Law School Outline - Contracts - Ahdieh3

Sunday, November 14, 2004 5:50 PM I. Types of Contracts: 1. 2. 3. 4. Unilateral Bi-lateral Output K Requirement K 1. Bi-lateral K: When there is an exchange of promises; an exchange of reciprocal commitments; product of negotiation process known as offer and acceptance. 2. Unilateral Contract- A contract in which only the offerror makes a promise in exchange of a future performance of the offeree. o Binding on Offerror only upon completion of the performance by the offeree. Petterson v. Pattsberg (179) Petterson wants to purchase finish paying off his third mortgage, makes an agreement to do so, but when goes to pay, the offeror says 'it's too late'. What is required is the payment of money. Peterson's statement 'it's too late' before the money is turned over means the option contract is revoked. 3. Requirements contract: a contract where the buyer agrees to purchase all of its commodity needs from a particular seller, and that seller agrees to supply all of the buyer's requirements.     The seller is ordinarily free to also sell to any other buyers as long as he meets all of the first buyer's requirements Buyer is guaranteed all the product he needs for the life of the contract Seller knows they have a certain channel for an amount of product they sell Theory: consideration comes from commitment of buyer to either buy goods from the designated seller or not at all—the decision to not buy at all creates a legal detriment Over-demand situation-Requirement K: i. UCC 2-306(1) ii. Is an issue of good faith b/c if the market situation changes such that it is advantageous to buy product at the now cheap price, the seller will be taken advantage of it forced to sell much more product than originally contracted for. This creates stockpiling – not using current requirements but rather storing for the future. Under-demand situation:  Can decrease the amount purchased even to 0, but must have a good reason. E.G.:  Purchase of commodity would lead to bankruptcy  Stopped delivering the product  Bad reasons include  Change in management  Unpredictability  Get a better deal somewhere else When is there a breach?    1  Not completely clear, but reduction in orders in good faith (and thereby not a breach) if result from circumstances directly beyond buyer's control  Will be a breach if done in bad faith. Questions for the jury  It is difficult to distinguish between an agreement where buyer agrees to buy all of product from a particular seller and agreement where buyer merely promises to buy whatever it might want from the seller (the second is an illusory contract)  4. Output contract: requires seller to sell all of output to the buyer, an imposes a duty on the buyer to purchase all of the seller's products  If the buyer wants to buy even more of the product from someone else, that is okay so long as purchases all output from the seller  Provides seller with a guaranteed market  Gives buyer assurance he can purchase product at a fixed price Is there Proper K Formation? Saturday, October 30, 2004 9:36 PM I. Is there Valid K Formation: Offer & Acceptance? i. Test: Offer Is it a Valid Offer?: It must contain these elements either expressly or by implication 1. It must be communicated to the offeree. It cannot take effect until it is known by the offeree.  an objective standard  An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. §24 2. It must indicate a desire to enter into a K i. Specify the performances to be exchanged 3. Definite and Specific Terms in the offer  The "Offerror is the Master of his Offer" and has control over what the  its terms will be. If not terms for acceptance are stated then they must be reasonable. R. §50 or 58 §33 Restatement-Certainty:  Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain. 2  The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy 4. It must be directed at some person or group of persons.  Usually offers are directed at a specific person, it is possible to make an offer to a defined or undefined group 5. The offer must create reasonable understanding that upon acceptance, a K will arise without any further approval being required by the offeror. It must invite acceptance.  An offer is a promise, IF it is a complete proposal that creates w/in the offeree the power of acceptance.  Power of Acceptance: Defined as the the power to complete the manifestation of intent and legally bind both parties without the need for any additional statements or actions from the offerror.  It may or may not indicate how and by what time this acceptance is to be communicated. Lonergan v. Scolnick, CA 1954 [man offered to sell property and sold before he received acceptance by offeree acceptance letter's. Crt held that offerror's intent was to find out if the offeree was interested, and was sufficient to advise the plaintiff that additional assent would be needed by the defendant. No K formed ii. Is it not an offer, But a Preliminary Proposal? 1. The words used in the communication; is it clear? 2. Does it omit significant terms? 3. Is it not specifically directed to a particular person, but to multiple people  Could be an offer, but more likely that is not seen as one. 4. Relationship of the Parties  Any previous dealings between them, and any prior communications in the transaction How to distinguish an offer from an Preliminary Proposal-Invitation to make an offer 5. Common Practices or Trade Usage  When parties are members of the same community or trade. 6. Look at the objective whole, and determine if it appears to be an offer A. Is there an Option K? For Those NOT Between Merchants: Def: Generally an offer is revocable, even if it states that it will be held open for a stated term, unless it meets the legal requirement for an option (or Firm offer) 3  The offerror undertakes not to revoke the offer for a specified period of time, so that the offeree is assured of a set time to consider and respond w/o a risk of it being withdrawn.  The offerror is committed before the offeree becomes bound.  Offer does not expire during option period, even if the offeree rejects it during the expiration period. Offeree can change her mind. §87 Test: Four Things 1. Requires the option to be in writing 2. Signed by the offerror 3. States the purported consideration 1. In exchange for the grant of an option the offeree has to give something, consideration, to the offerror . Consideration is given to the Offeror, so that he will keep the option open.  The valid option must have its own separate consideration tied to the promise not to revoke.  If an option is granted under an existing K, it is part of exchange in the original K and is supported by that consideration. ie. Option to buy within lease terms.  could be a transfer of property, giving up a legal right or something abstract-other than money 2. For relative short-term options, courts are more likely to accept nominal and sham consideration. i. Nominal-even if the value of the payment or performance is patently lower than the value of the right to hold the offerror to the option. ii. Sham-Consideration is not actually given, but merely stated to have been given to make it appear that requirement has been meet. Drennan v. Star Paving When a Sub-contractor makes this type of offer in this context, there is a subsidiary promise attached that it will give the Gen. contractor a certain amount of time to accept the offer after the general contract has been award.  Here, The plaintiff acted in reliance upon that subsidiary promise. Therefore, an option contract was formed. Drennan knew Star would rely on its bid, so it is only fair that Drennan has a chance to accept the offer. Invoked §45 3. An option contract supported by consideration, is not revocable by offerror. The Offeree can change their mind any numerous amounts of time, until the time has lapsed.  (lawyer should be careful in advising an option contract)  However, if an offeror has taken substantial detrimental reliance on an offeree's rejection, the offeree may not reverse the rejection later by acceptance. The court will apply the doctrine of promissory estoppel. 4 4. Binding option contract, supported by consideration is Not terminated by Death.  If the consideration is nominal, some courts will make the offer binding after death, some will not. 5. Option K & Promissory Estoppel: i. Offeree can use promissory estoppel to bind the offeror to honor that commitment only if she can show that despite having not given consideration for the promise of irrevocability, she was justified in relying on it.  Enforcement will in part depend on the level of the court's interest in preserving consideration.  Used in Construction Bidding Cases See Drennan  Generally however, courts are weary of enforcing contracts during the negotiation period. 4. Propose an exchange on fair terms within a reasonable time 5. Mailbox Rule does not apply to Option K B. Option Contracts Between Merchants: Def: One way to make an offer an option contract (and therefore binding) is by statute.  The UCC has provisions make certain offers irrevocable (despite a lack of consideration.§2-205 Firm Offers: Some offers will be irrevocable despite the absence of any consideration.  (Analogous to 87.1A and is 87.1B.-Case Law) Test: 1. Limited to the sales of goods between Merchants  Definition of Merchant:  §2-104 A person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. o Don't have to run a shop or business, but they have to be a person w/expertise in a particular goods transaction.  Someone who's knowledge and skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill. o I.e., an agent or broke 2. The offer must be in writing, oral communication will not suffice. 3. Must give assurance to the offeree that the offer will be held open 5 4. If the assurance is contained on a form supplied by the offeree, the offerror must sign the assurance separately.  The signature may be less than a formal signature o initials will suffice o handwritten document on writer's letterhead o authorized telegram will suffice 5. No Matter of time stipulation, it cannot exceed three months. C. Is it a Unilateral K:? Def: Unilateral Contract- A contract in which only the offerror makes a promise in exchange of a future performance of the offeree. o Binding on Offerror only upon completion of the performance by the offeree. Petterson v. Pattsberg (179) Petterson wants to purchase finish paying off his third mortgage, makes an agreement to do so, but when goes to pay, the offeror says 'it's too late'. What is required is the payment of money. Peterson's statement 'it's too late' before the money is turned over means the option contract is revoked. i. Is it an Advertisement Offer? Factors to Asses: 1. Does the Ad Narrow the Market?  If the ad limits the quantity-specificity (as to whom).  Does the ad define the population "first come/first serve". Does the ad narrow or limit the # of persons who can accept the offer.  For Izadi v.Machado: narrow pop are those persons who want to buy a car, who have money, and who come to the lot. A weak argument, but one nonetheless. 2. Are the terms general or specific? i. The more the specific terms are defined, the more it begins to look like an offer. 3. Is there an Industry Trade Customs?:  if there is a narrow market for purchasers of the item being offered. Could be construed as an offer given the customs of a given industry 4. If the ad is deliberately misleading. For Izadi v.Machado: narrow pop are those persons who want to buy a car, who have money, and who come to the lot. A weak argument, but one nonetheless. 5. Look at the collective words, does it add up to be an offer?  When looking at the ad, do we think that the advertiser has given it's last word. Has it shown a commitment to contract, w/o any further word by the offerror.  If it seems like there is more to be done; then the offerror has not given his last word. 6. Is there a prior Relationship or Course of Dealings?  What are the specifics of the prior relationship between the offerror and offeree. 6 Leonard v. Pepsico Court holds that the commercial is not an offer because it reserved the details of the offer to the catalog. It also didn't mention the steps to take to redeem the alleged offer of the Jet. The commercial was an advertisement, a solicitation to receive offers. Lefowitz, p. 171[Landmark case on whether an ad can be an offer. Selling Fur stoles to first three customers gets the stole for $1. Seller, states that the purchaser has to be a woman. Court holds that is in an offer; it sufficiently narrows the target market. C. Is there a Valid Acceptance?: Bi-Lateral K & Unilateral K: A. Acceptance of the Offer: a. General Rules: 1. Acceptance is a manifestation of assent to the terms made by the offeree in a manner invited or required by the offer. a. Mailbox rule::  Although both an offer and a revocation must be communicated to be effective, an acceptance will in some circumstances be treated as effective as soon as dispatched (mailed, telegraphed, etc.) by offeree;  Offeree has a firm basis for action in reliance on the effectiveness of her acceptance one the acceptance has been dispatched  Exception: When offeror has stated (Expressly or by implication) that the offeror must receive the acceptance for it to be effective Restated in §63: an acceptance is generally effective when you put it out of the offeree's possession (e.g., a mailbox). (Does not apply to option K)  b. Silence as Acceptance or Exercise of Dominion: §69 1. Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: a. Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. b. Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. 7 c. Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. 2. Exercising Dominion: An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance with the offered terms; unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. a. If you exercise dominion over the property, you are only liable for the fair-market value of the property, because the offeror can be making an unreasonable request. b. i.e eating a fruit basket that is left, requesting payment. 2. Acceptance by performance requires that at least part of what the offer requests be performed or tendered. (Unilateral K)  However, In a unilateral contract, an option contract is created when the offeree tenders or begins the invited performance or tenders the beginning of it. Restmt. §45. Payment: Three stages: 1. Manifestation of an intent to make payment 2. Tendering of payment 3. Receipt of payment  3. Acceptance by a promise requires that the offeree complete every act essential to the making of the promise. 4. If the offer states a mandatory and exclusive mode of acceptance, then the offeree must comply with it exactly. 5. Comments/Actions that under the Common Law are not considered a change to the agreement. Very limited and finite provisions. 1. If the acceptance simply attempts to make explicit something that was implicit in the offer. 2. Acceptance merely suggests a new term w/o insisting on it's inclusion. 3. If the acceptance is grumbling. 4. If the Offer is a binding option contract under 87(1) 5. If the offer explicitly states it will stay open, notwithstanding a rejection.  That was actually bargained for, that was the consideration. 8 6. The acceptance reserves the right to keep the offer under advisement i. "I'll think about it…but if you want an agreement know I'll give you xyb " ii. Not a rejection, but still a counter-offer. Counter offer doesn't kill the first offer. 7. A mere inquiry-doesn't function as a rejection or counter offer i. "Will you take xyb instead?".  Doesn't automatically form a rejection B. Was the Acceptance Terminated? Termination of the Power of Acceptance: §36 An offeree’s power of acceptance may be terminated by: 1. Rejection -once communicated it cannot be recanted; i. A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement. §38 2. Counter-Offer by the offeree, or i. Def/Counter Offer-Rest. §39: An offer by the offeree to the offerror, relating to the original offer, but proposes a change or substitute bargain. A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer. Counteroffers terminate the original offer §39  Normile v. Miller, Counteroffer nullifies the previous offer 3. Lapse of time-stated in the agreement, or  If no time is specified to accept the offer, we use a reasonableness standard (and we consider the method of communicating the offer) i. Assess: What would be needed to receive, consider, and reply to the offer under all the circumstances of the transaction. 4. Revocation by the offeror-must be received by the offeree b4 he accepts, or Indirect Revocation: offer is also revoked if the offeror take action clearly i. inconsistent with the continued intent to enter a K, and the offeree obtains reliable information of this action. §43 5. Death or incapacity of the offeror or offeree. 6. In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer. 9 7. If the offeree becomes apprised that the offer has been revoked (even if not by the offeror), he cannot later accept. Is the Offer & Acceptance Based on Forms: Apply UCC 2-207 A. Theory: Courts must fashion new rules for determining when sufficient agreement has been reached when using standardized forms to find a contract has been made and what its terms are 1. Flow i. ii. iii. iv. of "Form" Based Trans. for the purchase of goods: Buyer request for a price quote Sellers sends a quote (an invitation to make an offer) Buyer submits a P.O. to buy good (Offeror) Seller accepts and sends an Order Acknowledgment (Offeree) 2. Mirror Image Rule: Common Law Rule The acceptance must be a mirror image of the offer for it be a valid acceptance. If the offeree makes changes to the offer, it is not an acceptance. The changes can be miniscule and meaningless, but can still void the contract. 3. Last Shot Rule: A party (usually a buyer) impliedly assented to and thereby accepted a counter-offer by conduct indicating lack of objection to it.  This tends in practice to favor sellers over buyers because sellers normally ―fire the last shot‖, because of the order acknowledgement form.  In general whoever’s last counter-offer was presented an accepted, those terms apply B. How to Approach Fact Pattern: Ask Four Questions 1. Is there a valid offer?  Don't need to go into detail, just identify which form is the offer and which one is the acceptance. Use common law principles. 2. Do we have a contract?: (Welsher Problem)  Is there a Definite and Seasonable Acceptance  Or is there a counter-offer Parties agree on the basic nature of the agreement, then something happens and one party wants out of the deal. 3. What are the Terms of the Contract: a. If conclude that there is a K, then what are the terms. b. Dispute are usually over warranty issues, quality of the goods, or other non-K formation questions. c. Buyer refers to his p/o to govern the terms of the contract. (might be warranty clause) d. Seller refers to its order acknowledgment. (fine print may disclaim all warranties.) 10 4. Is it a Confirmation after an oral K?  What is the effect of a written confirmatory memo following an oral agreement? Should a party's post-formation addition or change be given any effect.  Written confirmation of Oral Agreements: (Para 2Comment 6) If a written confirm has a different meaning from the original agreement or if two confirmations of the same oral agreement are different from each other: i. Terms of the K, of which the parties originally agreed become valid ii. iii. iv. v. Terms in the confirmation which do agree, become valid Additional terms which are not seasonably objected to become valid Terms that conflict do not become part of the agreement. If needed, UCC gap-fillers apply to other areas. C. Definitions/Notes: i. Basic Terms: The aspects of the contract that the parties did not bargain over. The blank spaces in a form, things like price and quantity, probably quality and delivery terms too. Materially Altering Terms: Significant element of the exchange that is bargained for by the parties. A term is material if it would result in surprise or hardship on the other party. (should have both surprise and hardship) a. Surprise: A term is not a surprise if it is within the reasonable expectations of the parties in light of common practice and usage. If it is sufficiently common to be expected. b. Hardship: An unbargained for burden (financial or otherwise) c. Need to interpret the term in the context of the agreement and any course of dealings or trade practices. Reasonable Notice of Objection: Is given either before the acceptance or a reasonable time after notification of the acceptance. UCC Gap Fillers: a. Delivery-Must take place at the seller's premises 2.308 b. Payment-Must be made on delivery 2.310 c. Warranty-Sets minimum amounts 2.314 & 2.315 ii. iii. iv. II. Is there an Essential Agreement between the parties?: 11 A. Need an Objective Manifestation of Intent of Parties to Contract: Def: The existence and terms of contracts are determined from the manifestations made by each of the parties, rather than by each party’s subjective intention. Ray v. William Eurice, Where court held that it was the objective intent of party for which the court will assess contract formation from. Tests for Intent:  What a reasonable person in the position of the other party [the promisee] would conclude that his objective manifestations of intent meant. Hypo: If promisor A makes an offer in jest and promisee B proves that he had reason to believe the offer when he accepted, court will likely rule in favor of B. Alternatively, if A can prove that B knew it was a joke, or that a reasonable person in B’s position would conclude it was a joke, then the court will most likely not enforce the promise.  Not a Subjective Intent-does not mean that the parties must have subjectively been in agreement. Rather, it means that each party must act in such a way as to lead the other to reasonably believe that an agreement has been reached.  The doctrine that only the parties’ acts, and not their subjective thoughts, are relevant in determining whether there has been mutual assent, stems from the objective theory of contracts, as discussed below.  This standard does not apply, however, in the case of fraud or misrepresentation Park 100 Investors v. Kartes where defendants signed a personal guaranty under the impression that it was only the lease.  The Promisee needs to subjectively believe that an actual promise is being made. Is there an Enforceable K? Friday, November 05, 2004 11:42 AM Is there an Enforceable K? I. Is there adequate Consideration?: 12 I.  Test For Valid Consideration Bargain for Exchange: Consideration must be sought by the promisor and given by the promisee. Hammer v. Sidway, Uncle promises money to nephew to refrain from drinking etc.  If the requirement of a consideration is met, there is no additional requirement of a gain, advantage, or benefit to the promisor or a loss, disadvantage or detriment to the promisee; or §79 Definition: BFE To constitute a valid bargained for exchange, the parties must: A. Promisor:  Make a. b. c. a promise or conditional promise §71 Bi-lateral Exchange of Promises or Unilateral Promise to Perform or to conduct a certain act. Forbearance  Refraining from something which there is a legal right to do Hammer v. Sidway, Uncle promises money to nephew to refrain from drinking etc.  A legal benefit must be Received §71  Benefit/Detriment  The thing that was bargained for needs to have a benefit to the promisor and a detriment to the promisee. The value of the exchange is not taken into account.  In analyzing if there is a bargain for exchange, we do ask the questions of benefit to promisor, detriment to promisee, and relative value. These questions are asked however, in the analysis for determining if there is a valid Bargain for Exchange.  Motive Inducing: The fact that a promise does not induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise.  The law will not second guess the promisor's motive, as long as he receives a benefit. § 81.2  The promise/consideration must not be a sham §71  Def: of no benefit to the promisor, giving it up is of no detriment to the promisee and there is a huge imbalance in the equivalence. Dougherty v. Salt, Aunt promises money to nephew; court concluded it was nominal consideration and no valid K.  If the court sees a situation where there is a gross inadequacy, in consideration that the court can ONLY 13 conclude that it is not a real bargain, and just done to mask a gift. The court will conclude that it is sham/nominal consideration. Hypo:-Whether a mere peppercorn can be consideration for a promise to convey black acre (hypothetical farm). No, it cannot. B. Promisee:   Must know about promise Must have consideration, but not past consideration  Past Consideration- Cannot bargain for something that has already been done.  Pre-Existing Duty-Cannot be used as consideration Shadwell Case-Uncle pays nephew $150lbs per year for marrying a woman. The money continue that until his income of 600guineas. The thing is, the nephew has already proposed as the Uncle writes the letter. Did the nephew actually marry in exchange for the money? Could be no, because the promise to pay the money did not influence the promise that he would get married. He had already proposed and was intending to get married.  A legal detriment must be incurred. Unfair/Unequal Consideration: Has no legal recourse, There is no concern for fairness in the consideration doctrine. Batsakis v. Demotisis, Texas 1949Court held that the defendant got what she bargained for, even though it wasn't fair II. What is NOT valid Consideration: Three Types 1. Conditional Promises: Consideration and condition must be distinguished: if the Professor says ―If you come to my office, I’ll give you this book,‖ he doesn’t want you to come to his office, he is just saying that your coming is a condition to getting the book. In Kirksey v. Kirksey, where the brother-in-law invited his brother’s widow to abandon her home and live with him, the majority ruled that the inconvenience of leaving her home and moving (and eventually losing it) was a condition of the gratuitous promise and not consideration. In Greiner v. Greiner, however, where mother changes her mind about willing part of her estate to her son, the son’s moving and improvements on the land show detrimental reliance. 2. Gratuitous promises: a. Kirksey v. Kirksey, the brother-in-law took the widow and her children in and changed his mind later. His actions were gratuitous and the promise was not enforceable in court. (the promise may have been enforced under promissory estoppel). 3. Illusory promises :§77 a. §77 Illusory and Alternative Promises 14 A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless a. Each of the alternative performances would have been consideration if it alone had been bargained for; or b. One of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration b. For example, seller enters into a contract to buy from the farmer as much of a certain product that he wants at a certain price. Quantity was not specified. This is an illusory promise. If the seller promised to buy only from this farmer, then that would be consideration. II. Is there a Basis For Promissory Estoppel? 1. If K for Services: See B Below for Test 2. If K for Sales of Goods: See Firm offer i. Promissory Estoppel/Detrimental Reliance? Exception to needing Consideration Def: Promises that lack consideration but which induce the promisor to rely on them to his detriment. This is not a claim of valid consideration just detrimental reliance.  Some courts are broadening the doctrine of promissory estoppel and are enforcing some promises that have not been detrimentally relied upon such as charitable promises (different from gratuitous promises). i. Charitable subscriptions:  For public policy purposes, because charities rarely bargain for charitable contributions; however promises to make donations can be enforced. Allegheny College v. National Chautaugua County Bank of Jamestown said that in the case where the charity promised to name the scholarship fund after the donor, there was a bilateral contract and consideration was given – although he did mention that the doctrine of promissory estoppel could be used to enforce it.  This applies only to written promises, and not oral promises.  The Test: a. Rest.2nd §90: Promissory Estoppel Test (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. Requirements/4 things: 1. Is there a Promise?: a. Was it a a Promise to make gifts?:  intra-family promises to make gifts are rarely enforceable since there rarely exists an intent to 15 contract, nor consideration – in some cases, if the promisee can demonstrate detrimental reliance, then the promise may be enforceable. b. Is it a Conditional Promise?  Are NOT reliance. See if there are issues of timing, location, or "administrative issues". Also look at relative value of the exchange. Hypo: If you come to my office, I will give you an umbrella. If I fail to give umbrella, no reliance. -No benefit to promisee. Kirsky v. Kirsky Brother in law offers place to stay to widowed sister-in-law, crt says no contract/no reliance/no consideration. 2. Is there Reasonable expectation by promisor that the promisee would rely? a. Is there Forseeability of reliance?:  The promisee’s reliance must have been reasonably foreseeable to the promisor – not just that the promisee would have relied, but that the promisee would have relied in that particular way. 3. Is there Actual Reliance?  Detrimental Reliance: Occurs when: Plaintiff has made actual expenditures on reliance of the promise; the promisee relied to his detriment; or Change in Position is also a form of reliance; or   Is this a Charitable Subscription or a marriage settlement? If so, do not need proof that the promise induced action or forbearance-reliance. §90 (2); or  Is this a situation for Equitable estoppel? : A person who makes a misrepresentation of fact regarding their right is 'equitably estopped' regarding the assertion of that right. E.g.: you are stuck with your lie. o Applies to statements of facts. Serves as a defense o Hypo: I am building a house and ask a neighbor if he has legal rights on parts of the land, he says no. Later after house is built, he says he was wrong, and wants me to destroy house. Crts. say no, he cannot under equitable estoppel. 4. Does Justice require enforcement or damages?  Should be limited as justice requires. What Justice requires should be determined by a judge. b. Use of Promissory Estoppel: Can be a sword or shield 16  Shield – plaintiff asserts a claim, defendant says there is no consideration, and plaintiff responds that even if that is so, there was reliance that acts as a substitute for consideration Sword – there is no contract, but I relied upon your promise (used as a theory of recovery—a cause of action)  III. Are there reasons for Restitution? Def.: When a benefit has been conferred on a recipient under circumstances in which it is unfair to permit him to retain it without payment, the cause of action of unjust enrichment is available to the person who gave the benefit. o The conferrer makes a claim for the remedy of restitution. o founded on the notion of unjust enrichment, and in modern law has no relationship to contract. Two Methods of Applying Restitution: 1. Is there is not a K formed, but the court will imply one? i. See A -Restitution in Absence of a Promise or 2. Is there Promissory Restitution i. See B- Promissory Restitution A. Restitution in the Absence of a Promise:  Theory: Implied-in Law (quasi contract)  For an implied-in-law contract we need knowledge and consent: it is a legal fiction that creates an obligation to prevent unjust enrichment. Test: (R. Restitution § 81) 1. Has a benefit been conferred on the defendant? Question is: If the person receives the benefit that he did not request, under what circumstances would it be unjust or unfair for that person to retain the benefit without compensating the party that provided the benefit Credit Bureau v. Pelo was liable for payment under a theory of contract implied in law, as he benefited from his hospitalization. Since he could not give consent (as he was mentally ill), and as he received services for which payment would ordinarily be made, he must give restitution.  Was there Officious interference?: An intermeddler who, in an unbargained-for-exchange gives service to someone who is not given the opportunity to decline it.  Restitution is not granted here  17 2. Does defendant have knowledge of the benefit?  If No, The defendant did not know of the Benefit, The court may allow restitution only in the following situations: (Resmt of Restit.§116) 1. He acted inofficiously and with intent to charge; 2. The things or services were necessary to prevent the other from suffering serious bodily harm or pain; 3. The person supplying them had no reason to know that the other would not consent to receiving them, if mentally competent; 4. It was impossible for the other to give consent or, because of extreme youth or mental impairment, the other’s consent would have been immaterial. a. Comment on this section is: Knowledge of dissent. There can be no restitution for services or things rendered to a person who refuses to accept the services and who is of sufficient mental capacity to understand the necessity of receiving them. 5. In an emergency situation, the restitution obligation lies with the 'reasonable value of the services received'.  Contract law does not compensate a good Samaritan. But for Doctors, etc., the law presumes payment. 3. The defendant has accepted or retained the benefit conferred  This is not a basis for enforcing promises, there is no consent, intent, consideration or even promise. It is an alternative basis for determining contractual obligation (although different from reliance, which is an alternative basis for enforcing a promise). 4. It would be inequitable/unjust for the defendant to retain the benefit without paying fair value for it.  Interfamily services are presumed to be gratuitous. Sexual relationship is not sufficient for consideration: bargains must be independent of this illicit relationship (although two people contracting are free to engage in whatever they want). B. Promissory Restitution: "Material Benefit Rule" 18 1. Def: However when a party makes a promise to pay an earlier unenforceable legal obligation (debt). Although the later promise lacks consideration, the moral obligation to pay the pre-existing unenforceable obligation (debt) is treated as sufficient to make the promise enforceable.  Generally, past consideration, something that I did for you in the past cannot be consideration for a promise now. There may however be circumstances and past consideration can be a basis for promissory restitution and moral obligation. Mills v. Wyman, MA Supreme Court 1825[father promised to pay person who took care of his dying adult son]  Generally comes into play by debts that are unenforceable due to statue of limitations. But can also be: debts of infants, bankruptcy 2. Test: "Material Benefit Rule" §86: Court might enforce a promise based on a pre-existing unenforceable obligation if: 1. The promisor has been unjustly enriched by a benefit previously received from the promisee 2. The benefit was not given as a gift 3. The promisor subsequently makes a promise in recognition of the benefit  Past debts can be: bankruptcy things barred by statue of limitations, debts of infants.  Factors to look at when assessing the Promisor's promise: o State of mind of the promisor, is it purely an emotional response? o Is there a direct relationship between the parties. o Does the promisor partially act on the promise Webb v. McGowin Alabama Ct. of Appeals 1936 man saves a coworkers life and in the processes cripples himself.  Note:  The Restatement 86: is a forward looking provision, it has not been successful in becoming a majority rule. The predominate rule is Mills, which still have a presumption of gratuitous.  If you get a fact pattern, have to find out what the rule is the jurisdiction Calculating Restitution Damages: An Equitable Remedy-Judge uses his own judgment to determine rights, obligation, intent. Two different standards: 1. The reasonable value of services provided i. How much it would cost to pay someone for the same services; or 19 2. Net enrichment i. How much was the wealth of the other person increased The court often chooses based upon how easy it is to calculate IV. Statue of Frauds (SOF) Def: Some K's will need to be reflected in a written document for the agreement to be enforceable. Any statue that requires a transaction to be in writing for legal efficacy is likely to be referred to as a "statue of frauds". The SOF is usually used a defense against K enforcement. Test: Need to Ask Three Questions 1. Does the given K fall within the Statue/ Is the K about one of the following?  Yes-> Move to #2  No--> Enforceable K 'cause it falls Outside of SOF.  P is free to prove her K by any combination of relevant evidence: (written/oral; direct/circumstantial) A. Is it Under Common Law §110? : 1. A contract that is not to be performed within one year of the making of the agreement.  The one year period does not relate to the length of performance but the period between the making of the K and the end of performance. (The time between making the K and performance) i. Hypo: I enter a K to work for a duration of 6months that starts in 9months. K is covered by the statue of frauds ii. Hypo: I make hotel reservations on July 1st 2000 for a vacation on July 4 2001. K falls within the statue.  If there is any possibility that performance could be completed before a year, the statue is held to be inapplicable. i. Hypo: K to work for someone for life, is not covered. The K could theoretically be performed within a year, if he dies within the year. ii. Hypo: Agree to work for two years or until I die whichever comes first. Not governed by the statue. 2. 3. 4. 5. A contract for the sale of interest in land contract made upon the consideration of marriage-pre nup Contract of an Executor or Admin Contract to answer for a duty for another 20 B. Is it Governed by UCC?: 1. K for the sale of goods for more than $500 §2-201 2. k for the sale of securities §8-319 3. K for the sale of personal property not otherwise covered, beyond $5K §1-206 2. Is there a Signed Memorandum? i. Yes --> K Enforceable ii. No --> Move to #3 Need the Following: 1. The memo has to be signed by the charged party-the party against whom enforcement is sought a. The writing needs to set forth most if not all of the material terms of the K. b. Signature: The signed requirement is interpreted loosely. A memo on letterhead with the defendant's name can be sufficient. Crabtree the mere name of the D and the designation of Secretary to draw up as sufficient c. Electronic writings under the E-sign act can constitute writings and signatures d. If only one party to the agreement has signature on the writing, the K is enforceable only against that person. 2. Memo has to refer to the actual K. Needs to give some of the basic and necessary terms. a. It is not necessary for the signed writing to establish a contractual relationship; the memorandum may consist of an informal writing (including an unsent letter), an offer, or a document that attempts to repudiate contractual liability §133 b. UCC - Caveat in UCC2-201(1)-appears to be more strict, it works out that it is not so much strict (1). Winternitz v. Summit Hills Joint Venture MD, 1988 man sued leasor for breach of contract. Court held that agreement barred by the Statue of Fraud-it needs to be in writing. P wanted to rely on the doctrine of part performance, but crt held that it can only be used in cases of equity, not in pure money damages cases. 3. You can Link documents, both signed and unsigned to meet this requirement.  For purposes of answering question two it is fine to have multiple documents. §132  Parole evidence (oral testimony) is admissible to link these documents together.  While the unsigned document must on its face refer to the same transaction as that set forth in the one that was signed.  The Parole evidence serves to connect the separate documents and show that there was assent by the 21 party to be charged, to the contents of the unsigned document. (must show assent) Crabtree v. Elizabeth Arden Sales. Corp Common Law Approach. Breach of contract over D's failure to adhere to payment terms in employment agreement. Court held that the three documents, read together (both signed and unsigned) constitute a memorandum of the terms of the contract  Equal Dignity Rule: Where there is a subsidiary contract to a contract that is being evaluated or comes under the statute of frauds, the subsidiary contracts must also meet the statute of frauds; must specify that a person is an agent (and there is obviously a specific realm upon which agent can act) In Crabtree case, the Comptroller must have an agreement that allows him to be sign for E.Arden. 3. Is there an Exception? For situations where a K falls within the statue and fails to comply with it. Some exceptions permit enforcement. i. Yes --> K is Enforceable ii. No--> K is Unenforceable 1. Is there reliance? §139 (not covered in the reading..) 1. (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires. 2. (2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant: a. (a) the availability and adequacy of other remedies, particularly cancellation and restitution; b. (b) the definite and substantial character of the action or forbearance in relation to the remedy sought; c. (c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence; d. (d) the reasonableness of the action or forbearance; e. (e) the extent to which the action or forbearance was foreseeable by the promisor.  Note: Even if §139 does apply, it does not mean the promise will be enforced, as its enforcement must be the ONLY way Injustice can be avoided. 4. Is their an admission by the other Party of a K? 5. Is the K about a Specialty Made Good? 22 i. ii. Goods that are specially made for the buyer and otherwise easily saleable. UCC2-201(3)  i.e. I contracted to make 1K special T-shirts. I love DeNoir.  Court would review, and reason, why else would someone undertake such an action. Only reason would be because there was an agreement. Part Performance:pg.308 Winternitz v. Summit Hills Joint Venture MD, 1988 man sued leasor for breach of contract. Court held that agreement barred by the Statue of Fraud-it needs to be in writing. P wanted to rely on the doctrine of part performance, but crt held that it can only be used in cases of equity, not in pure money damages cases. Disagreement of the Meaning of the K? Friday, November 05, 2004 1:13 PM I. Is there a Conflict Between the Parties on the Meaning of K ? A. Apply Principles of Interpretations i. Implied Terms-UCC "Gap Fillers" ii. Requirement of Good Faith B. Parol Evidence Rule A. Principles of K Interpretation: Modified Objective Approach 1. Do the Parties (Subjectively) Agree on the meaning of the K? o o Need to determine the subjective meaning of both of the parties. IF both parties (subjectively) attach the same meaning to a provision, that meaning will govern.  The mutual understanding of the parties controls, even if it is different from the interpretation that would be given by a reasonable person. § 201(1) Purpose of contract law is to protect the reasonable expectation of the parties, not the reasonable expectation of the court. 2. Do the Parties (Subjectively) Disagree on Meaning to the K?  Need to determine who's meaning controls the contract. § 201(2) Approach: . i. Does a party know or have reason to know that the other party has a different interpretation?  knowing takes priority over reason to know 23 ii. If so, the court will not use the interpretation of the party who knew or had reason to know that the other party has a different interpretation. Joyner v. Adams N.C. 1987 retail space lease, different interpretations of development. Court held that TC errored in enforcing the K under the P's meaning. Because the evidence does not answer the question of each parties knowledge of what the other party interpreted the provisions. Remands for finding on that issue. 3. Do Neither party know or have reason to know of the meaning? i. There is no contract because of the absence of mutual assent  Plaintiff has burden to prove defendant knew or should have known the meaning of the plaintiff. § 201(3) Frigaliment Importing co. v. BNS International Sales Corp. NY 1960 Court holds that the P did not carry burden to show their definition of chicken should control 4. **What do we do when there is no question that there is a K and #3 is not satisfied? When Step 3 above is not a sufficient solution. i. **key** Standards of Preference in Interpretation Restatement 203: In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable: 1. An interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred  to an interpretation which leaves a part unreasonable, unlawful, or of no effect; 2. Weights of the various terms  express terms outweighs  course of performance outweighs  course of dealing outweighs  usage of trade 3. specific terms and exact terms are given greater weight than general language; 4. separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated ii. Good Faith-Common Law-Non Merchants R 2.205 There is a duty of good faith and fair dealing in every contract.  Good faith requires honesty in fact-subjective honesty of the parties.  Neither party shall do anything which shall have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.  No party is allowed to realize gains that in making the contract he had implicitly agreed to surrender, or unfairly deny to the other party the fruits of the contract that she reasonably expected to receive. 24 iii. Also can use various interpretations maxims: pg. 358 1. Construe the language against the drafter if it contains a word or phrase which is capable of two reasonable meanings (if the parties are not sophisticated businessmen who negotiated the contract) Omnia praesumuntur contra proferentem 2. The meaning of a word in a series is affected by others in the same series; a word is affected by its immediate context. Noscitur a sociis 3. A general term joined with a specific one will be deemed to include only things that are like (of the same genus as) the specific one. Ejusdem generic 4. If one or more specific items are listed, without any more general or inclusive terms, other items although similar in kind are excluded. Expression unius exclusion alterius 5. Interpret contract as a whole 6. The principal apparent purpose of the parties is given great weight in determining the meaning to be given to manifestations of intention or to any part thereof. Purpose of the parties 7. If two provisions of a contract are inconsistent with each other and one is general enough to influence the specific situation to which the other is confined, the specific provision will be an exception to the general one. Specific provision is exception to a general one 8. Handwritten or typed provisions are given preference over printed provisions 9. The interpretation or construction is preferred which favors the public interest. Public interest preferred iv. Contract for the Sale of Goods? UCC Gap Fillers & Good Faith Requirement Used for Implied Terms that are not in the agreement Only use if K is for the sale of goods, otherwise use test above Theory:  Gap Fillers are: Implied-in-Law terms that are not in the K, but the court holds should be implied by law and made a part of the agreement. Terms that the parties would have agreed if they had bargained about the issue.  Implied-in-Fact: Contract terms that the parties agreed to either by tacit understanding or by the assumption that it existed.  Rationale for "Gap Fillers": Usually courts like for K to survive and be binding, so they imply terms for the following reasons: 25    Parties Intentions Fairness Economic Efficiency  Otherwise the cost of transaction, doing business would dramatically increase because w/would need for account for all possibilities.  UCC makes it easier to do business by filling in the gaps.  Pertinent UCC Gap Fillers:  Warranties-Unless the agreement expresses otherwise, 2.312, 2.314 and 2.315 imply certain warranties that a seller makes under defined circumstances regarding title to and quality of the goods. Price-If the parties do not specify a price 2.305 infers that they agreed to a reasonable price unless the apparent intent of the agreement is otherwise. Payment- Terms-If not expressed 2.307 and 2.310 assume C.OD.. Delivery-Requires that goods be delivered in a single lot at the seller's place of business within a reasonable time. 2.307, 2.308, 2.309 Termination: Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable 2.309(3)     Termination at will clause like an illusory contract. However:  A termination clause only gives rise to an illusory contract IF:  the termination clause is interpreted to mean a party has unfettered (unrestricted) discretion to terminate the contract at any time for any reason.  Almost any restriction of the right to cancel will enable the contract to be upheld. For example, if it specify: i. Unsatisfactory performance ii. Good cause iii. A specific event occurring iv. A specific period of notice v. Some courts say just a requirement of some notice  Under UCC, even if there is just a bare cancellation or termination clause (may cancel at any time without notice), the court will read it as if the termination clause requires reasonable notice. Court will ignore the explicit term (majority approach) 26     Implied Good Faith: For merchants you need Honesty in fact and the observance of reasonable commercial standards of fair dealing. (unlike common law it requires something more of also being reasonable) o Subjective Honesty o Objective Reasonableness UCC (1-203): every contract or duty within its scope imposes an obligation of good faith in its performance or enforcement Neither party shall do anything which shall have the effect of destroying or injuring the right of the other party to receive the fruits of the contract No party is allowed to realize gains that in making the contract he had implicitly agreed to surrender, or unfairly deny to the other party the fruits of the contract that she reasonably expected to receive. v.  Implied Terms in Exclusive Dealings Distribution & Exclusive Agreements: Termination: A distribution contract of indefinite duration is still subject to termination atwill upon reasonable notice  What could constitute reasonable notice? i. accommodate distributor's need to sell off remaining inventory ii. whether distributor still has substantial unrecouped investments made in reliance upon the agreement Liebel v. Raynor Manufacturing KY 1978 Reasonable Efforts: UCC 2-306(2)-Captures the obligation to make reasonable efforts in Exclusive Agency Deals:  Implied in law promise to use best efforts to promote the sale of the good  Making best efforts has a good faith dimension to make best efforts/reasonable efforts.  Has a hierarchy of good faith obligations:  For Merchants-Good faith means more than just subjective honesty. Also an objective or common sense notion of good faith.  Parties must observe reasonable commercial standards of fair dealing. Under the UCC, obligations.  The category for illusory promises becomes very narrow. If we find that there are good reasons for the parties to enter into a K.  Area will this will arise, Real Estate making a good faith effort for a mortgage for which a K is contingent upon. 27 Parole Evidence Rule Sunday, November 14, 2004 3:32 PM B. Parole Evidence Rule §213 I. Definition and Purpose PER: i. What is Parole Evidence?: i. All extrinsic evidence of alleged terms not incorporated in the written document, but claimed by one of the parties to have been agreed to, either in writing or orally, at some time before its execution.  Can be oral evidence or written evidence ii. Theory is that a final contract must have been intended to supersede earlier negotiations and communications to the extent that its terms depart from or do not include what was formerly agreed.  As a result evidence of any earlier agreement is irrelevant and misleading and should be kept from the factfinder. i. Def Parole Evidence Rule:  Parol Evidence can never be used to contradict an agreement. (complete or partial).   For a Completely Integrated agreement, parol evidence may not be admitted to supplement or explain the agreement. For a partially integrated agreement parol evidence can be admitted to: supplement or explain those parts of it that have not been finally expressed.  The evidence must be consistent with the agreement. ii. When     PER applies: All evidence pertaining to the fact being asserted is excluded. Even written evidence that could establish a contested fact. The issue is not about how trustworthy the evidence is, but whether it contradicts the agreed upon writing. The more detail the agreement is the more likely the parol evidence rule applies  The writing does not have to be signed. iii. Who Asserts the PER? 28 The person asserting the parol evidence rule thinks the agreement language is crystal clear and that everything else is contradictory. i. Range of Parol Evidence Rule:  Agreements Before K Execution:  Oral- Subject to Rule  Written-Subject to Rule  Agreements After K Execution:  Oral- Not subject to rule  Written-Not subject to rule  Considered Modifications to the original K Agreements at the time of K Execution:  Oral-Subject to the rule  Written-Likely Not to be subject to the rule  ----------II. Who Determines the Question of Integration: i. ii. The judge conducts the initial inquiry into the admissibility of parole evidence. If the evidence is admitted the factfinder (jury/judge) evaluates its credibility. There are two approaches to determining integration, the Modern and Classical View: Two Approaches: 1. Williston-Classical Approach:  Takes Four Corner's approach to looking at the contract. The ambiguity must be patent, and on its face to be deemed ambiguous.  There is X and there is not X. on it's face the term is ambiguous. Thompson v. Libby MN SC 1885[classic interpretation of the  parol evidence rule, court says that the agreement is fully integrated, because of this even supplemental information cannot be added. 1. Modern-Corbin Individualized Approach: used today  The modern court is likely to go beyond the face value of the writing, and review extrinsic evidence that may be helpful in revealing that an apparently integrated writing was in fact not intended as such or contains an ambiguity that is not otherwise obvious. Modern view will consider a latent ambiguity, something that on its face is not ambiguous. ie must be done in ten days, but maybe someone meant 10 business days. On the face it is not ambiguity.  Judge looks at the extrinsic evidence, if he concludes that: in light of this evidence the contract is not 29 ambiguous then he will apply the PER and it can't go to jury.  If the K is ambiguous when considering the extrinsic evidence then judge allows the info in and the jury determines Taylor v. State Farm Mutual Automobile Ariz (1993) [vague language in a insurance release was considered not under the parol evidence rule. release had ambiguous language. affirmed trial court, reversed appeal court] Deals w/the use of extrinsic evidence for interpretation. Parties agree that there is full & complete integration. Question instead is what does the agreement mean. What does it provide for. Test/PER Analysis: Is the agreement integrated? Means is it a final and complete document III. 1. If Yes --> PER Applies 2. If No ---> Is the agreement partially integrated? 3. If No, The agreement is not integrated  Just negotiations and PER does not apply. Question 1: Is the agreement Completely Integrated? Complete Integration-Writing that is intended to be a final and exclusive expression of the agreement. i. ii. Broad and surrounding circumstances Four Corners Rule:  On the face of this agreement does it look to be the final intended agreement. (Williston approach only looks at this to determine if the K is completely integrated) Detail and complexity of the written document  Is it handwritten or not handwritten  was the document specially prepared or was it a form agreement Relevant sophistication of the parties  The less sophisticated the parties, the more likely the court will let additional elements apply. Representation by counsel Formality of the setting  to what extent does the transaction look like a negotiation of a K  the more formal the setting, the more likely the court will state that it is a full integrated agreement iii. iv. v. vi. 30 vii. Presence of Merger Clause- Inclusion of Merger clause, the court will tend to find that the writing intended to be a final and complete, but it is not dispositive.  Modern approach-, even the presence of a merger clause is not dispositive. Court could include that it is only a partial integration (probably would not conclude that there is not a K.)  Was there extrinsic evidence to support the conclusion that the release language was reasonably susceptible to Taylor's interpretation. IF the judge concludes that the evidence is reasonably susceptible and then it goes to the jury. Question 2: Is the agreement Partially Integrated? Partial Integration: Writing that intended to be a final but not complete expression because it deals with some but not all aspects of the transaction between the parties.  The contract does not exclude the possibilities that additional terms can be a part of the agreement. Parol evidence rule does not apply. Exceptions to the Parol Evidence Rule: Extrinsic Element can be used...(Arguments that someone argues to try and bring in the evidence) 1. Collateral (related to the subject matter but not part of the primary agreement)  Agreements supported by separate consideration, one that might reasonably and logically be omitted may nonetheless come in.  Sometimes court will say that the collateral agreement can be supported by the same consideration.  what they really mean is that they think the original K was a partial agreement. Most often used when there is a merger clause, and court uncomfortable stating a partial integration. Court will state ok, merger clause so full integration. And court will say the consideration of original K can support the collateral agreement.  2. Notion of Reformation: where there is clear and convincing evidence that what was written in the contract is not what the parties agreed to. In that situation the party can seek the remedy of reformation of the K to reflect the actual agreement.  Need clear and convincing evidence. -very high standard. IF you can meet that standard, than the PER cannot apply.  Corrects mistakes when there is clear and convincing evidence. When there is an omission of an agreed term, inclusion of a non-agreed term. or incorrect term in writing a typographical error. The legal claim is not to allow Parole Evidence, but instead saying this agreement is a Mistake. (see Mistake rule)  3. Claim that there is not an agreement or an invalid agreement: 31 4. To help interpret an agreement-see interpretation outline 5. To show an oral condition precedent: A notion that the execution of this written agreement was dependent upon some condition occurring. i. (ie If I can get the loan, if I can sell my house, if I get this job) 6. Agreements After K Execution; both oral and written i. Subsequent Agreements- are they always free standing agreements?. (needs to have consideration?) both oral and written. Difficult to prove oral. 7. Evidence offered to show fraud, duress, undue influence, incapacity, mistake or illegality Patent ambiguity: -w/in the agreement there is X and there is not X. On it's face the term is ambiguous. Latent ambiguity ie must be done in ten days, but maybe someone meant 10 business days. On the face it is not ambiguous. Defenses to K Enforcement Sunday, November 14, 2004 6:02 PM I. Defenses to K Enforcemant A. Status: i. Minority ii. Incapacity iii. Intoxication B. Behavioral : i. Duress ii. Undue Influence iii. Misrepresentation iv. Non-Disclosure C. Substantive: i. Unconsciounabilty ii. Public Policy Defenses Overview: Ask Three Questions: 1. Status: Question regarding the status of one of the bargaining parties. It may be that one of the bargaining parties is not sufficiently able to enter into 32 K's and make binding promises. In certain circumstances, we allow that party to escape the K. 2. Behavior: Worry is that one of the bargaining parties may have engaged in certain behavior in exacting the bargain, or getting the other party to agree; such that we are unwilling to enforce the promise. 3. Substance of the Bargain: May be that inequity in consideration may make a K unenforceable. When there is gross difference in the value exchanged; doesn't prevent consideration, but may prevent the K from being enforced.  Each of these defenses are intertwinable you can look to a combination of these as a defense to enforcing a Contract. A. Status Defenses i. Minority a. Want to protect the party that lacks capacity against their inability to understand the consequences of their actions.  Also want to protect the legitimate expectation of the party on the other side.  Minority Rule: Until a person reaches the age of majority, any contract entered into by the minor is voidable at the option of the minor. Rest. 2nd Sect. 14  Voidable-Means that it is not automatically void, it is voidable at the election of the minor. But if they chose not to, they don't have to.  After the minor enters the age of majority they can affirm the K.  In some jurisdictions, if a minor fails to disaffirm the K it is the same of ratification or affirming the agreement.  In disaffirming the K, the minor can only give back what she gives back, even if a bought car is totaled.  Party entering into a K w/a minor is  Usually in areas where the K is about services or consumable goods  Emancipation Statues-allows a minor to petition a court to release them from their minority status. b. Why do we let Minors have option for voidable contracts?  Don't have the capacity to understand the K  Paternalistic notion that we want to protect the young  However, there are minors who are sufficiently mature and don't need this protection. Then you get this fact intensive inquiry about level of maturity-not an efficient use of judicial resources. Instead we go with the brightline rule.  Another reason for brightline rule, is that minorities may be more susceptible to duress and undue influence. c. Restitution Exceptions: 1. A K for necessaries. In this circumstance the minor is still liable in restitution for any benefit received that can't be returned. (food, 33 shelter, clothing) Anything basic and fundamental to survival. (say: Obligation of Restitutions for Necessities) i. Liable for restitution of the fair market value of the food. Most of the time it is the price actually paid. ii. unless the minor is taken advantage of iii. Trend is to extend what is considered a necessity (broader recognition) 2. Where the minor has misrepresented their age. Creating a reasonable belief that they are 18 or older. i. Minor can still void the K; but she will be liable in tort for fraud ii. Tort of fraud doesn't have a minority defense ii. Mental Incapacity: Rest. Section15   Person with mental incapacity can void any K entered into during the time he was incapacitated. Does not apply to ignorance or stupidity; this is not alone sufficient to make the argument. Gen. Principle is that you don't have to be very smart to enter into a K. Mental Illness or defect is Necessary to make the showing but not sufficient You need to meet one of the two tests: Rstmt 15 1. Cognizant Test 15(a) i. When the person is unable to understand in a reasonable manner the nature and consequences of the transaction. Guardian is able to void the K 2. Volitional Test 15(b) i. Do you have the ability to control your actions in a reasonable way.  Understands consequences of the actions ie. signing paper he is putting money aside from pension. But, he is unable to act in a reasonable manner in relation to the transaction. (he may believe that he has to sign up else the CIA will execute him). Person cannot control his actions in a reasonable manner. 15(b) ii. iii. The other party has to know about the person's impairment. 15(2) However court can uphold if the K is on fair terms, if the other party has no actual knowledge of the impairment, and if the other party has relied on the K or circumstances have changed such that avoidance would work a great hardship. 15(2) When the other party didn't know about the impairment, it has access to full restitution for whatever benefits have been destroyed.  iv. iii. Intoxication: 34 Rstmt. Sect. 16.  Same test as above for mental defect. both a cognizant and volitional test. Most courts however, only apply 16(a) (Cognizant) because 16(b) (Volitional) is too loose. If your intoxication rendered you such that you didn't know what you were doing, you can render the K void. And it only applies if the other party has reason to know of the impairment. Much greater protection of the other party. Very similar to the Minority section, person will have to make restitution; even however for goods that have been loss.    B. Behavioral Defenses i. Duress: Def: The use of force or threats to make someone perform an action or request. Scope expanded significantly over the years. From physical threat duress to duress of goods then to principle of economic duress. Test: Duress Elements: 1. Improper or Wrongful Threat i. Doesn't have to be an illegal act ii. Bad-Faith behavior can be sufficient iii. Physical Threat iv. A threat not to perform under a K, if it is done in bad faith. v. A vindictive threat; intended to hurt the other party; w/o any benefit to the threatening party vi. Threat of criminal prosecution (use threat of reporting crime) 2. Has to induce the making of the K (causation) i. General Rule: The lack of a reasonable alternative must have arisen from the misconduct of the defendant (and not outside factors). The defendant must have taken actions that substantially caused the duress. ii. Standards: 1. Defendant completely caused the economic distress (a few states) 2. Defendant's actions must substantially cause the economic duress (most states; the restatement standard)  Restatement 492(b): any wrongful threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if 35 the threat was intended or should reasonably have been expected to operate as an inducement. 3. Defendant's actions need not cause the situation, but the defendant knew of the economic situation and took advantage of it (a few states) 3. Threat leaves the victim with no reasonable alternative i. MODERN TEST is the --NO REASONABLE ALTERNATIVE TEST ii. When the he legal remedies are inadequate; ie a suit for breach will not be a reasonable alternative because the co. may go into bankruptcy in the interim.  Need to be an irreperable harm. money isn't sufficient to fix the problem. Generally the same standard that comes up in equitable relief. iii. Effect on K:  The contract is voidable at the option of the party acting under duress unless the party has ratified it or the party has waited too long. i. Voidable if made under physical threat (R 174) ii. See R176: a threat is wrongful or improper when it is a threat to commit a crime or tort and threats of criminal prosecution  The party that acted under duress may receive restitution, but must also give restitution. – Putting both parties back into the position where they were previously. The Restatements:  174: Duress by Physical Compulsion Prevents a contract  175: When duress by threat makes a contract voidable  176: when a threat is improper  ii. Undue Influence: Def: High (excessive pressure)-almost coercion that works on a mental, moral, or emotional weakness that makes the person susceptible to pressure. Persuasion which tends to be coercive in nature, and that which overcomes the will w/o convincing the judgment.  Pressure that takes advantage of someone's weaknesses. [reason why you might want to make duress claim instead of undue influence; might be hard to establish] Test: Elements of Undue Influence: i. Undue susceptibility to pressure ii. Excessive strength of bargaining party (excessive pressure) 36 Difference between legitimate persuasion and excessive pressure rests largely on the manner in which the party goes about their business. (Rstmt. 177(1))  Unusual or inappropriate time  Transaction at an unusual place  Insistence that this must happen now  Extreme emphasis on the consequences of delay  Use of multiple persuaders by the dominant side against a single subservient party  Absence of third party advisers  Statement there isn't time to consult an attorney or financial advisers iii. Things that    Does not require bad faith – is not a wrongful or improper threat can create undue influence, but are not necessary to do so Confidential relationship between the parties A misrepresentation by one of the parties If there is bad faith iii. Misrepresentation Theory: An assertion that is inconsistent with the Facts Test:Can avoid a contract for misrepresentation by showing three things: 1. Fraud in the inducement (R §162): 99% of cases. Fraudulently misrepresented something that was relative to the transaction. You said something fraudulently that led me to enter into the agreement. (Can be making statements for a person to sign a waiver) Test: If the misrepresenting party intends her assertion to induce another party to enter into an agreement and she either: i. ii. iii. knows or believes the assertion is not true lacks confidence in the truth or assertion but presents it as fact says or implies there is a basis for the assertion, such as a personal knowledge or investigation when in fact the basis does not exist. A voidable K  2. Fraud in the factum (R §163): Test: a. A party misrepresented what the K is about. or what the consequences of the agreement is. b. Thusly, there is no agreement, because the fraud was to the essence of the agreement  a void K 37 3. Material misrepresentation §162(2) Test: i. A misrepresentation is material if it If it would likely induce a reasonable person to agree. An objective standard. ii.  OR, If the maker knows that it would be likely to induce the recipient to do so A subjective standard. It is not necessary to show the maker of the statement knows it is false in misrepresentation. R 164(1)  reliance upon the misrepresentation to enter into the contract  that reliance was justified Voidable K   A statement of opinion may be actionable if the one giving the opinion:(§169)    stands in a relationship of trust or confidence to the recipient (a fiduciary relationship) Is an expert on matters covered by the opinion Renders the opinion to one who, because of age or other factors, is peculiarly susceptible to misrepresentation iv. Non-Disclosure (R.161) Theory: General rule is that a party does not have an obligation to disclose facts concerning the subject matter of a contract. There is only a requirement to disclose where a failure to speak constitutes a misrepresentation or fraud and induces or causes a person to enter into an agreement. Example: (a) Say x. Learn that x is false. Have an obligation to correct what has become a misstatement. Test: A non-disclosure is actionable if: a. In situations where unless a person discloses information, a previous made statement becomes untrue. b. If the fact goes to the basic assumption of the K and not disclosing the information results in bad faith. Can even be a threat to bring a legal action if it is bad faith or if the effectiveness of the threat is significantly increased by prior unfair dealing by the party making the threat. i. if it is bad faith both (dishonest) and (not reasonable) c. Where a party knows that disclosure of the fact would correct a mistake of the other party as to the contents of a writing embodying the agreement. d. Relationship of trust between the parties: dr., account, mother, priest. If you would think that the person has your best interest at heart. i. Not consistent w/reasonable standards of fair dealing; 38  Where there can be liability for innocent misrepresentation where it affects a material term, there is generally not liability for innocent nondisclosure C. Substantive Defenses i. Unconsciounabilty Theory: The defense of unconscionable really only comes into play when someone can show both a status and behavior defense. They can almost market them, but they don' t have one element. Unconscionable agreement: an agreement that no promisor with any sense and not under a delusion, would make, and that no honest and fair promisee would accept Test: R.208 UCC 2.302  Unconsciounabilty: must show both 1. [substantive]: deals with the fairness of the terms of the resulting bargain.  Contract terms that are unreasonably favorable to the other party.  An intensely fact specific analysis of what is necessary and what is not necessary. 2. [procedural]: the context of the bargain that has been struck:  Absence of a meaningful choice by one party or some defect in the bargaining process.  ii. Determined as of the time contract was made Public Policy Theory: ○ Violates Social Norm- A convention or norm of a given society ○ Protection of certain parties ○ Contrary to objectives of other laws Justification for Non-Performance Monday, November 15, 2004 11:37 AM II. Justification for Non-performance: A. Mistake B. Changed Circumstances i. Impossibility 39 ii. iii. Frustration of Purpose Impractibility C. Modification A. Mistake Theory: Should a party be able to escape a contractual obligation merely because she later regrets the deal—regarding it as a mistake? Based on the erroneous belief of one or both of the parties must relate to a fact in existence at the time the contract is executed.  The error causes one or both parties to manifest assent that would not have been given had the true facts been known. Mistake in written expression: When the mutual mistake is the failure of the written contract to accurately state the actual agreement, reformation is the normal remedy— evidence of the mistake must be clear and convincing. Have the court correct the writing so that it accurately reflects what was agreed. Equitable relief: Normal relief is rescission plus restitution—since this is an 'equitable remedy', the courts can be creative in making a remedy to fit the mistake. Both parties must restore any benefit resulting from performance that was rendered prior to the termination. Court could assert reliance damages, to restore the non-mistaken party to he status quo. a. Mutual Mistake-Defined as a belief that is not in accord with the Facts. If test is met you have a voidable contract. Test: R.152 A mistake of both parties makes a K voidable If: 1. There is a mistaken belief of fact (not judgment) that the parties shared. The error must be made at the time of contracting; and must relate to a state of affairs existing at the time the contract was made rather than one predicted to occur in the future. 2. Relating to a basic assumption of the parties upon which the contract is made. It must be so fundamental to the shared intent and purpose of both parties that it is reasonable to conclude that they would not have made the K at all or on the present terms had they known the truth. 3. Which materially affects the agreed performance of the parties. This calls for an assessment of the mistake's impact on the balance of the exchange to see if it substantially deprived the adversely affected party of the value of the exchange. 4. The party attempting to avoid the contract must not have borne the risk of the mistake.  Bearing the Risk of the Mistake R.154 A party bears the risk of the mistake if: 40 a. The risk is allocated to him by the agreement of the parties ( "as is clause") b. He realizes that he doesn't know everything but goes forward anyways. Failure to investigate the Risks c. Risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. b. Unilateral Mistake Def: Where one party knows the true facts and the other does not. And also where both parties may be unaware of the truth yet the facts at issue affects the decision of only of the parties and is of no interest and relevance to the other. Also refers to a mechanical error of computation. Generally a Unilateral Mistake doesn't help you, but there are some exceptions. Test: R. 153 Very High Bar To Meet Have to show all the requirements of a mutual mistake And: a. The effect of the mistake must be such that enforcement of the K is unconscionable-hugely burdensome, given the mistake that you made. (would avoidance impose an unfair hardship on the non-mistaken party) or b. That the other party had reason to know of the mistake or his fault caused the mistake. Must have no substantial reliance by the other party. (The status quo argument)  Mistake of fact vs. mistake of judgment o Historically, cases could only be rescinded for mistakes of fact (e.g. transcribing errors) and not mistakes of judgment o More recently, the line between the two is blurred: focus on strength of proof that a genuine and identifiable mistake was made B. Changed Circumstances Theory: In these cases there is no mistake at the time the K is entered into. But after the K is entered into something happens, that undermines the K. a. Impossibility: Def: When a person or thing necessary for the performance of the agreement dies or is incapacitated, is destroyed or damaged, the duty of performance is excused.  An objective impossibility-Meaning that no one could do it. Not a subjective one, I cannot do it. Test: 41  Impossibility: Performance is literally (objectively) impossible When a person or thing 'necessary for performance' of the agreement dies or is incapacitated, is destroyed or damaged, the duty of performance is excused o See Restatement §§ 262, 263, 264 o See UCC §2-613 o Can include death, a building burning down, government action o "No one" could do it b. Frustration of Purpose: The exchanged called for lost all value to a party because of a supervening change in extrinsic circumstances.  ie. Rent a room to see the king's coronation, but the king is sick so no coronation, and the room thereby cannot be used for its intended purpose  Doctrine is rarely successfully used  Restatement § 265, 266  Usually the argument is that the contract is less beneficial Equitable Doctrine: The doctrine's purpose, as an equitable doctrine, is to fairly apportion risks between the parties in light of unforeseen circumstances, with the risk apportioned as the parties would have if the necessity had occurred to them Test: R. 265  A party's duties to render performance are discharged where: a. A contract is made; and b. A party's principal purpose is substantially frustrated by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made; and i. ii. Principal purpose means the object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense Substantial frustration means that frustration must be so severe that it is not fairly to be regarded as within the risks he assumed under the contract. It is not enough for the transaction to be less profitable or even that the party will sustain a loss. Basic assumption criteria:  the continuation of existing market conditions and of the financial situation of one of the parties do not usually constitute a basic assumption  a severe shortage of raw materials or supplies due to war, etc., may bring the case within the rule iii. c. The frustration was not the fault of the party; and d. No implicit or explicit assumption of the risk. The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances 42 c. Impractability: If performance was sufficiently different from what the parties had both contemplated at the time of contracting, to constitute being impractable. Not impossible but much more costly and difficult.  ie. A contract to build a bridge out of gravel from one lot. It turns out the lot has hidden rocks that causes the price to triple 9-fold.  Usually the argument is that the K is more costly Test: A duty to render performance is discharged when: i. ii. iii. The contract is made; and Performance is made impracticable without his fault; and Performance is made impracticable by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made; and The language or circumstances do not indicate to the contrary The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances iv. v. Basic assumption criteria: a. The continuation of existing market conditions and of the financial situation of one of the parties do not usually constitute a basic assumption b. A severe shortage of raw materials or supplies due to war, etc., may bring the case within the rule d. Notes on Changed Circumstances Arguments: i. Impracticality and frustration doctrines are very similar. Both require to show  Substantial reduction of the value of the contract  Because of the occurrence of an event, the nonoccurrence of which was a basic assumption of the contract  Without the party's fault  The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances Granting relief based upon increased costs rarely occurs if resulting from change in market conditions Natural disaster or war is a basis of relief, but it too is very rarely granted In instances of terrorism, relief has occasionally been granted, but the perception of danger must be 'objectively reasonable' Death or incapacity of particular person necessary for performance will increase the likelihood of an excuse being accepted; but not if such an eventuality is mentioned in the contract ii. iii. iv. v. 43 vi. vii. viii. ix. x. Some courts require the non-occurrence to not be foreseeable; but most courts don't care Some folks use 'economic analysis' to shift burden to the superior risk bearer These defenses (according to the Restatement) should be decided at law by the court Normal relief is rescission plus restitution; courts will occasionally revise the contract itself The courts are more willing to grant relief when the event upon which the claim rests is some form of supervening governmental action C. Modification Theory: Issues of Contractual Modification lie in both the Consideration Doctrine and Duress Doctrine. Consideration- Requires a contractual Obligation to be supported by new consideration. Duress- A modification should be upheld if it was fairly bargained for, but it should be avoided if a party's agreement to provide increased compensation was induced by the other's party improper threat. (threat to breach etc..)  Pre-Existing Duty Rule: (makes a contract unenforceable) Where there is a pre-existing duty, any additional promise made upon that duty without consideration is not binding. o Serves as a guard against coercive modifications of contracts. o Courts want to police behavior because they want to encourage contract formation. If there is a pre-existing duty, ―A‖ cannot extract more from ―B‖ based on a duty ―A‖ already has. o If there is a new consideration- then there is no pre-exiting duty. However there is still a concern of duress.  Exceptions to the Pre-Existing Duty Rule: 1. Unforeseen Circumstances Restmt 89 i. No way to now upfront to know. A modification based upon the unforeseen circumstance will be upheld. ii. ex: once worker get to site they realize the work requires more labor and would be more expensive to perform). 2. Reliance Modification (in 89, but apply 90) i. If party relied on the promisor's statement to modify the contract ii. Courts are restrained from allowing this. iii. This is a hard argument to make 3. Mutual Release i. Courts police it very strictly, so very difficult to get courts to enforce  Notes on Modifications: 44 No-Oral Modification Clause: Very standard in contracts. Prevents all oral modifications from being binding. A party can be estopped from using NOM clause when they initiated the modification and they performed under the modification. Statue of Fraud: Modifications must meet the statue of frauds rule, however many states have exceptions to the statue to prevent people from manipulating the rule. No Waiver Clause: Creates a private statue of frauds, parties create their own version, that requires xyz to be in writing even if the courts say no. Courts will apply the same analysis as the state SOF , meaning there could be reliance. Modification through settlement: Unliquidated Damages: If claim is for unliquidated damages (it does not have a specific dollar value), the accepting and cashing of a check is a settlement and will not be disturbed even if write on check "depositing under protest". o Payment will be considered final, debt paid. Liquidated Damages: If claim is liquidated (a set dollar amount) and get check for less than is owed, and write depositing under protest, it depends on the state whether that will be considered full settlement. Majority rule is you have released all claims. Could vary state to sate. UCC: There is no pre-existing duty rule under the UCC. Eliminated under 2-209, and instead look to see if modification was bargained for. Agreements (under 2-209) are policed by the generalized requirement of good faith. Look to see: a. Was there a dispute as to the obligation? b. Look at course of dealing in the past, and the circumstances under which the change was made c. Whether there has been delivery and acceptance under the new terms, and if so, for how long d. Did they have a good reason to make the modification Third-Party Beneficiaries Monday, November 22, 2004 9:31 PM III. Third-Party Beneficiaries Def: A contract may create rights in a third party when the parties to the contract expressly or impliedly agree, at the tie of making it, that the performance of one of them will be rendered to or for the benefit of a person who is not a party to the contract. And that non-party will have the right to enforce that commitment. 45    Gives the third-party an independent cause of action to enforce the promise If there are additional rights created in the contract (e.g. a right to arbitration), the third party is bound by those rights as well (third party is essentially standing in for promisee) If given standing to sue, the third-party would still need to show offer/acceptance, mutual assent, consideration and other K formation requirements. Test: Two types of beneficiaries R.302 1. Intended beneficiary: A party is an intended beneficiary if recognition of the right is appropriate to effectuate the intention of the parties. Needs to be one of the two: i. Creditor Beneficiary: Performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or  A lends money to B, B lends that money to C, A can sue C Donee Beneficiary: Where the promisee intended to make a gift of the benefit to the beneficiary.  Women on deathbed makes husband promise to give money to niece. He makes that promise, but does not perform. Niece can sue Husband for Wife's promise.  Does not need to be intended as a gift. Can be for other reasons. ii. Intent: Central to this is the intent of the parties to the third party beneficiary Intent is determined by the: a. Promisee's intent (302(1)(b)) a. Must be apparent from the language of the contract or its circumstances. (the party channeling benefit to the third-party that would otherwise be due to him.) b. Promisee and promisor's intent (302(1)) a. The promisee must have communicated this intent to the promisor sufficiently for the promisor to have reasonably understood that she was assenting to it. (because she incurs liability to another party) c. Promisee's intent and promisor knew or had reason to know of promisee's intent d. The court may choose depending on the nature of the contract as to how much intent they require (as move from creditor to donee); depends upon the jurisdiction iv. Normally, if the parties intend to confer the status of intended beneficiary on someone, that person is likely to be specifically named iii. 46 or identified in the contract. If this is not so, the strong inference is that the benefit is merely incidental.  However this is on conclusive. Intent to benefit is a matter of interpretation. 2. Incidental beneficiary: May be deriving some benefit from the contract, but they don't meet the requirements to be 'intended' and are unable to sue on the contract (are not formally a third party beneficiary) Modification of Contract and of 3rd Party Rights: What if A & B who entered into a contract want to modify the contract? R.311 They generally can modify the contract without the consent of the third party; however at some point after the contract is made, the benefit vests in the beneficiary-it becomes irrevocably settled and it cannot be changed or withdrawn by the contracting parties. The benefit vest in the third-party:  When the third party manifests assent (agreement) to the contract at the request of one of the parties.  The party sues on the contract  The party justifiably relies on the contract  If the K contract stipulates that consent is necessary for modification Defenses of Promisor Against a Third-Party Beneficiary: i. All the standard defenses: duress, mutual mistake, lack of assent, etc. ii. Also defenses of fraud, duress and mistake Third Party Beneficiaries and the Government  Can a beneficiary of a government contract have standing to sue?  Raises a fundamental question of why a third party matters.  Usually there is a BFE, because the promisee is getting something even if miniscule. And the third party gets the major benefit.  more difficult to establish  Usually not a Third-Party Beneficiary R. 313- but it varies case-by-case and fact specific.  On an exam, you need to make the argument and claims that support your view and there is no brightline rule. Government has agencies or divisions, responsible for policing contracts  A reason for not allowing third party beneficiary standing  but it is impossible because of the large # of beneficiaries and it can't possibly police them all. Look at the actions of the gov when trying to assess. Is the gov. making a direct payment-third party beneficiary is more important. (check facts) Gov K's an important aspect of third party beneficiaries. Factors court considered o Whether the purpose/benefit of the provision goes to the third party. (in housing case it went to tenants.)     47 o o o Intent of the legislation – (to make affordable housing available) The benefit must go to specific people (and not people generally) Who is hurt (whether the people intended to benefit were hurt or the government paid for it) Whether there is an administrative mechanism to deal with this issue Martinez had a provision providing for limited liability; in this case there was no provision for limited liability The agreement itself manifests an intent to make them direct as opposed to incidental beneficiaries In Martinez, plaintiffs were seeking compensatory damages (which are relatively open ended) – in this case tenants are suing for restitution (which is clear and finite liability) o o o o Assignment & Delegation Monday, November 22, 2004 11:40 PM A. Assignment is an issue of rights under a contract   In a commercial economy that is driven by credit, it is essential that a party be able to assign their contract right In order for people to get credit for subsequent transaction, people can say we assign those benefits from the subsequent transactions to the bank in return for receipt of credit. Restatement 317: Assignment under the rights of a contract is allowed. Except:    When the assignment of one's rights under a contract violates some statute or public policy Where assignment of one's rights has a material adverse affect on the other party Where there is a valid preclusion of an assignment under the contract i. these preclusions are assessed very narrowly. Means that in some circumstances, even if the K states you can't u still may be able to Eliminates the obligations of the original party  B. Delegation is about delegating duties under a contract 48  Because of the greater potential for harming the interests of the party, courts are much more stringent in enforcing than under assignment Restatement 318: largely the ability to delegate duties depends on the extent to which the contract was directed to one individual  There is a big distinction between a contract for payment versus asking Ahdieh to sign at a wedding  A delegation does not eliminate the obligations of the original party until that duty is fulfilled (actual performance)  Exception: Novation: Where the promisee clearly releases promisor from promise (it is now owed by delegate)  Generally, if contract allows for delegation/assignment it is allowed, if contract forbids it, it is forbidden Breach of Contract Tuesday, November 23, 2004 5:41 PM I. Determing Breach of Contract A. Material Breach or Substantial Performance? Def:  A breach is material if the failure or deficiency in performance is so central to the contract that it impairs the value and undermines the promisee's reasonable expectations under the contract? Whether there is a material breach or substantial performance lets the the non-breaching party know if their performance is excused. A breach doesn't have to be intentional, sufficient that the party has just not performed. Very fact intensive exercise, no hard and fast rules    How to determine if MB or SP:R.241 i. The extent to which the breaching party has already performed 49  A breach at the outset is most likely to be material  Test for substantial performance: Whether the performance has been rendered meets the essential purposes of the contract. i. Perfection is not required, unless the K specially mentions that in an express condition.  Performance must be expressly conditional upon compliance with those conditions. "Performance requires, and will not be complete unless etc..." ii. i.e. If in Jacobs the purpose of the house was to showcase reading pipe, then maybe the pipe could have been an essential purpose. ii. The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing (negligent or willful behavior) The extent of uncertainty that the breaching party will perform the remainder of the contract.  Taking account of all the circumstances including any reasonable assurance (that is, the likelihood of full performance: will he finish the contract?) The extent to which the non-breaching party will obtain or has obtained the benefit he bargained for. The extent to which the non-breaching party can be adequately compensated for the defective or incomplete performance, The degree of hardship imposed on the breaching party by holding the breach material and terminating all his contractual rights Plus: look at the purpose of the contract (to build a house? To lay pipe? iii. iv. v. vi. vii. B. If it is a MB, Is the Breach Total or Partial?  A breach may still be immaterial even if there is no specific performance, why you have to ask the two questions below i. Total Breach?:  A material breach that is not cured after a reasonable period of time so that the other party no longer has to perform and can sue for damages. Can sue for present damage and future damage. Partial Breach?:  Allows the other party to suspend performance while waiting for the breach to be cured;  If the other party cures it (they make performance), the nonbreaching party has to perform and can only sue for the costs of the delay ii. 50  How to determine if a Breach is Total or Partial, thus allowing the nonbreaching party to suspend performance? Look at factors in R.241 plus two additional factors R. 242 i. ii. iii. The degree of importance the parties attached to timeliness of performance Look to the extent to which delay is likely to prevent or hinder the non-breaching party from making substitute arrangements Does the K have a time of the essence clause? This will favor that we have total breach.  Policy Reasons: i. How to make both parties feel secure so that their expectation interests are protected; but don't want parties to abuse this provision  assess whether there was adequate reason for the party to suspend their performance.  (If you terminate immediately after a breach, you run the risk that the court will hold you liable for breaching the contract) ii. iii. If it is difficult to calculate the amount of the plaintiff's injury, the court is less likely to find substantial performance If it is 100% clear there is a material breach or you must act to protect your interests, you can get away with suspending your performance UCC Perfect Tender Rule:  No room in commercial contract for less than perfect tender or substantial performance. What is required is perfect tender.   Buyer has the option to reject the good if anything is wrong. But the UCC has a good faith requirement, so can still protect against persons abusing the system. o A much higher threshold than substantial performance, when using the UCC Good Faith rules. The rejecting party must also give reasons for their rejection, so that the other party has the opportunity to cure their breach. If you accept goods, then there is no perfect tender rule.   C. Damages  Even if there is not a material breach, there is still a breach. So the P has to pay something. How do you calculate the damages: Normally the lower one is favored and the easier one to calculate is favored. o Cost of Completion  Difference between contract price and cost of completing the contract. 51 o o o Diminution in Value Damages  If cost of completion would lead to substantial economic waste, or would be unreasonably disproportionate to the value gained by the owner.  Damages measured by the value of what the owner would have received if the contractor had performed the contract in full minus the value of what the owner actually received.  value of perf. promised minus value of perf. rendered Expectation Damages  see outline section. Also, breaching party may be entitled to restitution for any benefits conferred upon the non-breaching party. (less any damages) Anticipatory Repudiation and Adequate Assurance Tuesday, November 23, 2004 7:48 PM I. i. Anticipatory Repudiation Def: R 250 (like UCC 2-610): a. A statement by the obligor to the oblige indicating that the obligor will commit a breach that would of itself give the oblige a claim for damages for total breach under §243, or b. a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach ii. Test: How does the other party know when there is an anticipatory repudiation?    There must be a clear manifestation of intent not to perform the contract on the date of the performance. That manifestation must be definite and unequivocal. Doubtful and inadequate statements are not sufficient. When the second party starts to have serious doubts about the willingness or ability of the first party to perform before the date specified. i. Can be manifested by the first party clearly indicating that it will not perform (known as anticipatory repudiation) – may be expressed orally, in writing, or by conduct showing an unwillingness to perform ii. Can be manifested by circumstances that give the second party reasonable grounds for insecurity about the ability of the first party to perform on time o E.g.: financial difficulty or shortage of materials 52 iii. iii. Insolvency does constitute ground for demand of adequate assurance of performance What is the effect of an anticipatory repudiation?  Gives the injured party an immediate right to damages for total breach, as well as discharging the injured party's remaining duties of performance Effect of a Repudiation as a Breach and on Other Party's Duties-R.253:  When an obligor repudiates a duty before he has committed a breach by nonperformance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach  Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance iv. v. How may a party respond to an anticipatory repudiation? i. Treat the repudiation as an immediate breach and sue for damages i. Ignore the repudiation, urge the repudiator to perform, wait for the specified time of performance, and sue if the repudiating party does not perform Cancel the contract-not perform ii. vi. How does a party communicate he accepts the other party has anticipatory repudiation?  The aggrieved party can indicate to the other party that it is electing to treat the contract as rescinded by o Bringing suit o Reliance o Acceptance-Notifying the repudiated party o In some other way manifesting an election to treat the contract as rescinded vii. What if the repudiating party changes his mind? Restatement 256/ UCC 2-611: Nullification of Repudiation or Basis for Repudiation  The effect of a repudiation is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party; o before he materially changes his position in reliance on the repudiation; o or indicates to the other party that he considers the repudiation to be final. The effect of events other than a statement constituting a repudiation is nullified if,  to the knowledge of the injured party, those events have ceased to exist before he materially changes his position in reliance on the repudiation  53  II. i. or indicates to the other party that he considers the repudiation to be final Adequate Assurance Def: Where a party of a contract is unsure whether the other praty has repudiated or can perform, he can request adequate assurance.    Once party receives adequate assurance to perform by the other party, he must keep with the contract. The other party may claim harassment and that it was unreasonable for the party to ask for adequate assurance. The Assurance Doctrine originates in the UCC 2.609 distinct because usually it is the other way around. The common law does thus adopts in R.251. ii. Test: Grounds for insecurity? When can you request an Assurance: very fact intensive a. Significant financial difficulties are more likely to suffice. b. Look at what exactly the person said c. Course of Dealings between the parties d. Failure to perform important obligations under the contract e. The other party's failure to perform obligations under related contracts f. On occasion, some circumstances that have nothing to do with the other party's conduct can give rise to reasonable grounds g. However, unreliable rumors or insignificant risks to not constitute reasonable grounds h. The nature of the industry and its situation i. iii. Is there 'commercial reasonableness' What to do if a party feel insecure? The demand for adequate assurance must be based on circumstances that arise after the contract was formed. some reasonable grounds for insecurity.  They can demand assurance and  can suspend performance if they don't receive it. a. Assurances demanded may range from verbal guarantee to the posting of a bond, depending upon the circumstances (very fact intensive – depends upon the industry). Doesn't have to be written. i. Various courts hold differently as to whether a demand must be written 54 ii. iii. UCC requires the request for adequate assurances be in writing, but most courts will allow it to be verbal A demand for assurances must be made in good faith b. In some circumstances, a demand may be required before termination. A minority of jurisdictions but still relevant. i. A party that is in a position to explain the difficulties which have caused the insecurity should be given the opportunity to do so ii. Protects the party that might be breaching c. Must give reasonable amount of time to respond.  The maximum time allowed for reasonable assurances is 30 days, although circumstances may decrease that time. A party must respond within a "reasonable" time. d. If one requests adequate assurances of performance, and that person receives such assurances, they must go through with performance unless there are additional changes in circumstances. e. If you fail to respond for a request for adequate assurances, the failure to respond constitutes anticipatory repudiation. iv. When a failure to Give Assurance May be Treated as a RepudiationRestatement 251: protects non-breaching party  When reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the oblige a claim for damages for total breach under §243; the oblige may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance The oblige may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of particular care   Contractual Conditions Tuesday, November 23, 2004 7:52 PM I. Has a Condition not been met that gives one Party an ability not to Perform? Is it also a breach allowing for recovery of damages? A. Theory: 55 Express Conditions-speaks to the non-breaching party's obligation to perform. When a party to a K messes up the other party wants to do two things: 1. Sue for Breach 2. Not have to perform their side of the contract. Express conditions, speak to when a party does not have to perform their promise in a K. B. Def: Conditions: A condition is an event, the occurrence or non-occurrence of is either unknown or uncertain to occur. A performance under a K is subject to a condition if both parties agree that the performance is contingent on the occurrence of the uncertain event.  Commonly concern future events  Can also be about things that occurred in the past, but knowledge of the outcome is unknown.  If the contract is conditional, it is either void or voidable, but a contract is definitely formed. Five Possibilities for Conditions: 1. Condition Precedent: If the event is a condition precedent only, its failure to occur discharges the promisor from her own performance obligations; but does not create a claim for damages against the other party. An act or event, other than a lapse of time which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises (R.224) 2. Express Condition-No Substantial Perf. i. Promissory Condition-an express condition and a promise -NO Subst. Performance  Failure of the event to occur both discharges the injured party from any future performance obligations and entitles the injured party to damages for its loss (if any)  A promissory condition is fundamental to the defendant's obligation. 3. Promise-Substantial Perf. ok 4. Construction-Substantial Perf. ok 5. Condition Subsequent: Everything that we've discussed is a condition precedent. That is, some condition that must occur before the relevant other party's obligation arises. There are also conditions subsequent. Ahdieh's burning my house down is a condition precedent to the insurance company paying the money to rebuild the house. A condition subsequent is that I must file a claim—if define the relevant event as the house burning down, the filing of paperwork afterward is the condition subsequent. Idepependent Condition: if the promise to pay is an independent promise on the condition-the non breaching party must pay regardless of performance. 56 Dependent Condition: if the promise to pay is a dependent promise, the remaining money due after breach does not need to be paid C. Express Conditions: Where the parties have expressly agreed that the duty of one or both parties depends on the occurrence or non-occurrence of a specified event. Express means it is clearly stated in conditional language "if, unless, until, only if" etc.   Substantial Performance cannot be used as a Defense for failure to adhere to the condition. Can be a Promissory condition:  one of the party's promises expressly or impliedly that the condition will occur, and will become liable for breach if the condition does not occur.  The non-breaching party can sue for breach if it is a promissory condition. Usually when a person attempts to fulfill a condition, the courts will construe the effort as the promise . Different from express condition because the person can be sued  When there is an express condition, there must be perfect tender (that is, perfect performance)—substantial performance is not sufficient. i. When parties add an express condition, it indicates it is in there because the parties negotiated over it ii. The requirement of perfect tender in an express condition can create unfair results. So courts use adverse interpretation Unclear K language at to if an Express Condition Exists:  The courts generally interpret doubtful language as embodying a promise or constructive condition rather than an express condition.  This preference becomes stronger when the finding of an express condition would increase the risk of forfeiture by the obligee. (R 227)  If there is unmistakable language, no interpretation as a means of reducing risk of forfeiture can be employed  D. Methods to Excuse Conditions: How courts avoid the strict effect of express condition. 1. Forfeiture-Equitable Relief: If there is potential for forfeiture, then the strict rule won't apply. 2. Interpretation-Apply certain principles: i. Promise (not a condition) ii. Constructive Condition 3. Waiver 4. Estoppel 5. Doctrine of Prevention 57 1. Forfeiture: Equitable Relief -Relates only to Express Conditions (R 229): A court may excuse the nonoccurrence of a condition where forfeiture would otherwise result, unless the conditioning event was a material part of the parties' exchange. The restatement definition is broad enough to encompass reliance losses in general, and not just those that unjustly enriched the obligor. Court will assess the following: a. Did the party against whom the condition is being asserted rely or incur costs that they will now be 'out' if the express condition is applied to them. Is there a loss to the person whom the condition is being imposed on  (Cross Bay Chelsea) b. What are the costs to the other side? No prejudice to that other side, or unjust enrichment  e.g. JNA reaping the benefits of the improvements the other side made and not incurring any costs. c. The reasons for the failure. Some fault dimension: Is either party at fault in some way? Cross bay was negligent, but they are not at fault. JNA, however, looks shady.  Is one of the parties acting in bad faith d. This is a very fact-specific analysis. 2. Constructive Conditions: Things that parties did not put in their K, but the judge infers into the agreement. A condition imposed by law to input justice. Where the court says, doing X, is a requirement or precursor to the other party having to fulfill their obligation under the K.  Can use a Substantial Performance Defense for failure to adhere to the condition.  P often will want to construe the language as a constructive condition instead of an express condition. Sometimes called adverse interpretation. Adverse interpretation: we will interpret the express condition against the unfair or unjust result a. A court may ignore the express condition b. Sometimes the party's language is sufficiently ambiguous the court can play with it, so the court may construe it as a constructive condition c. A court may interpret the express condition as a promise i. If it is a promise, can ask whether the promise was materially breached, and if it was not the non-breaching party still has to perform (e.g. pay) ii. If view it as an independent promise, the contract is breached and the damages will be minimal. E.G.: if you don't do X, you have breached the contract. But payment must still be tendered. 58 iii. If view it as a dependent promise, the contract is still breached, there are still minimal damages, but the non-breaching party can avoid performing on the contract. d. Court may interpret an express condition as both a promise and an express condition i. The forces the promisor, if he decides not to perform, he can be sued for breach of promise ii. But if the promisor does perform, he must only substantially perform (and not perfectly perform) iii. E.G. Oppenheimer must tell Oppenheim by the date requested that the landlord has given permission to set up the phone lines, but he doesn't have to get it in writing immediately. e. The more conditional language you use, the more likely the court will say it is an express condition f. Any promise made must be acted upon in good faith 3. Waiver: An intentional relinquishment of a known right. a. If the condition waived is not a material part of the performance, the waiver is successful regardless of consideration or reliance.  If the waiver occurs after the time for fulfillment of the contract has passed, the waiver is non-retractable  If the waiver occurs before the time for fulfillment of the contract has passed, the retraction is effective unless the obligee has changed his position in reliance of the waver. b. If the condition waived is a material part of the performance, the waiver only occurs if there was consideration exchange or reliance by the other party. c. When can a waiver be retracted?  If the waiver on a material condition is not made in return for consideration, it cannot be waived.  If the waiver on a material condition is made in return for consideration (or a consideration substitute like reliance), it is effective and non-retractable. d. If the waiver is a non-material condition, the waiver does not need to be supported by consideration to be effective. It's ability to be retracted depends upon its timing 4. Estoppel When a party agrees to the non-occurrence of the K condition. Much more of an affirmative statement. You have done or said something and you are now estopped from going back on that. It is okay that the condition that is being estopped is a material condition. 59 5. Doctrine of Prevention: A condition is excused if the promisor wrongfully hinders or prevents the condition from occurring  First ascertain what degree of obligation the obligor has with respect to the happening of the condition in question  If the conditioning event is within the obligor's control, he is likely to have the obligation to attempt to cause the condition to occur  If the conditioning event is not within the obligor's control, he may at a minimum be bound to not impede the other party's efforts, and may as well be required to cooperate with the obligee to cause the condition to happen E. Timing clauses: a. Hypo: builder agrees to construct a house on owner's land. Builder hires a subcontract to do some of the work. Says the builder will pay the subcontractor when the builder is paid by owner. What happens if owner doesn't pay? Every jurisdiction construes this not a condition, but merely as a requirement for timing. b. Hypo: Ahdieh loans $1k that must be repaid when timber is cut down on land. Go and purchase the equipment, but in the mean time the trees burn down. Still have to pay, because all that condition actually does is set the timing as to when payment must be paid (it is not a condition upon payment). F. Satisfaction Conditions: There are two possible standards: 1. Objective Standard-the reasonable person standard (from R 228) (objective) 2. Subjective Standard- and the good faith standard. (subjective) does the person dislike it in good faith or is he lying. Still a honesty requirement.  The reasonable person standard is used when the contract involves commercial quality, operative fitness, or other things knowledgeable persons can judge. The Subjective-standard of good faith is used when the contract involves personal aesthetics or fancy.  Situations where the satisfaction clause should be interpreted objectively a. where there is a risk of forfeiture to one party and there is a gain to the other party; e.g. a construction contract [more likely to interpret objectively] b. When there is a risk of forfeiture but no gain to the other side; e.g. specially made goods – a tie with Ahdieh's face [somewhat likely to be interpreted objectively] Least worry about subjective standard: 60 a. Where there is no risk of forfeiture and no benefit to the owner; e.g. make a specialty watch for Ahdieh, but can be easily resold [likely to accept as a subjective satisfaction clause; court is unlikely to accept as an objective satisfaction clause Three possibilities for satisfaction clause 1. Introduce a neutral third party to make a judgment. 2. Parties agree some third party will act as a judge as to satisfaction; e.g. agree builder work will be judged by architect – so long as the third party exercises their independent judgment, courts will uphold that determination even if it is an unreasonable interpretation  If the third party judge cannot perform their judging function or they refuse to exercise their independent judgment, the condition of satisfaction may be deemed to be waived 3. Where one of the contracting parties is the judge (e.g. the buyer): two possibilities  The thing is really subject to taste or fancy (color of paint or type of wallpaper) are generally interpreted according to subjective standard – all the contracting party must do is be honest and act in good faith  The thing is not subject to taste or fancy of the third party (e.g. the type of furnace), the court will use an objective standard  The thing is subject to taste or fancy (e.g. the type of furnace), the court will use an objective standard Expectation Damages Tuesday, November 23, 2004 10:41 PM I. Expectation Damages: Def: Expectation Interest: Put plaintiff in as good a position as he would have occupied had the defendant performed; give the promisee the value of the expectancy which the promise created. Giving the plaintiff the benefit of the bargain. i. Formula: General Measure= loss in value + other loss - cost avoided - loss avoided  Loss in Value: Difference in what was contracted for and what was received. Deducting the contractual value of what the plaintiff received ( if any) from what she was promised. (What the parties bargained for.)  If the breaching party didn't partly pay or partly perform this will be the contract amount. Other Loss:  61 o Incidental Damages: additional costs incurred after the breach in a reasonable attempt to avoid costs. directly related to the contract. Consequential Damages: Those loses beyond the actual deprivation of the contracted performance. Damages are further losses in other transactions or endeavors that were dependent upon the contract.  The breaching party must know or have reason to know of these losses.  Where the forseeability rule plays most heavily. This damages must be foreseeable. o  Cost Avoided: Additional expenses or costs that would have been accrued under the agreement by the non-breaching party had the contract been performed. Loss Avoided: Costs salvaged or otherwise reallocated that otherwise would have had to been used on the contracts. Mitigated loss.  i. Example of Gen. Measure pg. 812 Loss in value = 130K (200[contract price]- 70[amount already paid by breaching party]) Other Loss=0 Cost Avoided= 85K (180 [cost to perform K by nonbreaching party]-95 [cost already expended on contract]) Loss Avoided (Mitigated Damages)=10K Damages= 35K ii. Example of Alternate Computation: pg. 812#3 Damages= Expected Net Profit + unreimbursed expenses Expected Profit= 20K Unreimbursed= 15K Damages =35K ii. Alternate Computations:  Real estate: difference between the contract price and the market price at the time of the breach When seller claims damages [buyer breaches] – must show at the time of the breach the property was worth less on the market than the contract price When buyer claims damages [seller breaches] – must show at the time of the breach the property was worth more on the market than the contract price Proof of estate value: experts and owner can testify about the value of the property. The resale price may be taken as evidence of its market value in an arm's length transaction so long as the sale occurs within a reasonable period of time. Home listing prices do not suffice as evidence of market value 62  Employment contract: It is not the objective value of the services that is important when a non-breaching employer finds a replacement that is better qualified. It is the fact that the plaintiff receives no more than it bargained for. Handicapped Children's Education Board v. Lukazewski i. ii. A wrongfully terminated employee must make a reasonable effort to recoup her lost earnings by taking other employment in substitution for that promised under the breached contract.  Only requires reasonable efforts and does not impose on the victim the obligation to take action that is prejudicial or unduly burdensome. Inferiority is measured by the quality of the substitute employment in relation to the victim's reasonable interest in career development and persona dignity.  Construction contract: builder's expected net profit on the entire contract plus builder's unreimbursed expenses (at the time of the breach) (See R 348)  Cost of completion: General rule for breach of construction contract is injured party recovers damages that are direct, natural, and immediate consequences of the breach that was within the reasonable contemplation of the parties when the contract was made. When contractor performance is defective, the reasonable cost of replacement or completion is the usual measure (R §346). Exception is when it creates 'unreasonable economic waste'  Ue when there is still work to be done i. ii. iii. Economic waste: must be unreasonable economic waste, i.e. the house build with pipe different in name but equal in quality (Jacob & Youngs v. Kent) – b/c want contracts to be 'efficient' Is the breach incidental to the main purpose of the contact? Difference (or diminution) in value: This standard of damage provides for a difference between the value of what was performed and what was contracted for.  When a contract has been substantially performed, so that the costs of rectifying a trivial breach exceeds the value of the benefit that full performance will confer on the plaintiff, principles of fairness dictate that diminution in value is the proper measure. Jacob & Young v. Kent  However, the breach must not be material and must involve some minor aspect of performance, incidental to the essence of the values exchanged. American Standard v. Schechtman  Where the breach relates to the central purpose of the contract it would be wrong for the court to defeat the plaintiff's expectation. American Standard v. Schechtman iii. UCC Damage Rules: 63 May be measured by the difference between the market price and the contract price of the goods Seller's Damages: (Repudiation or Non-Acceptance by Buyer) market price(at the time and place for tender) -unpaid contract price + incidental damages in 2-710 – expenses saved in consequence of the buyer's breach Buyer's Damages: For Non-delivery or Repudiation by Seller market price at the time when the buyer learned of the breach -the contract price +incidental damages from 2-715 +consequential damages from 2-715 -expenses saved in consequence of the seller's breach Proof of Market Price: R2.723 provides flexibility Alternative measures of damages: When the market measure formula does not accurately determine the loss suffered by non-breaching party  Seller's Damages: (breach by buyer) seller's resale allows seller who complies with UCC to obtain from a breaching buyer. Formula: contract price – the seller's resale price 2-706  Buyer's Damges: (breach by seller) buyer can 'cover' her loss by purchasing substitute goods Formula: cost of the goods – the contract price 2-712(1): II. Limitations on Expectation Damages Theory: For there to be a recovery, the damages must either: A. General Damages: arise naturally,according to the usual course of things, from the breach of contract itself, or a. The court will impute forseeability to the defendant as to those damages which any reasonable person could have foreseen, whether or not the defendant actually foresaw them i. These are Loss in Value Damages B. Forseeability: Damages are foreseeable when at the time of making the contract the party who breached, reasonably should have realized that those damages were a likely consequence of the breach. Hadley v. Baxendale rule.  can only recover those damages reasonably in the contemplation of the parties when they made the contract as the probable result of the breach  Consequential damages Special Damages: arise from the special circumstances under which the contract was made if and only if these special circumstances were communicated by the plaintiff to the defendants 64  The court will award damages as to remote or unusual consequences, but only if the defendant had actual notice of the probability of these consequences Consequential/special damages: arise from special circumstances communicated at the time the contract was formed  Most important type of consequential damages is lost profits arising from collateral contracts.  Includes injury to person or property caused by goods that fail to comply with contractual warranties  Modern Formulation-Consequential Damages: Stated in terms of forseeability of the loss. Recoverability of consequential damages depends upon 1. The defendant's knowledge at the time the contract is made 2. The type of loss must be foreseeable, not the manner in which the loss occurs. 3. The standard for forseeability is at least in part objective. The breaching party is liable for losses about which it had reason to know The loss must be foreseeable as a "probable" result of the breach 4. Where there is a gross disparity the court will limit consequential damages, because justice requires. An unusual provision, and few courts have adopted it. Need to show an egregious differential. Need to show a burden of liability far in excess of the real loss suffered by the plaintiff. Giving the plaintiff a windfall  A potential out when you have potential high consequential damages. R.351(3) Restatement 351: Unforeseeability And Related Limitations On Damages a. Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. b. Loss may be foreseeable as a probable result of a breach because it follows from the breach i. in the ordinary course of events, or ii. as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. i. C. Certainty: a. Certainty: The requirement that damages be proved with reasonable certainty: b. the fact that there are damages-requires highest degree of certainty AND c. the amount of damages (general idea) d. Preponderance of the evidence standard. The evidence must be sufficient to persuade a factfinder that the loss is more likely to have occurred than not, and must give the factfinder enough basis for calculating a monetary award. 65 D. Causation: Causation: The loss must flow directly, naturally, or proximately from the breach. Usually becomes an issue when determining consequential damages. ii. Mitigation (loss avoided) Def: Duty to mitigate damages: damages cannot be recovered to the extent they could have been avoided or minimized by reasonable efforts  "Duty to mitigate": there isn't really a duty to mitigate, but rather think: where the plaintiff fails to mitigate their damages, they are unable to shift that part of the loss onto the defendant. The defendant need not compensate the plaintiff to the extent that the plaintiff's own actions were a contributing cause of her injury.  However the defendant cannot complain of a failure to mitigate if the action would have been unduly burdensome, humiliating or risky to the plaintiff. Doctrine of avoidable consequences: The plaintiff may not recover for those injurious consequences of the defendant's breach that the plaintiff herself could by reasonable action have avoided  Application of doctrine of avoidable consequences varies according to the type of case under consideration Measure of recovery by a wrongfully discharged employee: i. The amount of salary agreed upon from the period of service less ii. the amount that the employer proves the employee has earned or with reasonable effort might have earned from other employment. Substitutes & Mitigating Damages: 1. Similar Transactions after breach: One should not automatically assume that a similar transaction after the breach must be a substitute for the broken contract. It should only be so treated if it is clear that the plaintiff would not or could not have entered into it if the party had not breached. i. Otherwise could wrongly reduce the plaintiff's damages. 2. Wrongful termination raises two issues: a. Was the plaintiff wrongfully terminated? b. What is the liability of the former employer for such wrongful termination? 3. Two prongs for mitigation: a. The substitute must be sufficiently similar to the original i. in a commercial context, think of companies as primarily wanting to make money, so it is more likely that any substitute would be okay (so long as the money is the same) ii. The victim of a breach is not expected to enter into a mitigating contract if the substitute transaction is inconsistent with or worse, damaging to victim's reasonable expectation under the breached contract. b. Burden of proof is on the breaching party (to prove the substitute is substantially similar) 66 i. Assume defendant has more information on mitigation possibilities: more true in employment context, less true in other contexts Since defendant wants to reduce the damage award, it follows that he should have the burden to show elements that would reduce the damages ii. 4. The Plaintiff must make reasonable efforts to mitigate the damages. When following a total breach the plaintiff obtains a reasonable substitute performance, expectation damages are the difference between what the plaintiff had to pay for the substitute and what it would have had to pay under the contract for the equivalent performance.  When the substitute is more expensive the additional cost will be bore by the breaching party.  This is true even if the plaintiff profits somewhat by a performance superior to what was expected. Handicapped Children's Education Board v. Lukazewski 5. Comparable or substantially similar employment can include elements of location, type of services, hours of work, and status. a. For movies, most filmmakers use 'pay-or-play' clause, which gives one party an option to either perform under the contract or to pay the amount set forth in the clause. 6. R §350(1) sets forth three special circumstances that justify rejection of an employer's unconditional offer of reemployment: undue risk, burden, or humiliation 7. Even if the employer offers the same job, if the employee is afraid will be fired, the court may or may not consider that enough to make the job substantially different. a. If the offer is a pre-textual offer, that creates a special circumstances so plaintiff doesn't have to take the job b. If there is a change in circumstances (e.g. employee has become pregnant), that creates a special circumstance 8. UCC: although there is no explicit UCC provision on mitigation, the duty of mitigation is implicit in the general obligation of good faith in §1-203. 9. Real Estate Leases a. Traditionally: defaulting tenants are held to their obligations to pay the rent in full, with no obligation of the landlord's part to mitigate damages by re-renting b. Modern: the courts have a duty to mitigate. Not all courts agree. Non-Recoverable Damages 67 Tuesday, November 23, 2004 10:42 PM I. Nonrecoverable: Damages that are not given for Contract Breach: 1. Attorney's Fees 2. Mental Distress Damages: Category of Non-economic damages/that are internal to ourselves. Reason being is because they are hard to calculate or even estimate. i. House Construction case as an example 3. Punitive Damages: meant to penalize. Will be a big problem in civil law for punitive damages in international award. Are not awarded in contract law. i. It would not encourage efficient breach-where the party know the damages and it is inefficient to perform the contract. The goal that contracts seeks is efficient contract-not fair, honest, decent. Contract law is based on strict liability fault so it follows that the damages should also be not based on fault. 4. Specific Performance: is not allowed in most cases. Where we might want to use Mental Distress: 1. When there is a tortious violation in a contract breach. 2. When there has been bodily harm. 3. Things related to corpses-mishandling a dead body. probably mental distress damages 4. K's to deliver information of a death-Mental distress available. 5. "where mental distress in exceedingly likely, we give mental distress damages". i. Where the contract is one aimed purely at alleviating the plaintiff's suffering or enhancing his psychic well being. Where might we grant Punitive Damages: 1. Where there is a malicious intent to harm the other party 2. For Insurance breach. Gives them incentives to hold out for damages, if it is less then what they would have to pay in good faith. o also the insurance business is to provide security to the parties o also there is no bargaining power for other party. party can't adjust the terms of the insurance policy. 3. Where a breach is unlikely to be discovered or, damages are likely to be minimal. Reliance, Restitution, Specific Performance 68 Tuesday, November 23, 2004 10:42 PM I. Reliance Damages A. Summary of Damages Choices: Expectation Damages will be the standards unless for some reason they cannot be given. Reasons why: a. To ensure that we effectively protect the non breaching party's reliance b. Afraid that if we use only reliance we may under compensate the nonbreaching party. c. Expectation damages in most cases, should also encompass reliance & restitution. d. If give only reliance then it should encompass restitution. B. When to use Reliance Damages & Not Expectation Damages: Reliance damages puts the promisee in the position they would have been had the K never been entered into. However, If the basis of liability is considerationexpectation damages is the standard of damages, for the most part.  When promissory estoppel used as shield,  when it appears there is a K, just lack of consideration  Expectation damages is the standard for damages.  When used as a sword  "u made a promise, and I acted in reliance." A more unusual basis for liability.  Courts select reliance damages as the standard. (situation as reliance as a basis for liability) Walser v. Toyota Motor Sales, USA P wants expectation damages for the breach of contract and not reliance damages. Promissory estoppel is not being used as a consideration substitute here. In this situation, there is no plausible claim that there is a contract. But there is a promise, from the sales director, and it was reasonable to rely on the promise. Here the court holds that justice requires only a low amount of reliance: P knew of the steps, and the response was quick. Would be over calculating damages if we gave them the cost of the property, but they sill owned the property, and could mitigate the damages. Which is why they only get $200K. C. Def: Reliance Damages: Puts the promisee in the position she would have been, had the K never been entered into. To be used when expectation damages are too speculative or when promissory estoppel is basis for contract enforcement. a. Reliance expenses are those would not have incurred, opportunities they would not have foregone, etc. b. Essential Loss: The amount that the P paid to the defendant. (put P in condition that he would have been in had the K not been entered into). Expenditures the non-breaching party made in furtherance of the contractual obligations. c. Incidental Loss: All the other expenses that the non-breaching party incurred because of the K. Usually a wasted expense. i. The caveat is that incidental reliance damages are limited by the restrictions of forseeability, causation and certainty. .  Need to calculate both essential and incidental. 69 d. Reliance Damages and No Profit from K: In general in reliance damages, if a defendant can answer that there would not have been a profit, but a loss; that expectation damages would have been zero then they might be able to avoid reliance damages. *Burden on D to prove. i. This is to bring the plaintiff's recovery in line with his expectations ii. Some courts reduce the recovery proportionally the anticipated loss. iii. however keep in mind that not all K are made to expect profits, some are for services. Wartzman v. Hightower Productions, Ltdb .Expectation Damages could not be calculated because of forseeability, causation, certainty. Which is why the P is seeking reliance damages. Defendant argues against providing reliance damages, because it essentially makes the contract an insurance contract against a failed venture. Equal Opportunity Rule:  Creates as situation where if the D can, he has the duty to mitigate damages too. In a situation where either party can mitigation, the obligation to mitigate goes away.  Not all courts apply this rule-but u can make the argument. II. Restitution Damages pg. 210 in supplement Restitution Damages: Restores to the plaintiff the value of a benefit unjustly conferred on the defendant. When the plaintiff has disaffirmed the contract (acting as if the k does not exist) and suing in restitution for the recovery of benefits conferred under the now defunct contract. o Used in situations where the plaintiff cannot recover expectation damages because she cannot prove them or she has a negative expectation.  Two ways to calculate damages: R.371 o First: cost avoided 371(a): The reasonable value of the services.  Ask how much it would have cost to have gotten these service from someone else.  The measure is the market value of the work performed. Second: net enrichment 371(b)  How much was the breaching party enriched.  Most of the time net enrichment will be bigger, but it is much harder to calculate. Even when the K has failed for SOF, Defenses (minority, frustr, imprac), Void K, there still may be restitution damages to be paid by the breaching party. R.375-77 o   When Damages are a definite sum of money: R.373  If all that is outstanding is that the party owes a definite sum of money, then you can't use restitution damages. Would use expectation damages to recover. Restitution for Unjust enrichment/Breaching party claiming damages: R.374  70  When the party who breached the contract is seeking restitution for unjust enrichment. Courts have traditionally said that the party has dirty hands and cannot recover. Because we don't want to overcompensate the innocent party. The innocent party would then turn around and sue for consequential and incidental costs. In this case the parties would settle.  Not a situation of substantial performance.   A non-breaching party may recover damages in restitution even if he would not have made any money under the contract. (making zero expectation damages). Recovery is not diminished by an loss he would have suffered under the contract. Specific Performance III. Def: An order to the defendant requiring him to perform as promised. Theory: Specific performance is not the norm, and is only granted where money damages will be incapable of adequately compensating the plaintiff. Theory is there is something unique that is hard to replace and hard to substitute.  Also specific performance was granted primarily in courts of equity, and courts of equity were intended to intervene only when the available remedies at law were inadequate. When courts grant specific performance:  Where money damages will be inadequate  A Standard/norm damage for land sale agreements City Stores Co. v. Ammerman 1968 71