obligation of good faith in its performance or enforcement. c. The 2d restatement §205 echoes this idea d. Both the UCC and the RE have a subjective requirement of honesty in fact. The UCC also requires an objective standard of reasonable commercial standards and fair dealing. e. Generally good faith only applies to existing contracts f. Good faith v. Best efforts i. In addition to the requirement of good faith, the UCC also adds an additional obligation of best efforts (see Woods above). The drafters viewed best efforts as the more onerous obligation. 2. Good faith in the courts a. While all courts recognize the implied duty of good faith, not all courts will give the concept a broad application b. Most share the general view that where one party’s actions were such as to undermine the spirit of the contract good faith should be employed c. discretionary rights i. Courts may draw fine distinctions btw actions that are covered exclusively by express terms and those that are subject to the implied duty of good faith. ii. Locke v. Warner Bros., Inc. (CA 1997) The contract gave them first look at any picture she was interested in developing and to pay her or use her directing services. She brought testimonial evidence that they had no intent to accept any of her projects. The court held that there was a triable issue regarding whether or not Warner breached its agreement in bad faith. d. the good faith requirement implied in every contract means that though party did everything strictly required of them under the contract it is not enough in discretionary contract ; contract provides the other party with reasonable expectations that can be violated e. open price terms 23 i. based on the UCC terms breach of duty of good faith could be shown through the improper motive even though the prices could appear to be reasonable 3. Requirements contracts and good faith a. Requirements contract- buyer agrees to purchase all of requirements from seller and seller agrees to supply all req. i. The seller is usually free to all sell to others as long as they can continue to meet the buyers req, but the buyer agrees to just buy from one. ii. Buyer can then have guaranteed source of need and seller has continued avenue of sales. iii. UCC of 2-306 b. Output contract is the opposite--- buyer gets all of output from seller, though can get more also. i. Seller only sells to buyer, gives both an advantage as buyer has guaranteed supply and seller has guaranteed market. c. Initially requirements contracts were treated coldly by US courts: i. The lack of consideration issue was dealt w/ by Corbin, who asserted that consideration did exist because of the commitment to buy from the one seller (at least within a region) or not buy at all. d. Test of good faith in under demand cases: i. Substantial reduction or elimination of all requirements by a buyer is subject to the test of good faith even though the contract contains an estimate. ii. The reason for the reduction, rather than the amount is pivotal. iii. The mere fact that a requirements contract has become unprofitable is not a sufficient reason for reduction or elimination of demand, yet a shut-down for lack of orders is permissible. iv. The court have given buyers a good deal of flexibility. v. The general principle is that a seller in a requirements contract assumes the risk of all good faith variations in a buyer’s requirements, including the termination of business. f. Empire Gas Corp. v. American Bakeries Co. (7th 1988) Requirements contract specifically stated 3,000 more or less depending on the buyer’s need. American then never ordered any. Posner determines that 2-306 implies difference btw increase in estimate and decrease in estimate and UCC only applies in that section to increase in demand. i. Posner rule for decrease is you can go down as low as you want or need, but you must have a reason (as he distinguishes it from an options contract) or it is not considered to be acting in good faith. VII- Avoiding Enforcement A. Incapacity (status defenses) -Issues of capacity to contract-2 conflicting concerns 1- we want people to be able to rely on contracts 2- we don’t want people to be held to contracts they could not understand 24 1. Minority a. The simple rule is that contracts made by minors are voidable by the minor. RE §14 b. A number of courts hold that in certain circumstances a minor’s recovery will be decreased by the value of the benefit the minor has received. i. Dodson v. Shrader (TN 1992) Minor sought to disaffirm contract for truck after problems developed. Can the minor return the truck for full value or is there a setoff for decrease . Held that where the minor has not been taken advantage of and has used the article in ques minor cannot recover full price, rather the use or the damage to the item will be taken into account. c. However other courts stand by the traditional rule and allow minors to disaffirm contracts unless they have misrepresented their age or willfully destroyed the property. i. If there is a misrepresentation of age on the part of the minor- even those jurisdictions that generally do not require depreciation- either find the contract not voidable or do take out depreciation. ii. In jurisdictions were depreciation is generally taken out anyway (like above) then it is more likely that the contract will not be voidable. d. Why do have the rule that limits minorities’ contracting ability? i. Would be fairer to look at individual cases and assess maturity. ii. However that is almost impossible to evaluate and it is more efficient to have a general rule. e. Minors are held to the reasonable value of the contract for necessaries – [Though the reasonable value (or fair market value) is not always the same as contract value.] f. At majority, the minor can chose to disaffirm a contract or they can chose to affirm it or if no action taken they are considered to have affirmed it after a reasonable period of time. 2. Mental Incapacity a. The law concerning mental incapacity has a great deal in common with the minority doctrine concerning matters such as liability for necessities and the possibility of disaffirmance or ratification. b. However there is a fact question for mental incapacity- whereas minority is a matter of law c. An individual can void any contract made while they were incapacitated (voidable not void) d. the standard is very high- only apples if there is some illness or mental condition or inherent mental disability. e. §15 of restatement- Lacking capacity is necessary but not sufficient- the individual must lack capacity and meet one of the 2 tests in §15-1 i. a cognitive test – unable to understand transactions reasonably ii. volitional test- unable to act in a reasonable manner 25 iii. With a volitional test- the other party has to have reason to know of the condition (the cognitive test does not have this req.). f. A minor generally can disaffirm even if restoration cannot be made, but the mentally incompetent person is required to make restoration unless special circumstances are present. i. 15-2 - court can uphold contract if it is a fair contract, the other party did not know of disability, and if there was substantial reliance ii. Hauer v. Union State Bank (WI 1995) Bank loaned money to a woman, with questionable mental capacity who had once had a court guardian. Should woman lose the stocks put up as collateral? Court found that there was evidence of mental incapacity and that bank did not act in good faith. Therefore the contract could be voided without the woman having to return the money. g. The general rule is that a person does not have capacity to enter into contracts if the person’s property is under guardianship. h. §16 intoxicated people- rule is the similar to above- both cognitive and volitional test- generally courts have only applied cognitive test (unable to realize what they were doing) i. other party must have reason to know of intoxication ii. Self induced impairment so court is not very willing to release from contract- when it is avoided restitution may be required iii. The rule with necessaries is the same as with minors- fair market restitution iv. The restatement provides that a contract is voidable if a party has reason to know that because of intoxication the other person is unable to understand the transaction or act in a reasonable manner. B. Bargaining Misconduct (behavior defenses) 1. Duress a. Duress has origins in cases of physical constraint, the Restatement recognizes that a contract is void if made under conditions of physical threat. However a claim of economic coercion is voidable rather than void. The contract is binding unless disaffirmed and can be implicitly or expressly ratified by purported victim. b. Def of economic duress- three elements i-wrongful or improper threat -does not have to be illegal if it was done in bad faith ii-lack of reasonable alternative -what is test of reasonable? - The restatement mentions alternatives such as legal action, alternative sources of goods, service, or funds, or if the threat involves only a minor vexation. -Current standard (opposite of most other changes) -is subjective to individual and their circumstances 26 - The attendant circumstances are all considered (age, background, relationship of the parties etc.). iii-actual inducement of the contract by the threat -general principle-situation has to have arisen from the conduct of the other party (or substantially contributed to by their actions)- not just external circumstances -some jurisdictions have said- no need for causal relationship if there is knowledge of the situation and acted in bad faith accordingly c. Totem Marine Tug & Barge v. Alyeska Pipeline (AK 1978) Alyeska hired Totem to transport materials under certain conditions and in a certain time frame. Part way through the process they terminated. Alyeska said payment would be very slow and they offered Totem a settlement in exchange for immediate payment if Totem would sign a release. Totem did so but then brought suit for the remainder claiming economic duress Court found that if Totem’s accusations were true than a claim of economic duress could be supported. d. Claims of duress frequently arise in connection w/ releases executed to settle contract disputes---the defense of duress can also be used to avoid enforcement of a contractual modification of an executory contract. 2. Undue Influence a. Restatement 2d §177 describes undue influence as involving unfair persuasion to a party under the domination of the person exercising the persuasion or who by virtue of the relationship btw them is justified in assuming that that person will not act in a manner inconsistent with his welfare. b. Elements of Undue Influence (required): i. Extreme pressure ii. Undue susceptibility to pressure c. Factors that go to undue influence (not required): 1-transaction at an unusual or inappropriate time 2-transaction in an unusual place 3- insistent demand the business be finished at once 4- emphasis on consequences of delay 5- multiple persuaders by the dominant side against a single subservient party 6- absence of 3d party advisors to the subservient party 7- statements that there is no time to consult advisors d. Odorizzi v. Bloomfield School District (CA 1966) An elementary school teacher was arrested. The superintendent and the principal of his school came to his house and asked him to resign. He did so, the charges were dropped against him and claimed undue influence. The court said he had a case for undue influence. e. The finding of a special relationship will often be a significant factor in a court’s assessment of undue influence. 27 3. Misrepresentation a. Misrepresentation requires: RE §164 i-existence of misrepresentation (fraudulent or material) ii- reliance in entering into the contract iii- reliance was justified b. The fact that a misrepresentation relates to a matter of public record will not necessarily preclude reasonable reliance. c. Fraudulent misrepresentationi. Restatement §162-Fraud in the inducement - misrepresentation is knowing or conscious and made with the intention to deceive the other party and encourage them to enter into the contract (contract is voidable) ii. §163-Fraud in the factum - (contract is void) misrepresentation that keeps the party from knowing the character or terms of the contract d. Fraudulent also includes an assertion made as true but without knowledge or confidence by the maker whether it is true or false and thus may include statements that are made recklessly or negligently. e. Material misrepresentation i. Fraud is a type of misrepresentation -however misrepresentation can also be material but not fraudulent (§162-2) ii. Therefore there is no requirement that a misrepresentation be made with the intent to deceive or in bad faith f. There is traditionally a distinction btw statements of opinion and representations of fact. i. Modern law has qualified the classical rule that opinions are not actionable. Under the revised restatement a statement of opinion amounts to a misrepresentation of fact if the person giving the opinion misrepresented the state of his mind. j. Even if the person actually held the opinion it could still be actionable. A statement of opinion amounts to an implied representation that the person giving the opinion does not know any facts that would make the opinion false and that the person knows sufficient facts to be able to render the opinion (restatement §168) 4. Non-disclosure a. General rule is that there is no legal obligation to share what you know b. in some situations a failure to disclose a material fact may justify rescission of a contract. Restatement §161- in some specific limited instances and a general provision- when nondisclosure amounts to a failure to act in accordance with standards of good faith and fair dealing, silence is equal to misrepresentation. c. Exceptions §161 i. If you are asked you can’t lie (even where no further duty) - Caveat emptor- buyer beware (asking questions people must respond and can’t lie) ii. If you say something you can’t tell half-truth iii. Can’t act affirmatively to conceal info 28 iv. where confidential or fiduciary relationship exists silence is equal to misrepresentation d. In the case of a fiduciary relationship a greater duty is imposed btw two contracting parties. Not only does the duty to disclose apply, but the terms of the transaction must be fair and must be fully explained to the other party. Also the fiduciary has the burden of showing that they complied with the legal obligations. e. Where buyer and seller have theoretically equal opportunity to discover info there is no disclosure req (beyond those listed above). However where the buyer has a significant advantage in knowing something the buyer cannot easily discover (i.e. with homeowners) than there is a duty to disclose i. Hill v. Jones (AZ 1986) Sellers of a home did not disclose information they had about former termite infestations. After they moved in and discovered the damage, the buyers tried to rescind the contract. The appeals court found that parol evidence is always admissible to show fraud. They also held that the sellers did have a duty to disclose material facts which are not readily available. g. There is generally not liability for innocent nondisclosure standard is know rather than had reason to know (different from usual) h. Undisclosed fact that relates to enhancement of value rather than defect (oil co. hypo) – not likely to be held as nondisclosure; courts are more likely to protect buyers from defects than sellers from enhancements i. Some economic analysts feel the court should draw a distinction btw information that has been casually acquired and information obtained through a deliberate and costly investigation as it socially desirable to give parties an incentive to acquire information. j. Even in oil co. hypo- if the buyer lies about purpose- and if effects the interests of the seller- not just curiosity than the buyer can be liable C. Public Policy (substantive defenses) 1. Unconscionability a. Generally under BFE the court does not second guess the bargainindividuals are in the best position to decide on fairness (if there is actual BFE- not sham consideration) the market is left to decide what a fair bargain is b. A judicial tool is the doctrine of unconscionability- RE §208 and UCC §2-302. c. Unfairness is a stronger argument when there are also questions relating to status and behavior concerns in combination i. Williams v. Walker-Thomas Furniture Co. (DC 1965) Skelly Wright -Consumer bought household items from the def on credit. The terms of sale were contained in a preprinted form contract which leased the item to the P. until it was paid off. Two consumers defaulted on a payment and the def tried to repossess all items. Court found that unconscionable contracts are not enforceable 29 d. The presence of an absence of: i. lack meaningful choice for one party combined with ii. excessively favorable terms for the other, iii. inequality of bargaining power, iv. Lack of opportunity to understand the terms of the contract, and v. deceptive sales practices all issues to be considered in terming unconscionability. e. Courts have shown restraint in applying the unconscionability doctrine. f. generally two parts are required for a determination of unconscionability i. Procedural unconscionability- absence of choice by one party or some defect in the bargaining process (quasi-fraud or quasiduress) ii. Substantive unconscionability- the unfairness of the terms of the resulting contract iii. most courts require both, some just one h. Unconscionability is determined as of the time the contract was made (not based on later changes) i. Determination is fact intensive and individual---- but judge is to determine- matter of law 2. Public Policy a. In some situations, though the process of contract formation is untainted, a contract may still be unenforceable because it either violates or rums contrary to some public policy. i. RR v. MH & another (MA 1998) Surrogate mother contract b. The restatement §191 holds that a contract affecting the custody of a child is invalid unless it is consistent with the best interests of the child. c. Courts also recognize a more general limit on contracts that are deemed to impair or harm family relations. VIII- Justification for Non-Performance A. Mistake 1. Mutual mistake a. Restatement §152- mutual mistake i- basic assumption of contract (difference btw I thought this rental property would be worth more v. I thought this was rental property) ii-material effect (consequential) iii-unless party affected bears the risk in the situation according to §154 (assumption of risk) iv-contract is voidable (not void) - this does not go to value and quality (that is by definition a risk inherent to a contract) b. Different types of mistakesi. When the mutual mistake is a failure of the written contract to accurately state the agreement of the parties reformation is the normal remedy 30 ii. the relief for any mistake not just in the writing is usually rescission, along with any restitution that may be appropriate c. A number of courts have denied rescission based on the existence of an “as is” clause. (Though this is not always the case even w/ the clause.) i. Lenawee Cty Bd of Health v. Messerly (MI 1982) A couple bought some property with a three unit apartment. Soon after found serious sewage problems that made the property uninhabitable. Court held that there was a mutual mistake, each party thought the property was income producing. A contract may be rescinded in case of mutual mistake but not if one of the parties assumed the risk. ii. Sherwood v. Walker (MI 1887)- barren cow found to be pregnant, farmer allowed to reneg on deal to sell for low price- nature or essence of cow was different from contractual agreement. Court held that cow case insufficient and follows RE. . d. §154- party bears risk of mistake when i- risk is allocated to him in contract ii- he is aware he has limited knowledge but treats his knowledge as sufficient iii- court allocates risk based on reasonableness e. as mutual mistake is an equitable remedy courts have discretion in fashioning a remedy to fit the mistake or refusing remedy altogether f. both parties are generally innocent in mutual mistake 2. Unilateral mistake a. Unilateral mistake rescission requires all the elements of mutual mistake (basic assumption, material effect, no assumption of risk) rescission plus (§153) i- Enforcement would be unconscionable, or ii- the other party has reason to know of, or caused the mistake b. Unconscionability in this context is generally held to be severe enough to cause a serious loss. c. Some courts have held that a mistake must be non-negligent, but not all courts require it when proof of mistake is clear and effect of enforcement very serious. §157 of RE negates any requirement that the mistake be non-negligent d. Wil-Fred’s Inc. v. Metropolitan Sanitary District (IL 1978) In this case Wil-Fred’s bid on a city sanitation project. Their bid was substantially lower than any one else’s. The subcontractor found they had made in error. The court held that WFs error was a mistake material to the contract, that the consequences of enforcement would be unconscionable, that WF had exercised reasonable care and that the city should have known there was an error based on the size of the difference in the contract, therefore they could rescind. e. Mistake of fact v. Mistake of judgment i. Mistake of fact- clerical or mathematical errors- rescission is generally permitted ii. Mistake of judgment- rescission not generally permittedalthough this is not as clear cut as it used to be (see WF above) 31 some courts now focus on strength of proof that genuine mistake occurred. B. Changed Circumstances 1. Impossibility a. Generally promissor bears the risk of contract- unless contract otherwise indicates. Promissor could have bought ins or neg in contract for exception b. in common law there developed three exceptions: 1- gov’t action--- makes performance illegal or impossible 2- death or incapacity of the promissor 3- existence of something is necessary and destruction or deterioration prevents performance c. Taylor v. Caldwell (Eng 1863)- 1st exception to strict liability Taylor rented music hall for performance which burned down before 1st performance. Court held Caldwell was not responsible for breach. d. Individuals own actions cannot create the impossibility e. the doctrine of impossibility required literal impossibility (no one could do it) f. therefore the rule could not serve as an excuse because performance had become more expensive or more because the contract had lost its value. g. RE- Impossibility- §262, 263, 264 h. UCC Impossibility- §2-613 2. Impracticability and Frustration of Purpose a. Impracticability and frustration of purpose are separate grounds for relief but have very similar requirements i. Impracticability §261 1-performance is made impracticable 2-without fault of party 3-occurrence of an event the non occurrence of which was a basic assumption under which the contract was made 4- unless party seeking relief bears risk from contract or other circumstances ii. Frustration §265 1-substantial frustration of principal purpose 2-without fault of party 3-occurrence of an event the non occurrence of which was a basic assumption under which the contract was made 4- unless party seeking relief bears risk from contract or other circumstances iii. impracticability is looking at the performance, frustration is looking at the purpose that performance is directed towards b. UCC §2-615 is broad enough to cover impracticability, frustration, and impossibility i. While the section expressly addresses excuse of performance by the seller on the grounds of impracticability it does not mention 32 relief to the buyer. However courts have generally granted relief to the buyer as well as the seller. ii. Most likely to apply in: 1- destruction of the subject matter of contract 2- gov’t regulation 3- unforeseeable or unforeseen cataclysmic event (diff from restatement) -in a sale of goods context court is more likely to focus on issues of foreseeability c. Generally courts will not find either if a contract becomes more expensive or less profitable because of changing market conditions. i. Karl Wendt Farm v. IH (6th 1991) Wendt was franchisee of IH. IH decide to go out of farm equipment business due to serious economic downturn and so cancelled contract with Wendt. Wendt filed for breach of contract, IH claimed impracticability defense. The occurrence of downturn was not a change in a basic assumption on which the contract was made. d. However sometimes impracticability may by found if events other than market change causes increase in cost of performance (i.e. safety concerns in outdoor performance of opera during storm) e. Generally courts are more willing to grant relief when the event on which the claim of impossibility or frustration rests is some form of superceding governmental action, rather than cases in which the event is war, natural disaster, or market change. f. However the limits are still stringent. The frustration must be quite substantial. h. Some courts require that the event have been unforeseeable (because if it was foreseeable the contract could have made provision) i. However other courts do not require forseeability- as on some level everything is foreseeable i. Economic analysis- doctrines should be applied to shift burden to superior risk bearer. i. If the contract designates a risk bearer that person is the superior risk bearer ii. If no designation who was in the best position to prevent the event from occurring or to minimize its effect (ie insurance) j. leasing contracts- There is often a portion of a leasing contract which addresses issues of partial or total destruction of the facility or a change in zoning laws. This is force majeure clause. Issues covered often include circumstances beyond the control of the party- governmental regulation, natural events, outside forces (war, riot etc), strikes, and labor disputes. To a large extent force majeure clauses are now covered by the UCC §2-615 and other parts of the RE. However individual clauses may go further and provide excuse where the law would not. While this is permissible the law generally does not favor such clauses as they tend to become sweeping generalizations often in boilerplate. 33 C. Contractual Modification 1. Common law modification a. Pre-existing duty rule- in contracts it is a fundamental tenet that promising to perform an existing obligation will not serve as valid consideration for additional return compensation from the other party. iii. Alaska Packers’ Asso. v. Domenico (9th Cir 1902) Here fisherman were hired in San Francisco for the fishing season in Alaska and promised a set salary and extra for fish caught. Wanted raise when there. Company representative agreed. When they returned to CA they were paid the original amount and brought suit. Court that fishermen’s new contracts had been w/o consideration as they were already under contract to render the services they did. b. However courts will accept consideration where there is also alteration of the performance owed, even if it is a small change. c. Although generally courts require modification to be supported by consideration on both sides there are some exceptions: i- unforeseen circumstances (RE §89)- though not necessarily to the level of impracticability ii- reliance on a promised modification iii- mutual release (joint recission) iv. disputed obligation (good faith question) d. If a new promise has already been performed the PEDR does not apply (if Alaska folks had already been paid in Alaska they could only have claimed duress- not PEDR) 2. UCC modifications a. Under the UCC no pre-existing duty rule- was the modification bargained for is the question b. What does the UCC use to police this and make sure this is not abused? They use the generalized requirement of good faith §2-209 to be sure changes are not a product of coercion or bad faith i. Courts look at past dealings ii. Unforeseen circumstances iii. Whether there is a dispute iv. Was breach threatened- often a sign of bad faith c. If someone tries to make a modification and the other party agrees, but does not want to, do they have some good faith argument to indicate that they agree involuntarily and will possibly dispute it later? i. UCC holds that good faith implies you should (common law also has good faith obligation but it is less dominant) 3. Modification and the statute of frauds a. §2-209 in the UCC for the stat of frauds requires that “requirements of the stat of frauds section of this article must be satisfied if the contract as modified is within its provisions.” i. Brookside Farms v. Mama Rizzo’s Inc (SD Texas 1995) Brookside entered a requirements contract with MRI to sell them all the basil they needed with a minimum set at 91,000 lbs. The 34 contract contained both a no oral modifications clause and a no waiver clause. Court held that case fell within the stat of frauds, which does not bar oral changes if they do not materially change contract and that because MRI had promised to make note of oral modifications these changes would not bar enforcement. Court also held that exception stat of frauds- on goods received and accepted. b. Most courts hold that a modification must be in writing not only when the modification brings an oral contract within the statute, but also when the original contract was in writing. c. NOM (no oral modification clauses)- under the common law such a clause is usually held to be ineffective to restrict the parties’ freedom to later modify the agreement orally or in writing. d. In §2-209 the UCC authorizes parties to include a NOM clause to create a private stat of frauds and that a signed agreement that includes a NOM clause cannot be rescinded except by a signed writing e. §2-209 must be read in conjunction with 2-209-4 which provides that although attempt at modification does not satisfy the requirements it can act as a waiver. f. 2-209-5 says such a waiver once relied upon can’t be revoked g. Most cases do support the idea that a NOM clause may be waived by oral agreement or by a combination of oral agreement and behavior. h. In addition to the NOM clause the case above also had a no waiver clause- attempting to insulate the parties from a claim that any provision including the NOM clause could be orally waived. i. However if a NOM clause can be waived, perhaps a no waiver clause can too. i. The NOM clause and the no waiver clause play a similar role in this area that the merger clause plays with respect to the PER. 4. The accord and satisfaction rule a. Full payment checks- If a creditor accepts and cashes a check marked “payment in full” according to pre-code law if the amount owed was an unliquidated amount or the subject of a good faith dispute than acceptance of the check amounted in legal effect to accord and satisfactiondischarging any remaining debt. b. Agreements for liquidated amounts that are undisputed have traditionally not been binding on the creditor even if they cash the check. IX- Rights and Duties of Third Parties A. Third party beneficiaries 1. Who is a 3rd party beneficiary? a. traditional 3rd party beneficiaries i. . creditor beneficiary 1. Lawrence v. Fox (NY 1859)- one person loaned money to another, the second made a loan to a third that required repayment to the first. The 1st than sued the 3rd for 35 repayment. The court held that there was a cause of action likening it to a trustee relationship. ii.. donee beneficiary 1. Seaver v. Ransom (NY 1918)- niece recovered from her aunt’s estate because her aunt had made her spouse promise to provide for her. After his death it turned out he had not. b. §302 of RE- Intended and Incidental beneficiaries i. intended- the interests of a party who is not an original party, is central to the contract- then they can be a 3rd party- the purpose of the contract relates centrally to the interests of this other party plus one of the following: 1-creditor beneficiary (a- in the RE) 2- donee beneficiary (b- in the RE) ii. incidental- derives some benefit but does meet requirements for recovery (no standing)- not officially a 3rd party beneficiary c. Category b is now bigger and more flexible than it was under the original common law context d. What the nature of a benefit sufficient for a 3rd party to be an intended beneficiary? i. Is a pecuniary benefit required or is that too restrictive? ii. RE says that if the beneficiary would be reasonable in relying on the promise as manifesting an intention to confer benefit to him than he is a beneficiary. e. Vesting of third party rights- no longer subject to change by agreement btw promissee and promissor RE §311 1-manifest assent at the invitation of the primissor or promissee 2- materially change in position based on justifiable reliance 3- brings suit on the promise 2. Intent to create 3rd party beneficiaries a. Vogan v. Hayes Appraisal Assoc (IA 1999) The P.s took out a loan to have a home constructed. Their bank hired Hayes App to report on the progress of the builder so they would know when to release funds. Court held that P. was 3rd party beneficiary as contract manifested intent to benefited them as 3rd party. Court held reports were a proximate cause of injury to P. b. RE § 302 is unclear- is it: 1- the intention of both parties, or does 2- the intention of the promissee control, and if the latter 3- does the promissor have to know or have reason to know of the intent to benefit the 3rd party. c. Most courts focus on the promissee (at least in a monetary context302a). Others use 1 or 3. d. What evidence of intent is required? i. Sometimes a contract specifically confirms or negates standing of 3rd party. 36 ii. In the absence of clear provisions a totality of circumstances approach is often used. iii. However some courts apply a presumption against 3rd party standing that only clear evidence to the contrary will overcome. 3. Government contracts and 3rd Parties a. §313 of RE sets forth special rules making it more difficult for P.s to establish they are 3rd parties of govt contracts. Likelihood of impairment of service or of excessive financial burden, availability of alternatives such as ins. etc. i. Zigas v. Superior Court (CA 1982) Apartment building financed with a federally insured mortgage under an agreement not to charge more then the HUD schedule or rents. P.s were renters who were charged above the mandated level. Court P.s have standing to sue as contract was for their benefit- they were direct beneficiaries and the loss suffered was theirs alone. ii. Other fed courts have rejected Zigas and held that tenants are only incidental beneficiaries. iii. Case of H.R. Moch v. Rensselaer (NY 1928) –Cardozoinhabitant of city cannot sue water comp for ineffective water pressure in hydrants as contract was with city. 1. Citizens not 3rd parties in gov’t contracts if it would create infinite liability for parties in contract 2. The difference in Zigas is the class is a limited group asking for limited damages B. Assignment and Delegation 1. Assignment a. Assignment is an issue of rights under a contract b. There was once a question of whether a party could assign their contract rights to another person c. In a commercial (credit driven) economy it was crucial that this be allowed (like taking out a loan based on home equity?) d. §317 RE assignment is allowed 3 exceptions1- if it violates a statute or public policy 2- where it has a material, adverse effect on the other party 3- where there is a valid preclusion of assignment under the contract itself 2. Delegation a. Delegation of duties under a contract i. This is a more difficult issue, creates greater risk for harming interest of other party, hence courts are much more stringent b. §318 of RE i. ability to delegate depends on the extent to which the contract is specific to one party (or object etc.) ii. delegation does not eliminate obligation under the original party (duty is not eliminated until contract is fulfilled) 37 iii. the exception to that is if the promissee clearly releases original party – this is a novation c. a contract can forbid or permit most delegations generally (though if necessary courts will sometimes refuse to give effect to a policy either way) X. Consequences of Non-Performance A. Material Breach 1. Breach a. The 2d RE defines breach as – when a performance of a duty under a contract is due any non-performance is a breach. §235 b. a breach can be either insubstantial or material i. Jacob & Youngs, Inc. v. Kent (NY 1921)- Cardozo A contractor built a house for a client. The client discovers the pipes used were not the specified pipes and refuses final payment or demands that the contractor fix the problem. Though full performance is generally required, a trivial omission will not be a breach and be followed by forfeiture. Here the difference is not substantial so replacement is not warranted contract or owes only the difference in value, which is close to nothing. c. breach is very fact intensive 2. Determining material breach a. Factors in substantial performance: Does performance that has been rendered meet the essential purposes of the contract? Something less than perfection is adequate b. Factors in determining material breach: 1- magnitude in breach (based on total worth of the contract) 2- timeliness (how essential in nature of the contract) 3- extent of part performance 4- nature of the excuse given (was or was not willful or negligent) 5- hardship to the breaching party 6- likelihood of full performance 7- why the injured party entered into the contract 8- difficulty in calculating extent of P.s injury (this is more likely to lead a court to declare material breach- then P. will have to declare how much they want if they want additional damages) c. the determination in any case will be a question of fact and an analysis of degree 3. Behavior after a Breach a. The rules of breach are designed to protect the exchange as much as possible. b. if there has been substantial performance there is no material breach c. If there is an insubstantial breach (i.e. substantial performance) the other party is generally still supposed to perform (though they may be able to sue for the difference) d. Where there is a material breach the contract is null and void and the other party is not obligated to perform 38 e. Always a risk with substantial performance- one party may see an action as breach and so halt their own performance, if the court then sees the first party has having completed substantial performance than it is the 2d party who is guilty of material breach. Therefore all parties generally try (or should try) and continue performance and seek damages or settlement later to be on the safe side. 4. Total and Partial Breach a. Total breach- not cured after a period of time so that the other party no longer has to perform and can sue for damages b. Partial breach- non-breaching party can suspend performance and wait for a cure, but if the other party does cure breach, they are obligated to perform and can only get damages for the delay. 5. Questions in the breach context a- is the breach material? §241 factors in determination b- is the breach total or is the breach partial? §241 factors plus i-degree of importance that the parties attached to timeliness of performance ii-extent to which delay is likely to hinder the non-breaching party from making substitute arrangements B. Anticipatory Repudiation 1. Promissor Refusal before a Breach a. If one party commits a total breach when her performance is due, the second party is justified in treating her performance obligations as discharged. b. What if something happens before the date of performance? The 1st party could indicate she will not perform by refusal, this is an anticipatory breach. c. This can be expressed orally, in writing, or by conduct. d. The repudiation doctrine (and rescission process) is widely accepted in US courts (in RE §250- 253; UCC 2-610 i. A definite and unequivocal statement is required for anticipatory repudiation. ii. However the words can be language that under a fair reading amounts to a statement of intent not to perform except on conditions which go beyond the contract. iii. It may also be action rather than words.- conduct that renders the obligor apparently unable to perform may be a repudiation. iv. However the performance must be a practical impossibility for conduct to be enough. e. Truman L. Flatt & Sons Co. v. Schupf (IL 1995) Buyer would try and get the zoning changed, and if they did not succeed the contract would be voidable at their option. They were unable to change the zoning and sent a letter to the seller asking if given that the price could be lowered. The seller responded that the lack of zoning change and the new price request had voided the contract and they would not sell. Buyer brought suit. Court found that 39 there was no repudiation- a clear manifestation of intent not to perform is required and this is not met by a suggestion for modification. 2. Retraction of AR RE §256 a. Where AR has occurred, retraction is allowed unless: i- there is a notice or manifestation of assent from non-repudiating party (including bringing suit), or ii- there is reliance on the retraction C. Adequate Assurances of Performance 1. Insecurity about performance and repudiation a. Even if the 1st party does not actually repudiate circumstances might give the 2d party reasonable grounds for insecurity b. Also under the common law it was difficult to determine when a party had committed a total breach of contract. That meant a party was at risk she could be held to have breached the contract if she acted in response to what she perceived was a breach or a repudiation. c. Hence the UCC created a new right in §2-609 by which a party who has reasonable grounds for insecurity can request an adequate assurance of performance. The failure to provide such constitutes a repudiation. i. Hornell Brewing Co. v. Spry (NY 1997) Spry received permission from Hornell to distribute Arizona Iced Tea in Canada. Hornell terminated the relationship. The court held that Hornell had lawfully terminated based on UCC 2-609 which allows for one party with reasonable grounds for insecurity to demand adequate assurance of due performance and to suspend performance until such is received d. RE§251 has adopted a similar concept. e. The general rule is that if assurances have been requested and given, the requesting party must then perform unless there is a change in circumstances (no additional requests w/o change) f. if assurance is not given as requested repudiation has occured 2. Requesting Assurance a. Case law, the UCC, and the RE give some guidance as to what gives a party reasonable grounds for insecurity: i. Significant financial difficulties ii. Failure to perform important contractual obligations (including contracts with 3rd parties) iii. Failure to perform under related contracts iv. general course of dealing btw parties v. industry standard of commercial reasonableness and factual determination vi. Unreliable rumors or insignificant risks do not constitute reasonable grounds vii. reasonableness of grounds are always fact driven and case by case analysis is required b. The demand for adequate assurance must be based on circumstances that arise after the contract was formed, not on a situation that was known when the contract was formed. 40 c. Adequate assurances may range from a verbal guarantee to posting a bond depending on the circumstances d. Both the UCC and the RE require that a demand for assurance be made in good faith. e. Officially a demand for adequate assurances must be in writing. Courts are divided on whether this is required for enforcement. f. Under the UCC after a justified demand a party must wait a reasonable period of time not to exceed 30 days. 30 days is the max, a shorter period may be required. If assurances are not given in that time the demanding party may treat the failure to respond as an anticipatory repudiation. D. Express Conditions: Classical Principles 1. Constructive conditions a. “constructive” condition is created by the court, in order to reach a just result. (implied condition) b. constructive conditions are either: i. Dependent condition- promise is dependent on fulfillment of condition ii. Independent condition- promise is independent that must be fulfilled regardless c. If there is a dependent condition one party does not have to perform if the other party does not complete a certain promise. i. In Jacobs & Young case court held type of pipe was an independent condition (suing for damages allowed, but performance required). ii. However if contractor had not built a house landowner would not have to pay (dependent condition) d. Cardozo formulated a generally accepted qualification to the constructive condition analysis- ordinarily substantial performance will be sufficient to satisfy the constructive condition to the other party’s obligation. 2. Express conditions: a. An express condition is dependent by definition (and so not labeled such as it is intrinsic) b. when an express contract is spelled out in a contract, it implies there was negotiation . It will often be a condition to the duty of only one party, because that term has been included in the agreement to protect that party from having to perform in a situation where performance is for some reason less advantageous. c. The party whose performance is so conditioned can be referred to in this context as the obligor, the one whose performance obligation is at issue. i. Oppenheimer & Co. v. Oppenheim, Appel, Dixon, & Co. (NY 1995) The two parties entered into a conditional contract to form a sublease. The leasing party was to get the landlord’s written confirmation of the sublease and the landlord’s written permission for the sub-leasor to make certain changes to the space to make it functional for them, by a certain deadline. Express conditions must be literally complied with. 41 d. The general rule of strict enforcement of express conditions and comment d to §237 rejects the application of a substantial performance qualification to that rule. e. The court must determine whether an express condition is present from the language. f. Express condition languagei. if ii. unless and until iii. this is an express condition iv. consequences will follow if this condition or element of the contract is not met. g. Literal fulfillment of an express condition is sometimes called- “perfect tender” h. Until the conditioning event does occur, the reciprocal duty does not arise; at the point when it cannot (or for some reason will not) occur, the def is discharged. RE §225 in this respect the express condition may be stronger than the constructive condition. i. The strict enforcement approach may be characteristic of classical contract law it is by no means obsolete. E. Excuse and Interpretation of Conditions 1. Waiver and estoppel a. one way an express condition will not be enforced is if the express condition was waived b. Waiver is a voluntary abandonment of a contractual right (through word or conduct). i. There is no requirement of reliance. ii. A material condition cannot be waived w/o consideration iii. Waivers are retractable prior to the time for the conditions fulfillment unless there has been detrimental reliance iv. also not retractable if it was given in exchange for consideration. c. Estoppel prevents the assertion of a right by a party who by words or conduct has caused the other party to believe that the right does not exist or that it will not be asserted. i. In the context of estoppel there must be reliance ii. but it is okay if the relevant condition is a material one. 2. Prevention a. an express condition will also not be enforced if one party prevents the condition from occurring. The court will then construe the condition as having occurred. This is the doctrine of prevention. §245 b. In order to know if an obligor’s prevention of the occurrence of a condition to her duty is wrongful it is necessary first to ascertain what degree of obligation (if any) the obligor has with respect to the happening of the condition in question. c. Courts have frequently held that the possibility of prevention of the condition by the obligor was a risk assumed by the obligee, and thus not wrongful. 42 3. Forfeiture a. the most general grounds for avoiding a condition is forfeiture b. Meaning of forfeiture-the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially, as by preparation or performance on the expectation of that exchange. c. Standard of forfeiture- amorphous doctrine of many pieces i- were there costs incurred that the party will lose – balancing of adverse interests? ii- is there unjust enrichment iii-fault dimension – more on one side than the other? d. §229 of the RE states as general proposition that a court may excuse the non-occurrence of a condition where forfeiture would otherwise result, unless the conditioning event was a material part of the parties’ exchange. i. JNA Realty Corp. v. Cross Bay Chelsea (NY 1977) Chelsea then made substantial improvements of the property including up through the last six months of their lease. Chelsea turned the lease renewal in late and JNA refused to accept it. JNA brought suit to recover the premises. Chelsea asked for equity to relieve them from forfeiture. The court held that generally default on an option does not usually result in forfeiture of any vested rights, however in the case of a lease it can be different if the tenant has made substantial improvements on the property. e. This application of forfeiture is about the renewal of a lease and is a relatively common application of forfeiture f. In cases involving the purchase of real estate (as opposed to lease renewal) courts almost uniformly have denied equitable relief to an option holder who fails to comply with the time period set forth in the option. g. Leasing with option to buy is a more complicated situation in which the answer varys by court- could be treated like a lease or like an option to buy 4. Adverse interpretation a. Is possible to say an express condition is a constructive condition- as sometimes the result can be very harsh (i.e. fax v. telegram)? b. To get around excessive harshness courts could interpret an express condition as a constructive condition or as a promise----this is an adverse interpretation i-Courts might ignore the express condition (as Cardozo did in Jacobs & Young) ii- or the language is sufficiently ambiguous that the court denies the express condition c. if the condition is seen as a promise rather than a condition- the question arises did the ind, materially breach – which then replaces an express condition with a material promise- which would allow for substantial performance- which produces the same result 43 d. if it is both a promise and an express condition- contract will not happen without it but material fulfillment is acceptable and promising party is also liable for breach for not fulfilling promise and condition (promissory condition). Neither party can use the express condition to get out of the contract. e. Occasionally a term that defines a performance obligation by reference to the happening of some event may also be neither a promise nor a condition. (i.e. paid when paid clause in contract work interpreted to actually mean in a reasonable period of time). 5. Conditions of Satisfaction a. satisfactions as a condition is a particular form of express condition b. as with other express conditions- at times courts may use adverse condition to interpret satisfaction conditions i. Morin Building Products Co. v. Baystone Construction Inc. (7th 1983) Posner- Baystone hired Morin to provide and install metal siding on the addition in contract with aesthesic sat clause. The architect found the siding was not sufficiently uniform and rejected it. Posner held that given the nature of the transaction, and the fact that this language was standardized and not created for this particular project it is logical to assume that the parties had they forseen the dispute would have adopted a reasonable person standard for this contract. c. Conditions of satisfactory performance- are unlikely to be interpreted as conferring on the party whose satisfaction is at issue an unlimited power to determine satisfaction w/o an external check. If it was interpreted that way the condition might be thought to have created an “illusory promise” defeating the contract as a whole. d. Generally the approaches of Morin are usedi. either a standard of objective reasonableness (RP standard) ii. or a standard of honest dissatisfaction (good faith) e. The standard of interpretation is usually chosen based on the nature of the contract. Common law distinction btw commercial (RP standard) and aesthetic contracts (subjective standard) f. Courts prefer the objective standard §228 REg. In general in distinguishing btw the two standards the objective standard i-is most likely to be applied when there is risk of forfeiture on one side and a gain to the other (this is generally true in construction cases) ii-the next level arises where there is a risk of forfeiture but no gain to the other side (specially made goods) iii-courts are least likely to interpret satisfaction clause as objective where there is no forfeiture and no gain to the other side h. Parties often agree to satisfaction clauses- then question who is judge and what is standard 1- parties agree 3rd party will be a judge 44 i. so long as 3rd party exercises independent judgment courts will generally uphold this (even if decision is unreasonable) ii. if the 3rd party cannot decide or is not exercising independent judgment the clause will be deemed to be waived 2- when one of the contracting parties is the relevant judge if the thing really is subject to taste or fancy it will be interpreted under subjective standard- all the contracting party has to do is be honest 3- when one of the contracting parties is the relevant judge if the thing is not an aesthetic decision the court will interpret the provision to be an objective standard i. (§2-103). Under the UCC a satisfaction clause would require performance to be judged by both subjective and objective standards 6. Conditions precedent and Conditions subsequent a. everything we have talked about is a condition precedent- a condition that must occur before the other parties obligation arises b. there also conditions subsequent (though they are very rare) filing a claim after a house fire might be considered a condition subsequent- ins. will not pay unless claim is filed after event XI. Expectation Damages: Principles and Limitations A. Expectation Damages 1. Standards in Contracts Damages a. Expectation damages are the standard of damages in the contracts world b. They aim to put the non-breaching party in the condition they would have been in if the contract had been performed (benefit of the bargain the P. would have realized had the agreement been fully performed) RE §347 c. Fuller and Perdue- Three basic interests the law tries to protect – standard modern approach to contracts remedies: i- restitution interest- prevention of unjust enrichment court makes def disgorge value received from P. ii-reliance interest- purpose of undoing the harm the the P.’s reliance caused him iii- expectation interest- court seeks to give the promisee the value of the expectancy which the promise created d. generally (though not always) expectation damages encompass both reliance and restitution damages e. Nominal damages (a small sum fixed w/o regard to the amount of loss)which serve to vindicate rights even when no actual damage is shown, are not sought outside of perhaps libel actions f. net profits are the standard for damages not gross profits B. Computing Expectation Damages 1. General formula a. RE §347 offers formula i. loss in value- breach caused the injured party loss by depriving them of the performance expected under the contract 45 ii. other loss- incidental and consequential damages -the following two only apply to claims for total breach iii. cost avoided- if the injured party terminates and claims damages the breach may have a beneficial effect on that party by saving them further expenditure -(builder stops work on building after breach) iv. loss avoided- breach may allow injured party to salvage or reallocate resources -(builder resells some equipment purchased for building) b. formula for general measure of damages for total breach isgeneral measure= loss in value + other loss- cost avoided – loss avoided c. formula for partial breach is loss in value + other loss d. These formulas work relatively easily when breaching party is paying party 2. Problems in determining the formula a. Where the def’s promised performance is something other than payment of money the question of loss in value is not as easily answered b. The case will be further complicated if the P.’s own performance was incomplete when the claim is adjudicated. c. Courts look at the actual P not a hypothetical P- subjective standard 3. Computing UCC Damage rules a. Damages for breach of a contract to buy or sell goods under the UCC may also be measured by the diff btw the market price and the contract price of the goods UCC 2-708 b. UCC 2-713 provides that the measure damages is the difference btw the market price at the time when the buyer learned of the breach and the contract price together with any incidental or consequential damages, but less expenses saved in consequence of the seller’s breach c. drafters were concerned that the application of the market measure of damages often did not accurately determine the loss suffered d. alternative measures of damages in the UCC: i. seller’s resale- damages measured by the difference btw the contract price and the seller’s resale price. ii. in cases of breach by the seller the buyer can cover her loss by purchasing substitute goods and measure her damages by the difference btw the cost of those goods and the contract price. 4. Prejudgment and post-judgment interest a. Postjudgment interest will usually at least from its date of entry, perhaps from the date of the verdict b. Agreements that call for the payment of a fixed sum on or before a certain date or specific event- will often have an interest provision in the contract- courts will generally enforce these unless it violates a usury statute c. Even w/o such contract language P may recover some prejudgement interest – if the judgment is based on a claim for a liquidated sum. 46 d. if a claim is for a unliquidated sum it is very unlikely any pre-judgment interest will be ever be awarded C. Expectation Damages in Specific Contracts 1. Real estate contracts a. Difference in market price and contract price at the time of breachgives you loss in value i. Turner v. Benson (TN 1984) Parties entered into a contract for the sale of real estate. Def then did not show for closing. Difference btw market value and contract price was non-existent - damages were all consequential and incidental. b. Diff situation if seller breached than buyer breached i. If buyer breaches- for there to be a loss in value the contract must be worth more than the market price ii. If the seller breaches for their to be a loss the contract price must be less than the market value c. How is proof of market value determined? i-real estate or other appraisers can provide testimony ii-courts also often allow property owners to provide testimony about market value iii-many courts have also allowed the resale price of the property as evidence provided it occurs within a reasonable period of time d. Additionally P.’s can then recover incidental and consequential damages (other loss) based on HvB rules. 2. Construction Contracts a. Construction contracts measure of breach by owner is builder’s expected net profit on the entire contract plus the builder’s un-reimbursed expenses at the time of breach. b. Should the standard of damages for breach by builder be for difference (dimunition) in value or for cost of completion- both are expectation damages – the question is whose expectation- this Ps or objective P i. American Standard v. Schectman (NY 1981) P’s agreed to sell equipment on their land to def in exchange for his removing it, demolishing various structures, and grading the land. Def claimed difference was out of proportion to the good to be realized based on his substantial performance. Court held that cost of completion was the norm and diminution in value was to prevent injustice for those who had done substantial performance in good faith c. Generally with unfinished construction work the courts will grant cost of completion. d. Rationale for cost of completion damages: i. more consistent with benefit of the bargain because the injured party can expend damages to complete performance. ii. also actual injury to the P may not be reflected in the market value e. Court may hold difference in value should only be used when there has been substantial performance and unreasonable economic waste RE §348 47 g. is the breach incidental to the main purpose of the contract? If so court more likely to award difference in value. h. part of decision may involve what the P plans to do with the land 3. Employment Contracts a. In cases with money a court is willing to accept the argument that one party got more than they bargained for b. when the bargain is for something not fungible (such as an employee) the court is less willing to accept that a party got more or even equal to what they bargained for as non-fungible cases what was bargained for will not be the same i. Handicapped Children’s Ed Bd v. Lukaszewski (WI 1983) Def was hired as a speech and language therapist for the 78-79 school year by the P. She then resigned and took up the job at the other place. The Bd then hired someone else- but had to be paid more. The Bd sued def for the breach of contract requesting the diff in salary and conseq damages of advertising. Court of WI said- breach and damagesthey should get the benefit of their bargain- they wanted her level of experience and salary- not a more qualified person for more. c. Courts almost never order specific performance by an employee of the services promised in a contract for employment. i. The court uses the measure of the diff in contract price and replacement price (as above) ii. court could also have issued an injunction against the employee preventing her from similar employment anywhere else during that period (which sometimes results in performance from lack of other choices) iii. difference in contract price and the market price iv. difference in contract price and price P received for services elsewhere d. in a personal service contract the death or incapacity (illness?) of a person necessary for performance may excuse non-performance D. Foreseeability, Certainty, and Causation 1. Foreseeability a. HvB Rule: damages that arise naturally from the breach of contract (general or direct) must be within the in the contemplation of the parties at the time of the contract b. For someone to become liable for special damages- they had to have had the authority to make changes to the contract that may be necessary (cab driver example). Liability only arises when they could have contemplated the damages and could have done something about it once given that notice. i. Hadley v. Baxendale (Eng 1854) A miller’s employee brought a broken a broken crank shaft to a carrier to have it transported as fast as possible to the manufacturer. The carrier promised delivery the next day, but the delivery was delayed and the mill lost several additional days of work. The court found that the damages must either arise 48 naturally from the contract or have been in the contemplation of both parties at the time they made the contract. c. §351 RE- damages must be foreseeable at the time the contract was entered into, not at the time the breach occurred (that way any special arrangements that are necessary can be taken care of) d. The most important type of consequential damages in commercial cases is lost profits arising from collateral contracts. e. The modern formulation of the rule of H v B is now stated in terms of foreseeability of loss. i. Consequential damages still depend on whether such damages were in the contemplation of the parties at the time they made the contract. ii. It is only necessary that the type of loss be foreseeable, not the manner in which the loss occurs. iii. While courts sometimes refer to the risks that are within the contemplation of both parties, the focus of foreseeability is on the breaching party. iv. The standard for foreseeability is at least in part objective. 2. Certainty and Causation a. certainty- An injured party cannot recover speculative damages. Ps must prove their damages with reasonable certainty RE §352. b. Courts often draw a distinction btw uncertainty about the fact of damage and uncertainty regarding the amount of damage. i. Florafax International v. GTE Market Resources Inc (OK 1997) In October 1989 Florafax contracted with GTE to provide call answering services for them for large contract with Bellarose Floral. Within the contract was a clause concerning lost profits if GTE did not perform. The court held the damages could be recovered and whether an issue was in the contemplation of the parties is an issue of fact. To be recovered lost profits also must be reasonably certain. c. The new business rule- Ps have traditionally encountered a great deal of difficulty in recovering lost profits in a new business venture. Many recent decisions have rejected the strict application of this rule d. causation- the loss must flow directly, naturally, or proximately from the breach e. In RE §351, there is a proposed limitation on consequential damages in addition to the HvB rule- where justice so requires in order to avoid disproportionate compensation. E. Mitigation 1. The Mitigation Principle a. The mitigation principle: The duty to mitigate is not strictly speaking a duty- it is rather a limitation of the P’s right to recover damages- if a P could have mitigated damages but does not do so- he cannot shift that portion of his loss to the def RE §350b 49 b. The P may not recover for those injurious consequences of the def’s breach that the P herself could by reasonable action avoided.- the doctrine of avoidable consequences-§347 RE- cost avoided and loss avoided i. Rockingham County v. Luten Bridge Co (4th 1929) Notice of cancellation from the county. Luten continued with the construction of the bridge and sued for damages. The court agreed holding that Luten had a duty not to do nothing to increase the amount of damages owed to them. c. Mitigation is an off-setting factor that may have the effect of reducing P’s recovery or eliminating it. d. Reasonable efforts is the general standard for mitigation and loss avoided. d. A substitute must be sufficiently similar in order to be required for mitigation e. In a commercial context- rather than personal service- any substitute may be more likely to be required. f. the burden of proof in mitigation is on the breaching party g. equal opportunity rule- def could have mitigated the damages in the same way as the P- then generally (in Js where the rule is applied) lack mitigation on Ps side is not a defense (not all Js have adopted this rule though- fearing fewer Ps will then mitigate- also makes analysis more complicated) 2. Employment mitigation a. deduction from the employee’s recovery for failure to take another position is allowed only when the employment is comparable or substantially similar in such respects as location, types of service, hours of work, and status i. Boehm v. American Broadcasting Co. (ABC) (9th 1991) Boehm sued ABC in a wrongful termination suit. ABC held that he was not entitled to recover damages because he refused to accept ABC’s offer of employment (for a diff job) which was a failure to mitigate. Court held that under CA law an employee has a duty to mitigate but is not required to take other employment unless it is comparable to the lost job. b. What circumstances would justify rejection of an employer’s unconditional offer of reemployment? i. Fair v. Red Lion- P was apprehensive to return to employer once burned- court did not support that as job was still the same c. Special circumstances i. pretextual offer (to protect employer from liability) ii. offer that does not take into account a change in circumstances are all considered when court considers reasonableness of new offer d. In seeking substitute employment a wrongfully discharged employee may have to spend money in various ways, such as travel and employment agency fees. This will be incidental expenses for which recovery may be sought. §347c 50 e. P has no duty to mitigate by taking employment that is not comparable, but if she does take another job the amounts earned there from are likely to be set off against her recoverable damages. f. this is different if you could have done both (like a construction co) then those profits are not subtracted for mitigation F. Non-recoverable Damages - Conventional damages both a floor and a ceiling -At least expectation damages-but nothing more - Generally denied include attorney’s fees, mental distress, and punitive damages 1. Attorney’s fees a. CISG and UCC: i. A sale of goods btw two US companies is covered by the UCCclaims for attorneys fees under the UCC have generally been unsuccessful. ii. An American co and foreign co is under the CISG (unless co is from the UK or Japan)- generally under the CISG attorney’s fees are recoverable if they are foreseeable. b. Zapata Hermanos Sucesores v. Hearthside (IL 2001) P was a Mexican tin making co and def was a US bakery co. As P was a Mexican co, the court had to evaluate if American rule or English rule applied to attorney’s fees (were they paid by winner or did each pay their own fees). Court held that using CISG non-american rule applied. i. Zapata Hermanos Sucesores v. Hearthside- Appeal (2002)Posner- On appeal Posner held that CISG does specifically say whether the American rule or international rule should be appliedtherefore local rule (based on Erie) should be used d. If parties themselves provide for attorney’s fees in cases of dispute in the contract courts should enforce that promise (though it varies by J) e. There are numerous fed statutes that authorize the courts to grant attorney’s fees- states have similar statutes for certain situations f. As above courts may also allow the recovery of attorney’s fees- fed rules- for improper litigation conduct 2. Emotional distress a. Contract cases in which damages for emotional distress may be recovered: RE §353 1- breach of contract also causes bodily harm 2- emotional distress is a particularly likely consequence of the breach- i.e. disposition of dead bodies, contracts for the delivery of messages concerning death etc. b. Erlich v. Menezes (CA 1999) Are emotional distress damages recoverable for the neg breach of a contract to construct a house? In this case house was insanely badly built. The court held that emotional distress damages were not possible under regular breach of contract case. 3. Punitive damages a. Generally no punitive damages for bad faith breach of contract: 51 i. §355- punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable b. Are there some situations that are so outside regular contract practice that it is less efficient to not give punitive damages than to give punitive damages? c. 1st party and 3rd,party insurance contractsi. in 3rd party ins contracts often more than expectation damages are granted- punitives allowed because it is so inconsistent with efficient contract practice to let ins co not pay ii with 1st party ins contracts some courts have given them- but most have not XII. Alternatives to Expectation Damages A. Reliance Damages 1. Uncertain Damages a. Occasionally where expectation damages would in theory be recoverable, they may not be provable with reasonable certainty. The P will then generally seek reliance damages. RE §349 b. Wartzman v. Hightower Productions (MD 1983) Hightower productions planned a promotional venture which involved a singer living on top of a pole for several months to break the Guinness book of records-record for flagpole sitting. They hired an attorney to incorporate them and began to sell stock. Attorney informed the co that they were structured wrong and so could not sell more stock. Court held that where lost profits are too speculative reliance damages can be awarded. c. Though generally expectation are the largest and the others get smaller by gradations that is not always the case 2. Limitations a. Should reliance damages be recoverable for more than the cost of the contract? b. So long as reliance damages include incidental damages- the overall damages can end up being much larger than the price of the original contract c. The revised RE indicates that the doctrines that normally apply to limit recovery of expectation damages- foreseeability, causation, certainty, and mitigation should also apply to recovery of reliance damages RE §352 d. Courts may not allow a party to recover for reliance costs incurred before the contract was made. e. Ordinarily reliance damages are thought of as out of pocket expenditures made by the P 3. Court discretion a. Generally in PE cases the trial court has the discretion to award a full range of remedies including PE and expectation damages. (majority rule) b. However some courts view the recovery under PE more restrictively and are more likely to grant only reliance damages. 52 i. Walser v. Toyota Motor Sales (8th 1994) Toyota decided to open a Lexus dealership in the St Paul area and contacted Ps about serving as dealers. They were then called a few days later and this was revoked. In the meanwhile P’s father had purchased property for the dealership. Court held that under PE remedy for breach may be limited as justice requires. Here reliance was for a short time and preliminary neg were no complete so court found limited damages appropriate. c. distinction btw commercial (where expectation are more common)- may have given up alternative opportunities and noncommercial- less worry about opportunity cost and reliance more common B. Restitutionary Damages 1. Alternative Remedy for Breach of Contract a. market value restitution- when a P elects to recover under restitution the measure of recovery is the reasonable value of the performance and recovery is undiminished by any loss which would have been incurred in complete performance. b. US ex rel Coastal Steel Erectors Inc. v. Algernon Blair (4th 1973) Subcontractor and contractor had a disagreement. Coastal brought suit for labor and materials expended. The higher court held that Coastal could recover under quantum meruit irrespective of whether P would have lost money on the contract and the measure is the reasonable value of the performance. c. a majority of courts follow the mvr rule d. what is the effect of the contract price in measuring restitution i. Contract price can be immaterial to damages ii. It can be determinative (cap of above) iii.Or it can be probative evidence of what market price would be e. full performance exception to mvr i. if the breaching party’s only remaining duty of performance is to pay a sum of money than the other party cannot elect restitution but is limited to expectation damages. 2. On behalf of the Breaching Party a. §374 RE- a general right to restitution in favor of a party in default. b. Lancellotti v. Thomas (PA 1985) Def agreed to buy a business name, goodwill, and equipment and add an extension to the property which was not sold with the business. The higher found that as contract law is not about punishment the breaching party should be able to recover beyond the damages caused by the breach. c. UCC §2-718 provides for a right of restitution to a defaulting party in purchase of goods d. Limitations on recovery by breaching party 1- non-breaching party’s right to offset damages 2- limited to actual enrichment- monetary terms gone to the nonbreaching party 3- denied if there is a valid liquidated remedy clause 4- if the injured party seeks or is entitled to specific performance 53 5- in no case should recovery be more than a ratable portion of the total contract price (mvr for breaching party) 3. Restitution Where a Contract is Unenforceable a. restitution is available when a contract is rendered unenforceable for some reason (fraud, mistake etc.)- if a court rescinds a contract each party has to make restitution b. Ventura v. Titan Sports (8th 1995) Ventura sued Titan for enrichment based on rebroadcasts of WWF episodes including Ventura. The court then held the contract invalid due to fraud and allowed him to recover also for that period. c. §371- restitution can be measured by two standards 1- cost avoided- what would it have cost the def to have obtained the same benefit from a person in Ps position 2- net enrichment- what was the increase in the value of the def’s property d. for the most part courts will generally award the smaller amount e. §371 gives courts the power to decide as justice requires- either the benefit or the enrichment theory C. Specific Performance 1. When is Specific Performance Available? a. specific performance is not a remedy to which the P is automatically entitled, even when an unexcused breach has clearly been established. b. City Stores v. Ammerman (DC 1967) Def was trying to get the zoning for a suburban shopping development. P agreed to write a letter in support of def to be used to support the rezoning. Court held that there was a unilateral options contract btw the parties even though the terms were not fully spelled out. Court then held that the contract was sufficient for specific performance (which is a higher standard). c. Specific relief will not be denied merely because the parties have left some matters out of their agreement particularly when the parties have agreed on all the material terms and other equitable factors are present. RE §362 d. However failure to agree on material terms may result in a denial of specific relief e. Modern American courts will routinely grant specific performance to purchasers of real estate. f. Circumstances in which damages may be inadequate include i- difficulties in proving damages with certainty ii-difficulty in procuring and equivalent substitute performance iii-likelihood that damages will not be collectible g. Other factors courts have traditionally considered in granting specific relief include: i. Was the contract a product of a mistake or unfair practices? ii. Is the exchange grossly inadequate or unfair iii. Does the asking party have “clean hands” iv. Would the relief cause undue hardship to the party in breach? v. Would there be any effect on 3rd parties? 54 h. Traditionally courts have less willing to grant specific performance where a lot of supervision would be necessary. i. This is generally less true today post- civil rights than it once was j. RE §366- discusses when to grant specific relief in spite of supervision that will be required 2. Specific Performance under the UCC a. §2-716- specific performance may be decreed where the goods are unique or in other proper circumstances b. the general previous policy is to be continued (of rare instances of spec performance) but with a more liberal attitude than some courts have shown. c. However goods must still be unique enough to justify specific enforcement of the contract of sale. The Theory of Expectation Damages a. What does the other contract law mean in the absence of remedy? Where is no remedy there is no breach (or no violation of law) b. protecting the expectation interest under a wholly executory contract: c. what justifies the law’s willingness to award an expectation based remedy to a P who has not been demonstrably injured in any quantifiable or even tangible way by the def’s breach? d. Arguments for expectation damages: (where there is no reliance or restitution) 1- compensate the party 2- encourage people to enter into contracts (issues of credit economy) 3- property interest at stake 4- psychic gain 5- will theory- parties made legal rules btw them 6- justice/morality (but what would that mean in each case) 7- efficient adjudication (what was this K worth and what would they get out of it, rather than deciding who should get what in each case) 8- lost opportunity/reliance- lost opportunity cost 9- rarity of executory K- a promise exchanged for a promisegenerally reliance results from people’s behavior following a change in circumstances 10- encourages cooperation 11- cautionary function in entering into contracts 12- facilitating planning 13- protection of a risk allocation d. Fuller and Perdue: -Psychological expectancy -Will theory- establishment of private law btw parties -Economic or institutional approach- credit as property -Juristic- conscious policy of law makers 55 e. Atiyah- in cases where enforcement of a completely executory contract is sought are much rarer in real life than contract theory- predicts that modern emphasis on protection of the reliance and restitution interests may produce a corresponding decline in the law’s willingness to protect the P’s expectation under a completely executory contract. f. Eisenburg- half- completed contract-where one party renders full performance and seeks return performance or its value---both fairness and efficiency are served by full enforcement ---where there is an element of unconscionability – neither fairness or efficiency are served by full enforcement of the even the half completed bargain---where P has not performed at all three policies may justify enforcement of full bargain 1- assured protection of the full cost of reliance 2- facilitation of planning 3- protection of risk allocation that the contract was created to effectuate Encouraging breach of contract: the theory of efficient breach a. Posner- view of Holmes- breaching party is required to choose btw performance and compensation i. contract damages should not prevent breach- just require injury for any injury that results b. criticisms of efficient breach: i. issue of transaction costs ii. limitations creating undercompensation (certainty, foreseeability, causation) iii. unquantifiable damages- emotional etc. iv. what about concerns other than efficiency – law/equity concerns c. Modificatory ideas -supercompensatory breach 56