Law School Outline - Contracts - Ahdieh4

CONTRACTS Prof. Ahdieh Fall 2003 NOTE: UCC only applies in the sale of goods context for goods worth more than $500. Contract – a legally enforceable promise or set of promises 3 Methods for enforcing contracts: 1. Consideration 2. Reliance – promissory estoppel 3. Restitution – unjust enrichment ENFORCING PROMISES: THE ALTERNATIVE BASES OF OBLIGATION Objective and Subjective Theory of contracts a) Objective Theory of Intent/Contract (Majority Rule) 1. One is ordinarily bound or not bound by the reasonable interpretation of her words and actions. 2. Reasonable person standard 3. About intent of promisor (defendant), to lesser extent promisee (plaintiff) 4. Judgment in line with the rules 5. “Duty to inform” is outside of objective theory (Park 100) 6. Reasoning behind objective theory i. any time the value (utility) of contract changes, parties could change their mind – avoid changing the story ii. Promotes more efficient behavior – people will read what they sign iii. Place cost on least cost avoider, who can best avoid costs by clarifying intent 7. Objective manifestation of intent is not trumped by misrepresentation. b) Subjective Stance 1. Uses broader pool of evidence and facts. 2. Situational context; More questions related to the specific person/situation 3. Justification 4. Social goals promoted by subjective theory i. Fairness – limit to situation where parties knew what they were getting into ii. Least cost avoider – incentive to walk through clearly (social values)? Ray v. Eurice Bros.: Plaintiff wanted house built to specifications, but defendant thought differently. a. Objective manifestation by promisee (plaintiff) and subjective manifestation by promisor (defendant) b. Duty to read trumped subjective manifestation. c. Expectation damages – differences between what he would have gotten and what should have paid under the contract Park 100: Fraudulently induced plaintiff to sign lease agreement iii. False misrepresentation overrules objective duty to read – can’t expect to be held to a contract if fraud is evident.. Plaintiffs used ordinary care and diligence by consulting their lawyer before signing. Consideration §71  To constitute consideration, a performance or return of promise must be bargained for. A return promise or performance is bargained for if it is sought by promisor in exchange for 1 his promise and is given in exchange for that promise. Performance = act other than promise, forbearance or change of legal relation  3 Pillars of Consideration a) Action of Covenant – evidence and cautionary protections around promise (promisor cautions before entering contract) b) Action of Debt - benefit to promisor supports enforcement of promise c) Assumpsit – detriment to the promisee or reliance supports enforcement  Functions of legal formalities o Channeling function – simple, external test of enforceability for facilitation of judicial diagnosis (favors substance) o Cautionary function – cautionary or deterrent function by acting as a check against inconsiderate action. Writing, seal, attestation, etc. (favors substance) o Evidentiary function – providing evidence of existence and purport of contract in case of controversy. Satisfied by writing, attestation, certification by notary. (favors form) §81(1) Consideration as Motive or Inducing Cause a. The fact that what is bargained for does not of itself induce the making of a promise does not prevent it from being consideration for the promise. b. Even if would have received something anyway, doesn’t make it not consideration 1. I.e. – when you get married, I will…, not if you get married, I will…, still consideration 2. Consideration if it influences the making of the promise §79 Adequacy of Consideration 1. If requirement of consideration is met, no additional requirement of 1. Gain, advantage or benefit to promisor or loss, disadvantage or detriment to promisee (no benefit/detriment consideration) 2. Equivalence of values exchanged 3. Mutuality of obligation Imbalance in value of exchange a. Consideration v. Condition i. Gratuitous promise with a condition placed on it. Helps to consider if the happening of the condition will be a benefit to the promisor, if so, then consideration. Temporal issues make it more condition than consideration. b. Nominal consideration (§79) – if consideration is met, nominal consideration doesn’t matter. If consideration isn’t met, examine nominal consideration. ii. No benefit to promisor iii. Giving up is no detriment to promisee iv. Imbalance in value of exchange Reliance: Protection of unbargained-for reliance  Equitable Estoppel – is a defense to a claim of a promise that was based on misstatement of fact relied on by the other party. The person lied, so they can’t assert facts based on the truth.  Promissory Estoppel – as a defense to the claim of a promise. Also a cause of action in the absence of a contract, just reliance on a promise. Damages: If used as a substitute for consideration, then contract claim and expectation damages. If used as cause of action in absence of a contract, reliance damages. Promissory Estoppel (Restatement §90) as basis for contract 2 a. (1) Promise which the promisor should reasonably expect to induce action or reliance/forbearance on the part of the promisee or a third person and which does induce such action or reliance/forbearance is binding if injustice can be avoided only by enforcement of the promise. b. (2) A charitable subscription or a marriage settlement is binding under Subsection (a) without proof that the promise induced action or reliance/forbearance. (Majority rule: still need to show reliance)  Not for actual contracts, just for gifts and promises. Considered as an exception to consideration and perhaps mutual consent.  Four requirements: a. Promise b. Reasonable expectation of induced action or reliance (forbearance) c. That induces the action d. Injustice can be avoided only by enforcement of that promise.  Damages e. If used as a substitute for consideration – then it’s a contract claim and get expectation damages. f. If used as sword, because it caused harm to another then get reliance damages. Allegheny College: Cardozo trying to introduce, establish promissory estoppel, but the facts of the case didn’t really support it. King v. Boston University: actions of the university showed reliance on the promise that Dr. King made.  Benefits – promises to charitable institutions will be binding, but the claims don’t always have to be enforced.  Costs – donors may become less willing to make donations. Courts can enforce contributions without the institution demonstrating reliance. Reliance: Commercial Promises and Rescue in the absence of a promise  Employment context o Reliance is giving up your job in reliance on the promise of a pension o Reliance on the promise is what induces you to give up your position. Don’t make the decision to retire before the promise of a pension. o Doesn’t have to be loss of money, might be for change of position (promotion)  Detrimental Reliance – any time you do something you didn’t have to do (requirement of promissory estoppel) Restitution  Requirements: (1) Enrichment of one party (benefit) (2) Injustice; Person unjustly enriched at the expense of another must make restitution.  Implied-in-law or Quasi-contract – A contract implied in law is an obligation imposed by the law without regard to either party’s expressions of assent either by words or acts. Essential element is benefit to promisor. Remedies when seeking monetary remedy because not a contract claim and not a tort claim. Arose where there was no premise of consensuality of no interaction between 2 parties  Implied in fact contracts – are true contracts, if the party receiving the benefit requested it, then the claim based on the contract will lie. Benefit is irrelevant because it was seen as a contract. 3 Restitution for services performed is required, even if recipient did not request or voluntarily consent to receive services. I.e hospitals  “Good Samaritan”- contract law does not protect/compensate G.S., called presumption of gratuitousness. Promissory Restitution  Past acts can’t be consideration, but promissory restitution acknowledges that, have a promise that post-dates the relevant consideration.  Moral obligation is not enough for consideration BARGAINED FOR EXCHANGE Offer & Acceptance – Bilateral Contracts An exchange of promises on both sides. Bilateral contracts are products of offer and acceptance. 1. Preliminary negotiation 2. Offeror makes an offer 1. § 24 Offer – 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. NOTE: Direct complete proposal that a contract be entered into providing for the exchange of defined performances. 2. §33 Certainty 3. What constitutes an offer depends on what a reasonable person would perceive. An ad is an offer if (1) size of group offer is directed to (2) specificity (3) # of terms left out and their importance (4) Course of dealing between the parties, prior history (5) customs in the industry (6) Reasonable person standard. 4. Promise in exchange for a promise. Offer = one promise, acceptance = second promise. 5. Rule: Offer is revocable unless and until it is accepted by the offeree, even if the offer itself expressly states that it cannot and will not be revoked. 3. Which creates the power of acceptance 1. Definition - Power to complete manifestation of offer and intent to create a binding contract between the parties without further negotiation. 2. Once the offer is accepted the contract is formed 3. Power of acceptance is terminated by offeree’s rejection. Termination by: iv. Rejection of counteroffer v. Lapse of time (contract expires) – if no period, lapse over reasonable amount of time determined by (1) subject matter of offer (2) means of termination vi. Revocation by offeror (need not be told by offeror themselves) vii. Death/incapacity of offeror/offeree 4. §63 Mailbox Rule – acceptance is effective when put out of offeree’s possession; revocation of offer is effective only when received by offeree to prevent reliance. 4. “Counteroffer” – acceptance or withdrawal; revocation 1. Qualified offer is a counteroffer which has the same effect as rejection with regard to original offer, not inflexible Offer & Acceptance – Unilateral Contracts  Offer - Asking to do something that can be accepted by doing what is asked; offeror isn’t bargaining for a return promise, bargaining for performance.  Acceptance - §69 Silence as acceptance – general rule, silence cannot constitute acceptance, even as a stated condition. Exceptions: prior dealing, accept the benefit of  4 offers with a reasonable opportunity to accept and have reason to know compensation is expected, offeror gave reason to understand silence was an acceptance.  Maximum protection for offeror (person offering) because they are not bound until and unless performance is received. Risky for offeree (person accepting offer) because offer may be revoked before completion and once commenced there is no remedy for the offeree.  § 45 Acceptance by Part Performance in a Unilateral Contract (Option Contract created by part performance or tender) o (1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance (unilateral, not bilateral contract) an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. o (2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer. OBLIGATION IN THE ABSENCE OF COMPLETE AGREEMENT Promissory Estoppel to enforce offers (substitute for consideration)  Rule: Offer is revocable unless and until it is accepted by the offeree, even if the offer itself expressly states that it cannot and will not be revoked.  Rigidity o Offer is revocable until accepted. o Promise to keep offer open is not acceptable if it lacks consideration.  Offer is binding when it is an option contract supported by consideration or a conditional acceptance. (Baird)  General rule in contracting: Mere use by a general contractor of one particular subcontractor’s bid does not constitute acceptance of that bid, forming a bilateral contract binding both parties.  Baird v. Gimbel Bros. (Learned Hand) – subcontractor withdraws his proposal before the contractor is awarded the contract. o Holding: Offer was withdrawn before it was accepted. Offer was not accepted by putting in the proposal because he wasn’t obligated to fulfill the contract if the bid wasn’t accepted. o Reliance application  No contract, because no offer and acceptance  No option contract because no consideration  No promissory estoppel – wasn’t a promise for a gift, was a promise about a promise for a contract price. Promissory estoppel doesn’t work because wasn’t seeking a gift, but seeking a return promise.  Promissory estoppel can’t be used to form a contract, just for promises/gifts. o To make an offer binding, plaintiff should insist on an option contract or conditional acceptance, but then he would lose his option to revoke the contract if he got a cheaper bid. o Plaintiff could win in 3 ways  Bilateral contract by obligation – by including my bid in your bid it’s a binding offer 5 Promissory estoppel (reliance) – can’t withdraw or resubmit bid, so stuck; use as a claim for damages  Option contract could exist because there was consideration and based on promissory estoppel (acted in reliance on that claim).  Drennan v. Star Paving (Traynor) o “Implied subsidiary promise” – an option contract grounded in promissory estoppel and reasonable reliance on the claim is the consideration for the promise. o Defendant expected and wanted him to rely on his promise (bid) §25 Option Contracts (by BFE or by § 87(2) are binding) An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.  Promise to keep offer open is not acceptable if it lacks consideration. Nominal or sham consideration is not enough, although courts are more willing to accept minimal or small consideration.  §87 - If option contracts are based on minimal consideration, these are the requirements: (1) Option contracts are binding if they are in writing and signed by the offeror (evidentiary and cautionary functions); if it recites purported consideration; if the offer (underlying contract) proposes a fair exchange and brought to closure in a reasonable period of time. If they are based on real consideration, none of the above matters.  (2) An offer which the offeror should reasonable expect to induce action to forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. o Restatement of Drennan holding. Based on promissory estoppel claims, but doesn’t create an option contract based on promissory estoppel in general.  If an offer is irrevocable, supported by consideration, an offeree can reject the offer, change mind and accept the offer within the allotted amount of time. Firm Offers (option in the UCC context) §2-205 – No consideration is necessary for offer to be binding and irrevocable. Offering period can’t exceed 3 months.  Irrevocability clauses must be signed separately and at least initialed by the offeror. To prevent abuse by signing inadvertently and to prevent unconscionable result.  UCC precludes oral offer/acceptance.  If supported by consideration, may be open for longer than 3 months, for what parties’ bargained for. Mirror image rule (Based on § 59) Requires offer and acceptance to mirror each other, if there is variation, then seen as a counteroffer, not acceptance. Offeror is the master of the offer and only has acceptance when as a mirror/same as offered. Exceptions when/if: 1. Acceptance attempts to make explicit something that was implicit 2. Acceptance suggests a new term without insisting on it 3. If acceptance is grumbling, it won’t undermine it. 4. If the offer is a binding option 5. Offer explicitly states that it will stay open despite rejection 6. Acceptance reserves the right to keep an offer under advisement 7. Mere inquiry – isn’t a revocation  6 Problem under mirror image rule: 1. Welsher problem – fine prints are different, so not contract. Especially when economics change. 2. What are the terms of the contract?  Last shot rule – party impliedly assented to and thereby accepted a counter-offer by conduct indicating lack of objection to it. Favors the seller because they usually send the last form (fire the last shot) Basic difference between common law and UCC – under UCC purported acceptance is acceptance, even if it contains different or additional terms. UCC only applies to sale of goods. Battle of the Forms UCC §2-207 Addresses problems caused by use of 4 different forms in commercial context because all are preprinted with blank spaces filled in. The basic terms mirror each other, but fine print and boilerplate terms are different: 1. Buyer’s request for price quotes 2. Seller’s quote 3. Buyer’s purchase order (offer) 4. Seller’s order acknowledgment  Required under 2-207 (1) Definite and seasonable expression of acceptance or written confirmation sent within a reasonable time is an acceptance even though it has additional or different terms from the ones offered or agreed on, unless acceptance is expressly conditional to assent to the additional or different terms. (2) Additional terms are to be seen as proposals for addition to the contract.  Between merchants, the additional terms become part of the contract unless: i. The offer expressly limits acceptance to the terms of the offer ii. They materially alter the contract; or iii. Notification of objection to the terms has already been given or is given within reasonable time after notice is received. (3) Conduct by both parties that recognizes the existence of a contract is sufficient to establish the contract, although the writings may not establish a contract. In this case, the terms they agree to are the contract, and the UCC will supplement the missing terms.  Formal acceptance with material alteration – contract exists, but the material alteration may not become part of the contract.  Where the offeror has expressly conditioned acceptance on these terms and the offeree accepts, but with different terms there is a contract. If offeree changes the basic terms, then there’s no contract.  §2-207(3) – forms haven’t formed a contract, but both parties have performed their sides. o Won’t arise where basic terms were changed, but where there was a conditional acceptance.  §2-207(1) and (2) – additional terms are proposals for contract. As merchants the terms are part of the contract, unless: 1. Different terms are treated as additional terms 2. Different terms are not covered by (2) so they drop out Electronic contracts Postponed Bargaining: Agreements to Agree  2 types of postponed bargaining 7 o Agreements to agree – parties have reached agreement on a number of matters, but have left for future agreement one or more terms. o Formal contract contemplated – parties have reached agreement in principle on at least the major provisions, but they contemplate the execution of a formal written contract.  Walker v. Keith (1964)  Terms of the agreement need to be sufficiently definite (§33) o §33 Certainty (1) even though 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.  Requirement – need to be a price or a clear method for calculating the price in a contract.  Bad faith – agreements to agree create an obligation to try to agree, even if can’t actually agree. A violation of that agreement is in bad faith.  Classical approach – o Why should court have to figure out a term when the parties themselves didn’t set one? o Concern with efficient use of judicial resources o Private autonomy – paternalistic potential by establishing price o Specifying terms is easy for the parties, therefore they will be more likely to set the terms if they know the court won’t.  Modern approach – o Clause wasn’t superfluous, so the parties clearly intended to be bound. Because reliance followed from this contract, the court will try to figure it out. Formal contract contemplated cases  Is the language ambiguous on the parties’ intent?  Factors to determine intent to be bound (Quake Construction v. American Airlines, 1990) o Whether type of agreement involved is one usually put to writing o Whether agreement contains many or few details o Whether agreement involves large or small amount of money o Whether the agreement requires a formal writing for the full expression of covenants o Whether negotiations indicated that a formal written document was contemplated at the completion of negotiations.  Question of fact if the parties intended to be bound.  When parties contemplate the execution of a formal contract, they often reduce their agreement in principle to a written letter of intent.  Rule (Quake): whether a contract is formed in cases of agreements to agree or formal contract contemplated turns on the factual question of whether the parties intended to be bound when they agreed in principle or only after further negotiations prove successful. UCC and Restatement in accord with this holding. THE STATUTE OF FRAUDS  Enforcement of contract: About what contracts need to be in writing. An enforceable promise that does not comply with the statute of frauds is invalid.  §110 Restatement covers typical statute of frauds. Each state has their own version.  Questions re: Statute of Frauds o Whether the relevant contract falls within the statute of frauds 8 o Does the contract satisfy the statute frauds? o Is there an exception to statute of frauds? Scope and Sufficiency of Memorandum  The entire contract doesn’t need to be reduced to writing. The writing needs to establish: o Some contract was formed o Give the key terms of the contract o Writing has to be signed by the party to be charged (defendant)  Signed could mean on letterhead, doesn’t need an official signature.  Nonmutuality does not apply (contract enforceable against one party but not the other).  Equitable estoppel – can’t make a claim based on contrary evidence  Writing does not have to be all in one document. (Crabtree v. Elizabeth Arden, 1953) o Documents can be linked by “sufficient connection”. o 1 document must be signed o The unsigned documents have to refer back to the subject matter  Parol evidence can be brought in to support that the unsigned docs support the signed document. o Documents must contain the basic terms of the agreement. o An offer, not just the contract, is sufficient evidence in Restatement. Not in sale of goods UCC §2-201(1) context, but comments allow exceptions to be made.  § 131 General Requisites of a Memorandum (a) reasonable identifies the subject matter of contract (b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and (c) states with reasonable certainty the essential terms of the unperformed promises in the contract.  In general, courts are hostile to statute of frauds and they will read the requirements loosely.  Most common transactions under statute of frauds o Transference of property (real property) – sales and leases in excess of 1 year. o Sales of goods of $500 or more (UCC §2-201(1)) o Contracts that include obligations that cannot be performed within 1 yr of the contract.  Lifetime contracts – no, because could die within a yr and contract would be completed. Yes, because lifetime usually is for more than a year.  Equal Dignity Rule – agency relationships (someone represents someone) if statute of frauds applies to a contract signed by an agent, the agency relationship becomes subject to the statute of frauds, so written memorandum of agency relationship must be signed by the agent, or it is not enforceable against the principal. Part Performance  Partial performance is not an exception to SOF (§129) (Winternitz v. Summit Hills Joint Venture, 1987) o §129 – SOF does not apply if it is established that the party seeking enforcement, in reasonable reliance on the contract and the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific performance. o Only applies if specific performance was being asked for under equity  Equity – not directed to paying damages, but specific performance 9  Law – substantial remedies (pay damages) o Repudiation after part performance is virtual fraud. Promissory Estoppel exceptions  Promissory estoppel can be used to enforce an oral contract within the statute of frauds.  Allows court to hear claims that were barred by the statute of frauds.  § 139 Enforcement by Virtue of Action in Reliance – a promise which the promisor should reasonable expect to induce action or forbearance on part of promisee and does induce that forbearance is enforceable notwithstanding the statute of frauds if injustice can be avoided only by enforcement of that promise. Remedy for breach is limited as justice requires. o Factors for consideration  Availability and adequacy of other remedies, particularly cancellation and restitution  Definite and substantial character of the action or forbearance in relation to remedy sought  Extent to which action or forbearance corroborates evidence of the making and terms of the promise, or making and terms are otherwise established by clear and convincing evidence  Reasonableness of the action or forbearance  Extent to which forbearance was foreseeable by promisor. o NOTE: Even if §139 applies, promise may not be enforced. UCC statute of frauds  § 2-201 Sale of Goods statute of frauds  UCC writing requirements o Enforcement possible on fragmentary notion of terms, as long as the writing persuades the court that it indicates a contract for sale. o Agreed upon term (price) may be missing, but enforcement is limited to quantity shown in writing. o Partial performance – payment of part of the price is sufficient to validate the entire contract. o Admission exception is specific to the UCC  §2-201(3)(b) – if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision, then the contract becomes enforceable. o Specially made goods exception to SOF  §2-301(3)(a) if the goods are specially made for buyer and cannot be sold to others and under circumstances that reasonably indicate that buyer has made a commitment, so statute of frauds applies. THE MEANING OF THE AGREEMENT: PRINCIPLES OF INTERPRETATION & PAROL EVIDENCE RULE Principles and Sources of Interpretation of a Contract 3 Theories of Interpretation 1. Subjective – meeting of the minds, concerned with individual wills, what did each party intend contract terms to be 2. Objective – outward appearance of their behavior, what a reasonable person would believe the terms to be, mental state of the parties is irrelevant. 10  Problem: outcome may be what neither party had intended 3. Modified objective view – where parties agree on the meaning, that will be enforced; did one of the parties know or have reason to know that intention was x (least cost avoider – if you knew or should have known, then you can/should have resolved the ambiguity); if parties disagree, then court can choose one. If neither party agrees and neither party knew, then there is no contract.  § 203 Standards of Preference in Interpretation –(a) 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. (b) express terms are given more weight than course of performance, trade usage, etc. (c) specific terms and exact terms are given greater weight than general language (d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated. o To determine terms of contract, court looks at: negotiations leading up to contract, language of contract, try to give reasonable effect to all terms, course of performance, course of dealing, usage of the trade, statutes, dictionary. o Usage of trade (§222) – usage having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to a particular agreement. Determined as questions of fact. Adhesion contracts  Doctrine of Reasonable Expectations: Boilerplate terms in contract are interpreted to be consistent with reasonable interpretation/expectation of the non-drafting party, even if the expressed terms are contrary to expectations. Requirements: 1. Standardized form 2. Disparity of bargaining power (inequality) 3. No choice in acceptance of terms “take it or leave it” form. 4. Reasonable expectations are violated when i. Terms are bizarre of oppressive ii. Term is inconsistent with the document iii. Term negates the benefits of the transaction (insurance)  Distinct from classical doctrine because making an exception to the duty to read. Parol Evidence Rule: Classical and Modern Principles  Parol evidence rule serves to exclude certain evidence.  Principle: To give legal affect to whatever intention the parties may have had to make their writing a final and complete expression of the agreement. 1. Complete (full) integration – document is complete on its face, there’s nothing to be added (exclusion of nonwritten parts); can’t use parol evidence.  Parol evidence cannot be brought in to a fully integrated agreement to contradict the written terms or bring in additional terms. 2. Partial integration – have all of some terms, but one issue isn’t fully integrated.  Extrinsic evidence can be used to bring in additional or supplemental terms.  NOTE: Parol evidence can be brought in at any time to interpret, explain, or clarify a term.  Classical approach - “4 Corners”: o Grounded in integration – if the agreement is integrated, then evidence that contradicts can’t come in and evidence that adds to the document is excluded (supplemental or additional terms). Focus only on the text of the document. 11    Merger clause – prima facie, conclusive statement of integration, but not required for conclusion of integration. o Restrictive, plain meaning view – only ambiguous terms can add parol evidence.  Reasons for classical approach (4 Corners): 1. Potential misunderstanding of argued terms 2. Adds an element of certainty to define rules and remedies – want people to enter into contracts 3. Concern of fraud with oral evidence 4. Institutionally – want a question of law, not fact. Juries can be swayed by oral evidence in a way they aren’t swayed by written document. Modern approach o Look at extrinsic evidence. Judge must consider the evidence, and then decide to admit it or not. o Concerns with no negotiation of contract, but standard form o Standard form with merger clause is not dispositive because there may still be additional terms. Weigh merger clause as evidence. o Term doesn’t have to be ambiguous for parol evidence to apply. o Whether term is “reasonably susceptible” to interpretation is asserted, if so, judge will hear the evidence. Exceptions to parol evidence rule o Evidence to explain the meaning of the agreement (interpretation) 1. Not always clear line between interpretation and contradiction 2. Depends on whether term is ambiguous or not. o Doesn’t apply to subsequent agreements o Evidence to show that effectiveness of agreement was subject to an oral condition precedent o Evidence offered to show agreement is invalid due to fraud, duress, mistake, etc o Evidence that establishes a right to an equitable remedy, such as reformation of the contract. o Evidence to establish a collateral agreement between parties.  Evidence doesn’t have to be signed. Determine intent of the parties by:  Looking at the evidence to determine if it’s contradictory  See if evidence speaks to a collateral agreement  If situation where natural course is to put in writing, see if it’s integrated (general course of dealings).  Detail, complexity of the writing - the more detailed the agreement is, the more likely parol evidence rule applies.  Entirely handwritten vs form agreement  Specifically prepared for this agreement  Sophistication of parties  Representation by counsel  Formality of setting  Merger clause o 12 SUPPLEMENTING THE AGREEMENT: THE OBLIGATION OF GOOD FAITH AND OTHER IMPLIED TERMS Rationale for Implied Terms: Classical & Modern Principles  Implied in fact – terms agreed to by the parties  Implied in law – terms imposed by the court that the parties would have agreed upon if they had bargained on this issue  Rationale – to end up with a valid contract because the absence of that term means there’s no contract (invalid/not binding) o Court must assume a return promise before enforcing the contract, or else there is no consideration.  Wood v. Lady Duff (Cardozo, 1917) – implied obligation on plaintiff’s part to make an effort to sell defendant’s name. If don’t imply the obligation, then it would just be an illusory promise. o An implied obligation to use reasonable efforts will prevent a somewhat indefinite promise from being illusory. o If she’s making a promise to him and he’s not making a promise at all, that’s not a reasonable interpretation of the contract. Looking at the written contract, it doesn’t accurately reflect the meaning of the agreement.  In a non-exclusive situation, seller doesn’t need a return promise to protect himself. But in an exclusive situation, seller must be seeking more, or contract doesn’t make any sense. Not an illusory promise, need a return promise from agent to sell whatever he can.  Reasons for implied terms incorporation in contracts: o Intent o Fairness o Efficiency  For negotiations – implied terms fill in gaps  Encourages willingness to engage in contracts  Gap filling provisions that will be implied in law in contracts for sale of goods unless otherwise agreed by the parties. o §2-309 Absence of specific time provisions; Notice of 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.  Termination clause isn’t indicative of an illusory promise – nothing binding the promisor – but in general only an illusory clause if termination clause has no restrictions. Any restrictions on termination clause prevents it from being illusory. o Some notice is required. o Time limit for the notice  Implied in law restrictions on parties’ ability to terminate at will. If it’s a sale of goods contract, court will imply terms from UCC, even if clause in contract explicitly states that it wants to cancel the contract with no notice at all. Implied Obligation of Good Faith  UCC §1-201(19) – good faith means honesty in fact in the conduct or transaction concerned. 13 Objective standard of reasonable conduct is required §2-103(1)(b) good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.  Restatement §205 – every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.  Output and requirement contracts o UCC §2-306(1) – term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonable disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. o Posner rule – on downside can go as low as you want, but must have a good reason. (reasonable basis)  Can only go up a little in good faith  Definition of reasonable basis – bankruptcy, going out of business. Unreasonable – unprofitability, change of management, buying from a different seller. o NOTE: If no estimate, “normal amount” is still a jury question re: general output, standards of industry, examine course of performance.  Court implies a good faith obligation into every contract. There is a good faith limit on discretionary rights explicitly provided for in a contract. The standard is reasonable expectations. Not enough that someone fulfills all the requirements of a contract, because of implied good faith, can still lose the case.  Implied good faith in race and gender discrimination. o Implied obligation of good faith does not automatically disallow gender or racial discrimination because parties to a contact may have those views. o Implied good faith should be used to prohibit racial discrimination because it would give effect to the numerous anti-discrimination laws and give effect to reasonable expectations of the parties that they will not be treated in a manner offensive to prevailing community norms. AVOIDING ENFORCEMENT: INCAPACITY, BARGAINING MISCONDUCT, UNCONSCIONABILITY, AND PUBLIC POLICY Contract defenses  Arise where you have a valid enforceable contract, but defendant can bar enforcement of the contract. o Offer, acceptance, statute of frauds are all defenses o Carve away at consideration doctrine  Alternate basis of liability – because consideration is inadequate in all circumstances where we’d like to hold a promisor to a promise. o Promissory Estoppel o Restitution (property, promissory restitution – past consideration)  3 categories of defenses – tend to be analyzed together 1. Status – question of a parties’ capacity to enter into a contract. Consider the expectations of the parties and if they contract with someone (minor/incapacitated) want them to keep faith in contracting – balance of competing policies.  14 2. Behavior – behavior of one of the parties is sufficiently reprehensible that we are not going to hold the other party to the bargain o Favors security of transaction based on informed, freely given consent (assent) 3. Substantive – substance of the bargain itself is illegal or unenforceable o Modern approach – greater willingness to examine the substance of an agreement (fairness and unconscionability) Defense of Minority  Someone who has not reached the age of majority, the contract is binding, but is voidable at the option of the minor. 1. § 14 – capacity to incur only voidable contractual duties until the day before 18th birthday. 2. Emancipation status of minors allows them to enter into binding contracts.  Benefit Rule/Bright line rule – upon contract rescission, recovery of full purchase price is subject to deduction for minor’s use of the merchandise  If youth misrepresented age in jurisdictions that don’t depreciate the value, then (1) contract is not voidable or (2) must depreciate the value. In jurisdictions that do depreciate, contract isn’t voidable.  Necessaries – minors have to pay back necessaries (medical bills, etc.) with reasonable or “fair market value” or goods.  At age of majority, minor can choose to affirm (explicitly or by failure to disaffirm) or disaffirm a contract in a reasonable amount of time. Mental Incapacity Defense General Rule: a person can void any contract they entered into while incapacitated (similar to minority rule)  High standard – only for some condition or inherent mental disability  Must fall under one of 2 tests o § 15(1)(a) Cognitive test – ability to understand in reasonable manner the nature and consequences of transaction o § 15(1)(b) Volitional test – ability to control actions in a reasonable way and the other party has a reason to know  Exceptions: § 15(2) where contract made on fair terms and the other party is without knowledge of the mental illness or defect, to the extent the contract has been performed in whole or in part or circumstances have changed so that avoidance would be unjust, court may grant relief. o Hardship or substantial reliance on contract and in addition the minimum effects of the ability to avoid (unfair) where the other party doesn’t know of the impairment, the other party has full rights of restitution for any benefits conferred on mentally impaired party.  § 16 Intoxicated persons o Courts generally only apply the cognitive test (if unable to know what they were doing), and not volitional test – greater protection for the sober party. o Same consequences as minors (give everything back) o Necessaries – fair market value restriction Duress (Behavior Defense) § 492 (b) Components of Duress 15 1. Wrongful threat  Threat to commit a tort - threat of physical harm  Threats to initiate criminal action to induce settlement in a civil case  Threat to engage in civil litigation  For it to be wrong doesn’t have to be illegal – courts look for bad faith 2. No reasonable alternative  Old standard: Deprived of free will – reasonable firmness (objective)  New standard: No reasonable alternative – contextual (subjective)  Alternative not available because pursuing remedy would have caused immediate and irreparable loss to economic or business interest. (fact question) 3. Causation: Resulting agreement induced by threat  Lack of reasonable alternative must be caused by the conduct of the defendant.  Can’t be just a result of the necessities of external circumstances  Restatement – conduct has to substantially contribute to duress  Some courts, doesn’t need to be caused by threatening party, but knowledge of economic duress and bad faith (taking advantage) is sufficient.  Policy concern: Duress doctrine was created to prevent excessive gain resulting from exploitation of impaired bargaining power. This is true in every almost every context (leases, cars, insurance) so duress becomes a murky doctrine if applied on its face.  Consequences o Contract is voidable at the moving parties’ option. Exceptions:  Unless it has been subsequently ratified by the party  If the plaintiff waited too long to bring suit. o If voided, restitution is available and each side must return the benefits received.  Duress is easier to show because must show position of power/dominance in undue influence. Undue Influence (Behavior defense)  Elements of undue influence 1. Excessive pressure by dominant party 2. Undue susceptibility to pressure  Relevant factors (but not required)  Confidential relationship between the parties  Lying or misrepresentation  Bad faith  Undue influence easier to show than duress because wrongful threat is difficult to demonstrate. Overpersuasion Factors 1. Discussion of transaction at unusual or inappropriate time 2. Consummation at unusual place 3. Demand business be finished at once 4. Extreme emphasis on untoward consequences of delay 5. Use of multiple persuaders by dominant side against a single servient party 6. Absence of third party advisers to servient party 7. Statements that there is no time to consult financial advisers or attorneys. Misrepresentation 16 § 164 Restatement – a contract is voidable if a party’s manifestation of assent is induced by either a fraudulent or material misrepresentation by the other party upon which the recipient is justified in relying. Must show 1. Existence of misrepresentation 2. Reliance on that misrepresentation in forming the contract 3. Reliance on misrepresentation was justified NOTE: Nondisclosure is actionable as misrepresentation.  § 162 (1) Fraud – 2 forms 1. Fraud in inducement – knowing or conscious misrepresentation made with intention to deceive the other party and induce them to enter into a contract. (Contract is voidable) 2. Fraud in factum – in execution of contract, misrepresentation keeps party from knowing character or essential terms of the contract (Park 100)  § 162 (2) Material misrepresentation 1. If it would induce someone to assent 2. Subjective- in these particular circumstances 3. No need for bad faith or intent to confuse/deceive  Remedies for misrepresentation: a) Tort action to compensate for damages o Check to make sure a waiver of ability to sue (release) is not a hindrance. b) Rescission (avoiding enforceability) of the contract o Each side must return money or property received. (Not always an attractive option) o Can rescind for material misrepresentation even if misrepresentation doesn’t have fraudulent intent. o If benefit derived isn’t monetary, rescission claim won’t work because can’t return that benefit.  § 168 Misrepresentation based on opinion o Opinion – an expression of a belief without certainty, as to the existence of fact. o Modern contract law - opinions are misrepresentations of fact if the person giving the opinion misrepresented his state of mind. o Misrepresentation of opinion is actionable if:  Stands in a relationship of trust or confidence to the recipient (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. Non-disclosure  Basis for rescission if a material fact is concealed.  General rule: No legal obligation to disclose. Caveat emptor. Exceptions (§ 161): o (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or fraudulent or material. o (b) Where knows that disclosure of the facts would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. 17 o (c) Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part. o (d) Where the other person is entitled to know the fact because of a relation of trust and confidence between them. o If asked a question, can’t lie o If say something, can’t disclose half of the truth o Can’t act affirmatively to conceal information. o Can be liable for innocent misrepresentation, but no liability for innocent nondisclosure. Know vs. had reason to know. Plaintiff must show actual knowledge of defendant.  Policy behind allowing nondisclosure o Nondisclosure by buyer about things that are enhancement in value of property is allowable because encourages research and development and discovery of concealed value. (Produces desired behavior) Buyer is not taking advantage of seller because seller had same opportunity to discover that value. o Not about morality and justice, but about efficiency. o Nondisclosure by seller of defects in property is actionable as misrepresentation. Unconscionability  UCC § 2-302 adopts rules of unconscionability, but courts have been restrained in using this claim. (1) If the court as a matter of law finds the contract or any term to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable term, or it may limit the application of that term as to avoid and unconscionable result. (2) When it is claimed or appears to the court that the contract or any term thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.  Factors for unconscionability (1) Procedural unconscionability – absence of meaningful choice for one party, gross inequality in bargaining power (2) Substantive unconscionability – terms which unreasonably favor one party (fact specific) (3) Manner contract is made  Could plaintiff exercise options  Education of plaintiff  Plaintiff’s understanding of the terms  Visibility of the terms (4) Must be unconscionable at the time the contract was formed for determination. Judge makes the decision because don’t trust juries, rests on assumption of necessities and do we want to prevent a segment of the population from having the ability to contract.  Consideration 18 o BFE – don’t assess the value of the bargain, don’t make sure there’s fairness or equality because law assumes the market will set the price. o If there is a flaw in bargaining, have status and behavior defenses. If no defenses to be made, then  Court can’t decide there’s no bargain just by claiming unfairness  Unconscionability is something to assert.  Unfairness becomes a stronger argument in conjunction with a status or behavior defense. Court then more likely to state contract is void.  Substantial disparity, but if you don’t meet other requirements, court may be inclined not to enforce the bargain (grossly unfair)  With adhesion contracts, rise in boilerplate (standard form contracts) and neither party has read in a “take it or leave it” circumstance. Public Policy  Consumer Protection Statutes: give governmental authority to agencies to regulate improper conduct by sellers.  Contract may be unenforceable because it violates or runs directly contrary to some public policy. Some things should be decided as a matter or law, not by contract.(R.R. v. M.H. and another: surrogate mother case, 1998) Covenants not to Compete (I have nothing on this?) JUSTIFICATION FOR NON-PERFORMANCE: MISTAKE, CHANGED CIRCUMSTANCES & CONTRACTUAL MODIFICATION Mistake  A belief that is not in accordance with the facts (misrepresentation – assertion that is not in accord with the facts) 1. Mutual mistake (§ 152) – (1) Where a mistake of both parties at the time a contract is made was as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under rule §154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way or reformation, restitution or otherwise. a. Mistake as to basic assumption that contract was made on (doesn’t include value and quality) b. Must have material effect on agreed to exchange c. No assumption of risk for party seeking relief d. Contract can be rescinded, but court doesn’t have to grant relief. 2. Unilateral Mistake (§ 153) – where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154 and (a) the effect of the mistake is such that the enforcement of the contract would be unconscionable or (b) the other party had reason to know of the mistake or his fault caused the mistake. a. If effect of mistake leads to unconscionable result (not same unconscionable as § 208) b. If party had reason to know of mistake (not party that made the mistake, but party to whom the mistake was in their favor) c. If party caused the mistake d. Mistake of basic assumption. 19 e. Same as requirements of mutual mistake, plus these. f. Clerical/mathematical errors are difficult to prevent and would create a disincentive to contract and inefficient behavior if people were held to these types of errors. 3. NOTE: substantial hardship = unconscionability and material effect; lack of detrimental reliance = goes to equitable relief; reasonable = effect of mistake  Law will allow a party to avoid obligation if the expectations have been disappointed. CHANGE IN CIRCUMSTANCES DEFENSES Restatement treats all of these as a question of law, not of fact. General rule: Strict liability exists for performance, regardless of ability Impossibility doctrine (exceptions to general rule): 1. Government action – a superceding government action excuses contractual obligations 2. Death of the promisor – if person’s existence is necessary to performance, then duty is discharged 3. If existence of something is necessary for performance, party is excused if destruction of the thing causes the contract not to be performed. NOTE: Impossibility doctrine doesn’t apply if the person causes the impossibility. If you’ve guaranteed the performance, you’ve contracted out of the impossibility doctrine. 1. Impossibility Defense o Future makes performance impossible 2. Impracticability Defense  § 261 – where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. o Can still perform, but performance is more expensive or difficult o If economics plays into the defense of impracticability, then it doesn’t go to a basic assumption of the agreement. 3. Frustration of Purpose Defense (§ 265)  3 Factors o Purpose frustrated must be a “principal purpose” – not profitability, because then it’s the principal purpose of all agreements. o Substantial – not enough that it’s less profitable o Non-occurrence of event must be a basic assumption of the agreement  Value of performance has been significantly reduced  In general, win or lose on both because impracticability and frustration have similar requirements.  General judicial tendency to reject frustration/impracticability based on an economic argument because should get insurance or regulate (contract) for the risk. Even in war and disaster, reluctant to grant.  Economic analysis – who can better avoid this risk?  Some courts consider foreseeability. To assert a defense, the event must be unforeseeable.  Governmental intervention – courts are more likely to be forgiving of government intervention in frustration of purpose  UCC § 2-615 Excuse by Failure of Presupposed Conditions o Broad enough to cover impracticability and frustration in sale of goods context. 20 o Expressly addresses excuse of performance by seller on the ground of impracticability, but does not mention buyer. Courts will grant relief to buyer as well. o Most likely to apply for destruction of subject matter, government regulation and at least unforeseen cataclysmic events. o More focus on foreseeability than common law. Modification and Contractual limits  Grounded in consideration and duress o Pre-existing duty under previous contract, so no consideration for the new contract. o If give an upgrade or something, then modification is supported by consideration. o If there are many choices, the court will enforce the contract. But when there are no choices, court will let the buyer out of the contract of the theory of economic duress.  Pre-existing duty rule – obligation comes from an existing contract, so any additional promise made viz. that pre-existing duty is not binding. o Relation to duress – pre-existing obligation to perform can’t be consideration for a new contract, so want to prevent the possibility for coercion. Exeptions:  Mutual release (joint rescission) – because old agreement is gone, can create a new contract. However, this creates a fiction and the court would be concerned if destroy and reform the contract at the same time.  Change in performance – if get a better deal (even slight) and an additional duty is imposed, the pre-existing duty rule doesn’t apply because there is consideration.  Disputed obligation – if there is a good faith question of obligation, then no pre-existing duty rule.  Doesn’t apply when the obligation has been fully performed. Can’t recover what was already given.  § 89 Restatement – modification binding if (a) Unforseen circumstances – not anticipated when contract was made; or (b) To extent provided by statute; or (c) To extent of reliance on the promised obligation NOTE: Some states have no pre-existing duty rule, they just examine if the modification has been bargained for.  UCC § 2-209 Modification; Rescission and Waiver 1. A modification agreement needs no consideration to be binding 2. An agreement that excludes modification, except by signed record cannot be modified, except as a separate form with the modification separately signed by the other party.  No oral modification (NOM) clause – if you initiate a violation of the clause, you are estopped from asserting the clause. a. Part performance is an exception to the NOM clause. NOM is a private statute of frauds, so because part performance is exception to SOF, it’s an exception to NOM. (Brookside v. Mama Rizzo’s: basil for restaurant) 3. Requirements of statute of frauds must be satisfied if contract is modified 4. An attempt at modification can operate as a waiver, even if it doesn’t satisfy 2 and 3. 5. A party that has made a waiver may retract the waiver by reasonable notification received by other party that strict performance will be required of any term waived, unless retraction would be unjust in view of material change of position in reliance on waiver. 21 a. No pre-existing duty rule, just look to the bargain because in the real world people make modifications. b. Police agreements by general requirement of good faith in all transactions and duress. i. Was there a dispute as to the obligation? ii. Apply duress and coercion and general course of dealings iii. Was there good reason for modification? iv. Was breach threatened?  Full payment check – “accord and satisfaction.” If check is deposited that says “full payment” and if claim has no specific price (unliquidated damages), then it is considered a settlement and defendant is released from obligation. But if have a liquidated claim ($10,000) and full payment claim is made for partial amount ($5,000), most jurisdictions won’t see that as full payment.  When you have to accept the modification you have a good faith obligation to indicate that you aren’t going to pay the additional amount. If you have the intention of disputing, then you should indicate that intention. RIGHTS AND DUTIES OF THIRD PARTIES Rights of third parties as contract beneficiaries  Third party – people that may have rights or duties or both enforceable by or against them as a result of the making of contracts to which they were not themselves parties.  Exceptions to privity – Question of whether the benefits of the contract between two parties run to the 3rd party. Does 3rd party have some rights under the contact? If so, then 3rd party beneficiary. o Must have 3 parties o Must clearly distinguish between promisor, promisee and 3rd party beneficiary. §302 Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.  Incidental beneficiary – receive some benefit, but don’t meet the requirements of the intended beneficiary, so can’t sue on the contract.  Intended beneficiary – 3rd party interests are central to the contract. Makes sense that they are either (common law pre-Restatement categories) o Creditor beneficiary – B owed A money and told C to pay money to A. o Donee beneficiary – A wants to give C money, and C sues B (testatrix) to get the money. Now not juts the gift context, category is bigger and more flexible.  Promisor and promisee can modify contract without consulting 3rd party, except: o When 3rd party justifiably relies on promise o 3rd party gives assent at request of promisor and promisee o When 3rd party brings suit under the promise.  Intent requirements (who courts focus on and how much intent is required depends on the contract, and if there was a pecuniary benefit conferred) o Rare that focus on promisor’s intent 22 o Promisee’s intent (usually relevant intent) o Promisee’s intent and promisor knew of had reason to know of that intent o Intent of both parties  Third party rights may arise from the making of the original contract. o Was there some benefit going to 3rd party? o What was the intent of the statute? Who was it designed to protect/help? o Who pays the expense? o Limited liability provision?  Limit liability to control litigation and claim settlement, the likelihood of impairment of service or of excessive financial burden and availability of alternatives such as insuance. o What type of damages are they seeking?  Restitution damages are often awarded because they are very specific  Compensatory damages are difficult to give, open-ended. o Vogan v. Hayes Appraisal, rule from Tredrea: A third party who is not a promisee and who gave no consideration has an enforceable right if the promised performance will be of pecuniary benefit to third party and contract is expressed to give promisor reason to know that such benefit is contemplated by promisee as one of the motivating causes of his making the contract.  Defenses of promisor in responding to an action by a third-party beneficiary o Duress, fraud, etc. o Bound to the particular defenses in the contract – any claim must go to arbitration, etc.  Remedies that are appropriate in third party beneficiary cases Assignment  Assignment – issue of rights under the contract. Question of whether you can assign the rights to someone else. o In commercial context (credit society) needed to be able to assign benefits under one contract to receive credit for other projects. o § 317(2) 3 Circumstances where rights cannot be assigned  If assignment violates some statute or public policy  Has material adverse effect on other party (materially change the duty of obligor, materially increase burden or risk imposed on him by contract, materially impair his chance of obtaining return performance, materially reduce its value to him.)  Valid preclusion of assignment under the contract Delegation of Duty § 318 – (1) Can delegate duties, unless delegation is contrary to public policy or terms of promise. (2) unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised. (3) Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.  Delegate may not have the resources and can harm the interests of the first party.  Courts are more stringent – depends on the extent that the contract was specifically directed at a specific party – court less likely to permit delegation. 23  Delegation doesn’t eliminate the obligations of original parties, duty isn’t eliminated until delegated party performs, unless original party releases promisee from contract (novation).  All depends on the terms of the contract (if it allows or forbids), but right to a payment can be assigned, even if it specifically says you can’t (according to the courts). CONSEQUENCES OF NON-PERFORMANCE: MATERIAL BREACH, ANTICIPATORY REPUDIATION AND EXPRESS CONDITIONS Material Breach  Fact intensive area of contract law. Change in facts may change the outcome.  Most contracts are bilateral and consist of exchange of promises which look to exchange of performances o If promise is not satisfied it gives rise to an action for breach o If breach happens, on one part, that does not necessarily release other party from their promise o Idea is to protect the contract and give the parties what they bargained for  Total breach – material breach that is not cured after a reasonable amount of time. Other party does not have to perform and can sue for damages.  Partial breach – nonbreaching party can suspend performance while waiting for cure, if breaching party does cure, non breaching party has to perform and can sue for damages.  § 241 Factors for Material breach o Extent to which injured party will be deprived of the benefit which he reasonably expected o Extent to which injured party can be adequately compensated for the part of that benefit of which he will be deprived o Extent to which breaching party will suffer forfeiture o Likelihood that breaching party will cure his failure, taking account of all the circumstances, including any reasonable assurances. o Extent to which behavior of breaching party comports with standards of good faith and fair dealing. o For determining total or partial breach add these two factors:  Degree of importance parties attach to timeliness  Extent to which delay is likely to prevent or hinder non-breaching party from making substitute arrangements.  Breach can be insubstantial or material. o If other party materially breaches the contract, I can be excused from performance. o If the other party substantially performs, I can’t be excused from performance. o In case of immaterial breach, get the cost of the difference if there is substantial performance. (Jacob & Youngs v. Kent: Reading pipe replacement case, got cost of difference between Reading pipe and pipe that was used, basically nominal damages because difference was insignificant)  Damages o Diminution in value standard – reasonable expectation of what you were getting o Cost of completion standard – expectation damages, cost of putting in the same position as if contract had been fulfilled  Test for substantial performance o Whether the performance rendered meets the essential purposes of the contract 24 o Essential purpose – something less than perfect is sufficient, if condition of material breach o If substantial performance, party breached against still has to perform their part of the contact, but they can still sue for damages o Willful breach – knowingly breached, then court more likely to use cost of performance or diminution of value.  Contract law wants to encourage efficient breach because sometimes it’s more efficient to breach the contract and write a check than to perform the contract.  Factors to determine substantial performance o Look to magnitude of breach (difference in relative costs) o Time limits – was there timeliness provision o Size of possible damages (amount) and extent of part performance. Less likely to find substantial performance if it is difficult to calculate the damages. o Hardship to breaching party (i.e. have to rebuild entire house) o Negligent or willful behavior o Likelihood of full performance (are they likely to fulfill the contract?) o Definitely a question of fact. To what extent does performance favor material or substantial performance?  Policy concerns o Want to allow both parties to have reasonable amount of security to protect expectation interests, but don’t want parties to abuse privilege. o Assess if adequate reason for party to suspend performance  If breaching party suspends, nonbreaching party must delay an appropriate amount of time.  If nonbreaching party doesn’t wait, run risk of partial breach or part performance and nonbreaching party being in breach  If 100% clear of material breach and needed alternate arrangements, can get away with part performance. Anticipatory Repudiation  Requires a clear manifestation of an intent not to perform the contract on the date of performance. That intention must be a definite and unequivocal manifestation that he will not render the promised performance when the time fixed for it in the contract arrives. Doubtful and indefinite statements that performance may or may not take place are not enough to constitute anticipatory repudiation. (Truman Flatt v. Schupf, 1995) o Fact intensive issue for the jury.  Before time of performance has come, information (actions or words) is available to suggest that the party will not perform. But not just financial difficulty, must be clear that they are repudiating the contract (say or do). o Bankruptcy filing – financial evidence of anticipatory repudiation  § 256 Retraction in time of anticipatory repudiation is allowed unless o Communicated acceptance of repudiation as final or o Now relied on the repudiation.  If you rely without adequate reasonable basis for repudiation, then your party is in breach. o Prevent the retraction by:  Saying you accept the repudiation as final or 25  Go ahead and sell to someone else (rely to your detriment)  Negotiate with the other party and communicate or  Demand adequate assurance of performance.  Give notice by: o Telling makes it final. o Send your lawyer, send a complaint saying liable for the damages. Adequate Assurances of Performance  Standard: When there are reasonable grounds for insecurity, a party can demand adequate assurances and suspend their own performance until they get those assurances. o Under a contract, need to know how to proceed. Should put party on notice, because it is unreasonable to make someone question the performance, and impose the burden of wondering. o In general, courts don’t impose an obligation to request adequate assurances in anticipatory repudiation, but a court may check those things.  Requirements for insecurity: o Buyer falls behind in obligations o No reasonable insecurity as to this transaction, but as to default of missed payments to others o Issue of specific circumstances, examination of facts in this case. o Misrepresentation o General course of dealing (past payment history) o Nature of industry in this situation – “one of commercial reasonableness and factual conditions”  Assurances formally need to be in writing, but courts will accept oral.  Fact intensive (Hormel, asked for a personal guarantee and line of credit, and that was too much to ask for).  Once you get the assurances, you are obliged to perform unless circumstances change. Then you request further assurance of performance.  § 251 (1) May suspend performance until you receive requested assurances. (2) If fail to respond within a reasonable amount of time (often 30 days) to a request for adequate assurances, then that is anticipatory repudiation of the contract and there is no longer a contract.  Adequate assurances of performance originate in the UCC § 2-609 Right to Adequate Assurance of Performance, to alleviate concern. Not limited to sale of goods because adopted in §251. Express Conditions: Classical Principles  Constructive conditions (Cardozo, Jacob & Youngs) o The judge determines constructive conditions and is rejecting the judge decided intent, not the intent of the parties. The court implies constructive conditions by determining the relationship between the promises. Independent and dependent are used with constructive conditions, not express conditions. o Dependent promises – if promises are dependent, then if one isn’t performed, the other one doesn’t have to be performed. If court determines that promise to perform is dependent on the other, then constructive/implied condition. Depends on the materiality and intent of the parties. 26         o Independent promises – if promises are independent, then if one promise isn’t performed, still have to fulfill your promise.  The promise to use Reading pipe was independent of the promise of payment, and it was substantial performance. Express conditions o Uses the language of “if” and “unless and until”, consequences will follow, an express condition is…) there is no substantial performance. “Perfect tender” (from UCC) is required. o Conditions determined by the parties. The court would be rejecting the parties’ intent by saying substantial performance is adequate. o Substantial performance does not apply in the case of express conditions because trying to protect the parties’ interests. Adverse interpretation – when a court ignores an express condition and construes it as a constructive condition. o Or language is sufficiently ambiguous, so court will say not express condition and substantial performance is ok o or when there is boilerplate language. Sometimes interpret express condition as a promise. o The other party must comply, and if not they are in breach. If it was materially breached, then apply substantial performance to breach, but other party still has to perform Interpret as both an express condition and a promise. o If express condition: x doesn’t occur y doesn’t occur or doesn’t have to happen (voidable). If a promise prevents intentional sabotage of condition and avoids where substantial performance can get out of a contract, so neither party can get out of the contract. o Avoids concern of promise vs. express condition. Nonoccurrence of express condition can be excused by waiver, breach or forfeiture Waiver of a condition (§ 84) o Voluntary abandonment of a contractual right. o No requirement of reliance, but can’t waive a material condition. o Waiver can be retracted prior to time for the conditions fulfillment, if there has been no reliance and it’s not supported by consideration. Estoppel of a condition o Assertion of a right by a party by their words or conduct has caused the other party to believe the right does not exist, or that it will not be asserted and the other party has relied on that belief, then they are estopped from asserting that claim. o But, must show reliance on that belief. Doesn’t matter if the relevant condition is material or not. Prevention of a condition (§245) o Condition is excused if the promisor wrongfully hinders or prevents the condition from occurring. o In order to know if prevention is wrongful, must ascertain what degree of obligation the obligor has with respect to the happening of the condition in question. If conditioning event is somewhat within the obligor’s control, then 27 obligor has to attempt to cause the condition to occur, cooperate with obligee in the occurrence or at least not hinder the occurrence.  Conditions and timing clauses o Builder tells subcontractor he will be paid when the builder is paid for building the house. o As a condition of payment, still has to pay the subcontractor, clause just sets the timing for when he will be paid. Excuse and Interpretation of Conditions All of these decisions are fact specific. Play both sides out on an exam. Forfeiture is the most general grounds for avoiding the effects of an express condition.  Forfeiture – denial of compensation that results when the obligee loses [its] right to the agreed exchange after [it] has relied substantially, as by preparation or performance on the expectation of that exchange (§229 comment b)  Forfeiture considerations/elements o Reliance element – did the party who is being held to the condition rely or will they be out/incur some costs? o Prejudice/unjust enrichment o Some fault dimension – was either party at fault? o Forfeiture only relates to express conditions.  Option to purchase – courts don’t apply forfeiture doctrine because not forfeiting anything.  Leasing with option to buy – courts are split on whether forfeiture doctrine applies.  Should always give notice, then it prevents risk of forfeiture.  Satisfaction as an express condition o Jacob & Youngs was a satisfaction condition, because the architect had to sign off on the pipe used. Morin Building v. Baystone aluminum finish. o Standards for satisfaction  Objective standard - reasonable person standard  Preferred by Restatement § 228 “practicable to determine whether a reasonable person in the position of the obligor would be satisfied.” Particularly when otherwise it would result in forfeiture or unjust enrichment.  Subjective standard - good faith standard (required to be honest)  Boilerplate language  Difference between construction contracts and aesthetic contracts. In artistic contracts, can use a more subjective standard.  To distinguish between objective and subjective standard  Greatest impetus to objective standard where the risk of forfeiture on one side and gain on the other side – usually in construction cases.  Intermediate level – risk of forfeiture, but no gain to other side (specially made goods)  General – no risk of forfeiture and no risk to the owner (something that can easily be sold to someone else) o Satisfaction clause interpretation  3rd party will be the judge of satisfaction 28 As long as 3rd party exercises independent judgment, court will allow it to stand.  If 3rd party can’t judge, or refuses to judge, then condition of satisfaction is deemed to be waived.  One contracting party is the judge  Something really subject to taste and fancy  If not subject to taste and fancy, use subjective standard. o Interpretation – interpret ambiguous language against the drafter. Computing Expectation Damages – Real estate transactions  Damages are measured at the time of breach.  §347 General measure of damages (total breach) = loss in value + other loss – cost avoided – loss avoided – total breach means don’t have to perform. o Loss in value (profits) – difference between value to injured party of performance that should have been received and value actually received. o Other loss  Incidental damages – additional costs incurred after breach in reasonable attempt to avoid loss  Consequential damages – injury to person or property caused by the breach o Cost avoided – additional expenditure saved by injured party after breach o Loss avoided (mitigation) – beneficial effect of breach by allowing party to avoid some loss by salvaging and reallocating some or all resources that otherwise would have devoted to contract performance  Measure of damages (partial breach) = loss in value + other loss o Partial breach means you should still continue your performance, so you shouldn’t have any materials left over to mitigate and you didn’t avoid any costs because you finished performance.  Expectation damages are the standard damages – puts plaintiff in position he would have been in had the defendant performed his promise.  Restitution interest – plaintiff has conferred some value on the defendant in reliance on defendant’s promise; prevention of unjust enrichment  Reliance interest – plaintiff has changed position in reliance on defendant’s promise; damages to undue harm to plaintiff caused by reliance on defendant’s promise. Put in as good a position as before promise was made. 3 limits to damages 1. Foreseeability of particular damages 2. Damages must be nonspeculative 3. Plaintiff’s need to mitigate damages.  Where benefit conferred is money, court is willing to accept the argument that you got more than you bargained for. Where the benefit is service (non-fungible) court is less willing to accept that you got more than you bargained for, so the party who breached should pay for the benefit, not the beneficiary. (?)  UCC § 2-708 Damages for non-acceptance or repudiation o Difference between market price and unpaid contract price at time and place for tender + incidental damages – expenses saved. Expectation Damages in Employment Contracts  Measure of damages: Difference in contract price and replacement price. 29   Employment contract breach rule: Employer can recover damages from an employee in breach of an employment contract. Nonbreaching party is entitled to full compensation for loss as long as its foreseeable and they acted reasonably to mitigate damages.  Monetary damages are adequate, so specific performance is not necessary.  Orders for specific performance are rare especially with personal service contracts because of Constitutional laws against involuntary servitude.  Question of the court for damages: What’s necessary to meet the expectation of the party and give them the benefit of the bargain? Expectation Damages in Construction Contracts  Is the standard difference in value or cost of completion?  General standard for breach of construction contract is that injured party may recover damages that are the direct, natural and immediate consequence of the breach and which can reasonably be said to have been in the contemplation of the parties when the contract was made. (American Standard v. Schectman) o Gen. Standard is cost of completion because want to put plaintiff in position they would have been in had the contract been fulfilled. Difference in value has risks of undercompensation of the plaintiff.  In defective or incomplete performance cases, reasonable cost of replacement or completion is measure. Id.  Good faith substantial performance, but defects exist, the correction of which would result in economic waste, courts have measured damages as difference in value of property as constructed and value if performance had been properly completed. Id. o General rule: A contractor who asks the court to apply diminution in value measure “as an instrument of justice” must not have breached the contract intentionally and must show substantial performance made in good faith.  Peeveyhouse: where the breach that is only incidental to the main purpose of the contract and completion would be disproportionately costly, courts have applied the diminution in value measure, even where no destruction of work is entailed. o This is the standard in cases where the defendant fails to adequately restore land as promised.  Standard: Focus should be on idiosyncratic goals of this plaintiff, even if they are strange and irrelevant. (subjective standard). Difference in value may undercompensate, but cost of completion may overcompensate the plaintiff.  Restatement §348(2) If breach results in unfinished construction and the loss in value to injured party is not proved with sufficient certainty, he may recover damages based on (a) diminution in market price (b) reasonable cost of completing performance or remedying the defects if that cost is not clearly disproportionate to probably loss in value to him. Completely opposite to American Standard.  Public interest: what are the environmental consequences of the incomplete restoration of land? How should that factor into the decision?  Arguments that courts are too strict with compensation problems and should just award specific performance and allow the parties to decide what will be done. RESTRICTIONS ON EXPECTATION DAMAGES RECOVERY  Requirements of consequential damages o Foreseeability o Certainty 30 o Causation Foreseeability of Damages in Other Loss (Consequential damages)  Requirements of Foreseeability of Loss (§351 and §2-715(2)) o Depends on knowledge of defendant at the time the contract is made, not at time when breach occurred. o Necessary that type of loss be foreseeable, not the manner the loss occurs. o Focus on foreseeability of the breaching party. o Objective standard – liable for losses it had reason to know. o Loss must be foreseeable as “probable” result of breach, doesn’t extend to remote losses.  Tacit agreement test: Consequential damages are only recoverable if specific circumstances were brought to the attention of the defendant and the other party consciously assumed liability in question. Proposed by Holmes, rejected by contract law.  Hadley v. Baxendale (Eng, 1854): Foreseeability of consequential damages (in other loss). Rule: general damages + special damages that are reasonably within the contemplation of the parties as a probably result of the breach. o Foreseeability: things that the parties had in mind or should have had in mind when the contract was formed. o Plaintiff required to inform defendant of exact situation because then defendant could get insurance, charge more for services and produce more efficient behavior. Need a mechanism for negotiation so defendant can refuse to take the contract if costs are too high.  Direct damages – plaintiff does not need a specific showing for these, because they are damages that arise naturally. Consequential damages – damages flowing from special circumstances brought to defendant’s attention. Certainty and Causation of Consequential damages  Florafax International v. GTE Market Resources (OK, 1997): Recovery for lost profits under a collateral contract. Under 2nd part of Hadley (special damages) because lost profits from a collateral contract. o Loss must be within the reasonable contemplation of the parties at the time the contract was formed. o If the loss flows directly or proximately from the breach (injury by breach) o If the loss is capable of reasonably accurate measurement or estimate  Damages must be proven with reasonable certainty. o Fact of damages – high standard to prove (question of law)  Need to have evidence, lost profits, expert testimony, must show damages would not have arisen without the breach. o Amount of damages – more liberal standard (question of fact)  General measure of damages: If lost profits are directly under the contract that was entered into, then should include in loss of value (and not other loss). If lost profits from a collateral contract, then they are consequential damages.  Contracts usually have clauses limiting liability for consequential damages.  New business rule: With a new business, lost profits are harder to calculate and courts generally won’t allow recovery for lost profits, unless provided with reasonable certainty.  Net profits are the standard, not gross profits, because gross profits would take cost avoided out of the formula. 31  To get lost profits don’t need a specific calculation, but need some degree of evidence. Mitigation: General Principles  §350 (1) Damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation. (2) The injured party is not precluded from recovery to the extent that he has made a reasonable but unsuccessful efforts to avoid loss.  Mitigation or Avoidable Consequences: after absolute repudiation or refusal to perform, plaintiff may not recover for those injurious consequences of the defendant’s breach that the plaintiff could by reasonable action have avoided.  Basic idea of mitigation: Compensation to the plaintiff should occur at the least cost to the defendant. Not meant to penalize the defendant, which supports the idea of efficient breach. o Unavoidable loss may be charged to the defendant, but avoidable loss can’t be. o Purposes of mitigation  Efficient use of resources  Punishing defendant with no real benefit to plaintiff (avoiding damages)  Plaintiff should request adequate assurances (in case they are unsure of what they should do) or request a declaratory judgment from the court. Mitigation in Employment Contracts  Rule: An employee who has been wrongfully terminated has a duty to mitigate damages through reasonable efforts to achieve other employment.  Defendant must prove that job offered to plaintiff was substantially similar to the job they were wrongfully terminated from. o Substitute must be substantially similar o Burden is on the breaching party to prove that mitigation is possible.  Defendant has burden of proof because assume the defendant has more information because it’s an element that will reduce the amount of damages they will have to pay.  Question of fact for jury to determine if plaintiff acted reasonable re: his duty to mitigate.  Measure of damages: amount of salary for period agreed on, subject to the mitigation duty. Deduction from employees recovery for failure to take another position is allowed only when the employment is “comparable or substantially similar” to the job from which plaintiff was discharged in location, type of services, hours of work and status. (Parker)  Incidental damages: Plaintiff may recover for costs associated with finding another job.  Effect of other income: If plaintiff does mitigate by taking another inferior job, amounts earned are set-off against recovered damages. Unless the inferior job can be performed in conjunction with old job, then don’t subtract those earnings.  In case of a substantially similar job, the plaintiff may not feel comfortable accepting a position from which they were already fired. o Some circumstances cut against mitigation: pretextual offer (one just made to mitigate) and offer that doesn’t account for change in circumstances (Red Lionwoman was pregnant and was afraid to take the offer for fear they would fire her for pregnancy). Question of whether mitigating offer is meaningful. The Theory of Expectation Damages  Why do we grant expectation damages even when parties didn’t rely on the promise? o Encourage entering into contracts and reliance on the promises. o Compensate the party 32 o Psychological – compensate the attitude of expectancy and deprivation of something that was his, even without actual reliance on the promise. o Will theory – contracting parties are exercising a legislative power, so legal enforcement is just implementing the private law established by the parties. o Economic or institutional approach – expectancy created by the contract is seen as an enforceable promise that is property and breach of promise is injury to that property. o Juristic – recovery to reimburse the plaintiff for the individual acts and forbearances that made up his total reliance on the contract. o Barnes theory – damages should be measured by the net expectation interest of the injured party. Protection of this interest reflects contracting parties’ interest in improving their well-being. o Protecting risk allocation – enter into fixed price contract based on needs o Facilitate planning – allow plaintiff to effectively plan out business needs.  Atiyah – in real world, don’t expect people to be held to a contract when there is no action in reliance. o The purpose of a contract is just to define terms and not to actually execute the contract. o Contradicting this – risk allocation and facilitation of planning can only occur if contract is executed, not just terms put on paper.  Efficient breach o Sharpest edge of law and economics that influences judges in determinations. o Concern that by making economics a basic measure of evaluating legal rules, creates a backlash that there are no values or morals left to keeping the contract. o Main criticism – efficient breach ignores transaction costs and the damages awarded don’t fully compensate the parties because proving damages has some element of loss. o Suggestion is that court order specific performance and parties can negotiate themselves Nonrecoverable Damages  Punitive damages o Don’t usually award punitive damages because contract doctrine is strict liability, not based on fault. o Award punitive damages in instances of bad faith because it’s less efficient not to give punitive damages to achieve a well-functioning society. o In 3rd party insurance contracts, attorney fees, emotional distress and punitive damages are awarded because it’s so inefficient. Less common in 1st party context. o Allowed in special relationship contexts with insurance or in cases of fraud or duress. But then punitive damages are for the tort basis, not the contract claim. o No emotional nature/commitment in contract law, but where it is, emotional distress damages will be available. o Because contract law is about pre-existing relationships and tort law is about no previous relationship, parties in contracts have the ability to contract and address emotional issues in advance.  Efficient breach – breacher runs numbers and variables, nonbreaching party can’t assess, so negotiate the distribution of the surplus between them.  Zapata – question of the American rule 33 o If losing party pays, excludes poorer litigants because they can’t afford to lose. o Judges argue because have to decide what a reasonable amount of attorney’s fees are.  Be conscious of CISG and different outcome it provides, different from UCC and common law. If it is adopted, then no American rule. If it is contracted out of, then apply provisions in the contract.  Posner - Difference between substantive rules (be consistent) and procedural rules (follow jurisdiction they’re in). Attorney’s fees are substantive, and the CISG should be followed. ALTERNATIVES TO EXPECTATION DAMAGES: RELIANCE AND RESTITUTION, SPECIFIC PERFORMANCE AND AGREED REMEDIES Reliance Damages as Alternative to Expectation Damages and in Promissory Estoppel Actions  Reliance damages instead of expectation damages because: o Don’t work or are inapplicable. o Noncommercial context, calculation is difficult, or doesn’t make sense. o Expectation damages may give too much relief, so turn to reliance damages. o Neither expectation or reliance damages will compensate the nonbreaching party. Also, of no help to breaching party Restitutionary Damages as Alternative Remedy for Breach of Contract and on Behalf of Breaching Party  Breaching and nonbreaching party has right to request restitution damages if reliance damages are not adequate. o For injured party, if restitution damages would provide a larger reward than expectation or reliance. (I.e. Algernon Blair, where party entered into a losing contract, expectation damages wouldn’t help because would get no damages because expectation is zero)  Restitution o Quantum Meriut – allow a promisee to recover the value of services he gave to defendant irrespective of whether he would have lost money on the contract and been unable to recover in a suit on the contract.  Measurable recovery is reasonable value of performance, undiminished by any loss which would have been incurred by complete performance.  Different Restitutionary claims: implied in law, quantum meruit contract and quasi contracts. Use them synonymously to refer when someone is unjustly enriched at the expense of the other party, that unjust enrichment/benefit derived will be taken from them. o Coastal v. Algernon Blair: plaintiff does not want contract damages (expectation) because under the contract there would have been a loss if they completed performance.  Court says plaintiff can elect to recover in restitution for the value of the benefit conferred on the other party. (§ 373 Restatement)  § 371 restitution measured by 2 standards 1. Cost avoided – what would cost the defendant to obtain the same benefit from a person in plaintiff’s position. So, if I’m the defendant, the beneficiary of unjust enrichment, what would it have cost me to get the same benefit from someone else? 2. Net enrichment – the increase in value of the defendant’s property. What was the amount by which I was enriched? 34 Courts will generally award the smaller amount because of conservativism and if both are appropriate standards, people will assume their recovery will be the lesser amount, and it ought to adequately compensate.  Because restitution is an equitable remedy, a court will consider what fairness requires, what’s the fair result, and potentially award larger sum if fairness requires it.  MAJORITY RULE: MARKET VALUE RESTITUTION. Court uses market value restitution (market value of benefit awarded). Problem with market value is that you shouldn’t put the nonbreaching party (plaintiff) in a better position than they would have been in. If you grant market value, they may be in a better position. o Alternative to market value is use some factor to calculate what the damages would be. Fraction of the contract worth. 24/33 x Contract price (Note 4) because that is what the parties contracted for, with contract price being a cap because don’t want to overcompensate. o Another alternative is to use contract price as evidence of what damages ought to be. Contract price isn’t determinative, just useful (probative) evidence. If market price is higher, then court might raise contract price.  § 373(2) Full performance exception – can’t get restitution damages if nonbreaching party has fully performed and only part due is payment of specific sum of money. Have this exception because it’s what the parties bargained for and wastes courts time (inefficient) to figure out the damages when the contract has already done the calculation.  § 374 – restitution is available even to breaching party. o A party who breaches after almost fully performing ends up more severely penalized than a party who breaches by not acting at all, or only after just beginning to act. Rule from Britton v. Turner. o Provision that said if breach was willful and deliberate, then breaching party can’t get restitutionary damages is dropped from the new Restatement. That old provision would basically eliminate efficient breach and because idea of contract damages isn’t to punish the breaching party. Willful and deliberate is a difficult assessment to make.  Limitations on right of restitution: o Restitutionary recovery by breaching party is limited by nonbreaching parties’ right to offset damages. Meaning, nonbreaching party gets all damages they need to be fully compensated for their injury, and then whatever is left goes to the breaching party. o Limited to actual enrichment. Only monetary benefit that has gone to nonbreaching party. o Cannot exceed a ratable portion of contact price. Market value damages can’t exceed proportion of contract price o Market value damages are denied if there is a valid liquidated damages clause. o If injured party seeks or is entitled to specific performance, no restitution damages. Restitutionary Damages in other Situations  Rule: No room for unjust enrichment where there is an express contract because there is no claim for breach. (unlike in Algernon Blair, where contract was breached). o Restitution not used as a method of recovery, but as a theory of recovery. o Contract defenses: Restitution is available when a contract is unenforceable for a number of reasons (fraud, mistake, incapacity, duress, etc.). If the court rescinds (voids) the  35 contract, each party must make restitution from value of benefit received from the other party. Specific Performance: General principles  Limitations on specific performance o Only available when monetary damages are inadequate. o Uniqueness – market can’t adequately replace/compensate (usually land) o Constitutional/moral/public policy limitation o Definiteness/specific – if contract isn’t definite, then what is court ordering? o Hardship to defendant. o Unfairness o Irreplaceable - 3rd party may have bought it.  Origins of division between damages and injunctive relief o Distinction between law (damages) and equity (injunctive relief) o Specific performance was available when damages were inadequate. o Now that law and equity has merged, court has option of damages or injunctive relief.  NOTE: Have to defend reasons for choosing specific performance over other remedies. Damages 1. Expectation interest  Interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed (§344) Net value plaintiff (or promisee) expects to receive from performance of contract, including opportunity costs and lost profits. Based on an objective and reasonable impression. 2. Reliance Interest  Interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made (§344) Expenditures made on reliance of contract being enforced (compensation for funds expended) by promisee (plaintiff) 3. Restitution  Interest in having restored to him any benefit that he has conferred on the other party (§344) Made to put defendant in same position as if the promissor (defendant) had not entered into the contract Study modern vs classical approach for possible essay on exam. 36