I. AN INTRODUCTION TO THE STUDY OF CONTRACT LAW (1) A. CONTRACT LAW IN THE FIRST YEAR LAW CURRICULUM 1. Contract a. an agreement that has legal effect; it creates obligations for which some sort of legal enforcement is available b. an agreement between two or more persons as to a common understanding that something be done in the future by one or both of them; an agreement that has legal effect c. Contract definition in R§1 (174): a contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty i. Promise: a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promise in understanding that a commitment has been made (a) Use an objective intent standard? 1. Could have non rational actor 2. Each party could always argue that there‘s mutual mistake which invalidates contract – bad public policy 3. Very difficult to prove subjective intent 4. Produces more deliberate behavior in the future (prevents contract breaches in the future—people will read what they sign) (b) Use a subjective intent standard? 1. Promotes some notion of fairness (shouldn‘t be bound to contract had no intent, desire, etc. to be in) 2. Get to better know what the other person is thinking d. Without a legal enforcement of special kinds of promises, the world would stop working 2. Three elements in a transaction, each of which constitutes a contract a. Agreement in fact b. Agreement as written c. Set of rights and duties created by a and b 3. Law of contracts is society's legal mechanism for protecting the expectations that arise from the making of agreements for the future exchange of various types of performance, such as the conveyance of property (tangible and intangible), the performance of services, and the payment of money. B. SOURCES OF CONTRACT LAW 1. Primary: prior judicial decisions, statutes, ordinances, etc. 2. Anything that can influence a court, E.g.: Restatements and commentaries by legal scholars 3. Judicial Opinions a. Stare decisis: adherence to past decisions 4. Statutory Law a. 1677 Parliament enacted ‗statute of frauds‘, now enacted in nearly every state, it requires certain types of contracts to be evidenced by a signed writing to be enforceable in court b. Contract law is predominantly judge-made and not statutory
c. Uniform Commercial Code, begun in 1940s, covers many but not all commercial transactions (doesn‘t cover real estate or personal service, for example) i. UCC originated in 19th century, when a number of states came together in ‗National Conference of Commissioners on Uniform State Laws (NCCUSL)‘ to address differences in states (to make business transactions easier); created predecessor ‗The Uniform Sales Act‘ ii. 1940s UCC created under purview of Professor Karl Llewellyn iii. UCC‘s legislative history exists in the ‗Official Comments‘ of its drafters d. Any court is bound to follow the provisions of a valid statute that apply to the dispute before it e. Statutory law can be interpreted based upon its language alone, or also upon its legislative history (to determine intent) 5. The Restatements a. Resemble a statute in form b. Consists of 'black letter' statements of the 'general rule', or if conflicting cases, the 'better rule' c. First Restatement i. Created in 1932 ii. Emphasizes generalizations and predictability (at expense of diversity and flexibility) d. Second Restatement i. Created in 1979 ii. Gives freer rein for judicial discretions iii. Better reflects the UCC 6. Legal Commentary a. Samuel Williston: regarded law as a set of abstract rules that courts could by deduction use to decide individual cases b. Arthur Corbin: saw task to discover what courts were actually doing and to attempt to weave these attempts into the 'working rules' of the law c. Allan Farnsworth: Wrote an influential short commentary d. White and Summers: Write influential treatise on UCC 7. International commercial Law a. GATT: reduce tariff and non-tariff barriers; clarify member countries' rules on trade b. CISG (UN Convention on the International Sale of Goods) i. Came into effect 1988 ii. International version of UCC (a) Applies to sales of goods (b) Has force of law (c) Applies when parties to a contract have places of business in countries that have adopted the convention (d) Unlike UCC, does not apply to consumer transactions c. UNIDROIT (UN International Institute for Unification of Private Law) created international analogy to the Restatements: The Principles of International Commercial Contracts i. Completed in 1994
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ii. Has no force of Law C. PERSPECTIVES OF CONTRACT THEORY 1. Legal Formalism – a.k.a. Willistonian period a. Contract law is viewed as a set of universal rules distilled from decided cases b. Follows mechanical application of rules c. Identified with Langell 2. Legal Realism – a.k.a. Sociological Jurisprudence a. Law is evaluated on the basis of the social interests it serves b. Since lawmaking is in effect policymaking, the formation of legal rules should be the result of a conscious application of all relevant knowledge of human affairs c. Criticizes the 'black-letter' approach of the restatements d. Proponents: Dean Roscoe Pound e. UCC was drafted by realist Karl Llewellyn i. judges should reach decisions only after having immersed themselves in the factual details of the dispute ii. emphasizes general standards (e.g. good faith and unconscionability) 3. Economic Efficiency – a.k.a. the Chicago School a. Applies economic analysis to legal issues based upon efficiency i. Efficiency increases when the cost of transaction in society is reduced, and resources are allocated to the most highly valued uses (a) Positive (that is, empirical) arguments tend in general to reach efficient outcomes (common law based) (b) Normative (the end purpose creates a social good) claims the 'inefficient' rules of law should be modified in the direction of greater efficiency ii. Courts should enforce agreements even if they are unfair or unconscionable iii. Courts should only not enforce agreements when they are the product of bargaining misconduct such as fraud or duress b. Opponents of Chicago school want i. Statutes that require disclosure of information to consumers ii. Regulate the language of contracts iii. Impose increased warranty obligations on manufacturers 4. MacNeil – contract law should embody principles designed to preserve long-term commercial or personal relationships; more emphasis on good faith and fair dealing 5. Moral Philosophy a. Contract Law should be based upon fairness, morality, and consent b. Proponents include Eisenberg, Fried, and Barnett 6. Critical Legal Studies a. the existing legal process is essentially a form of political ideology b. The ultimate goal of society should be based upon altruistic and communitarian values D. THE LAWYERING PERSPECTIVE 1. It is never a victory when an attorney wins a suit that could and should have been avoided 2. Roles of an attorney
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a. Counselor: identify nature and scope of legal problems; how court is likely to respond; legal consequences of different forms a commercial transaction might take b. Negotiator: Includes ability to capitalize on other sides emotions c. Drafter: Reduce to write an agreement that parties can adopt as the final and complete expression of their bargain d. Advocate: Keep in mind the vast majority of contracts don‘t end in court, and most dispute don‘t make it to court… court is last resort, and case law isn‘t a complete guide to creating contracts E. REMEDIES FOR BREACH OF CONTRACT (from P. 188-189) 1. Substitutional remedies – a.k.a. damages a. Expectation Damages: the net value that the plaintiff expected to realize from due performance of the contract at issue i. Put in as good a position as if the contract had been performed in full ii. Deprives the 'breacher' of the benefit of his breech iii. Looks to the future from the beginning of the contracting process iv. Includes opportunity costs and lost profits v. Use an objective standard: get the value of what would have actually happened at the time the contract was to come into force vi. Is the most common form of damages, and generally includes reliance and restitution damages vii. Is not intended to punish anyone viii. The plaintiff/seller is expected to "mitigate" damages by accepting the best price then available in the market b. Restitution Damages: The extent to which the defendant has been enriched by plaintiffs actions in reliance on the defendant's commitment to perform i. Puts one back into the position as if he had not entered into the contract ii. Looks backwards to when the contract was made iii. Is for the costs that arose because one relied upon the contract c. Reliance Damages: The extent to which the plaintiff has been injured by the plaintiff's actions in reliance on the defendant's commitment to perform i. Promisor violated promise and has been enriched by entering into the contract ii. Puts the promisee back in the same position as if the contract had never been entered into 2. Specific performance a. order the defendant to cooperate with the plaintiff in exchanging performances as originally agreed to b. is not money damages, but something else c. is an exceptional remedy: usually award one of the three conventional methods 3. Rescission of contract: There are no damages, but the contract ends F. Hawkins v. McGee (from Handout) – The Hairy Hand 1. An action where the plaintiff entered into a contract with the defendant-doctor to have an injury repaired, with a guarantee of full recovery, where treatment did not result in any improvement in condition. Holding: There is a contract, Supreme Court remands for a new trial II. ENFORCING PROMISES: BASES OF LEGAL OBLIGATION (25)
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A. THEORY 1. Lon Fuller's three substantive bases of contractual liability a. Private autonomy: the law views private individuals as possessing a power to effect, within certain limits, changes in their legal relations b. Reliance: the breach of a promise may work an injury to one who has changed his position in reliance on the expectation that the promise be fulfilled c. Unjust enrichment: When B breaks a promise to A, this is not the injury to A but the unjust enriching of B 2. Classical approach: legal formalism a. very clear rules (a contract is a contract) b. less concerned with moral or social policy c. not as interested in the real world of commercial activity 3. Modern approach a. Apply general standards, such as 1) unconscionability and 2) good faith B. INTENT 1. Theory a. Absent fraud, duress, or mutual mistake, any person with the capacity to understand a written document who signs it is bound by that signature. b. Use objective intent because: i. avoid people changing their story ii. place the burden on the least cost avoider (the person who is joking) 2. Examples a. Ray v. William G. Eurice & Bros., Inc. (27) i. Brief (a) Owners of realty brought action against building contractor to recover damages for complete breach of written contract to build house. Eurice entered into a contract upon a misunderstanding the terms of the contract, and subsequently breached it. (b) Court of Appeals held that contractor could not avoid performance of contract because of alleged unilateral mistake on part of contractor. Judgment reversed and judgment entered for owners. ii. Case Notes (a) Eurice is responsible for 'expectation interest', where Ray must be put in as good a position as if the contract had been performed. (b) No disparity in bargaining power (Eurice should have known what he was doing) b. Lucy v. Zehmer (35) – Joke Case i. Brief (a) Suit to compel specific performance of land purchase contract claimed by defendant vendors to have been entered into as joke. 1. Court of Appeals held that evidence showed that contract represented serious business transaction and good faith sale and purchase of farm, that no unusual circumstances existed in its making, and that purchasers were entitled to specific performance. Reversed and remanded. (b) Case Notes
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1. Lucy reasonably believed Zehmer was serious. TS for Zehmer for playing it straight. Using objective standard. c. Park 100 Investors, Inc. v. Kartes (36) i. Brief (a) Superior Court found that lessee's part-owners were not liable for unpaid rent under personal guaranty of lease. Appeal. (b) The Court of Appeals held that lessor used fraudulent means to procure signatures of part-owners. Affirmed. ii. Case Notes (a) When one employs fraud to induce a party's obligation under a contract, one cannot bind the party to the terms of the contract. (b) The Karteses, through use of ordinary care and diligence, believed the documents they were signing was a lease (c) The requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraud practiced on the unwary C. THE DOCTRINE OF CONSIDERATION (40) 1. Theory a. The forbearance of a legal activity constitutes consideration. b. Standard of consideration: is there a benefit to the promisor or a detriment to the promisee c. Restatement 79 – consideration no longer requires benefit to promisor or detriment to promisee d. Restatement 71 defines Consideration i. To constitute consideration, a performance or a return promise must be bargained for ii. A performance or return promise is bargained for if it (a) is sought by the promisor in exchange for his promise; and (b) is given by the promisee in exchange for the promise iii. the performance may consist of (a) an act other than a promise; or (b) a forbearance; or (c) the creation, modification, or destruction of a legal relation iv. the performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person. e. There must be a bargained for exchange. This case had no bargain (the forbearance to sue was solely for convenience of Baehr and not the defendant). That forbearance must be bargained for. f. Need to distinguish between statements meant to express present intention versus assurance of future event. Use factors: i. Formality of statement ii. Degree of reliance iii. Nature of intention of the promisor (intent versus commitment) g. Promise is defined in R 2
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h.
i.
j.
k.
i. A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. ii. The person manifesting the intention is the promisor. iii. The person to whom the manifestation is addressed is the promisee. iv. Where performance will benefit a person other than the promisee, that person is a beneficiary. Promise to make a gift is not enforceable i. If court knows for a fact the intent was to give a gift despite language (e.g. value received) stating otherwise, then consideration is really nominal or a sham, and doesn't constitute a bargained for exchange ii. Court will read into motive to the extent necessary to determine if there is a bargain Nominal or sham consideration: where consideration is of no benefit to the promisor, giving up the consideration is no detriment to the promisee, and there is too big an imbalance in the values exchanged The difference between consideration and condition i. Consideration: bargain for the if ii. Condition: "if you come to my office, I'll give you a raincoat" iii. If there is a temporal element, that is, an element of scheduling, that is a condition legal formalities (52) i. Functions performed by legal formalities (a) Evidentiary function: demonstrate there is some basis to show that a binding promise was made and entered into – creates a memorial detailing one's actions (b) Deterrent function (a.k.a. cautionary function): Cautions promisor from making a promise he doesn't intend to keep – creates deliberation (c) Channeling Function: Makes a simple and external text for enforceability (by a court or the parties) – is a way of being able to avoid the evidentiary function ii. the above legal formalities explain why we have three bases for enforcing contracts (consideration, reliance, restitution) iii. historically forms were used to indicate there is a contract, but now we focus on the substance of the contract, e.g.: (a) private autonomy – consideration (b) reliance – promissory estoppel (c) unjust enrichment – restitution iv. The first restatement permitted nominal consideration. That is, it emphasized form. How does it compare when viewed through the three functions? (a) Less effective at cautionary function (b) Equally effective at channeling function (c) More effective at evidentiary function v. The second restatement does not allow nominal (or sham) consideration. It emphasizes substance. How is it viewed through the three functions (a) More effective at cautionary function
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(b) Equally effective at channeling function (c) Less effective at evidentiary function vi. Why use substance over form? There is a greater potential for unjust and inaccurate judgment if court's focus on form more than substance 2. History of consideration i. Consideration is bargained for exchange ii. From "Action of Covenant" – we want certain evidence that a binding promise was made and that the promisor was cautions in entering into the contract iii. From "Action of Debt" – a benefit to the promisor supports enforcement iv. From "Assumpsit" – a detriment to the promisee supports enforcement of the contract (a) Assumpsit – a breach of an oral contract where the Promisor does not perform or improperly performs v. Modern consideration doctrine does not require an equal exchange vi. Forebearing from illegal activities is not adequate to create a contract 3. Examples a. Hamer v. Sidway (41) i. Brief (a) Uncle promised nephew that if he would refrain from certain actions until he turned 21, uncle would pay him $5k. Nephew fully performed, and requested money. Uncle reaffirmed, held on to money until later, but died before gave it to nephew. Nephew sold right to money to Hamer who sued uncle's estate. (b) Trial court entered judgment for plaintiff (Hamer). (c) Court of affirmed that there is a contract b. Baehr v. Penn-O-Tex Oil Corp. (47) i. Brief (a) Gas station case. Landlord's action for rents brought against corporation to which tenant had made assignment, as security for debt, of right to receive rents from subtenants. (b) Supreme Court held 1. Although defendant was in some sense in possession of the premises that Plaintiff had leased to Kemp, but he was not in effect an ‗assignee‘ of the lease between Kemp and Plaintiff, and was not liable on that basis for rent payments. 2. There is no evidence to support Plaintiff undertook or did not undertake any activity except at his own personal convenience, and he gave no evidence to indicate he believed Defendant‘s assurances or acted upon them in any way, so no consideration and no contract. c. Newman & Snells Bank (52) i. Brief (a) Husband died owing bank money. Widow got a document from the bank that bank told her she needed to have, but only after singing a note promising to pay off the debt. She did not pay off the debt. Bank sued. Court holds for Defendant. ii. Case Notes
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(a) This is a case that illustrates the difference between the old benefit/detriment model and the new bargained for exchange model (b) Under benefits/detriment: court rules for the widow—she did not receive a benefit (c) Under a bargained for exchange—widow got what she wanted: the document in return for her husband's debt obligation. But… she could make other defensive arguments to get out of this silly result d. Dougherty v. Salt (54) i. Brief (a) Posture: Defendant executrix sought review of an order of the Appellate Division of the Supreme Court in the Second Judicial Department (New York), which reversed a judgment in her favor entered pursuant to the trial court's order setting aside a verdict in favor of plaintiff boy and dismissing the complaint and which reinstated the verdict in favor of the boy in his suit for payment of a promissory note (note) given to him by the testatrix. (b) Overview: The boy's aunt told his guardian, who was a witness for him at trial, that she loved the boy and wanted to take care of him, so she gave him a note payable at her death, which had the words "value received" on it. She died, and boy sued aunt's executrix. (c) Holding: Promise to make gift is not enforceable. ii. Case Notes (a) Smart lawyer would have argued this was a trust, and not a gift—I've given the gift now, and am holding it for the future, instead of an intention to make a gift in the future e. Shadwell v. Shadwell (43) (a) Brief: I'll pay you 150 pounds yearly, if you get married. But Shadwell has already made the decision to get married before he received the letter (b) R 81 1. The fact that what is bargained for does not in itself induce the making of a promise does not prevent it from being consideration for the promise 2. The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise (c) If part of the reason he was going to get married was the 150 pounds a year, that satisfies the consideration component (d) Contract is examined 'objectively' to determine that part of intent must have been to induce forbearance (e) Law does not generally second guess motives, but rather assumes that one of the intents is to get what is being asked for f. Batsakis v. Demotsis (59) i. Brief (a) In April 1942 Plaintiff agreed to lend Defendant by a letter $2000, which shall be returned after the war with 8% interest. Defendant alleges that the letter is false and she signed it in order to obtain a loan of 500,000 drachmae, to alleviate her financial distress caused by the war. Defendant
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alleges Plaintiff knew of Defendant‘s desire to travel to the states, and exacted of her the instrument containing the $2000 promise. (b) The Court of Civil Appeals held that instrument providing that defendant would return to plaintiff $2000 in American money in payment of loan of Greek money (worth $25) amounted to a sale by plaintiff of the Greek money in consideration of execution of the instrument, and that defendant's plea of want of consideration was unavailing. Judgment affirmed. ii. Case Notes (a) Conditional Privilege of Private Necessity: When there is a life or death situation, a person can do whatever they need as long as they pay damages later (b) Fairness does not matter for purposes of consideration (c) Other doctrines can be used to avoid a bad result (e.g. unconscionability, duress, fraud, incapacity) D. THE DOCTRINE OF PROMISSORY ESTOPPEL (73) 1. Theory a. Why use reliance? Want people to be able to rely on contracts b. Not a question of whether there is 'actual detriment', but rather if there was some bargaining for the if c. Restatement 90: Promissory Estoppel i. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. ii. A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance. d. PE test again i. Promise (a) Reasonable expectation the promise will induce action or forbearance of the part of the promisee (b) The promisee actually took action or refrained from taking action in reliance on the promise, (c) Injustice can be avoided only by enforcement of promise e. Detrimental reliance occurs when: i. Plaintiff has made actual expenditures on reliance of the promise; or ii. A change in position may be sufficient to invoke promissory estoppel f. P.E. originated from idea of equitable estoppel. i. Equitable estoppel: A person who makes a misrepresentation of fact regarding their right is 'equitably estopped' regarding the assertion of that right. E.g.: you are stuck with your lie. g. P.E. can be a sword or shield i. Shield – plaintiff asserts a claim, defendant says there is no consideration, and plaintiff responds that even if that is so, there was reliance that acts as a substitute for consideration
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ii. Sword – there is no contract, but I relied upon your promise (used as a theory of recovery—a cause of action) h. Changes for first restatement to second: i. In second restatement, charities don't need to meet the requirement of proof that the promise induced action or forbearance. But, very few courts follow this revised rule. They still require all four elements. ii. Second restatement removes the requirement that the promise be definite or substantial (a) definite: makes clear what the expected reliance is (b) substantial: iii. Second restatement adds caveat that remedy may be limited as justice required. iv. Under second restatement, reliance can be by any party; whereas in first restatement reliance had to be by the promisee i. ERISA: Federal statute that governs employee benefit plans nationwide, preempting all state laws and common law. Purpose is to give uniform requirements nationwide. Promissory Estoppel claims will be recognized under ERISA as a matter of federal common law. The previous case (Danny Dare) would not have been covered by ERISA as it did not amount to a ―plan.‖ To be a plan, there must be an ‗ongoing administrative program‘, not a one-time obligation j. Fraud requires a misrepresentation of fact 2. Promises Within the Family a. Examples i. Kirksey v. Kirksey (74) (a) Brief 1. After death of husband (1840s), brother-in-law invited sister-in-law and family to move 60 miles to his property, where she could raise her family. She gave up her lease and did so. After 2 years, he moved her to an uncomfortable house and asked her to move off the property. She sued. 2. Overturned by Supreme Court, Verdict for Defendant. This was a gratuity, not a promise. (b) Notes and Questions 1. In modern view, there is P.E. here. ii. Greiner v. Greiner (76) (a) Brief 1. Mother promised son that she would give him a home and 80 acre tract if he returned to Mitchell county. The son moved, fixed up the house, and lived there for a year before being asked to leave. 2. Appeals: Son wins – should receive deed. Based upon theory of 'detrimental reliance' that creates an unjust result. Defendant relied on Plaintiff's promise to his detriment. (b) Case Notes 1. This occurs at the time of restatement first. So based upon benefit and detriment (hence detrimental reliance)
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iii. Wright v. Newman (80) (a) Brief 1. Mother brought paternity action against former boyfriend. 2. The Superior Court ordered boyfriend to pay child support even though he was not natural or formally adoptive father of child. Boyfriend appealed. 3. The Supreme Court held that boyfriend was obligated to support child under doctrine of promissory estoppel. Affirmed. (b) Case Notes 1. Wright voluntarily assumed the responsibilities of parent of the child, and that is an enforceable contract where promissory estoppel substitutes for consideration. 2. In this case, promissory estoppel is being used as a shield. 3. There is an implied promise: promissory estoppel may only require action iv. Allegheny College v. National Chautauqua County Bank (86) (a) Brief 1. A woman, Johnson, wrote on the back of a pledge form that she would donate $5000, adding the gift must be named after her and serve a specific purpose. Subsequently, she paid $1000, and before she died – activating her will and this gift – she renounced the gift. School waited 30 days, and then sued the estate. 2. Holding: a. Reliance: The school announced publicly it would comply with the terms of the gift b. Consideration: Naming the scholarship for a set purpose (immortality) for $5000 c. Although school had not named scholarship for her, it is because she had not remitted all the money, once she does so the college would act d. Can hold either the tendered $1000 is a gift and need not be returned, or it is a part of a scholarship the rest of which is due. That is, since I give you $1000, you must either now give it back or perform as contracted. If the latter, it is a contract! (b) Notes and Questions 1. This is Cardozo spin doctoring. He has facts that fit promissory estoppel, but at the time it was a weak theory. He wanted to use the strong theory of consideration, but the facts didn't fit it. v. King v. Trustees of Boston University (93) (a) Brief 1. Facts: Wife of MLK bringing suit to return documents that King delivered to BU. He had sent a letter stating his intentions with those documents. King gave documents to BU because he was an alumnus and school had approached to be depository for the letters. 2. Holding: the Bailment (placing document's into BU's hands) of MLK's letters is sufficient evidence to let a jury decide if it was a promise to
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transfer the documents, and whether that transfer and actions on BU's part constituted reliance 3. Promises in a Commercial Context a. Katz v. Danny Dare (102) i. Brief (a) Retired employee filed action seeking pension payments alleged to be due from his employer. (b) The Court of Appeals held that the employer was bound by its promise to pay the pension to the employee where the employee was not fired, but instead voluntarily retired, after the board of directors had adopted a resolution promising to pay the employee a pension. Employer intended employee to rely upon its promise of a pension, employee, at time payments were stopped, was age 70 and could not work full time. Injustice could be avoided only by enforcement of the promise and the fact that the employer had threatened to fire the employee if he did not retire on his pension did not preclude recovery. (c) Reversed and remanded. ii. Case Notes (a) Katz relied upon the promise from Danny Dare to retire to his detriment. b. Shoemaker v. Commonwealth Bank (108) i. Brief (a) Mortgagors, which failed to maintain insurance on the mortgaged property, brought cause of action against mortgagee bank, which had allegedly promised to obtain the insurance. (b) Appellate court held: 1. Mortgagors could not bring action in fraud against mortgagee; 2. Mortgagors could bring action in promissory estoppel; and 3. Fact issues concerning reasonableness of mortgagors' reliance precluded summary judgment on the estoppel issue. 4. Affirmed in part, reversed in part, and remanded. ii. Notes and Questions E. RESTITUTION 1. Theory a. The modern law of restitution is based on unjust enrichment and has no particular relationship to contract. The remedy: courts can fashion equitable remedies such as ‗constructive trust‘ and ‗accounting‘ b. Restatement on Restitution § 81 (1) i. Basis of liability: ―A person who has been unjustly enriched at the expense of another is required to make restitution to the other.‖ Two elements: (a) enrichment; (b) retention of benefits is unjust 2. Restitution in the Absence of a Promise a. Theory i. For the purposes of this class, the following are synonymous: quasi-contract claim, implied-in-law claim, quantum meruit ii. Implied in law contract
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(a) Requires: 1. knowledge 2. consent (b) There is no request for the thing provided, and we cannot know what the person wanted. (c) This is a legal fiction: an obligation created by the law without regard to the parties' expression of assent – the essential element is a benefit to the promisor iii. Implied in fact contract: if there is a request in word or deed, and that thing was provided, but there was no opportunity to close the contract (a) a service has been provided to one person by another upon his specific request, or without his specific request, but with his knowledge iv. There may be no premise of mutual consent between the parties; there may not even be interaction between the parties v. Historical origin: from an action of debt, where focus was on whether promisor had received something without value. People shouldn't be able to keep a compensation without a benefit. vi. This is the inverse of reliance. Instead of a detriment to the promisee, it is a benefit for the promisor. vii. Oficious intermeddler: interference in the affairs of others that is not justified by the circumstances under which the interference took place; e.g. no opportunity to decline the service viii. Restatement of Restitution Rule for No Consent: A person who has supplied things or services to another, although acting without the other's knowledge or consent, is entitled to restitution therefore from the other if (a) He acted unofficiously and with intent to charge therefore, and (b) The things or services were necessary to prevent the other from suffering serious bodily harm or pain, and (c) The person supplying them had no reason to know that the other would not consent to receiving them, if mentally competent; and (d) It was impossible for the other to give consent or, because of extreme youth or mental impairment, the other's consent would have been immaterial. ix. In an emergency situation, the restitution obligation lies with the 'reasonable value of the services received' x. Contract law does not compensate a good Samaritan. But Doctors, etc., the law presumes payment xi. Restitution damages are calculated by either (a) the reasonable value of services provided (how much it would cost to pay someone for the same services); or (b) net enrichment (how much was the wealth of the other person increased (c) The court often chooses based upon how easy it is to calculate b. Examples i. Credit Bureau Enterprises, Inc. v. Pelo (118) (a) Brief
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1. Patient who was involuntarily committed to private hospital appealed decision of small claims court holding him personally liable for cost of medical services he received. 2. The Supreme Court held: a. Patient was personally liable for hospital bill, and b. Requiring patient to pay for medical services did not violate his right to due process or his constitutional right to contract. c. Affirmed. (b) Case Notes 1. See Restatement Rule for No Contract 2. Pelo was liable for payment under a theory of contract implied in law, as he benefited from his hospitalization. Since he could not give consent (as he was mentally ill), and as he received services for which payment would ordinarily be made, he must give restitution. ii. Watts v. Watts (134) (a) Brief 1. Unmarried cohabitant brought action for accounting and share of accumulated property under family law statutes, theory of marriage by estoppel, theory of express or implied in fact contract, theory of constructive trust based upon unjust enrichment, and partition theory. 2. The Court of Appeals certified case. 3. The Supreme Court held: a. Unmarried cohabitants were not "family" within meaning of statute that authorizes division of property in action affecting family; b. Doctrine of marriage by estoppel was inapplicable; and c. Cohabitant stated claims for breach of express or implied in fact contract, unjust enrichment, and partition. d. Reversed and remanded. (b) Case Notes: 1. There was unjust enrichment, as both parties benefited from the relationship, but its dissolution effectively benefited one party (who got the house) and the other not at all, violating the principles of equity. 2. A contract for a meretricious relationship: for the sole purpose of having sex—is not binding 3. Promissory Restitution a. Theory: i. When one makes an express promise to pay after the service has been rendered ii. Past consideration: If I've done something for you in the past, it is no consideration, unless I reaffirm it iii. Restatement 86: Promise for a benefit received iv. Material Benefit Rule: If a person receives a material benefit from another, other than gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable (a.k.a. promissory restitution) – not all courts follow this b. Examples
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i. Mills v. Wyman (146) (a) Brief 1. Adult son estranged from father falls sick and is cared for by a stranger. Father sends a letter afterward offering to pay the expenses. He then reneges, and is sued. 2. The Samaritans lose. The father didn't receive a benefit. (b) Case Notes 1. This is no longer the law. Dad made an affirmation after the fact. 2. Now the court would say there is a 'waiver', where the Dad waives his right to not have to pay the money but the making of a subsequent promise ii. Webb v. McGowin (151) (a) Brief 1. Where workman clearing upper floor of mill started to turn block loose so that it would drop to ground but saw deceased on ground where block would have fallen and to divert course of its fall workman fell with it sustaining injuries causing permanent disability, deceased's agreement to compensate workman held valid and supported by consideration. (b) Case Notes 1. Here the person who would have been crushed by the block made the promise. And, he paid it for 8 years, so he really wanted to pay the money. 2. There was consideration: injury to the plaintiff and a benefit to the trustee defendant. III. REACHING AGREEMENT: THE PROCESS OF CONTRACT FORMATION A. THEORY 1. Consideration is not benefit/detriment or equivalency of values, but rather that there is a bargained for exchange. 2. There is a general duty to read documents one has signed, although there are exceptions including fraud and other good reasons not to enforce the contract 3. Offer defined a. R 24: An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. b. An offer is a promise that is a complete proposal, and it creates in the offeree the power of acceptance c. Power of Acceptance: The power to complete the manifestation of offeror intent, thereby legally binding both parties in the contract without the need for any additional statement or action from the offeror B. OFFER AND ACCEPTANCE: BILATERAL CONTRACTS 1. Theory a. Both parties are promisor and promisee b. A promise is given in exchange for a promise c. Classical model:
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i. Parties engage in a period of preliminary negotiation, exchanging communications of a more or less detailed nature about the type of exchange of performances to which each would be willing to agree ii. One party (the ‗offerer‘) makes an ‗offer‘: a direct, complete proposal that a contract be entered into, providing for an exchange of defined promises; creates in party to which offer is addressed a ‗power of acceptance‘ iii. The contract comes into being when the other party manifests her ‗acceptance‘ of the offer in a legally effective way iv. Or, there is a counter-offer, which may in turn be accepted by the original offer. And around and around d. An offer can not come into existence by i. Rejection ii. Too long a delay in acceptance (a) Termination by a time limit (explicit or implicit) contained in the offer (b) Revocation: offeror's withdrawal e. The offeror is the master of his offer: He can include any terms he wants. To accept, the offeree has to comply with those precise terms and conditions. If there are no terms set out, the manner of acceptance must be reasonable. f. Mailbox rule (a.k.a. deposited acceptance rule): Although both an offer and a revocation must be communicated to be effective, an acceptance will in some circumstances be treated as effective as soon as dispatched (mailed, telegraphed, etc.) by offeree; offeree has a firm basis for action in reliance on the effectiveness of her acceptance one the acceptance has been dispatched i. Exception: When offeror has stated (Expressly or by implication) that the offeror must receive the acceptance for it to be effective ii. Restated in §63: an acceptance is generally effective when you put it out of the offeree's possession (e.g., a mailbox) iii. Revocations of offers are effective only when received g. Methods of terminating the power of acceptance i. Rejection of offer by the offeree ii. Lapse of time (either stated or a reasonable period of time) iii. Revocation by the offeror (can be through a 3rd party) iv. Death or incapacity of offeror or offeree v. Offeree's power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer h. Option Contract: A contract by which the owner agrees to give another the exclusive right to buy property at a fixed price within a specified time i. Requires consideration ii. Is determined (whether it exists) by the objective standard i. Entering another contract is not revocation until it is communicated to the other party 2. Examples a. Lonergan v. Scolnick (162) i. Brief (a) Scolnick placed an advertisement to sell some property. After a series of letters, Scolnick sold to someone else
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ii. Case Notes (a) An advertisement is usually a request for offers, and not an offer itself. However, the more terms in an ad, the more likely it is to be an offer (b) Is an ad an offer? 1. Size of group offered to 2. Specificity: to what extent was it directed to a specific individual or group 3. The number of terms left out and the importance of the terms (e.g. price, quantity) 4. Customs in a given industry 5. History of contracts between two parties 6. Using the reasonable person standard 7. If say 'first come first serve' or 'subject to prior sale', the ad may constitute an offer (c) A form letter (sent to lots of people) is not an offer b. Normile v. Miller (171) i. Brief:
(a) Separate plaintiffs sued property owner for specific performance of identical written contracts to sell same parcel of real estate. (b) Supreme court held: 1. Vendor's qualified acceptance of purchasers' offer was in reality a rejection of the original offer because it was coupled with certain modifications or changes not contained in the original offer; 2. Thus, vendor's conditional acceptance amounted to a counteroffer; 3. Time limit within which offer must be accepted, contained in purchasers' original offer, did not become a term of vendor's subsequent counteroffer; 4. Purchasers rejected vendor's counteroffer, despite their mistaken belief that they had an option to purchase; and 5. By entering into contract with another purchaser, vendor manifested her intention to revoke her previous counteroffer to purchasers, and purchasers had no power to revive offer by any subsequent attempts to accept. Modified and affirmed.
ii. Case Notes (a) Counteroffer nullifies the previous offer C. OFFER AND ACCEPTANCE: UNILATERAL CONTRACTS 1. Theory a. When an offeror offers to exchange his promise of a future performance only in return for the offeree‘s actual rendering of performance; that performance constituted acceptance of that offer b. Classical theory holds: if offeror revokes his offer after offeree has started but not finished the requested performance, the offeree is denied any remedy on the contract because the offer was revoked before the proposed contract ever came into being (that is, the contract only comes into being when the offeree has finished performing) no longer true c. Restatement 45 – part performance (this is the modern version)
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i. Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. ii. 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. d. If no time is stated, the offer expires in a reasonable period of time e. Silence does not usually constitute acceptance, (R 69), even if offer say that it will. i. Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. (b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. ii. Exercise of Dominion: An offeree who does any act inconsistent with the offeror's ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. 2. Examples a. Petterson v. Pattsberg (179) i. Brief (a) Petterson wants to purchase finish paying off his third mortgage, makes an agreement to do so, but when goes to pay, the offeror says 'it's too late' ii. Case Notes (a) What is required is the payment of money. Peterson's statement 'it's too late' before the money is turned over means the option contract is revoked b. Leonard v. Pepsico (Supplement) i. Brief (a) Ad to purchase Harrier Jet ii. Case Notes (a) Ad is not an offer except: 1. there needs to be specific conditions (contains all the necessary terms) 2. it is clear who the ad is directed to (a relevant audience; invited offerees) 3. the language of the ad must be relatively plain and clear (not subject to ambiguity) 4. the language must be language of commitment – an invitation to act where there is nothing more to talk about D. LIMITING THE OFFEROR'S POWER TO REVOKE: THE EFFECT OF PRE-ACCEPTANCE RELIANCE 1. A promise to keep an offer open is not enforceable if it lacks consideration
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2. An offer is revocable until accepted 3. But, an offer cannot be revoked if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer a. It cannot be revoked if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable (e.g. an option contract) 4. Courts are much more willing to allow sham and nominal consideration at a bargain for an option contract. Why? a. Arises in a business setting, where people are more likely to understand what they're doing b. Since it is a commercial situation, we're more concerned with the enforcement of contracts c. Because an option contract is attached to the potential formation of another contract, it has consideration (the underlying contract being formed has real consideration) 5. An Option Contract Restatement 87 a. An offer is binding as an option contract if it i. Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or ii. Is made irrevocable by statute. b. An offer which the offeror should reasonably expect to induce action or 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. 6. Examples a. James Baird Co. v. Gimbel Bros. (190) i. Brief (a) Contractor's placing of successful bid for construction work, based, as to
linoleum, upon prices quoted in merchant's offer of prices for "prompt acceptance after general contract has been awarded," held not to create binding contract to supply linoleum, where offer was withdrawn before contractor gave notice of acceptance.
ii. Case Notes b. Drennan v. Star Paving i. Brief (a) Plaintiff, a licensed general contractor, was preparing a bid on the Monte Vista School Job. Bids for the school had to be submitted before 8 PM. It was customary for subcontractors to call in bids by telephone on the day set for the bidding and for the contractor to rely on them in computer their own bids. Plaintiff received a call from defendant, Hoon, who offered to do the paving work for $7,131.60. This was the lowest bid, and was incorporated in Plaintiff‘s bid to the government, which was accepted. The next day Plaintiff stopped at Defendant‘s office, where he was told that they made a mistake in their bid, couldn‘t pay for it at the original price. Plaintiff stated he expected they would carry through. Defendant stated they couldn‘t do the bid for less than $15,000. After several months, Plaintiff found someone else to do the work for $10,948.60.
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(b) When I make you an offer in this context, there is a subsidiary promise attached that I will give you a certain amount of time to accept the offer after the general contract has been award. The plaintiff acted in reliance upon that subsidiary promise. Therefore, an option contract was formed. Drennan knew Star would rely on its bid, so it is only fair that Drennan has a chance to accept the offer. ii. Case Notes (a) If the defendant's bid that expressly stated or clearly implied that it was revocable at any time, it could be revoked (b) If the general contract acts inequitably (e.g. shopping around after he is awarded the main contract), that may preclude the use of promissory estoppel c. Comment: Contract Law and Business Practice E. IRREVOCABILITY BY STATUTE: THE 'FIRM OFFER' 1. Theory a. One way to make an offer an option contract (and therefore binding) is by statute. For example, by a public contracting process, where bids cannot be withdrawn for a period of time. b. The UCC has provisions make certain offers irrevocable (despite a lack of consideration). c. Firm Offer Provision §2-205
i. An offer by a merchant to buy or sell goods in a signed writing which by its terms give assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror. ii. Firm means meeting the description of giving 'assurances that an offer will be held open' iii. If the offer is 'guaranteed' or 'firm' until the happening of a contingency while will occurring during the 3 month window, the offer is irrevocable until that point. If a promise is made for longer than the 3 months, it is binding only for the 3 months, but can be renewed. iv. Offers support by consideration, however, can last as long as the parties choose. v. If real consideration supports an offer, the offer does not have to be fair, the length of time does not have to be reasonable, and the offer is not terminated by the death or incapacity of the offeror vi. If it is an irrevocable offer supported by real consideration, and offeree can even reject an offer and then change his mind vii. Any 'term of assurance' (that is, firmness) on a firm supplied by the offeree must be separately signed by the offer viii. A merchant (2-104) is a person who has a particular knowledge or skill specific to the practice at hand ix. UCC is adopted by every state except for Louisiana x. UCC provides default rules where the parties have not adopted rules within a contract
xi. UCC imposes duties of good faith and fair dealing (1-203) xii. UCC tends to look towards 'usage of trade' or 'course of dealing' within a particular industry F. QUALIFIED ACCEPTANCE: THE 'BATTLE OF THE FORMS' 21
1. Theory a. Courts must fashion new rules for determining when sufficient agreement has been reached when using standardized forms to find a contract has been made and what its terms are b. Common law i. When you use your own form, that person becomes the offeror, and the acceptance is conduct. (the last shot rule) ii. Last-shot rule‖: A way of determining when a counter-offer is accepted; a party impliedly assents to and thereby accepts a counter-offer by conduct indicating a lack of objection to it; Tends to favor sellers over buyers iii. Mirror image rule (under common law): the ‗varying‘ acceptance of a contract (specifying different terms) is given the effect of a counter-offer (and hence a new offer) (a) Exceptions: A definite expression of acceptance is operative despite the statement of addition or different terms if the acceptance is not made to depend on assent to the additional or different terms 1. A response is not an objection if the acceptance just attempts to make explicit something that was implicit in the offer 2. The acceptance merely suggests a new term without insisting on its inclusion 3. An offer is a binding option 4. The offer explicitly states it will remain open despite a rejection [it has been bargained for, which makes it different from an option] 5. The acceptance reserves the right to keep the offer under advisement (some potential for post-agreement negotiation) 6. A mere inquiry (is that your best price) does not constitute a revocation c. UCC i. Applies only to sale of goods. Does not include real estate and service contracts. How tell the difference? (a) Language of the contract (talked about being a service agreement) (b) Nature of the business of the supplier (contract was with service division) (c) Intrinsic worth of the materials ii. iii. There must be a definite and seasonable expression of acceptance iv. UCC Undermines the mirror-image rule v. Basic terms: (a) Price (b) Quality (c) Quantity (sometimes) vi. UCC 2-207: Additional Terms in Acceptance or Confirmation. (a) A definite and seasonable expression of acceptance or a written
confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(b)
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3. notification of objection to them has already been given or is given within a reasonable time after notice of them is received. 4. [Note: "different terms" can be interpreted as 'additional or different terms', or the court can interpret that different terms are cancelled out, and act as if one of the parties is not a merchant—so different terms are just proposals that must be expressly accepted] (c) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. vii. What constitutes a definite acceptance?
1. the offer expressly limits acceptance to the terms of the offer; 2. they materially alter it; or
(a) A formal acceptance that includes a material alteration does constitute definite acceptance. But there remains the question of the terms of the contract [whether the change itself becomes part of the contract]. (b) A formal acceptance that changes a basic term of the agreement will result in a contract not being formed. Essentially, the basic terms are those that would be the blanks on a form. Basic terms: if price and quantity changes, no contract. If quality changes, maybe not a contract. If delivery date changes, probably not a contract. (c) A formal acceptance (by offeree) that is expressly conditioned upon its terms (e.g. we disclaim any warranty, and our acceptance is expressly conditioned upon the buyer‘s acceptance of our terms). It is a counteroffer, and not an expression of acceptance. (d) A formal acceptance (by offeror) where the offer is expressly conditioned upon its terms? Acceptance by the offeree/seller [to the purchase order which acts as the offer] is limited to all the terms and conditions contained in this form. Buyer crosses out warranty. When you make a change, it does not stop the contract from being formed. The change is treated as a proposal for change. (e) Verbally reach a basic bargain for exchange. Then send an order acknowledgment with a warranty disclaimer. Is that document a definite expression of acceptance? No, it is a written confirmation. The contract was formed verbally viii. When both parties make their acceptance expressly conditional, they instead end up under 2-207(3)
d. CISG: follows the common law approach and adopts the mirror-image rule
2. Examples a. Princess Cruises, Inc. v. General Electric (223) i. Brief (a) Cruise ship that is taken in for repairs by GE. Rotor is damaged. What is a goods or services contract, and when was there offer and acceptance? (b) Holding: As the contract was more about services than goods, courts should have used the common law. ii. Case Notes (a) Admiralty follows the UCC rules 23
b. Brown Machine v. Hercules (231) i. Brief (a) Even when the acceptance contains different language to the offer, including something expressly disallowed in the offer, as long as the offer was not conditioned upon the acceptance of the term, both terms are knocked out of the contract. ii. Case Notes (a) A Price quote is part of the preliminary negotiations and does not constitute an offer. (b) Even if the offeror has expressly conditioned acceptance on the offeror's terms, if the offeree accepts but sends back different terms, there is still a contract! Only if basic terms are changed is there not a contract. (c) [From Roto-Lith] The current rule is that acceptance of goods does not amount to an expressly conditional acceptance simply because it contains terms that materially differ from the terms of the offer. The acceptance must use clear language to indicate the offeree‘s assent is expressly conditional on the offeror‘s agreement to the terms of the offeree‘s document. G. ELECTRONIC CONTRACTING 1. Theory a. See 2-204 (generic rules on how to form a contract) b. See 2-207 regarding terms of a contract 2. Examples a. Hill v. Gateway 2000 (255) i. Brief (a) Judge Easterbrook. Follows his old case of ProCD. (b) Hills order a computer from Gateway, and keep it for more than 30 days before complaining about its performance. In box says there's an arbitration agreement. (c) A vendor, as master of its offer, may invite acceptance by conduct it specifies. ii. Case Notes (a) The offeror (gateway) is the master of its offer, and can characterize acceptance of its offer any way it wants (in this case by specific performance) (b) Very few people follow Hill v. Gateway. b. Klocek v. Gateway (259) i. Brief (a) Klocek ordered a computer from Gateway that didn't work as promised. Klocek sued for false promises of technical support, etc. Gateway sent an arbitration agreement in the box. (b) Holding: The 'confirmation letter' cannot contain additional terms that specify additional elements that the other party accepts by 'express acceptance' (c) The contract was formed at the time of the call, and the additional items are proposals.
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ii. Case Notes (a) Only 1 form is necessary for battle of the forms. Gateway used a form (as confirmation). No reason to say vendor is master of the offer. H. POSTPONED BARGAINING: THE 'AGREEMENT TO AGREE' 1. Theory a. What happens when parties have completed their bargaining, and have postponed certain matters for later decision? b. R 33 (certainty) i. Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain. ii. The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. iii. The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance. c. To be enforceable, a contact to enter a future covenant must specify all material and essential terms and leave nothing to be agreed upon as a result of future negotiation d. An agreement with a missing material term makes a contract unenforceable e. UCC holds opposite of restatement (§2-305): an ‗open price term‘ will not prevent enforcement of a contract for sale, if the parties intended to be bound by their agreement. The court may enforce a reasonable price, or if one party has the power to fix a price, he must do so in good faith. Court may still decide that the parties did not intend to be bound unless the price was fixed by agreement. f. Two types of incomplete bargains: i. Agreement to agree: parties have reached agreement on a number of matters but have left for the future agreement one or more terms ii. Formal contract contemplated: parties have reached an agreement in principle but contemplate the execution of a formal written contract (often reducing agreement in principle to a written letter of intent) parties may be bound when they reach an agreement in principle iii. Factors used to determine whether parties intended to reduce their agreement to writing: (a) Whether the type of agreement involved is one usually put into writing (b) Whether the agreement contains many or few details (c) Whether the agreement involves a large or small amount of money (d) Whether the agreement requires a formal writing for the full expression of the covenants (e) Whether the negotiations indicated that a formal written document was contemplated at the completion of the negotiations (f) Where in the negotiating process that process is abandoned (g) The reason it is abandoned (h) The extent of the assurances previously given by the party which now disclaims any contract (i) The Other party‘s reliance upon the anticipated completed transaction
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2. Examples a. Walker v. Keither (271) – Classical approach i. Brief (a) A rent renewal case. The parties agree to determine a renewal price later, and don‘t. (b) Holding: there is no contract option to lease as the parties never came to a substantive agreement. ii. Case Notes (a) There must be sufficient certainty as to the terms of the contract. Since there is no clear mechanism or agreed upon price, that term is very uncertain. (R§ 33) b. Quake Construction v. American Airlines (278) – modern approach i. Brief (a) Issue: did the parties intend the letter of intent to be a contract (b) Holding: there is enough ambiguity, so goes to jury 1. Look at language of letter if unambiguous, a question of law 2. Does the contract contain parol evidence (oral evidence, prior written documents, etc.) a question of fact c. Case Notes i. Looks at surrounding facts (the parties intend to have an agreement) IV. THE STATUTE OF FRAUDS A. THEORY 1. Frauds (from Restatement 110) a. (1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception: (a) Signature 1. The signed writing is interpreted loosely. A memorandum on the letterhead of the party to be charged is often considered sufficient to meet the requirement that it be signed. 2. Electronic writings under the E-sign act can constitute writings and signatures (b) The Memorandum 1. Signed writing threshold requirements: a. The signed writing must establish a contractual relationship between the parties b. The unsigned writing must on its face refer to the same transaction as set forth in the signed writing c. This must be considered without considering the parol evidence d. The Restatement: it is not necessary for the signed writing to establish a contractual relationship; the memorandum may consist of an informal writing (including an unsent letter), an offer, or a document that attempts to repudiate contractual liability 2. Requirements for linking documents: a. Several documents may be linked together through oral testimony even though the documents do not expressly refer to each other.
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But the testimony must show assent to the unsigned paper, otherwise the judge can conclude the state has not been satisfied. b. See R132: even if there is no internal reference or physical connection, the documents may be read together if under the circumstances they clearly relate to the same transaction and the party to be charged has acquiesced in the contents of the unsigned writing i. R 132: The memorandum may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction. 3. Memorandum alternative: a. Restatement §133: a memorandum sufficient to satisfy the statute of frauds need not have been made as a memorandum of the contact. An entry in a diary, minute of a meeting, communication to a third party, or even a letter attempting to repudiate or cancel the contract can constitute a memorandum ii. (a) a contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision); iii. (b) a contract to answer for the duty of another (the suretyship provision); iv. (c) a contract made upon consideration of marriage (the marriage provision); v. (d) a contract for the sale of an interest in land (the land contract provision); vi. (e) a contract that is not to be performed within one year from the making thereof (the one-year provision). (a) Interpreted liberally. The standard view is the contact is not subject to the statutory provision so long as it is possible that it could be performed within a year, even though the performance is unlikely (b) Most courts will hold a lifetime contract does not come under statute of frauds because contracts measured by a lifetime are capable of being performed in less than a year. (Minority argues lifetime is really a contract for a set number of years) b. (2) The following classes of contracts, which were traditionally subject to the Statute of Frauds, are now governed by Statute of Frauds provisions of the Uniform Commercial Code: i. (a) a contract for the sale of goods for the price of $500 or more (Uniform Commercial Code § 2-201); ii. (b) a contract for the sale of securities (Uniform Commercial Code § 8-319); iii. (c) a contract for the sale of personal property not otherwise covered, to the extent of enforcement by way of action or defense beyond $5,000 in amount or value of remedy (Uniform Commercial Code § 1-206). c. (3) In addition the Uniform Commercial Code requires a writing signed by the debtor for an agreement which creates or provides for a security interest in personal property or fixtures not in the possession of the secured party. i. The signed writing is also interpreted very loosely. A memorandum on the letterhead of the party to be charged is often considered sufficient to meet the requirement that it be signed.
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d. (4) Statutes in most states provide that no acknowledgment or promise is sufficient evidence of a new or continuing contract to take a case out of the operation of a statute of limitations unless made in some writing signed by the party to be charged, but that the statute does not alter the effect of any payment of principal or interest. e. (5) In many states other classes of contracts are subject to a requirement of a writing. 2. Failure to comply with the statute of frauds renders a promise unenforceable 3. Any statute that requires a transaction be memorialized in writing for legal efficacy is like to be referred to as a statute of frauds 4. Courts are very lenient. Ask three Questions: a. Is the relevant contract that falls within the scope of the statute? b. Is there a memorandum (some kind of writing) i. The writing needs to indicate that some contract was formed, ii. The writing must give the key terms of the contract. iii. The memorandum must be signed by the party to be charged (whomever is the defendant) c. Is there an exception to the state of frauds that voids application of the statute in this particular situation 5. Jargon a. Non-mutuality: a contract that is enforceable against one party but not the other b. Equitable Estoppel: When a person makes a claim, they are estopped from making a claim on a contrary fact c. Equal dignity rule: in an agency relationship, if the statue applies to a particular contract that has been signed by an agent, the agency relationship itself becomes subject to the statute of frauds, so that a written memorandum of the agency relationship must be signed by the actual party; where there is some subsidiary contract to a contract that is being evaluated or comes under the statute of frauds, the subsidiary contracts must also meet the statute of frauds; must specify that a person is an agent (and there is obviously a specific realm upon which agent can act) 6. Statute of frauds serves the cautionary and evidentiary function 7. Courts treat the statute of frauds as loosely as possible (e.g. a memorandum on the letterhead of a party to be charged is often considered to be sufficient to meet the requirements that it be signed by the party charged) B. GENERAL PRINCIPLES: SCOPE AND APPLICATION 1. TESTS: i. Does the statute of frauds apply to this contract (requiring a signed memorandum)? (a) No Plaintiff can prove contract by any combination of relevant evidence, written or oral, direct or circumstantial (b) Yes Go to #2 ii. Is the statute of frauds ―satisfied‖ (there is a written statement that meets the statute‘s requirements)? (a) No Go to #3 (b) Yes Statute is satisfied and presents no bar to enforcement
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iii. Are there other factors in the case (e.g. performance or reliance by the plaintiff) which might invoke an exception to the statutory bar? 2. EXAMPLES a. Crabtree v. Elizabeth Arden Sales Corp. (298) i. Brief (a) Crabtree entered into preliminary negotiations with Elizabeth Arden to work as a sales manager. Arden indicated on the telephone she was prepared to offer a two-year contract, based upon an annual salary of $20 for 6 months, $25k for second 6 months, and $30k for second year, plus $5k expenses per year. Crabtree responded ―interesting.‖ Arden had personal secretary make a memorandum. A few days later, Crabtree phone Mr. Johns (at Arden) and telegraphed Arden, accepting the invitation to join the organization; Miss Arden responded ―welcome‖. When Crabtree reported for work, a ―pay-roll change‖ card was made up, initialed by Johns, and forwarded to the payroll department. It contained the names of the parties, Crabtree‘s Job Classification, and the notation of the $20k, $25k, $350 pay scale. After 6 months, Crabtree‘s pay increased from $20 to $25k, but did not increase again. Johns, and the comptroller (Carstens) told Crabtree they would fix the error regarding the raise to $30k, and prepared another ―pay-roll change‖ card notating a ‗salary increase‘ ‗per contractual agreement with Arden.‘ Arden refused to approve the increase, and plaintiff quit and sued. (b) The three documents, read together, signed and unsigned, constitute a memorandum of the terms of the contract ii. Notes (a) Under restatements, a written offer by one party constitutes a memorandum (b) Under UCC, a written offer by one party does not constitute a memorandum (c) A memorandum 1. Doesn't all have to be one document, can be multiple linked documents 2. One of those documents must be signed 3. There must be a sufficient connection from the unsigned papers as determined by the reference to the same subject matter as the signed one 4. Altogether must contain all the basic/essential terms of the contract b. Winternitz v. Summit Hills Joint Venture (305) i. Brief (a) A lease of property between a landlord and a tenant was terminated by the landlord. The tenant brought an action against the landlord alleging breach of lease and interference with a contract. After a verdict in favor of the tenant, the trial court granted a judgment notwithstanding the verdict in favor of the landlord on all claims. The tenant sought review, and the court affirmed the judgment on the tenant's contract claims. The court held that the tenant's contract claims were barred by the statute of frauds. The doctrine of part performance was not available to the tenant because he
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sought monetary damages, and part performance was an equitable doctrine. The court reversed the judgment on the interference with a contract claim and reinstated the verdict in favor of the tenant. The court held that the landlord breached the lease for the purpose of hurting the tenant's sale of his business. ii. Notes (a) Damages in law receive damages. Equitable remedy requests get specific damages (b) In this land case, what is being sought is damages and not performance. But can only get performance in a land case –part performance does not apply. (c) Part performance doctrine: Is an exception to the statute of frauds (d) What type of part performance is sufficient to make an oral promise to transfer an interest in land enforceable? Most courts accept the transfer of possession of property plus the making of valuable improvements as sufficient past performance; payment alone of money is not (e) Contract in Real Property will get you into statute of frauds regardless of duration 3. Alaska Democratic Party v. Rice (314) a. Brief i. The Democratic Party member claimed that the Democratic Party official offered her a two-year position as executive director of the Alaska Democratic Party. When the job failed to materialize, the party member sued on the alleged oral contract. The jury awarded her damages based upon promissory estoppel and misrepresentation. The official and the Democratic Party appealed the trial court's decision. The court affirmed the judgment of the trial court and adopted R 139 as the law of the state. The court stated that the party member's proven § 139 claim had the effect of rendering the oral contract, which would have been invalid under the Statute of Frauds, legally enforceable on the basis of the terms that had been established by the party member. Injustice was avoided only by the court's enforcement of the oral contract of employment. b. Notes i. §139: Enforcement by virtue of action in reliance (a) Restatement 139 1. (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires. 2. (2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant: a. (a) the availability and adequacy of other remedies, particularly cancellation and restitution;
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b. (b) the definite and substantial character of the action or forbearance in relation to the remedy sought; c. (c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence; d. (d) the reasonableness of the action or forbearance; e. (e) the extent to which the action or forbearance was foreseeable by the promisor. (b) promissory estoppel doing an end-run around the statute of frauds (c) is intermittently enforced by the courts 1. middle ground: some courts hold that promissory estoppel only applies when threre was a promise to make a writing (d) Even if 139 does apply, it does not mean the promise will be enforced, as its enforcement must the only way injustice can be avoided C. THE SALE OF GOODS STATUE OF FRAUDS: UCC: 2-201 1. UCC 2-201 a. Formal Requirements i. (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing. ii. (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received. iii. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable (a) (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or 1. known as special manufacture exception (b) (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 beyond the quantity of goods admitted; or 1. Known as admission exception
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(c) (c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Sec. 2-606). b. All you need on the memo is a signature and a quantity: even the price may be left off c. Part Performance: Even a payment of part of the price is sufficient under 2203(3)(c) to validate the entire contract (since goods cannot be apportioned) d. Revised Article 2 replaces 'signed writing' with a requirement of an 'authenticated record' 2. Example a. Buffaloe v. Hart i. Brief (a) The tobacco farmer entered into an oral agreement to purchase five barns located on the property owners' farm. The tobacco farmer already had possession of the barns under a rental agreement. The tobacco farmer gave the property owners a check for partial payment on the barns, but the property owners returned the check four days later and informed the tobacco farmer that they had sold the barns to another buyer. A jury found in favor of the tobacco farmer on his breach of contract claim. The court affirmed the trial court's denial of the property owners' motions for directed verdict and for judgment notwithstanding the verdict. The court agreed with the property owners that the personal check was not sufficient to constitute a writing under the statute of frauds, because it was not endorsed by the property owners. The court, however, concluded that there was substantial relevant evidence that the tobacco farmer "accepted" the purchased barns and that the property owners "accepted" the tobacco farmer's check, thus taking the contract out of the statute of frauds. ii. Notes (a) Where the asserted contract is for one unit of the goods in question, even a payment of only part of the price will be sufficient under §2-201(3)(c) to validate the entire contract (since the goods cannot be apportioned) V. THE MEANING OF THE AGREEMENT A. PRINCIPLES OF INTERPRETATION 1. The process by which a court gives meaning to contractual language when the parties attach materially different meanings to the language 2. Three Approaches to Interpreting Intent a. Subjective – The Classical Approach to Interpretation i. Meeting of the minds ii. Interpretation? (a) The parties have a duty to read the contract b. Objective – outward appearance of parties behavior (as viewed by a reasonable person): what would reasonable person view the terms of the contract [mental state of parties is irrelevant]; (e.g. Holmes) i. Criticized subjective approach because (a) It made enforcement of contracts too difficult (b) The external method was fair b/c a speaker should always expect his words to be understood in accord with their normal usage
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ii. problem: can enforce a contract neither party intended c. Modified Objective – Modern Approach to Interpretation i. Whose meaning controls the interpretation of the contract? (a) Where parties agree on the meaning, that meaning will be enforced (b) If the parties disagree on the meaning, the court will enforce the meaning of one of the parties, and will try to evaluate if one party knew or should have know of the other party‘s understanding. (c) Where there is a difference of meaning and neither party knew of other party‘s meaning, there is no contract. (d) If neither party knew or had reason to know of the meaning of the other, there is no contract because of the absence of mutual assent 1. Plaintiff has burden to prove defendant knew or should have known the meaning of the plaintiff a. In rare circumstances courts will provide terms consistent with good faith and reasonable expectations ii. What was the meaning: Rules to aid with interpretation (R 202) (a) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (b) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (c) Unless a different intention is manifested, 1. where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; 2. technical terms and 3. words of art are given their technical meaning when used in a transaction within their technical field. (d) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (e) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade. iii. Reasonable expectations doctrine (a) Limits the duty to read a contract (b) The objectively reasonable expectations of application and intended beneficiaries will be honored even though painstaking study of the policy provisions would have negated those expectations (Keeton) (c) Test if a term violates the reasonable expectations of the non-drafting party (for Restatement): 1. The term is bizarre or oppressive 2. The term eviscerates the non-standard terms explicitly agreed to 3. The term eliminates the dominant purpose of the transaction
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4. If the adhering party does not have the opportunity to read the term 5. If the term is illegible or otherwise hidden from view (d) How to apply 1. Restatement differs from Mayhew (common law) as must assess contract from the drafter's perspective 2. Restatement 211 a. Except as stated in subsection 3, when a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings [i.e. forms] are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms used in the writing b. Such writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understand of the standard terms of the writing c. Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not party of the agreement 3. Mayhew/Common Law a. The doctrine should only apply to contracts of insurance that are true contracts of adhesion; b. In cases of ambiguity in the policy language, the policy will be interpreted in light of the objective reasonable expectations of the average insured; c. Regardless of any ambiguity…the objective reasonable expectations of the average insured will be applied where the insured did not receive the full and adequate notice of the provision in question, and i. the policy provision in question is unusual and unexpected, or ii. the policy provision effectively emasculates the apparent coverage; d. Where, prior to contracting for the insurance, some activity…which can be reasonably attributed to the insurer has created an objective impression of coverage as to a reasonable insured; and e. Where some activity reasonably attributable to the insured prior to contracting for the insurance has caused this particular insured to reasonably believe that he has coverage, although such coverage is denied by the policy. (e) Why use doctrine? 1. The world has changed, and can no longer really negotiate over the terms of this kind of contract. Tends to be a contract of adhesion (f) How do the states use the doctrine 1. More than half the states have adopted the reasonable expectations doctrine
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2. Limits? Many states have limited the doctrine by requiring the presence of ambiguity or have otherwise displayed a reluctance to adopt it as a broad rule (g) Often used in conjunction with an adhesion contract 1. An adhesion contract is: a. a standardized form b. is characterized by a gross disparity in bargaining power c. there is no choice as to the vast majority of terms of the contract [take it or leave it] d. ** an adhesion contract may also be the first step towards apply the doctrine of unconscionability iv. Doctrine of Ambiguity/ Plain meaning rule (leads to the parol evidence rule) (a) Courts often state the "plain meaning" of the language of a contract should govern and that extrinsic evidence is admissible only if the court concludes the contract is ambiguous (b) Although theorists reject the plain meaning rule, most courts rule to receive extrinsic evidence of meaning unless the court first concludes the agreement is ambiguous (c) Two types of ambiguity 1. Patent/Intrinsic: The term is ambiguous on its face 2. Latent/Extrinsic: The term is only ambiguous when additional evidence is admitted; the intent of the parties is 'clear' from the document itself 3. Rules to Aid with interpretation a. Restatement 202 (example of modified objective view) i. Words and other conduct are interpreted in the light of all the circumstances, an if the principle purpose of the parties is ascertainable it is given great weight ii. A writing is interpreted as a whole, and all writing that are part of the same transaction are interpreted together iii. Unless a different intention is manifested, (a) Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning (b) Technical terms and words of art are given their technical meaning when used in a transaction within their technical field iv. Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement v. Wherever reasonable the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade b. Additional Rules to aid in interpretation i. Construe the language against the drafter if it contains a word or phrase which is capable of two reasonable meanings (if the parties are not sophisticated
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businessmen who negotiated the contract) Omnia praesumuntur contra proferentem ii. Noscitur a sociis: The meaning of a word in a series is affected by others in the same series; a word is affected by its immediate context. iii. Ejusdem generic: A general term joined with a specific one will be deemed to include only things that are like (of the same genus as) the specific one. iv. Expression unius exclusion alterius: If one or more specific items are listed, without any more general or inclusive terms, other items although similar in kind are excluded. v. Interpret contract as a whole vi. Purpose of the parties: The principal apparent purpose of the parties is given great weight in determining the meaning to be given to manifestations of intention or to any part thereof vii. Specific provision is exception to a general one: If two provisions of a contract are inconsistent with each other and one is general enough to influence the specific situation to which the other is confined, the specific provision will be an exception to the general one. viii. Handwritten or typed provisions control printed provisions ix. Public interest preferred: The interpretation or construction is preferred which favors the public interest 4. Restatement 203: Standards of Preference in Interpretation a. In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable: i. 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; [Ut magis valeat quam pereat] ii. the weights of the various terms 1. express terms outweighs a. course of performance outweighs i. course of dealing outweighs ii. usage of trade iii. specific terms and exact terms are given greater weight than general language; iv. separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated. 5. Examples a. Joyner v. Adams i. What does the word "developed" mean? Joyner leased to Adams property, which if Adams 'developed', would not have to pay escalating rent. Did Adams sufficiently develop the property? ii. Since there was no meeting of the minds as they meant different things by the word developed, there was no contract. b. Frigaliment v. BNS i. What is chicken? Young Chicken, Fowl? Both? ii. Court considers usage of trade, preliminary negotiations, language of contract, price, governmental standards, course of performance, and course of dealing
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iii. Court holds: П did not carry burden to show their definition of chicken should control c. C&J Fertilizer i. Plaintiff operated a fertilizer plant that he insured against burglary under policies issued by defendant. When the plant was broken into defendant refused to pay for the loss and plaintiff brought action to recover for the loss. Defendant argued that the break in did not comport with the definition of "burglary" in the policy, which envisaged violent breaking leaving visible mark or physical damage to the door. The lower court found on behalf of defendant. On appeal, plaintiff claimed relief under the doctrine of reasonable expectations, implied warranty, and unconscionability. The court reversed the decision, holding that interpretation was a matter to be determined by the court and that the meaning of the word in the policy differed widely from its legal or normal meaning. The court held that plaintiff was entitled to judgment because the provision of the policy was unconscionable and departed from the reasonable expectation of an ordinary person. B. THE PAROL EVIDENCE RULE 1. Operates to give legal effect to whatever intention the parties may have had to make their writing a final and complete expression of their agreement 2. excludes evidence to prevent one party from introducing into the court extrinsic (or 'collateral' evidence of matters not contained in the written agreement between the parties, where that evidence is offered to supplement or contradict the written agreement 3. Demonstrates the court's preference for an agreement expressed in a formal writing over other oral and written modes of expression 4. Considerations when using the parole evidence rule a. The more detailed the writing, the more likely the parol evidence rule will be invoked b. Parol evidence is a rule of exclusion, not of evidence c. Any contract can be discharged or modified by a subsequent agreement d. There is no requirement that the extrinsic writing be signed 5. Merger clause: states the contract is intended to be final and complete; all prior understandings are deemed to have been ‗merged‘ into or superseded by the final writing 6. Complete/full integration: a writing that is intended to be a final and exclusive expression of the agreement of the parties; an integrated document is complete on its face; a final contract 7. Partial integration: a writing that is intended to be final but not complete because it deals with some but not all aspects of a transaction between the parties; contains all of certain elements but is missing other elements [contains X and Z, but not Y or not all of Y] 8. Extrinsic evidence is the same as parol evidence 9. CISG does not have a parol evidence rule 10. Approaches to using the Parol Evidence Rule a. Reasons to bring in extrinsic evidence (under parol evidence) i. Contradict
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b.
c. d.
e.
ii. Supplement iii. Interpret Ask i. Is the document integrated? ii. If so, is it partially or fully integrated? (a) If partially integrated, the relevant information cannot be contradicted, but it can be supplemented by relevant additional terms 1. By prior or contemporary oral statement 2. By prior written document iii. If the document is not integrated, parol evidence rule does not apply Integration is a question of law for a judge. The jury decides how to apply the evidence. Classical approach (Williston) i. If the document is Completely Integrated (a) Evidence that suggests contradictory terms cannot be examined (b) Evidence that suggests supplemental terms cannot be examined (c) If evidence is for purposes of clarification or interpretation, it may be included (d) A merger clause is a statement in the contract that states this writing is intended to be final and complete (all prior understandings are deemed to have been merged or superseded by the final writing); is not required to determine that a document is fully integrated 1. The merger clause (under classical approach) is dispositive (e) Includes exceptions to parole evidence rule ii. If the document is Partially Integrated (a) Extrinsic evidence (parol evidence) can be used to bring in supplemental terms (b) Cannot bring in terms that contradict those which are in the contract writing iii. The contract is determined by looking to the 4 corners of the document iv. Additional terms may have been left out purposely (we might not have been able to reach an agreement); an objective standard for assessing the terms— we want people to enter into contracts; certainty promotes economic activity; is more efficient; less risky; oral evidence also increases the risks of fraud; generally can be determined by a judge without a need for a jury v. Follow the plain meaning approach: do not allow the use of extrinsic evidence to uncover latent ambiguity. vi. However, if the document is obviously ambiguous, the document can be explained by the extrinsic evidence Modern approach i. Standard: ―Modern approach‖ adherents allows the use of extrinsic or parol evidence if the disputed language of the contract is ‗reasonably susceptible‘ to the different proffered meanings advanced by the parties; the court will consider at least preliminarily the extrinsic evidence and need not find the agreement to be patently ambiguous ii. See R 2-209 to 218 and UCC 2-202
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iii. Court weighs evidence the party wants to introduce, and uses the evidence to determine if the additional term (a) Is Contradictory evidence (b) Is Collateral evidence (c) Is A situation where the ordinary course would be to put the agreement in writing (d) Is Handwritten (as opposed to being part of the form (e) Is A detailed and complex writing (f) Was specially prepared for this transaction (g) Was put in by sophisticated parties (h) Was put in when parties were represented by counsel (i) Was written in a formal setting iv. Exceptions to the classical rule (a) The existence of a merger clause is not dispositive, particularly when using pre-printed forms (b) If the writing is partially integrated a consistent additional term is admissible to supplement it (but a contradictory term cannot be added) (c) If a writing is completely integrated, however, it cannot be supplemented. But it may be explained by extrinsic evidence—and does not need to be ambiguous for the courts to examine the evidence. v. Even if the writing is fully integrated, there is a way out: a party can introduce a collateral agreement – a second document that adds additional terms – that agreement can be written or oral (a) Used when there is a merger clause that makes it difficult for a court to say a document is partially integrated vi. UCC 2-202 (a) Terms with respect to which the confirmatory records of the parties agree or which are otherwise set for in a record intended by the parties as a final expression with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be supplemented by evidence of: 1. Course of performance, course of dealing, or usage of trade 2. Consistent additional terms unless the court finds the record to have been intended also as a complete and exclusive statement of the terms of the agreement (b) Terms in a record may be explained by evidence of course of performance, course of dealing, or usage of trade without a preliminary determination by the court that the language used is ambiguous 11. Exceptions to the Parol Evidence Rule (from R 213-215) a. Agreements (oral or written) made after the execution of the writing b. A claim of fraud or an invalid agreement (grounded in mistake) c. Does not apply to evidence offered to explain the meaning of the agreement i. If the document is a partial integration, the writing may not be contradicted by intrinsic evidence. But it may be supplemented by additional consistent terms. ii. If the writing is completely integrated, it may not be supplemented.
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iii. Classical courts will admit parol evidence for explanatory purpose only if the writing appears on its face to be ambiguous iv. Modern courts are more likely to admit parol evidence to show the language used in the agreement has a special meaning, even if that language does not appear unclear merely from an inspection of the writing d. Evidence that shows an oral condition precedent (the contract would come into existence based upon an oral term being met) e. Collateral agreement: a separate additional distinct agreement that we would not expect to see within the 4 corners of the main agreement i. Collateral contract is a side agreement that relates to a contract which, if unintegrated, can be supplemented by evidence of the side agreement; an agreement made before or at the same time as, but separately from, another contract (a) Collateral contract doctrine: the principle that in a dispute concerning a written contract, proof of a second (but oral) agreement will not be excluded under the parol-evidence rule if the oral agreement is independent of and not inconsistent with the written contract, and if the information in the oral agreement would not ordinarily be expected to be included in the written contract f. Equitable remedies such as a right to reformation: a claim there was an error in the writing of the agreement—must meet the clear and convincing evidence standard i. There is an omission of a term ii. A term that wasn't agreed to has been added, or misstates the obligation g. The agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake, or illegality i. Some courts limit fraud exception to 'fraud in the execution' when the contract's contents are misrepresented ii. Most courts will extend the fraud exception to include instances of 'fraud in the inducement'—misrepresentations of fact that induce the other party to enter into the contract (a) Even so, some courts will prohibit the introduction of parol evidence to support a claim of fraud in the inducement if the alleged misrepresentation directly contradicts a term in the writing 12. Examples a. Thompson v. Libby – Classical approach i. a contract to purchase logs. The defendant said in the contract there was an oral warranty that the logs would be of a certain quality. Wants to enter oral testimony. ii. The oral warranty cannot be brought into evidence under the four corners rule b. Taylor v. State Farm – Modern approach i. car accident. The insurance company provided representation for defendant. A week after this massive verdict comes down, Taylor signs release agreement for $15,000 in UM payments in return for releasing state farm from liability. What is the scope of the release?
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ii. Supreme Court: judge has to examine the extrinsic evidence, and make a determination as to whether to include it. But the judge cannot limit himself to the four corners until he looks at the intrinsic evidence. iii. Is the term reasonably susceptible to the proposed interpretation if so, goes to jury VI. SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD FAITH, AND WARRANTIES A. IMPLIED TERMS 1. Theory a. Implied Term: A term that the court does not find in the parties‘ agreement, even as broadly viewed, but that the court holds should be ‗implied by law‘ – made a part of the agreement by operation of the rules of law rather than by agreement of the parties themselves b. A term can be implied i. By statute ii. By common law precedent iii. Because the court concludes that in this particular case its implication is appropriate c. Implied in fact contract: Terms the parties did agree to d. Implied in law contract: terms the parties would have agreed to i. Adds terms the parties would have agreed to if they had bargained about the issue (a) Purpose: to have a valid contract e. How determine the objective standard for reasonable efforts to sell? Look to normal course in industry, the reasonable steps one will take in a given case. i. For merchants, good faith has an objective meaning—the reasonable commercial standards in a given industry. ii. See UCC 2-306: Output, Requirements, and Exclusive Dealings (a) A 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 unreasonably 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 (b) A lawful agreement by either the seller or the buy for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote the sale. iii. If there is a good reason for parties to enter into a bargain, then the promise is not illusory. We will imply a term creating an obligation even if it is not explicitly stated. f. Implied in law obligations i. Some of UCC's implied-in-law obligations are mandatory and cannot be varied by express agreement ii. Why use implied terms as default rules? (a) Represents a hypothetical bargain the parties would have entered into
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(b) Is grounded on relational aspects of repeated or long-term transactions between the same parties (c) Rules penalize those who engage in inappropriate strategic behavior g. Termination i. UCC 2-309(3): 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 ii. A distribution contract of indefinite duration is still subject to termination atwill upon reasonable notice (a) What could constitute reasonable notice? 1. accommodate distributor's need to sell off remaining inventory 2. whether distributor still has substantial unrecouped investments made in reliance upon the agreement iii. Termination at will looks like an illusory contract. But (a) A termination clause only gives rise to an illusory clause if the termination clause is interpreted to mean a party has unfettered discretion to terminate the contract at any time for any reason. Almost any restriction of the right to cancel will enable the contract to be upheld. For example, specify: 1. Unsatisfactory performance 2. Good cause 3. A specific event occurring 4. A specific period of notice 5. Some courts say just a requirement of some notice (b) Under UCC, even if there is just a bare cancellation or termination clause (may cancel at any time without notice), the court will read it as if the termination clause requires reasonable notice. Court will ignore the explicit term (majority approach) 2. Examples a. Wood v. Lucy, Lady Duff-Gordon i. Brief (a) Defendant fashion designer Lucy hired Wood to exclusively promote her designs in return for one-half of all profits and revenues. Contract is on a yearly basis with renewal 90 days prior to new year. Lucy broke the contract the promise by entering into a contract with Sears. Wood sues for damages. (b) Issue: Duff says Wood didn't bind himself to do anything (he didn't have to sell a thing!), so no contract. Wood says there is a contract. (c) Holding: Cardozo: Wood was making an implied obligation to try and sell the products ii. Notes (a) The critical factor is exclusivity. Because a contract like this one is exclusive (Duff will not sell through anyone else), it is not illusory, and therefore there is an implied obligation that the seller will make an effort to sell.
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1. The obligation to sell must be by reasonable efforts measured objectively. (b) If the contract is not exclusive, the designer does not need a return promise to protect herself. (c) This is not an option contract: Duff was bargaining for a commitment from Woods, not committing herself to a unilateral contract. b. Liebel v. Raynor Manufacturing Co. i. Brief (a) Liebel had an oral agreement with Raynor where he would have an exclusive dealer-distributor relationship for garage doors. Liebel borrowed heavily to make the business a success. After two years, Raynor notified the relationship was over, and would have to order from a competitor. (b) Holding: Reasonable notification is required in order to terminate an ongoing oral agreement for sale of goods between manufacturer-supplies and dealer-distributor ii. Notes (a) UCC applies b/c a dealer-distributor contract regards the sale of goods. The UCC requires reasonable notice of termination. (b) Purpose of requirement of 'reasonable notice': 1. Efficiency (as a reason for implying terms) 2. Negotiating efficiency (so don't have to negotiate every minor detail) 3. Transaction efficiency (people are more willing to enter into a contract) B. THE IMPLIED OBLIGATION OF GOOD FAITH 1. Theory a. Good faith: i. UCC (1-203): every contract or duty within its scope imposes an obligation of good faith in its performance or enforcement ii. R2 (205): there is a duty of good faith and fair dealing in every contract iii. At a minimum, good faith requires honesty in fact (1-203). In some situations, it also requires an objective standard of reasonable conduct (2-103-1-b) iv. Once a contract has been concluded, the terms will be deemed to include an obligation of good faith that is binding on both parties v. UCC applies 'subjective honesty' and 'objective reasonableness' to all parties vi. Neither party shall do anything which shall have the effect of destroying or injuring the right of the other party to receive the fruits of the contract vii. No party is allowed to realize gains that in making the contract he had implicitly agreed to surrender, or unfairly deny to the other party the fruits of the contract that she reasonably expected to receive b. Examples of bad faith: i. Seller concealing a defect ii. Builder willfully failing to perform in full, though otherwise substantially performing iii. Contractor openly abusing bargaining power to coerce an increase in contract price iv. Hiring a broken and then preventing from consummating a deal v. Harassing the other party for repeated assurances of performance
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c. Requirements contract: a contract where the buyer agrees to purchase all of its commodity needs from a particular seller, and that seller agrees to supply all of the buyer's requirements. i. The seller is ordinarily free to also sell to any other buyers as long as he meets all of the first buyer's requirements ii. Buyer is guaranteed all the product he needs for the life of the contract iii. Seller knows they have a certain channel for an amount of product they sell iv. Theory: consideration comes from commitment of buyer to either buy goods from the designated seller or not at all—the decision to not buy at all creates a legal detriment d. Output contract: requires seller to sell all of output to the buyer, an imposes a duty on the buyer to purchase all of the seller's products i. If the buyer wants to buy even more of the product from someone else, that is okay so long as purchases all output from the seller ii. Provides seller with a guaranteed market iii. Gives buyer assurance he can purchase product at a fixed price e. Output contract with the sale of Goods: i. Over-demand situation: (a) UCC 2-306(1) (b) Is an issue of good faith b/c if the market situation changes such that it is advantageous to buy product at the now cheap price, the seller will be taken advantage of it forced to sell much more product than originally contracted for. This creates stockpiling – not using current requirements but rather storing for the future. ii. Under-demand situation: (a) Can decrease the amount purchased even to 0, but must have a good reason. E.G.: 1. Purchase of commodity would lead to bankruptcy 2. Stopped delivering the product 3. Bad reasons include 4. Change in management 5. Unprofitability 6. Get a better deal somewhere else (b) When is there a breach? 1. Not completely clear, but reduction in orders are in good faith (and thereby not a breach) if result from circumstances directly beyond buyer's control iii. Questions for the jury (a) It is difficult to distinguish between an agreement where buyer agrees to buy all of product from a particular seller and agreement where buyer merely promises to buy whatever it might want from the seller (the second is an illusory contract) 2. Examples a. Locke v. Warner Bros., Inc i. Brief
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(a) Ex-girlfriend of Clint Eastwood got $750,000 but no real opportunity to make movies. She sued for bad faith and won. Although the contract allowed WB to use their discretion in choosing whether her works were any good, they still had an obligation of good faith and fair dealing to exercise that discretion honestly. There was an intent to defraud. ii. Notes (a) Standard is reasonable expectations. When the reasonable expectations are not met, there is a violation. Bad faith includes an 'evasion of the spirit of the bargain' (R 205d) b. Empire Gas Corp. v. American Bakeries Co. (Posner) i. Brief (a) A requirements contract where American Bakeries agreed to Buy 3000 gas vehicles and then purchased none. AB did not disclose any reason for its decision not to convert the trucks. (b) Issue: Did AB act in bad faith? Yes. ii. Notes (a) This is a requirements contract VII. AVOIDING ENFORCEMENT: INCAPACITY, BARGAINING, MISCONDUCT, UNCONSCIONABILITY, AND PUBLIC POLICY A. THEORY 1. Historical Basis a. Marriage unified husband and wife into a single legal personality, that of the husband b. Slavery c. Other racial and ethnic barriers 2. Modern Basis a. Status Defenses: concerns the status of one of the bargaining parties; arises when concerned with whether one of the bargainers can enter into a contract b. Behavior Defenses: concerns the behavior of one of the bargaining parties; arises if one of the parties has engaged in behavior we consider sufficiently reprehensible that we will not hold the other party to the bargain c. Substantive Defenses: concerns the substance of the bargain—there are some bargains we are unwilling to enforce for public policy reasons i. Modern Day courts are more willing to look at the substance of the agreement (a) Court looks to the fairness of the agreement (unconscionability) B. MINORITY AND MENTAL INCAPACITY 1. Theory a. Inherent conflict i. Don't want to hold people to promises they don't have the capacity to understand ii. Want to protect a party that enters into a contract with legitimate expectations from the other party b. Rule: Someone who has not reached the age of majority that enters into a contract has a voidable contract – the contract is voidable at the option of the minor (R§14) until the beginning of the day before the defendant's 18th birthday
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c. Emancipation statute: allows a minor to declare himself legally emancipated and act as an adult d. Minority i. Theory (a) Some courts will/will not remove the value of the depreciation. 1. If minor lied or engaged in tortious conduct such as destruction of goods contract is either not voidable or depreciation will be taken into account 2. Use a bright line rule (for age of majority) b/c easy to enforce (b) Necessaries (e.g. food, clothing, shelter) must be paid back. Minor is liable for the reasonable value of the necessaries (fair market value). 1. Question of fact to be determined in a particular case. (c) When Minor reaches majority 1. Can affirm or disaffirm the contract a. explicitly b. failure to disaffirm within a reasonable period of time affirms' (d) Legal settlements by a minor, which involve the execution of a release of a minor's claims, are binding; unless the settlement is not approved by the court (e) Some statutes allow minors to enter into contracts (f) Marriage may emancipate a child (g) Based upon Dodson, some propose a tiered system of protection: 1. Conclusive avoidance of contracts (for the youngest) 2. Presumption of incapacity (at mid-range age) 3. Rebuttable presumption of capacity (just before adulthood) ii. Example (a) Dodson v. Shrader (minority) 1. Brief a. 16 y-o plaintiff buys truck, 9 months later it develops problems, plaintiff ignores it, and the truck breaks. Plaintiff contacts defendant to rescind the purchase. Dealer wants to subtract the value of the depreciation of the truck from the money he needs to return. Court agrees. e. Mental Incapacity i. Theory (a) From Restatement 15 (mental illness or defect) (b) Rule: a person with a mental incapacity can avoid any contact they entered into while they were incapacitated. 1. If a person's property is under guardianship, as a general rule they lack capacity (Restatement 13) 2. Has a high standard. (c) One lacks capacity only if 1) laboring under some sort of mental illness or defect, 2) some sort of medical condition, 3) some sort of inherent disability (d) Test to show lack of capacity
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1. Cognitive Test: Unable to understand in a reasonable manner the nature and consequences of the transaction 2. Volitional Test: unable to control your actions in a reasonable way (unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition) (R 15) (e) When a contract is made on fair terms and the other party does not know about the mental illness or defect, and if there was substantial reliance by the second party, the court may grant relief as justice requires (and thereby enforce the contract) (f) In the situation where the other party does not know of the impairment and there is no way they could have reasonably known, courts say that the second party has full rights of restitution for any benefits conferred upon the mentally impaired party even if the original basis of the contract cannot be returned (g) Unlike minority, there are different levels of incapacity that apply differing standards for relief (from expectation damages to restitution to nothing) (h) Intoxication 1. See Restatement 16: a. A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication i. he is unable to understand in a reasonable manner the nature and consequences of the transaction, or [cognitive test] ii. he is unable to act in a reasonable manner in relation to the transaction [volitional test] ii. Example (a) Hauer v. Union State Bank of Wautoma (515) (mental incapacity) 1. Brief a. Bank loan to mentally incompetent woman to loan money to man who loses all of money. She doesn't have to pay. C. DURESS AND UNDUE INFLUENCE 1. Public policy favors the 'security' of the transaction. As the system is based upon freely given consent, in the case of duress or undue influence, although there is assent, it is not freely given. 2. When assent is not information, there arises the exception of mistake and misrepresentation 3. Court has broaden duress from undue influence between family members or those in a fiduciary relationship to threats to a person's property "duress of goods" and then to "economic duress". Undue influence has been expanded to situations that do not involve a confidential relationship. 4. Duress a. Theory i. Elements of Duress: (a) Wrongful or improper threat (b) No reasonable alternative to entering into the agreement
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(c) Inducement into that contract by the threat (some causation) ii. Wrongful or improper threats (a) Threat to commit a criminal act (b) Threat to commit a tortious act (c) Act in bad faith (d) Threat of criminal prosecution (use threat of reporting crime) (e) Threat to engage in civil litigation (f) Threat of physical harm iii. No Reasonable Alternative: (a) Standards: 1. Classical– deprived of free will 2. Modern– no reasonable alternative to entering into the agreement (b) Went from objective to more subjective standard (c) Includes 1. issues involving reputation 2. financial issues 3. level of business expertise 4. alternative sources of goods, service, or funds 5. toleration if the threat involves only a minor vexation iv. Causation Requirement: (a) General Rule: The lack of a reasonable alternative must have arisen from the misconduct of the defendant (and not outside factors). The defendant must have taken actions that substantially caused the duress. 1. Standards: a. Defendant completely caused the economic distress (a few states) b. Defendant's actions must substantially cause the economic duress (most states; the restatement standard) i. Restatement 492(b): any wrongful threat of one person by words or other conduct that induces another to enter into a transaction under the influence of such fear as precludes him from exercising free will and judgment, if the threat was intended or should reasonably have been expected to operate as an inducement c. Defendant's actions need not cause the situation, but the defendant knew of the economic situation and took advantage of it (a few states) v. The contract is voidable at the option of the party acting under duress unless the party has ratified it or the party has waited too long. (a) Voidable if made under physical threat (R 174) (b) See R176: a threat is wrongful or improper when it is a threat to commit a crime or tort and threats of criminal prosecution vi. The party that acted under duress may receive restitution, but must also give restitution. – Put the parties back into the position where they were previously. vii. The Restatements: (a) 174: Duress by Physical Compulsion Prevents a contract (b) 175: When duress by threat makes a contract voidable
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(c) 176: when a threat is improper (d) 177: when undue influence makes a contract voidable b. Example: i. Totem Marine Tug & Barge v. Alyeska Pipeline (526) (a) Brief 1. Totem is hired by Alyeska to ship pipe. Alyeska hinders the transactions, and eventually terminates. When Totem wants to get paid, Alyeska delays payment they know is due to squeeze them to accept a smaller payment. 2. Issue: does Totem's economic duress trump Totem's signed release 5. Undue Influence a. Theory i. Elements of undue influence: (a) Undue susceptibility to pressure (b) Excessive strength by bargaining party (excessive pressure) (c) Does not require bad faith – is not a wrongful or improper threat ii. Things that can create undue influence, but are not necessary to do so (a) Confidential relationship between the parties (b) A misrepresentation by one of the parties (c) If there is bad faith iii. Factors of over-persuasion (see R 177(1)) (a) Unusual or inappropriate time (b) Transaction at an unusual place (c) Insistence that this must happen now (d) Extreme emphasis on the consequences of delay (e) Use of multiple persuaders by the dominant side against a single subservient party (f) Absence of third party advisers (g) Statement there isn't time to consult an attorney or financial advisers b. Example i. Odorizzi v. Bloomfield School District (535) ** Perfect example of exam answer (a) Brief 1. Did teacher quit job under excessive pressure? D. MISREPRESENTATION AND NONDISCLOSURE 1. Theory a. Rescission: a judicial return of the parties to the status quo that existed before the contract was formed i. Historical: (a) Allowed to a party by courts of equity to a party who had been a victim of fraud (b) A party had to show she had made a "tender" of any money or property received before instituting the action ii. Modern law: two methods of redress (a) Tort action for damages (b) A right to avoid the enforceability of the contract by way of rescission
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1. requires the injured party to return any money or property he has received iii. Rescission is not allowed when (a) The property has been transferred to a third person (R of Rescission 66) b. Misrepresentation i. Can avoid a contract for misrepresentation by showing three things: (a) The existence of a misrepresentation a. fraudulent misrepresentation; and/or i. Fraudulent Misrepresentation ii. Fraud in the inducement (from R §162): arises where the relevant misrepresentation is knowing or conscious (commission or omission), and is made with intention to deceive the other party and induce them to enter into the contract—contract is voidable iii. Fraud in the factum (from R §163): Goes to the execution of the contract: a misrepresentation that keep the relevant party from knowing the character or essential terms of the proposed contract [say the contract is a lease, when it is not, etc.] — contract is void b. material misrepresentation i. Material Misrepresentation (§162(2) ii. If it would likely induce a reasonable person who manifests his assent [objective standard], or if the maker knows that it would be likely to induce the recipient to do so [subjective standard]. iii. It is not necessary to show the maker of the statement knows it is false in misrepresentation. (R 164(1)) (b) reliance upon the misrepresentation to enter into the contract (c) that reliance was justified ii. A statement of opinion may be actionable if (§169) the one giving the opinion (a) stands in a relationship of trust or confidence to the recipient (a fiduciary relationship) (b) Is an expert on matters covered by the opinion (c) Renders the opinion to one who, because of age or other factors, is peculiarly susceptible to misrepresentation iii. Example (a) Syester v. Banta – Fraud in the inducement 1. Brief a. Ballroom Dance Case. b. Syester brings a tort action for damages, but to recover, must overcome the contract releasing her claim to the dance studio. c. Syester proves by clear and convincing evidence that the release is not binding b/c it fraudulently overreaches and there was a concerned effort to get her to sign the release. d. Syester, after getting rescission, can bring either tort or rescission claim. Brings tort claim c. Nondisclosure
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i. Nondisclosure (see R § 161): Instances where a failure to speak constitutes an assertion for a misrepresentation or a fraud claim (a) Say x. Learn that x is false. Have an obligation to correct what has become a misstatement. (b) Half-truths will sometimes be actionable as misrepresentation. (c) Where a confidential or fiduciary relationship exists ii. When misrepresentation is fraudulent or material (R § 162) iii. No legal obligation to share what you know (disclose) except: (See R 161) (a) When buyer is forced to trust seller (the seller has greater access to information than buyer) – there is a gross disparity in available information regarding a material fact (something that affects the value of the property) (b) If asked a question, you cannot lie (c) If you say something, you cannot tell a half-trust (d) Cannot affirmatively act to conceal information iv. It is not allowed for the seller to shift a cost to the buyer by taking advantage of their superior knowledge, etc. But, value-creation is a good thing—law wants to encourage people to develop information skills, etc., so don't need to disclose information in that circumstance. [This may not necessarily be moral, but as a matter of policy it is efficient and produces desired behavior] (a) Protect buyers against defect, but not sellers who are ignorant of the increased value of property (b) Encourage people to invest in R&D to find concealed value v. Where there can be liability for innocent misrepresentation where it affects a material term, there is generally not liability for innocent nondisclosure vi. Examples (a) Hill v. Jones (553) – misrepresentation by nondisclosure 1. Brief a. Termite Case: Buyers learn the house is infested by terminate from neighbors. Buyers want rescission based upon misrepresentation and fraudulent concealment because sellers did not talk about terminate damage. b. Appeals court: Issue of fact—nondisclosure can be a basis for a rescission if there is a duty to disclose. E. UNCONSCIONABILITY 1. Theory a. Unfairness becomes a stronger argument when there are questions that bring in status and behavior concerns i. E.g. substantial disparities in bargaining strength of the parties b. UCC 2-302: adopted in wake of boilerplate contract provisions c. Rest 2-208 d. Courts are very reluctant to expand or use unconscionability e. Unconscionability i. Absence of a meaningful choice on the part of one of the parties or some defect in the bargaining process [procedural element: arises from unequal bargaining power, unequal terms, something else]
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ii. Must show terms that unreasonably favor one of the parties (fairness of the terms of the resulting bargain) [substantive: unconscionability: very fact specific--The manner in which the contract is made is important] iii. Determined as of the time contract was made iv. Determination is made by judge (even though it is very fact intensive) f. Unconscionability: must show both i. [substantive]: the bargain has been struck: the fairness of the terms of the resulting bargain ii. [procedural]: the context of the bargain that has been struck: the lack of choice by one party or some defect in the bargaining process 2. Example (a) 3. Consumer Protection Legislation a. Goals: i. Disclosure – require commercial parties to disclose information to consumers in a meaningful fashion ii. Substantive regulation – provisions thought to be unfair are declared unlawful iii. Improve enforcement (a) E.g. federal trade commission (and state equivalents) 1. give government agencies the power to regulate consumer matters, including the right to bring lawsuits to protect consumers from improper conduct by sellers and creditors (b) Consumer Credit Protection Act (a.k.a.) truth in lending act (c) Federal Trade Commission Improvement Act: contains provisions requiring increased disclosure of warranty terms, regulating to some degree the substance of warranty obligations, and improving consumer remedies for breach of warranty F. PUBLIC POLICY 1. Theory a. Specifically concerned that compensatory surrogacy will pressure members of an economically vulnerable class to act as a surrogate. They will be taken advantage of. 2. R.R. v. M.H. & another (619) a. Brief i. Surrogate mom doesn't want to give up kid to dad and bio mom ii. Court: for public policy reasons, the contract is unenforceable. Dad does not get custody of child, or his money back. iii. Mass. Supreme Court took issue away from the trial court that was ready to sign on to a custody agreement and imposed its ruling here
VIII. JUSTIFICATION FOR NONPERFORMANCE: MISTAKE, CHANGED CIRCUMSTANCES, AND CONTRACTUAL MODIFICATIONS 1. Theory
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a. The excuses from performance discussed here have to do with changes in circumstance that have either occurred or come to light since the original agreement was made b. Contract law is generally resistant to the suggestion that a contractual obligation might be avoided just because unforeseen or un-provided-for circumstances made it less favorable to one of the parties than had been originally contemplated c. Various categories i. Mistake ii. Impossibility iii. Impracticability iv. Frustration d. Underlying issue: if for one of the parties a circumstance not expressly provided for in the contract has adversely affected either performance itself or the value of the performance, should that party be permitted to escape the obligation of performance? B. MISTAKE 1. Theory a. Should a party be able to escape a contractual obligation merely because she later regrets the deal—regarding it as a mistake? b. Rescission i. See Restatement §152 When Mistake of Both Parties Makes a Contract Voidable (a) Rescission is indicated when 1. there is a mistaken belief 2. relating to a basic assumption of the parties upon which the contract is made 3. which materially affects the agreed performance of the parties ii. Rescission is not available to a party who has assumed the risk of loss in connection with a mistake iii. A contract may be rescinded because of a mutual misapprehension of the parties, granted only in the sound discretion of the court iv. Rescission is allowed when (a) There is a mistake about a material feature of the contract (b) That the party exercise reasonable care (c) The mistake will have such a grave consequence as to be unconscionable (d) The other party can be placed in the status quo c. See Restatement §154 When a Party Bears the Risk of Mistake i. A party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties; or (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so d. A contractual mistake is "a belief that is not in accord with the facts" R§151
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e.
f.
g. h. i.
j.
k.
i. The erroneous belief of one or both of the parties must relate to a fact in existence at the time the contract is executed Barren Cow Case: A cow is sold for $80 that is thought to be unable to bear calves—she turns out to be pregnant, the seller won't turn over the cow, and rescission is granted because both parties made a mistake as to the nature of the cow Two types of mistake: i. Value: how much something is worth ($80 for a barren cow) ii. Essence: what the thing really is (whether the cow is really barren) "As is" clause: Many courts deny relief on mutual mistake and other grounds when the contract contains an "as is" clause Conscious ignorance: party assumes risk when is consciously ignorant of all relevant facts (R § 154 (b)) Mistake in written expression: when the mutual mistake is the failure of the written contract to accurately state the actual agreement, reformation is the normal remedy—evidence of the mistake must be clear and convincing Equitable relief: Normal relief is rescission plus restitution—since this is an 'equitable remedy', the courts can be creative in making a remedy to fit the mistake i. Personal injury cases: courts (infrequently) may overturn settlements when the injuries turn out to be worse than they were thought at the time of the settlement Unilateral Mistake i. Palpable nature or unconscious effect of mistake: So obvious the other party either knew or should have known a mistake was made – a unilateral mistake (a) Restatement §153: a contract may be avoided for the 'mistake of one party' when either 1. The mistake be such that enforcement of the contract is unconscionable a. unconscionable here means severe enough to cause substantial loss 2. The other party had reason to know of the mistake 3. The other party was responsible for causing the mistake ii. Mistake of fact vs. mistake of judgment (a) Historically, cases could only be rescinded for mistakes of fact (e.g. transcribing errors) and not mistakes of judgment (b) More recently, the line between the two is blurred: focus on strength of proof that a genuine and identifiable mistake was made iii. Non-negligent? (a) Most courts have held that for there to be relief, the unilateral mistake must be non-negligent (b) The tendency requiring no negligence tends to be relaxed where the proof of mistake is strong and the effect of enforcement will be devastating or severely injurious to the mistaken party (c) §157 R expressly negates any requirement that the mistaken party be nonnegligent, requiring instead that its conduct not fall below the level of good faith and fair dealing
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(d) Mistakes in advertisements? If the ad constitutes a contract (depends upon state law, but usually not) the contract can be rescinded. 2. Example a. Lenawee County Board of Health v. Messerly (634) i. Brief
(a) Vendors sued purchasers of their three-unit apartment building seeking foreclosure of a land contract, sale of the property and a deficiency judgment. Purchasers counterclaimed for rescission. (b) The Circuit Court rendered judgment for the vendors. (c) The Court of Appeals reversed, and vendors appealed. (d) The Supreme Court held that: 1. Mutual Misapprehension: Both parties' erroneous assumption that the property was suitable for human habitation and could be used to generate rental income, when in fact the property was uninhabitable because of an inadequate and uncorrectable sewage system, was fundamental to the contract, however, 2. The equitable remedy of rescission was not proper because the risk of mistake was allocated to the purchasers by an "as is" clause in the contract. (e) Decision of Court of Appeals reversed.
b. Wil-Fred's, Inc. v Metropolitan Sanitary District (643) i. Brief
(a) Lowest bidder on sanitary district's project for rehabilitation of water reclamation plant filed complaint for preliminary injunction and rescission. (b) The Circuit Court granted rescission and return of $100,000 deposit to plaintiff and the defendant appealed. (c) The Appellate Court held that, although bid proposal form provided that bid could not be cancelled or withdrawn, where plaintiff acted in good faith in bidding on sanitary district's project, error of plaintiff's subcontractor occurred notwithstanding exercise of reasonable care and the bid was substantially lower than next lowest bid, so that sanitary district was on notice that bid contained a material error, equity would not allow district to take advantage of plaintiff's low offer by requiring either performance of contract at the bid price or forfeiture of plaintiff's security deposit. Affirmed.
C. Changed Circumstances, Impracticability, and Frustration 1. Theory a. Impossibility, impracticability, and frustration are thought of as involving changes in circumstances that occur between the making of the contract and the time set for its performance b. Impossibility: performance is literally (objectively) impossible i. When a person or thing 'necessary for performance' of the agreement dies or is incapacitated, is destroyed or damaged, the duty of performance is excused (a) See Restatement §§ 262, 263, 264 (b) See UCC §2-613 (c) Can include death, a building burning down, government action (d) "No one" could do it
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c. Frustration of purpose: the exchanged called for by the contract has lost all value to the defendant because of a supervening change in extrinsic circumstances i. E.G. rent a room to see the king's coronation, but the king is sick so no coronation, and the room thereby cannot be used for its intended purpose ii. Doctrine is rarely successfully used iii. Restatement § 265, 266 iv. The doctrine's purpose, as an equitable doctrine, is to fairly apportion risks between the parties in light of unforeseen circumstances, with the risk apportioned as the parties would have if the necessity had occurred to them v. [R 265] A party's duties to render performance are discharged where (a) A contract is made; and (b) A party's principal purpose is substantially frustrated by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made; and 1. Principal purpose means the object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense 2. Substantial frustration means that frustration must be so severe that it is not fairly to be regarded as within the risks he assumed under the contract. It is not enough for the transaction to be less profitable or even that the party will sustain a loss. 3. Basic assumption criteria: a. the continuation of existing market conditions and of the financial situation of one of the parties do not usually constitute a basic assumption b. a severe shortage of raw materials or supplies due to war, etc., may bring the case within the rule (c) The frustration was not the fault of the party; and (d) The language or the circumstances do not indicate the contrary d. Impracticable: Although performance is not literally impossible, it is sufficient different from what the parties had both contemplated at the time of the contracting as to be impracticable i. Restatement §261, 266 (a) R 261: A duty to render performance is discharged when 1. The contract is made; and 2. Performance is made impracticable without his fault; and 3. Performance is made impracticable by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made; and 4. The language or circumstances do not indicate to the contrary ii. UCC §2-615 and 2-616 iii. E.g.: contract to build a bridge out of gravel from one lot. It turns out the lot has hidden rocks that causes the price to triple 9-fold. iv. Basic assumption criteria: (a) the continuation of existing market conditions and of the financial situation of one of the parties do not usually constitute a basic assumption
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(b) a severe shortage of raw materials or supplies due to war, etc., may bring the case within the rule e. Historically, liability was a form a 'strict liability' f. Impossibility v. Impracticability i. Impracticality and frustration doctrines are very similar. Both require to show (a) Substantial reduction of the value of the contract (b) Because of the occurrence of an event, the nonoccurrence of which was a basic assumption of the contract (c) Without the party's fault (d) The party seeking relief does not bear the risk of that occurrence of the event either under the language of the contract or the surrounding circumstances ii. Granting relief based upon increased costs rarely occurs if resulting from change in market conditions iii. Natural disaster or war is a basis of relief, but it too is very rarely granted iv. In instances of terrorism, relief has occasionally been granted, but the perception of danger must be 'objectively reasonable' v. Death or incapacity of particular person necessary for performance will increase the likelihood of an excuse being accepted; but not if such an eventuality is mentioned in the contract vi. Some courts require the non-occurrence to not be foreseeable; but most courts don't care vii. Some folks use 'economic analysis' to shift burden to the superior risk bearer viii. These defenses (according to the Restatement) should be decided at law by the court 2. Examples a. Karl Wendt Farm Equipment v. International Harvester (655) i. Brief
(a) Farm equipment dealer brought action against manufacturer (IH) alleging breach of contract with respect to termination of dealership, and manufacturer filed counterclaim for deficiency judgment. (b) The Court of Appeals held 1. Neither defense of impracticability nor frustration of purpose were available to manufacturer on the basis of drastic decline in the farm equipment market and large losses, which led it to sell its farm equipment division; 2. Dealership agreement provision allowing manufacturer to withdraw product lines did not allow it to cease all operations without complying with the provisions for termination of a dealership; and 3. Dealer did not timely raise applicability of Michigan Farm and Utility Equipment Franchise Act to calculation of deficiency. 4. Affirmed in part and reversed and remanded in part.
ii. Case Briefs (a) Lack of profit is not sufficient for impracticability iii. Notes and Questions b. Mel Frank Tool & Supply, Inc. v. Di-Chem Co. (668) i. Brief
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(a) Landlord brought action against tenant, a chemical distributor, who vacated premises after city adopted ordinance prohibiting storage of hazardous chemicals. (b) The District Court awarded landlord judgment for unpaid rent and damages to premises, and tenant appealed. (c) The Supreme Court held 1. Tenant failed to establish that city ordinance substantially frustrated purpose of lease 2. Lease provision covering partial destruction of premises resulting in temporary interruption of tenant's business was inapplicable to city's adopting ordinance. 3. Affirmed.
ii. Notes and Questions (a) The courts are more willing to grant relief when the event upon which the claim rests is some form of supervening governmental action (b) See UCC §2-615: "compliance in good faith with any applicable foreign or domestic governmental regulation or order" (c) See R §264: compliance with government regulation order as a basis for excuse under impracticability (d) Force majeure: an event or effect that can neither be anticipated nor controlled (acts of nature and people—floods and riots) 1. Force majeure clause: law does not generally favor these clauses (especially since the ground is already covered in the Rs and UCC), as they are apt to become generalizations within boilerplate (e) Normal relief is rescission plus restitution; courts will occasionally revise the contract itself D. MODIFICATION 1. Theory a. Grounded in two areas of doctrine—1) consideration, 2) duress as a contract defense b. If you have a pre-existing duty, and change the object, without consideration c. If a new contract is freely negotiated, and the party chooses to accept the deal, the contract can be enforced as is. However, if it is not freely negotiated, the buyer can get out of the higher price under the theory of economic duress. d. Pre-existing duty rule: requires a modification in a contract to be supported by consideration on both sides. Goes to resolve the issue of duress. Where there is a pre-existing duty, any additional promise made upon that duty without consideration is not binding. e. Exceptions to the pre-existing duty rule: i. Rescission: the parties jointly rescind the old contract and enter into a new one. It may look suspicious if the rescission occurs as the same time the new contract is created. ii. Change in performance: can be a slight change in performance or duty imposed (rent a different car) iii. A disputed obligation: where it is not entirely clear there is an obligation – if a party has a good faith opinion as to whether there is an obligation to do something, that is an exception to the pre-existing duty rule
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iv. Unforeseen circumstances (R 89(a)) – won't apply pre-existing duty rule if unforeseen circumsntances arise v. Reliance (89(c)) – won't apply pre-existing duty rule when a party relies upon another f. There is no pre-existing duty rule under the UCC. Eliminated under 2-209, and instead look to see if modification was bargained for. g. Agreements (under 2-209) are policed by the generalized requirement of good faith. i. Was there a dispute as to the obligation? ii. Look at course of dealing in the past, and the circumstances under which the change was made iii. Whether there has been delivery and acceptance under the new terms, and if so, for how long iv. Did they have a good reason to make the modification v. ** Was a breach threatened? If breach was threatened when there isn't a matter in dispute or a really bad thing about to happen, that is bad faith h. Duress is still significant even where there is a pre-existing duty rule i. Pre-existing duty rule is primarily about modifications to a contract. Duress applies more broadly ii. If a party finds a way around the pre-existing duty rule, the other side can still assert duress iii. Pre-existing duty rule does not apply to a promise (or a part) that has already been performed. But duress may. iv. All pre-existing duty rule can do is make a promise unenforceable 2. Alaska Packers' Association v. Domenico (681) a. Brief i. Libelants contracted with respondent, which owned a salmon canning plant in Alaska, to perform services as sailors in navigating a vessel from San Francisco to such plant and return, and in catching and canning salmon, while there, during the season, for which they were to receive a stipulated compensation. After reaching the plant they refused, without cause, to further perform the contract unless respondent's superintendent signed an agreement to pay additional compensation. He stated that he had no authority to do so, but being unable to procure other men, owing to the remoteness of the place and the shortness of the season, he complied with their demand, and a second contract was signed, identical with the first except as to the compensation to be paid. ii. District Court held that the agreement to pay additional compensation for services which libelants were legally bound to render under the old contract was void for want of consideration, conceding the superintendent's authority to make it, there being no just ground to claim, under the circumstances shown, that respondent voluntarily waived the breach of the original contract by libelants. iii. Appellate Court affirmed, holding there was no consideration for the second contract. This s based upon the pre-existing duty rule. b. Example
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3. Brookside Farms v. Mama Rizzo's, Inc. (695) a. Brief
i. Seller brought suit against buyer alleging breach of contract for sale of 91,000 pounds fresh basil leaves and counterclaim was filed. Crossmotions for summary judgment were made. (Brookside is suing for their check bouncing for a payment of 3,000 lbs of basil and also not making their minimum purchasing requirements for the year) ii. The District Court held (a) oral modifications of price term in written contract were valid under Texas law (b) buyer breached contract by refusing to accept minimum amount set forth in requirements contract (c) Buyer violated Perishable Agricultural Commodities Act. (d) Granted in part, denied in part, and dismissed in part. iii. Notes (a) If claim is for unliquidated damages (it does not have a dollar value), the accepting and cashing of a check is a settlement and will not be disturbed even if write on check "depositing under protest" (b) If claim is liquidated (a set dollar amount) and get check for less than is owed, and write depositing under protest, it depends on the state whether that will be considered full settlement. Majority rule is you have released all claims.
IX. RIGHTS AND DUTIES OF THIRD PARTIES A. THEORY 1. When a person forms a contract for the main purpose of not benefiting himself but rather a third person 2. The question is that if the benefit of the contract runs to some other party, if that other party (C) has some rights under the contract – if they have those rights, they are a third party beneficiary a. E.g. A is promisor b. B is promisee c. C is third party beneficiary 3. Restatement 302 states rules for 3rd party beneficiaries a. Restatement says the old distinction between creditor and donee doesn't matter, all that matters is whether beneficiary is intended or incidental 4. Two types of beneficiaries i. Intended beneficiary: (a) The beneficiary is intended if recognition of the right is appropriate to effectuate the intention of the parties; and 1. Creditor Beneficiary: Performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or a. A lends money to B, B lends that money to C, A can sue C 2. Donee Beneficiary: The circumstances indicate that the promise intends to give the beneficiary the benefit of the promised performance a. Women on deathbed makes husband promise to give money to niece. He makes that promise, but does not perform. Niece can sue Husband for Wife's promise. b. Does not need to be intended as a gift. Can be for other reasons.
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c. Donee beneficiary is broader the restatement than the original common law 'donee beneficiary' ii. Incidental beneficiary: May be deriving some benefit from the contract, but they don't meet the requirements to be 'intended' and are unable to sue on the contract (are not formally a third party beneficiary) 5. privity: when parties have some direct relationship that allows them to sue on the contract 6. Traditionally: to be able to sue on the contract, privity was required. However, exceptions developed which now form the third-party beneficiary area of law 7. What if A & B who entered into a contract want to modify the contract? a. They generally can modify the contract without the consent of the third party i. unless the contract says otherwise (e.g. that the consent of the third party is necessary) ii. unless the third party beneficiary justifiable relied upon the contract iii. Where the third party manifests assent to the change in the contract; but at that point the parties can no longer modify the benefit that runs to the third party beneficiary iv. Unless the third party has brought a suit on the contract, at which point A &B can no longer modify the rights as to the third party beneficiary 8. Defenses of promisor against third party beneficiary: a. All the standard defenses: duress, mutual mistake, lack of assent, etc. b. If there are additional rights created in the contract (e.g. a right to arbitration), the third party is bound by those rights as w b ell (third party is essentially standing in for promisee) 9. Central to this is the intent of the parties to the third party beneficiary B. RIGHTS OF THIRD PARTIES AS CONTRACT BENEFICIARIES 1. Theory a. Intent is determined by the i. Promisee's intent (302(1)(b)) ii. Promisee and promisor's intent (302(1)) iii. Promisee's intent and promisor knew or had reason to know of promisee's intent b. The court may choose depending on the nature of the contract as to how much intent they require (as move from creditor to donee); depends upon the jurisdiction 2. Examples a. Vogan v. Hayes Appraisal Associates, Inc. (708) i. Brief (a) MidAmerica savings bank hired Hayes to monitor the progress of homebuilder Char. Hayes certified the progress made by the homebuilders, upon which MidAmerican continued to disperse the bank's and Vogan's money to Char. Char eventually says he cannot finish the construction. But the construction company wasn't doing their job right, and Hayes was not appropriately monitoring them. (b) Vogans sued and settled with MidAmerica. Vogans are now suing Hayes as a third party beneficiary to Hayes contract with MidAmerica.
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1. Hayes argues there was no intent for the contract to benefit the Vogans because there was no intent for the money to get to the Vogans 2. Vogans argue Hayes is the promisor, MidAmerica is the promisee. (c) Court holds there was sufficient evidence for the question to be submitted to the jury, and for the jury to include the Vogans were an intended beneficiary and would receive a pecuniary benefit from it ii. Case Notes (a) Court (in this case) tries to determine if there is a pecuniary benefit (although in other courts there may need be only a lesser standard) 3. Zigas v. Superior Court (717) a. Brief i. Tenants suing landlord under contract between landlord and HUD. The contract gives the landlord a loan from HUD, and has as a corollary a required schedule of how much rent is allowed. ii. Three issues: (a) federal or state law – state law applies (federal interests are not at stake) (b) do petitioners have standing to sue – tenants are 'intended' third party beneficiaries 1. factors court considered a. whether the purpose/benefit of the provision went to the tenants – it does b. intent of the legislation – to make affordable housing available c. the benefit must go to specific people (and not people generally) d. who is hurt (whether the people intended to benefit were hurt or the government paid for it) e. whether there is an administrative mechanism to deal with this issue f. Martinez had a provision providing for limited liability; in this case there was no provision for limited liability g. The agreement itself manifests an intent to make them direct as opposed to incidental beneficiaries h. In Martinez, plaintiffs were seeking compensatory damages (which are relatively open ended) – in this case tenants are suing for restitution (which is clear and finite liability) 2. Allowing tenants to sue is okay when recognition of the rights won't interfere with government policy 3. even if a government has a mechanism in place to deal with this kind of issue, it might still be wise to recognize third party beneficiary standard since government cannot police everything (c) Case is not moot as to damages (restitution), but it is moot as to any other type of damages: specific performance and injunction b. Notes and Questions i. E.g. Moch case (723) where there was not sufficient water pressure in a fire hydrant. No liability. Why? This would create infinite liability for the private contractor. But if the beneficiary group is much more finite, then third party liability (within scope of government issues) is more likely
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C. ASSIGNMENT AND DELEGATION OF CONTRACTUAL RIGHTS AND DUTIES 1. Assignment is an issue of rights under a contract a. In a commercial economy that is driven by credit, it is essential that a party be able to assign their contract right i. In order for people to get credit for subsequent transaction, people can say we assign those benefits from the subsequent transactions to the bank in return for receipt of credit b. Restatement 317: Assignment under the rights of a contract is allowed. Except: i. When the assignment of one's rights under a contract violates some statute or public policy ii. Where assignment of one's rights has a material adverse affect on the other party iii. Where there is a valid preclusion of an assignment under the contract c. Eliminates the obligations of the original party d. Courts will generally ignore the element of a contact that precludes the right to assign the benefit of a contract to someone else 2. Delegation is about delegating duties under a contract a. Because of the greater potential for harming the interests of the party, courts are much more stringent in enforcing than under assignment b. Restatement 318: largely the ability to delegate duties depends on the extent to which the contract was directed to one individual i. There is a big distinction between a contract for payment versus asking Ahdieh to sign at a wedding c. A delegation does not eliminate the obligations of the original party until that duty is fulfilled (actual performance) i. Exception: Novation: Where the promisee clearly releases promisor from promise (it is now owed by delegatee) d. Generally, if contract allows for delegation/assignment it is allowed, if contract forbids it, it is forbidden X. CHAPTER 10: CONSEQUENCES OF NONPERFORMANCE A. THEORY 1. Most contracts are bilateral: an exchange of promises that ultimately looks to an exchange of performances 2. If one party believes the other has breached his promise, what are his duties? 3. Designed to protect the exchange to the extent possible – how to minimize the effects of one party's breach 4. This is a very fact specific circumstances where a slight change in facts can lead to the opposite conclusion B. MATERIAL BREACH (a constructive condition) 1. Theory a. Factors to weigh in permitting a change in the contract i. The purpose served by the contract ii. The desire to be gratified by performance of the contract iii. The excuse for deviation from the letter of the contract iv. The cruelty of enforced adherence to the contract b. Breach can be
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i. Insubstantial: the other side still must perform ii. Material: the other side is excused from performance c. Constructive Conditions i. Constructive conditions: [where the party did not say if you don't do X, I don't have to do Y—contracts with express condition which uses phrase 'unless and until']. ii. Independent/Dependent Condition: Whether the promise to pay is dependent or independent of some condition being fulfilled d. Substantial performance: i. Test for substantial performance: Whether the performance has been rendered meets the essential purposes of the contract ii. Satisfaction condition: Way of contracting around 'substantial performance' – making the elements of a contract essential to its performance—this contract has not been substantially performed until the buyer indicates their satisfaction with the result (makes terms express conditions) e. Material Breach: i. How to examine a material breach: (a) Is the breach material? 1. Whether there is material breach (R 241) a. The extent to which the injured party will be deprived of the benefit which he reasonably expected (the extent of part performance, within a certain time period) b. The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived (the court to give an appropriate award of damages) c. The extent to which the party failing to perform or to offer to perform will suffer forfeiture (the hardship to the breaching party (e.g. have to rebuild whole house?) d. The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurance (that is, the likelihood of full performance: will he finish the contract?) e. The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing (negligent or willful behavior? f. Plus: look at the purpose of the contract (to build a house? To lay pipe?) (b) Is the breach total, or is it partial? 1. Total Breach: a material breach that is not cured after a reasonable period of time so that the other party no longer has to perform and can sue for damages 2. Partial Breach: allows the other party to suspend performance while waiting for the breach to be cured; but if the other party cures it (they make performance), they non-breaching party has to perform and can only sue for the costs of the delay 3. Look at factors in R 241 (above) plus two additional factors
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a. The degree of importance the parties attached to timeliness of performance b. Look to the extent to which delay is likely to prevent or hinder the non-breaching party from making substitute arrangements (c) Policy: how to make both parties feel secure so that their expectation interests are protected; but don't want parties to abuse this provision – assess whether there was adequate reason for the party to suspend their performance. (If you terminate immediately after a breach, you run the risk that the court will hold you liable for breaching the contract) 1. If it is difficult to calculate the amount of the П's injury, the court is less likely to find substantial performance 2. If it is 100% clear there is a material breach or you must act to protect your interests, you can get away with suspending your performance f. Damages Standards: i. two possible payment standards (a) Diminuition / difference of value – a kind of expectation damages (which very different expectations) 1. objective standard (what a reasonable person would have expected to get) [this may not be accurate] (b) Cost of completion – that is, expectation damages (putting promisee in the position they would have been had the contract been completed) 1. subjective standard (what guy expected to get) [this may not be accurate] ii. If there is substantial performance, the nonbreaching party can still sue, but will get only minimal damages iii. Rule: 'of substantive performance, with damages for unsubstantial omissions' iv. There is a wise tendency to err on the side of continuing performance, because if the court finds that the other side did not materially breach, and you stop performing, then you materially breached (a) Efficient breach (law and economics): if in a given case, breaching a contract saves money, the law wants to encourage that breach (b) If there is substantial performance, if the breach is not material, performance by the other party is not excused, and there is an offset for damages 2. Examples a. Jacob & Youngs, Inc. v. Kent (745) i. Brief (a) Facts: Plaintiff was under contract with defendant to build a home using a specific type of pipe for all of the plumbing. Plaintiff did not use the pipe that was specified but another pipe that was the exact same but with a different manufacturer. Defendant did not complain about defective performance until the pipe was almost completely encased in the walls of the home. To replace the pipe, plaintiff would have had to tear down substantial parts of the completed structure. The plaintiff (contractor) did not replace the pipe, and sought final payment. (b) Posture:
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1. The supreme court affirmed and directed verdict in favor of plaintiff. There was substantial performance, and contractor should collect the money less the difference in value (which is either nominal or nothing). 2. Dissent: Having departed from the agreement, if performance has not been waived by the other party, the law will not allow the contractor to allege he has made as good a building as the one he was engaged to erect. ii. Case Notes (a) Whether there is a material breach or substantial performance tells the other party whether their performance is excused (b) Court in this case did not hold it was an express condition b/c the homeowner had moved into the house for a year before complaining – this meets the test for substantial performance (c) Even when there is substantial performance, a court may use standard of cost of performance (that is, cost of completion) where there is a willful breach (d) Independent/Dependent condition: Dissent and Cardozo are fighting over whether the promise to pay is dependent or independent upon the use of Redding pipe; the majority holding is the payment is independent; the promise to use Redding pipe was independent of the promise to pay—in other worse, the contractor substantially performed (by building the house, etc.) b. Sackett v. Spindler (755) i. Ahdieh briefs this. (a) Plaintiff makes 2 payments to purchase a newspaper. The third payment is late and bounces. Plaintiff gives assurances that they will perform, but don't. Defendant is in financial straits, and sells the paper to someone else. Plaintiff sues to get the original payments back. (b) Court says plaintiff's breach was total and material. Therefore, the defendant was justified in their action, and were no longer required to perform because the original buyer had repudiated their contract by being seemingly unwilling to make their payments for the agreement C. ANTICIPATORY REPUDIATION 1. Theory a. What is an anticipatory repudiation? i. R 250 (like UCC 2-610): A repudiation is (a) a statement by the obligor to the oblige indicating that the obligor will commit a breach that would of itself give the oblige a claim for damages for total breach under §243, or (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach b. What is the effect of an anticipatory repudiation? i. Gives the injured party an immediate right to damages for total breach, as well as discharging the injured party's remaining duties of performance
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ii. Restatement 253: Effect of a Repudiation as a Breach and on Other Party's Duties (a) When an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach (b) Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance c. How may a party respond to an anticipatory repudiation? (a) Treat the repudiation as an immediate breach and sue for damages (b) Ignore the repudiation, urge the repudiator to perform, wait for the specified time of performance, and sue if the repudiating party does not perform (c) Cancel the contract d. How does the other party know when there is an anticipatory repudiation? i. The repudiation is definite and unequivocal ii. When the second party starts to have serious doubts about the willingness or ability of the first party to perform before the date specified (a) Can be manifested by the first party clearly indicating that it will not perform (known as anticipatory repudiation) – may be expressed orally, in writing, or by conduct showing an unwillingness to perform (b) Can be manifested by circumstances that give the second party reasonable grounds for insecurity about the ability of the first party to perform on time 1. E.g.: financial difficulty or shortage of materials 2. Insolvency does constitute ground for demand of adequate assurance of performance e. What if the second party is unsure as to whether the first party has repudiated or can perform? i. The second party can demand assurances ii. Restatement 251: When a failure to Give Assurance May be Treated as a Repudiation (a) When reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the oblige a claim for damages for total breach under §243, the oblige may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance (b) The oblige may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of particular care (c) Insecurity 1. Grounds for insecurity? a. Significant financial difficulties b. Failure to perform important obligations under the contract
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c. The other party's failure to perform obligations under related contracts d. On occasion, some circumstances that have nothing to do with the other party's conduct can give rise to reasonable grounds e. However, unreliable rumors or insignificant risks to not constitute reasonable grounds f. Must take into consideration: i. Course of dealing of the parties ii. The nature of the industry and its situation iii. Standard of 'commercial reasonableness' and 'factual conditions' 2. How to act if feel insecure? a. The demand for adequate assurance must be based on circumstances that arise after the contract was formed b. Assurances demanded may range from verbal guarantee to the posting of a bond, depending upon the circumstances (very fact intensive – depends upon the industry) i. Various courts hold differently as to whether a demand must be written ii. UCC requires the request for adequate assurances be in writing, but most courts will allow it to be verbal iii. A demand for assurances must be made in good faith c. In some circumstances, a demand may be required before termination i. A party that is in a position to explain the difficulties which have caused the insecurity should be given the opportunity to do so d. The maximum time allowed for reasonable assurances is 30 days, although circumstances may decrease that time. A party must respond within a "reasonable" time e. If one requests adequate assurances of performance, and that person receives such assurances, they must go through with performance unless there are additional changes in circumstances f. If you fail to respond for a request for adequate assurances, the failure to respond constitutes anticipatory repudiation g. Adequate assurances originates in UCC 2-609, but it is not limited to sale of goods as it has been adopted in R 251 –this is a mechanism to use before the other party has anticipatorily repudiated (but they have not yet done so) or they are going to breach requires the other party to clear up the ambiguities i. If rely on 2-609 or 251 without adequate grounds, you (and not the other party) are in breach f. How does a party communicate he accepts the other party has anticipatory repudiation? i. The aggrieved party can indicate to the other party that it is electing to treat the contract as rescinded by
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(a) Bringing suit (b) Notifying the repudiated party (c) In some other way manifesting an election to treat the contract as rescinded g. What is the repudiating party changes his mind? i. Restatement 256/ UCC 2-611: Nullification of Repudiation or Basis for Repudiation (a) The effect of a statement as constituting a repudiation under §250 or the basis for repudiation under §251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final (b) The effect of events other than a statement as constituting a repudiation under §250 or the basis for a repudiation under §251 is nullified if, to the knowledge of the injured party, those events have ceased to exist before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final 2. Examples a. Truman Flatt & Sons v. Schupf (763) i. Brief (a) Facts: Flatt seeks specific performance of a real estate contract from Schupf. The parties created a contract to sell a piece of land for $160,000 either before June 30th or upon approval of a zoning change request; with a contingency that if the buyer failed to get a zoning change within 120 days, he could void the contract. After the zoning hearing went badly, Flatt wrote Schupf advising her of that, and proposing a change to the contract that would reduce the sale price to $142,000. Schupf did not accept that offer. After some time had passed, Flatt wrote again, within the original time limit, stating that he would proceed with the purchase at the originally agreed upon price of $160,000. Defendant Schupf responded that plaintiff's failure to waive the rezoning requirement combined with the new offer to buy the offer at less than the contract price voided the contract. At the time of the suit, the property has not been sold. (b) Procedure: At trial court, judge granted a motion for summary judgment. Plaintiff appeals, and this court reverses and remands. (c) Issues: 1. Was the contract repudiated? 2. If there was repudiation, was it withdrawn in time? (d) Holding: 1. The contract was not repudiated. There must be a clear manifestation of intent not to perform the contract on the date of the performance. That manifestation must be definite and unequivocal. Here was a suggestion for the modification of a contract. That suggestion is not a repudiation, because there was no clearly implied threat of nonperformance. At best, the statement had an ambiguous repudiation.
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2. Even if there was repudiation, the plaintiff withdrew it in time. A repudiation can be withdrawn unless either the defendant has materially changed his position or otherwise indicated she considers the repudiation to be final. The defendants did neither. ii. Case Notes (a) Hochester v. De La Tour: started anticipatory repudiation. In light of defendant's unequivocal repudiation of the contract, the plaintiff had the right to bring suit even before the date for performance as it is unfair to hold the plaintiff ready to perform. b. Hornell Brewing Co. v Spry (770) i. Brief (a) Facts: Hornell (a brewing company) enters into an oral contract with Spry to act as its exclusive distributor in Canada. From 1993 to 1994, Hornell sold Spry its products on 10-day credit terms. Towards the end, Spry was consistently late with payments, tendered bad checks, etc. In May 1994, Hornell terminated its relationship with Spry and permanently ceased doing business with them. Before the end, Spry said it had opened a $1.5m credit line with Vanguard, but their continued late payments make that assertion questionable. On April 15, 1994, Hornell and Spry had a conversation where it was offered that once Spry paid off its arrears, Hornell would provide a $300k line of credit with a 14 day payment basis. Instead of payment on May 2, Hornell received a letter from Metro Factors, Inc., on April 25 to which it sent a letter stating that it must pay $80k by May 2. Hornell received payment on May 9, at which point Spry ordered approximately $400k worth of goods. In the interim, Spry learned Hornell had no staff, its warehouse was empty, etc. Hornell requested a letter confirming the existence of the credit line (letter of adequate assurance of performance) and a personal guarantee from Spry. Spry never responded. Several months later, Hornell sued. (b) Procedure: In trial court. Verdict for Plaintiff (c) Issue: whether the request for adequate assurances of performance were met (d) Holding: 1. There is a contract 2. Plaintiff demonstrated a basis for lawfully terminating its contract under UCC 2-609. Hornell had reasonable grounds for insecurity. It requested assurances. Whether or not defendants satisfied those grounds, new grounds arose that the defendant did not satisfy. The failure to respond to Hornell's letter, in light of its other practices, was sufficient grounds for security, and then termination. D. EXPRESS CONDITIONS a. Theory i. Express is a stated condition, constructive condition is implied by the court (whether a promise to perform was dependent or independent upon another action) – determines whether a party is free to terminate its performance (if it
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is dependent, they don't have to perform (e.g.) pay, and should just sue for damages); Contrasts with 'constructive conditions': ii. An express condition is always dependent (but we never use this phrase) iii. Where the parties have expressly agreed that the duty of one party (or perhaps both parties) should depend on the happening of one or more specified events. That conditioning might be all or part of one party's performance, but it could be an event completely outside the control of either party iv. When an express condition is spelled out in a contract, it will often by a condition to the duty of only one of the parties, it is included to protect that party from having to perform in a situation where performance is for some reason less advantageous v. Express conditions are designed to particularly protect the specific party vi. Jargon: (a) Obligor: the party whose performance is conditioned (and is at issue) (b) Obligee: the party to whom performance is owed (c) Condition precedent: an act or event, other than a lapse of time which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises (R 224) (d) Express condition: those agreed to and imposed by the parties themselves. Must be literally performed. (e) Implied (or constructive) condition: Imposed by law to do justice. Subject to the idea that substantial compliance is sufficient. (f) Forfeiture: the 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 the exchange (g) Promissory condition: The failure of an event to occur justifies the obligor in treating her obligations as discharged, and subjects the obligee to liability for damages (h) Pay-when-paid clause: Calls for payment of a subcontractor when a contractor is paid – is construed as merely calling for payment within a reasonable time, and does not condition the subcontractor's right to be paid upon prior receipt of payment by the general contractor vii. Waiver: an intentional relinquishment of a known right (a) If the condition waived is not a material part of the performance, the waiver is successful regardless of consideration or reliance (b) If the condition waived is a material part of the performance, the waiver only occurs if there was consideration exchange or reliance by the other party (c) When can a waiver be retracted? 1. If the waiver on a material condition is not made in return for consideration, it cannot be waived. 2. If the waiver on a material condition is made in return for consideration (or a consideration substitute like reliance), it is effective and nonretractable.
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3. If the waiver is a non-material condition, the waiver does not need to be supported by consideration to be effective. It's ability to be retracted depends upon its timing a. If the waiver occurs after the time for fulfillment of the contract has passed, the waiver is non-retractable b. If the waiver occurs before the time for fulfillment of the contract has passed, the retraction is effective unless the obligee has changed his position in reliance of the waver viii. Doctrine of Prevention: A condition is excused if the promisor wrongfully hinders or prevents the condition from occurring (a) First ascertain what degree of obligation the obligor has with respect to the happening of the condition in question (b) If the conditioning event is within the obligor's control, he is likely to have the obligation to attempt to cause the condition to occur (c) If the conditioning event is not within the obligor's control, he may at a minimum be bound to not impede the other party's efforts, and may as well be required to cooperate with the obligee to cause the condition to happen ix. The courts should interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This preference becomes stronger when the finding of an express condition would increase the risk of forfeiture by the obligee. (R 227) x. If there is unmistakable language, no interpretation as a means of reducing risk of forfeiture can be employed xi. Nonoccurrence of a condition may be excused by (R229) (a) Waiver (b) Breach (c) Forfeiture xii. Unless and until: key words that show a condition is express xiii. Issues of substantial performance are for judges to decide if the inferences are certain xiv. First step is to determine whether the duty in question is expressly conditioned. (a) Then determine who has the duty: are both party's duties conditioned or just one? xv. A contractual term can be both a promise and an express condition xvi. Two theories: classical and modern approach. (a) Classical approach interprets the express condition clause strictly, regardless of its impact (b) Modern approach insists on strict performance of conditions only when the conditioning events are material to the agreement of the parties and the risks created thereby. 'Technical' conditions (e.g. not related to the substance of the real reason for nonperformance) are generally excused under a variety of theories.
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(c) If an obligor has waived the right to insist on fulfillment of the condition before performing the duty, even if it is an express condition, the obligor may be held by a court to have to perform (R 84) xvii. With an express condition, the court will construe the condition as having been waived by the party for whose benefit it was included xviii. If one party prevents the condition from occurring, courts will often construe the condition as having occurred xix. Waiver and Estoppel (a) Estoppel prevent an assertion of a right by a party who by words or conduct has caused the other party to believe that the right does not exist or that it will not be asserted and the other party has relied upon that belief. It is okay that the condition that is being estopped is a material condition. (b) Waiver is a voluntary abandonment of a contractual right. For such a voluntary abandonment, there is no requirement of reliance. But, it cannot be a material condition. (E.g. cannot waive the right to pay rent) 1. Can be retracted prior to the time for the condition's fulfillment unless there has been detrimental reliance. This is only true if the waiver has not been supported by consideration. xx. Conditions and timing clauses: (a) Hypo: builder agrees to construct a house on owner's land. Builder hires a subcontract to do some of the work. Says the builder will pay the subcontractor when the contractor is paid by owner. What happens if owner doesn't pay? Every jurisdiction construes this not as a condition, but merely as a requirement for timing. (b) Hypo: Ahdieh loans $1k that must be repaid when timber is cut down on land. Go and purchase the equipment, but in the mean time the trees burn down. Still have to pay, because all that condition actually does is set the timing as to when payment must be paid (it is not a condition upon payment). xxi. Express vs. Constructive (or Implied) Performance (a) If the contract is conditional, it is either void or voidable, but a contract is definitely formed. (b) First, is the obligation to pay an independent or dependant promise 1. if the promise to pay is an independent promise (you must pay regardless of performance), it does not matter if the other party performed 2. if the promise to pay is a dependent promise, the remaining money due after breach does not need to be paid (c) If the court concludes the promise to pay as dependent (unless and until) upon some event occurring, that other thing happening is a constructive condition (the judge constructs the condition – it is implied) 1. Substantial performance satisfies a constructive condition; constructive condition is part of an equitable provision inserted by the court
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(d) If there is actual language (e.g. "if", "unless and until", "consequences will follow from the failure to do X", "this is an express condition"), that constitutes an express condition 1. When there is an express condition, there must be perfect tender (that is, perfect performance)—substantial performance is not sufficient 2. When parties add an express condition, it indicates it is in there because the parties negotiated over it (e) The requirement of perfect tender in an express condition can create unfair results. So courts use adverse interpretation 1. Adverse interpretation: we will interpret the express condition against the unfair or unjust result a. A court may ignore the express condition b. Sometimes the party's language is sufficiently ambiguous the court can play with it, so the court may construe it as a constructive condition c. A court may interpret the express condition as a promise i. If it is a promise, can ask whether the promise was materially breached, and if it was not the non-breaching party still has to perform (e.g. pay) ii. If view it as an independent promise, the contract is breached and the damages will be minimal. E.G.: if you don't do X, you have breached the contract. But payment must still be tendered. iii. If view it as a dependent promise, the contract is still breached, there are still minimal damages, but the non-breaching party can avoid performing on the contract. d. Court may interpret an express condition as both a promise and an express condition i. The forces the promisor, if he decides not to perform, he can be sued for breach of promise ii. But if the promisor does perform, he must only substantially perform (and not perfectly perform) iii. E.G. Oppenheimer must tell Oppenheim by the date requested that the landlord has given permission to set up the phone lines, but he doesn't have to get it in writing immediately. e. The more conditional language you use, the more likely the court will say it is an express condition f. Any promise made must be acted upon in good faith 2. Examples a. Oppenheimer & Co. v. Oppenheim (780) b. Brief i. Facts: An agreement that says there is no sublease between the parties 'unless and until' the plaintiff delivered to the defendant the prime landlord's written consent to 'tenant work' – setting up a phone line between the 29th and 33rd floors-- on or before a specific deadline. If that condition was not met, the sublease was to be deemed 'null and void.' Plaintiff only provided oral notice on the specified date. Get the written notice 22 days late.
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(a) P Oppenheimer argues waiver and estoppel. And in the alternative they argue that they substantially performed. (b) Jury finds for Oppenheimer. Trial court grants jnov saying no such thing as substantial performance (substantial performance doesn't apply in the context of an express condition). Appellate overturns. Court of appeals overturns. ii. Procedure: Court barred any reference to substantial performance, but permitted the jury to consider the theory of substantial performance. Verdict for plaintiff (the person who wanted to rent the property to someone else) for $1.2m. Trial court granted jnov. Court of Appeals Reversed, reinstating the jury verdict. Supreme Court reversed the court of appeals. iii. Issue: Does the doctrine of substantial performance apply to this case. iv. Holding: Substantial performance does not apply. The language requiring this condition was unambiguous. c. Case Notes i. Would it have made a difference if Oppenheimer got them the written note the day after it was due? Under the court's rule, is should not make a difference. But it might anyway. 3. J.N.A. Realty Corp. v. Cross Bay Chelsea (791) a. Brief i. JNA granted a 10-year lease with an option to renew for 10-years to Vascellero, who sold the lease to Forno who sold it to the plaintiff Chelsea. At the time of the sale, there was 5.5 years remaining on the lease, and the contract was modified so that the new tenant would have a right to renew the lease for 24 years instead of 10. No other provision was changed. On the property was a restaurant worth $150k, $40k worth of equipment. Throughout the remainder of the lease period, JNA notified Chelsea of its obligations under its lease, but did not remind Chelsea that it needed to renew the lease 6 months before the end of the lease. Chelsea failed to renew by June 1, 1973, and on November 12, 1973 JNA notified Chelsea the option had lapsed and stated they expected Chelsea to vacate the premises by January 1, 1974. Four days later Chelsea sent written notice of its intention to renew the option, which JNA refused to honor. ii. The civil court after a trial, held the tenant was entitled to equitable relief. The appellate term affirmed. The appellate division, reversed. The supreme court reverses the appellate division, holding Chelsea may be entitled to equitable relief, depending upon whether JNA's rights were prejudiced. iii. Issue: As the tenant has no legal right, do they have an equitable right to renew their lease iv. Holding and Reasoning: An equitable interest is recognized and protected against forfeiture in some cases where the tenant has made good faith improvements of a substantial character, intending to renew the lease. This occurs if the landlord is not harmed by the delay in the giving of notice and the leasee would sustain substantial loss in the case were the lease not renewed. A tenant or mortgagor should not be denied equitable relief from the consequences of his own neglect or inadvertence if forfeiture would result;
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this applies even thought the tenant or mortgagor, by his inadvertence, has neglected to perform an affirmative duty and thus breached a covenant in the agreement. The court cannot determine if JNA's rights are prejudiced, so remanded for a new trial. v. Dissent: Relief is more limited than the majority holds, allowable not for mere negligence, but as for excuses such as fraud, mistake, or accident. Tenant investment is not enough. This creates instability in the market; and puts the landlord at a disadvantage. A commercial tenant should act with more meticulousness, and have examined its lease. b. Case Notes i. Venial inattention: dissent says JNA didn't engage in wrongdoing by not notifying tenant of lease running out ii. General failure of there to be express grounds on forfeiture iii. This is an express condition situation. There is no substantial performance available. Notwithstanding the improvements and the negligent mistakes and good will lost and no prejudice to JNA; in the absence of using forfeiture, JNA loses; so court uses grounds of forfeiture to allow Cross Bay Chelsea to renew the lease iv. Forfeiture (R 229): a court may excuse the nonoccurrence of a condition where forfeiture would otherwise result, unless the conditioning event was a material part of the parties' exchange. The restatement definition is broad enough to encompass reliance losses in general, and not just those that unjustly enriched the obligor. (a) Did the party against whom the condition is being asserted (Cross Bay Chelsea) rely or incur costs that they will now be 'out' if the express condition is applied to them (b) What are the costs to the other side? No prejudice to that other side, or unjust enrichment (e.g. JNA reaping the benefits of the improvements the other side made) (c) Some fault dimension: Is either party at fault in some way? Cross bay was negligent, but they are not at fault. JNA, however, looks shady. (d) This is a very fact-specific analysis. v. Court weighs: (a) Costs to Chelsea: Lose the value of the improvements they made, lose 'good will' in the sense that people know where it is located. (b) Costs to JNA: can't lease for more money; but court says no evidence of prejudice against JNA – JNA is not harmed by allowing delay of CBC to renew (court discounts that rental rates have gone up) (c) Court: says no showing of prejudice to JNA. JNA needs to make that showing. They didn't make that showing because it shows JNA had other motives -- goes to bad faith vi. Forfeiture only relates to express conditions vii. Even within the last 6 month period of the lease, Chelsea is making improvement on the property. viii. JNA is the leading case in NY, creating an equitable relief against forfeiture, for tenants seeking to renew, etc.
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ix. In cases involving options to purchase and not lease real estate, courts almost always decide against equitable relief to an option holder who fails to comply with the time period set forth in the option x. Where have an option to purchase, courts do not apply the same forfeiture doctrine because nothing is being forfeited. So, it does matter what the particular condition is. xi. So, if lease with option to buy, and the option requires 6 months notice – courts split was to whether that constitutes forfeiture. xii. What should a lawyer do? Be very careful in giving JNA advice. If tell JNA to go ahead and lease to someone new without having given notice to Chelsea, the court could chose against you and you'd be SOL. Best advice is to tell client to give notice. xiii. Persuasive arguments on both sides: one scholar argues that it comes down to a moral decision by the individual judge 4. Morin Building Products Co. v. Baystone Construction (799) a. Brief i. GM hired Morin to construct an addition to its plant, and Morin in turn hired Baystone to erect the exterior walls from sheet metal, subject to the final approval of GM's authorized agent. The contract stated that the agent's decision in matters relating to the artistic effect shall be final, and that decision as to acceptability shall rest strictly with the Owner. When viewed in bright sunlight, the siding did not give the impression of a uniform finish, and the agent rejected it. ii. Issue: Was the jury instruction correct is telling the jury to make their decision based upon objective criteria, and not whether the owner was satisfied in fact, but rather whether he as a reasonable person should have been satisfied. iii. Holding: The jury instruction was correct, a reasonable person standard is accurate, and such a person would have been satisfied iv. There are two possible standards: the reasonable person standard (from R 228) and the good faith standard. The reasonable person standard is used when the contract involves commercial quality, operative fitness, or other things knowledgeable persons can judge. The standard of good faith is used when the contract involves personal aesthetics or fancy. This case is best described one of the reasonable person standard because aesthetic considerations were secondary, and there is no reason the express condition regarding 'artistic effect' was intended to cover the aesthetics of a mill-finish aluminum factory wall. When consulted, the district judge thought in this type of contact the buyer cannot unreasonable withhold approval of the seller's performance. As it did not appear from the language or circumstances of the contract that the parties really wanted GM's agent to exercise his personal aesthetic taste, the rejection is not proper. b. Case Notes i. Satisfaction as an express condition: architect must sign off. ii. Usual satisfaction language: the contract is null and void unless the paying party is fully and completely satisfied at their sole discretion
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iii. Objective (a.k.a. reasonable person) standard vs. Subjective (a.k.a. good faith) (a.k.a. honesty) standard iv. Provisions providing for 'satisfaction' upon the performance of the other party are not unlimited – if they were, it would be more like an illusory promise. Why not illusory? (a) The problem was witnessed by a third party? (b) GM has a contractual obligation not to lie, so they must act in good faith v. The satisfaction clause should be interpreted objectively (a) where there is a risk of forfeiture to one party and gain to the other party; e.g. a construction contract [more likely to interpret objectively] (b) When there is a risk of forfeiture but no gain to the other side; e.g. specially made goods – a tie with Ahdieh's face [somewhat likely to be interpreted objectively] (c) Where there is no risk of forfeiture and no benefit to the owner; e.g. make a specialty watch for Ahdieh, but can be easily resold [likely to accept as a subjective satisfaction clause; court is unlikely to accept as an objective satisfaction clause] vi. Three possibilities for satisfaction clause (a) Parties agree some third party will act as a judge as to satisfaction; e.g. agree builder work will be judged by architect – so long as the third party exercises their independent judgment, courts will uphold that determination even if it is an unreasonable interpretation 1. If the third party judge cannot perform their judging function or they refuse to exercise their independent judgment, the condition of satisfaction may be deemed to be waived (b) Where one of the contracting parties is the judge (e.g. the buyer): two possibilities 1. The thing is really subject to taste or fancy (color of paint or type of wallpaper) are generally interpreted according to subjective standard – all the contracting party must do is be honest and act in good faith 2. The thing is not subject to taste or fancy of the third party (e.g. the type of furnace), the court will use an objective standard 3. The thing is subject to taste or fancy (e.g. the type of furnace), the court will use an objective standard (c) Everything that we've discussed is a condition precedent. That is, some condition that must occur before the relevant other party's obligation arises. There are also conditions subsequent. Ahdieh's burning my house down is a condition precedent to the insurance company paying the money to rebuild the house. A condition subsequent is that I must file a claim—if define the relevant event as the house burning down, the filing of paperwork afterward is the condition subsequent. vii. Early decisions were all judged by subjective standard of 'promisee's honest dissatisfaction', but now use objective/subjective distinction from R 228. The objective standard is preferred by courts, particularly where a forfeiture will result.
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viii. Court makes distinction between aesthetic contract and commercial contract: former is subjective standard, latter is objective. ix. Court looks to the aesthetic requirements as part of the boilerplate to decrease their significance. x. Interpret the ambiguous language of the contract against the drafter. Interpret against GM b/c they could have made the language clearer. xi. If a third party is involved, the court is more likely to go with the subjective approval of the third party b/c they are less likely to be motivated by selfish interests. xii. One reason for preference for the objective test comes from the desire to avoid forfeiture. xiii. The UCC initially has two versions of good faith: a minimum 'honesty in fact standard' and a higher standard in the case of both honesty in fact and 'observance of reasonable commercial standards of fair dealing in the trade'. The merchant standard is now applicable to all contracts. (that is, honesty in fact + observing reasonable commercial standards). XI. EXPECTATION DAMAGES A. WHAT ARE EXPECTATION DAMAGES? 1. Plaintiff's net expectation 2. Interests a. Expectation Interest: Put plaintiff in as good a position as he would have occupied had the defendant performed; give the promisee the value of the expectancy which the promise created b. Restitution Interest: The prevention of unjust enrichment of promisor; force the defendant to disgorge the value he received from the plaintiff; the plaintiff has in reliance on the promise of the defendant conferred some value on the defendant, and the defendant failed to perform c. Reliance Interest: Put plaintiff in as good a position as he was before the promise was made; plaintiff in reliance on the promise of the defendant changed his position; undoes the arm that plaintiff's suffered in reliance on defendant's promise [reliance of promisee] B. WHY HAVE EXPECTATION DAMAGES? 1. Protecting the Expectation Interest Under a Wholly Executory Contract (Why have expectation interests?) a. Class discussion: i. Why expectations damages? (a) Compensate the other party (b) Encourage the use of contracts (need credit in an economy) (c) Property Interest at Stake (d) Psychic gain (e) Will Theory – create own private law (f) Justice/Morality (g) Efficient adjudication (makes easier for court to make calculation) (h) Lost Opportunity/Reliance
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(i) Rarity of executory contracts: people tends to almost immediately act or rely upon a contract 1. Executory promise: where both parties have promised, but neither has performed – is very rare (j) Encourages cooperation: creates dynamic that instead of efficient breach, renegotiate with П (k) Serves cautionary function in entering into contracts (l) Facilitation of planning (deters breach and thereby allows П to more effectively plan out their business activities)** (m) Protecting Risk Allocation (e.g. a contract for a future delivery at a fixed price—allocate risk of price going up onto seller and risk of price going down onto buyer)** ii. ** where Attiya doesn't apply: is a commercial contract where care about performance iii. all the other factors Attiya may apply: care about the terms of the contract b. Fuller and Perdue: Several possible answers as to why have expectations interest: i. Psychological: the promisee has formed an attitude of expectancy the breach of which causes him to feel he has been 'deprived'. (a) Criticism: Some rules or combination of rules effects a sifting out for enforcement of those promises deemed important enough to society to justify the law's concern with them. The impulse to assuage disappointment is not the core answer. ii. 'Will Theory': The contracting parties are exercising a legislative power, so legal enforcement is the implementation of a private already established law (a) Criticism: Doesn't give any answers as to how to assess damages iii. Economic/Institutional Approach: Expectancy is regarded as a kind of property, and the breach of expectancy is injury to that property (a) Criticism: The 'expectancy' value is the consequence of the law's enforcement of expectations, and not the cause of that intervention. Promises were enforced long before there was a general system of recovery for their breach. Law is primary over economics; law is the creator of social institutions. iv. Juristic: The rule of law grants the value of the expectancy as a cure for and a protection against expectation losses – this is a policy consideration. It offers the measure of recovery most likely to reimburse the plaintiff for the individual acts and forbearances that make up his total reliance on the contract. This is the most effective means of compensating for detrimental reliance. It is compensation for the loss of the opportunity to gain a similar remuneration from a different contract. Furthermore, it supports a policy in favor of promoting and facilitating reliance on business agreements, thereby stimulating the economy. Since reliance damages alone do not compensate for all reliance costs, the courts dispense with proof of reliance and make recovery on a promise independent of reliance. c. Barnes: damages should be measured by the next expectation interest of the injured party, even in cases of fully executory contracts
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d. Atiyah: the law's readiness to protect a promisee's expectation is a relatively recent development. Wholly executory contracts are nothing like as binding in practice as legal theory suggests. Only in the rare case is cancellation sought very soon after making the contract. And in real world, most people would not hold the other party to the contract if haven't acted in reliance. The modern emphasis on protection of the reliance and restitution interests may produce a corresponding decline in the law's willingness to protect the plaintiff's expectation under a completely executory contract. The primary purpose of a contract is not to bind people, it is to set forth a series of rules. i. E.g.: contract for 500 laptop computers. If give enough notice to say don't have computers, that's okay. But if show up on the day with the wrong type of computer, that's not ok. e. Eisenberg: i. Three policies that can be identified that singly or together mostly justify fullbargain enforcement (a) Assured protection of the full cost of reliance (a.k.a. surrogate-cost theory) (b) Facilitation of planning (by deterring breach in most cases) (c) Protection of a risk allocation that a contract was created to effectuate (e.g. a contract for a future delivery at a fixed price) ii. In a sale between 2 merchants of relatively homogeneous goods: can use the surrogate cost theory (that is, assured protection of the full cost of reliance) because the buyer's expectations damages are normally measured by the difference between the replacement price and the contract price iii. In a sale between a merchant and a consumer of relatively homogeneous services: (a) must keep in mind the nature of consumers. Two questions: 1. Why would the consumer make a contract early (e.g. on May 1 when performance is not until July 1) a. Ensure supply (make sure the service will have a spot available) b. Make a self-commitment 2. Would the parties have agreed to a provision permitting the seller to measure damages under a net-proceeds formula if they had consciously adverted to the issue? a. Most likely the consumer would not have agreed. (b) Is the net-proceeds formula necessary to require a seller to plan effectively? 1. There's no firm evidence, but firms appear to be able to plan without being entitled to damages (c) Sellers damages should be measured by a 'cancellation' charge based upon 1. amount necessary to reimburse the seller for incidental costs 2. enough deterrent to facilitate planning 3. payment for having a place reserved f. In the absence of either reliance or the restitution interest of the plaintiff, the arguments for full-bargain enforcement seem less compelling. Courts tend to find a way to deny enforcement.
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2. Encouraging Breach of Contract: The Theory of 'Efficient Breach' a. In class discussion i. Seems to be contrary to ethics/morality ii. The sharpest edge of the concept of law and economics –by making economics the basic measure by which we evaluate legal rules, we potentially eviscerate not only justice and morality, but a whole array of other values the legal system is meant to encompass: fairness, equity, distributional concerns b. Holmes: i. Warns against conflating law and morality: law is primarily the product of social forces c. Posner: i. Grabs onto Holmes' statement "the breaching party is merely required to choose between performance and compensation" as an economic insight ii. A contract should be breached if the breach wastes less resources is economically efficient and should be encouraged. iii. The objective of giving the promisor an incentive to fulfill his promise unless the result would be an inefficient use of resources can be achieved by giving the promisee his expected profit on the transaction iv. Where performance is impossible or impracticable, the law will excuse the nonperforming party of the duty of performance. The same result should follow if the breaching party could perform but chooses not to if the breach is 'Pareto Superior', that is, each party is either as good as they would have been if the contract was kept, and one party is better off. d. Goetz & Scott i. When nonperformance would be 'efficient' the law should encourage breach e. Birmingham i. Breach should be encouraged where gain to the employee will exceed loss to the employer. Transfer produces social gain through more efficient allocation of labor. f. Criticisms i. Farber (a) Many examples used to support the Pornerian argument are based on assumptions that run counter to the realities of contract. For example: 1. Posner ignored 'transaction costs' which can be very high 2. Traditional limitations on expectation damages (including denial of reimbursement for litigation costs, requirements of foreseeability and certainty) virtually guarantee the non-breaching party will be undercompensated 3. Other injuries of damage to employees reputation or psychic well being and idiosyncratic injuries (types of harm suffered that are not reflect in the market values of the goods or services) ii. Proposed modifications: (a) Farber: 'supercompensatory damages' calculated to compensate the plaintiff for some of the major transaction costs incurred as a result of breach (such as attorney fees) not ordinarily recoverable under present rules.
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1. a.k.a. "damages plus" (b) Schiro: loosening of the rules limiting the recovery of 'nonforeseeable' or 'speculative' damages to increase the likelihood that the actual injury resulting from breach will be fully compensated (c) Schwartz: expanded availability of specific performance iii. MacNeil: (a) Court's shouldn't promote efficient breach because the same outcome can and will be reached under a rule of 'specific performance' (where breaching party must perform) because the parties would then bargain among themselves to reach the 'efficient' result (b) Efficient breach analysis cannot be accurate unless it considers all potentially significant transaction costs under each proposed damage rule, including the costs of pre-contract planning, pre-breach planning, postbreach negotiation and litigation, 'relational costs' (including injury to reputation), etc. (c) Posner is biased towards individual, uncooperative behavior, and biased against behavior requiring the cooperation of both parties. He ignores the need to have a relationship afterward. He ignores that the costs of the parties trying to reach a solution after the breach is much more expensive. iv. Friedman: (a) Contract rights, like property rights, are entitlements which a person should not be deprived without his consent. (b) The efficient breach theory fails even on efficiency grounds b/c it increases transaction costs. v. Marshall (a) Promoting economic efficiency is neither a 'realistic' nor a 'proper' goal. (b) The court should distinguish between willful and non-willful breaches. (c) Specific performance or the highest possible compensatory damages should be awarded for willful breaches. (d) Punitive damages should be available when the breach is not only willful, but made in unreasonable disregard of the other party vi. Linzer (a) Fairness and justice are more important than economic efficiency. (b) Courts should award specific performance for breach rather than the diluted substitute of money damages. vii. Cohen (a) Courts do not always award expectation damages and the theory does not explain when courts choose expectation damages over other remedies (b) There should be a 'fault-based' theory of contract damages. This is what courts actually do, and is economically sound b/c it creates proper economic incentives. g. Few courts actually explicitly rely on the doctrine of efficient breach in deciding cases. Four possible reasons (Warkol). The theory i. Improperly assumes that people are rational and efficient economic actors ii. Is shortsighted because it fails to consider the value of mortality iii. Fails to recognize that contracts are risk allocation devices
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iv. Fails to account for the existence of non-economic damages that may be difficult to quantify or compensate h. Posner's kid admits the economic approach does not explain the current system of contract law, nor does it provide a solid basis for criticizing and reforming contract law C. HOW TO COMPUTE EXPECTATION DAMAGES? a. General measure of damages: loss in value (this contract) + other loss [consequential (has requirement of foreseeability) + incidental damages] – cost avoided – loss avoided (R 347) b. Total breach = loss in value + other loss – cost avoided – loss avoided i. Party has right to terminate performance (material breach) c. Partial Breach = loss in value + other loss i. Promisee must still perform d. Damages are measured at the time of the breach 2. Definition of Terms a. loss in value: the difference between the value to the injured party of the performance that should have been received and the value to that party of what, if anything, actually was received i. e.g. partial performance: value of goods purchased minus the value of the goods received ii. e.g. total breach: value to the injured party of the goods that were to have been tendered b. other loss: a loss that is not loss in value, subject to limitations such as unforeseeability; gives rise to incidental and consequential damages i. incidental damages: additional costs incurred after the breach in a reasonable attempt to avoid loss, even if the attempt is unsuccessful (a) e.g.: an injured party who has not received the promised performance pays a fee to a broken in a reasonable but unsuccessful attempt to obtain a substitute ii. consequential damages (a.k.a. special damages): include injury to person or property caused by the breach (a) e.g.: if the services furnished are defective and cause damage to property (b) do foreseeability analysis from Hadley v. Baxendale c. cost avoided: the beneficial effect on an injured party when breach saves it further expenditure that would otherwise have been incurred (money don't have to expend b/c performance is excused) i. e.g.: the money saved when a builder stops construction on a building d. loss avoided/mitigation: the beneficial effect on the injured party that breach causes by allowing that party to avoid some loss by salvaging and reallocating some or all of its resources that would otherwise have been devoted to performance of the contract i. loss avoided is based on the actual arrangements made; or what person should have reasonably saved ii. also known as mitigation of damages 3. When seller breaches:
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a. English Rule: When seller is in breach, the plaintiff purchaser is restricted to restitution of any payments made by her on the purchase price unless she can demonstrate that the defendant seller has breached in bad faith b. American Rule: When seller is in breach, expectation damages are awarded for any unexcused failure to convey, regardless of the good faith or bad faith of the seller c. The American rule is predominant in US 4. Interest a. Post-judgment interest under local law usually accrues with respect to the amount of the judgment from its date of entry, perhaps from the date of the verdict b. Pre-judgment interest occurs often when there is a call for the payment of a sum of money on or before a fixed date with interest resulting if timely payment is not made; unless there is a usury statute i. usually awarded only in cases where at the time of the breach the plaintiff's claim was for a liquidated sum (a) liquidated sum: a claim is liquidated when both the amount due and the date on which the amount is due are fixed and certain or when the amount due and date due become ascertainable by mathematical calculation (b) award of prejudgment interest is discretionary; and the existence of a good faith controversy over the amount of damages may not necessarily preclude prejudgment interest 5. Alternate Computations a. Real estate: difference between the contract price and the market price at the time of the breach i. When seller claims damages – must show at the time of the breach the property was worth less on the market than the contract price ii. When buyer claims damages – must show at the time of the breach the property was worth more on the market than the contract price iii. Proof of estate value: experts and owner can testify about the value of the property. The resale price may be taken as evidence of its market value in an arm's length transaction so long as the sale occurs within a reasonable period of time. Home listing prices do not suffice as evidence of market value b. Employment contract i. The breachee's desires (regarding skill level, the bargain, etc.) is the standard to measure the benefit of the bargain (a) Only applies when employee is bound by contract for a fixed period of time. Does not cover at-will employees. c. Construction contract: builder's expected net profit on the entire contract plus builder's unreimbursed expenses (at the time of the breach) (See R 348) i. Cost of completion: General rule for breach of construction contract is injured party recovers damages that are direct, natural, and immediate consequences of the breach that was within the reasonable contemplation of the parties when the contract was made. When contractor performance is defective, the reasonable cost of replacement or completion is the usual measure (R §346). Exception is when it creates 'unreasonable economic waste' (a) Use when there is still work to be done
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(b) Economic waste: must be unreasonable economic waste, i.e. the house build with pipe different in name but equal in quality (Jacob & Youngs v. Kent) – b/c want contracts to be 'efficient' 1. Is the breach incidental to the main purpose of the contact? ii. Difference (or diminution) in value: use when substantial performance (a) risk of under-compensation the П (b) Use when work is done but is defective 6. UCC Damage Rules a. May be measured by the difference between the market price and the contract price of the goods b. 2-708(1): measures seller's damages for nonacceptance or repudiation by buyer as: {[market price at the time and place for tender] – [(unpaid contract price) + (incidental damages in 2-710)]} – [expenses saved in consequence of the buyer's breach] c. 2-713: measures buyer's damages for nondelivery or repudiation by seller: the difference between the {[market price at the time when the buyer learned of the breach] – [(the contract price)] + [(incidental damages from 2-715) + (consequential damages from 2-715)]} – [expenses saved in consequence of the seller's breach] d. 2-723: provides flexibility on proof of market price e. The application of market measures does not accurately determine the loss suffered by non-breaching party; so there are alternative measures of damages i. 2-706: seller's resale when breach by buyer: allows seller who complies with UCC to obtain from a breaching buyer the damages measured by: [contract price] – [the seller's resale price] ii. 2-712(1): buyer can 'cover' her loss by purchasing substitute goods and measure damages: [cost of the goods] – [the contract price] f. Alternative Damages i. Specific performance: very rare in personal service contracts ii. Injunctive relief 7. Examples a. Turner v. Benson i. Turner entered into a contract to sell her house to Benson for $75,000. When Benson informed the Turners that she had received her loan, the Turner's signed a contract to purchase a new house. On the day of the closing, September 2, 1980, Benson did not show up. The Turners sold their house 15 months later on December 6, 1981 for $76,000. Turner sued for damages ii. Result: (a) No money for loss of in-home day care (b) Every item of expense incurred from owning two houses foreseeable (c) $1000 earnest money not credited to defendant, as П must show the money ended up in the seller's hands (d) the rental agreements are a proper credit for the Δ, but they must deduct the costs resulting from the Пs having to get the rental business in the first place b. Handicapped Children's Education Board v. Lukaszewski
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i. A teacher Lukaszewski was re-hired by Lightfoot school board for the 19781979 school year for $10,760. Before the school year began, Lukaszewski was offered and accepted a better paying ($13,000) job closer to home at Wee Day Care Center. Lukaszewski offered her resignation to Lightfoot, who refused to accept it, directing her to return to work. She left her job with Wee Day Care and returned to Lightfoot. She had a discussion with Lightfoot's Director, became agitated, and left the school, never to return. The next day she sought medical treatment, which found she had dangerously elevated blood pressure that the Doctor asserted would not improve until the situation was resolved. The doctor also said the long distance drives were dangerous in her agitated state. Lukaszewski offered a second letter of resignation, predicated upon her precarious health. The Lightfoot school board searched for a replacement, finding only one who was qualified, and hired her for a $1,026.64 a year as required by the teachers' union. Lukaszewski, a short time later, reapplied for and was hired by Wee Care Day Care Center. ii. L breached, and must pay the damages. She self-induced the impracticability. The Board, lost the benefit of its bargain. c. American Standard v. Schectman i. American Standard contracted with Schectman to convey buildings and equipment in return for a payment of $275,000, the promise to remove the equipment, and the demolition of structures and grade the property as specified. S. failed to perform as agreed. The cost of completion of the project is $90,000. The diminution of value (a.k.a. difference of value) of the property was $3,000. ii. The court rightly held the jury should have been charged to find damages against S by computing the cost of completion D. RESTRICTIONS ON RECOVERY FOR EXPECTATION DAMAGES 1. Foreseeability a. Purpose of foreseeable rule is to induce efficient behavior by the contracting party by notifying the other party what exactly must be done b. Hadley v. Baxendale rule: Damages are recoverable only if they were reasonably foreseeable at the time of the contract i. Hadley Rule: general damages (follow directly from the breach of the contract) + special damages (reasonably in the contemplation of the parties when they made the contract as the probable result of the reach) (a) For there to be a recovery, the damages must either 1. (General Damages): arise naturally, i.e. according to the usual course of things, from the breach of contract itself, or a. restated: the court will impute foreseeability to the defendant as to those damages which any reasonable person could have foreseen, whether or not the defendant actually foresaw them b. foreseeability: focused on what the parties had or ought to have had on their minds when entering into the contract i. for example, mill had a second crankshaft (so not shut down) ii. for example, mill may have had other defects which would have precluded the mill's working anyway (so not shut down)
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2. (Special Damages): arise from the special circumstances under which the contract was made if and only if these special circumstances were communicated by the plaintiff to the defendants a. restated: the court will award damages as to remote or unusual consequences, but only if the defendant had actual notice of the possibility of these consequences ii. Hadley is about consequential values the foreseeability of consequential losses (the other loss part of the equation) iii. To be responsible for special damages, the person being informed must have the authority to make the adjustments that the foreseeability doctrine is meant to trigger (get insurance, make sure performance happens, negotiate over price) –gives the party the chance to make the requirements as circumstances require: Notice only matters where the defendant can do something once informed iv. Incidental damages: Expenses that arise to correct the breach v. Consequential damages does not apply to non-payment of money or in not making a good title to land. vi. General/direct damages: arise naturally from the breach of contract vii. Consequential/special damages: arise from special circumstances communicated at the time the contract was formed (a) Most important type of consequential damages is lost profits arising from collateral contracts. (b) Includes injury to person or property caused by goods that fail to comply with contractual warranties c. Modern Formulation i. Stated in terms of foreseeability of the loss. Recoverability of consequential damages depends upon (a) The defendant's knowledge at the time the contract is made (b) That the type of loss be foreseeable, not the manner in which the loss occurs (c) The focus of foreseeability is on the breaching party (d) The standard for foreseeability is at least in part objective. The breaching party is liable for losses about which it had reason to know (e) The loss must be foreseeable as a "probable" result of the breach ii. R 351 and UCC 2-715 (a) Restatement 351: Unforeseeability And Related Limitations On Damages 1. Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. 2. Loss may be foreseeable as a probable result of a breach because it follows from the breach a. in the ordinary course of events, or b. as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. 3. A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in
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reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate (b) Ahdieh on restatement 351: 1. Damages must be foreseeable at the time the contract was entered into, and not at the time of the breach (that is the time you make the special arrangements: for the other party to buy insurance, to raise the price, etc.) (c) UCC 2-715 Incidental and Consequential Damages 1. Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. 2. Consequential damages resulting from the seller's breach include a. any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and b. injury to person or property proximately resulting from any breach of warranty. iii. CISG: losses may not exceed the loss which the party in breach foresaw or ought to have foreseen, in light of facts he knew or should have known (835) iv. Holmes suggested a limiting 'tacit agreement test' which modern contract law rejected. His rest was that the injured party would have been required to show not only that the special circumstances were brought to the attention of the other party, but also that the other party assumed consciously the liability in question. d. Examples i. Florafax Internation v. GTE (836) (a) Florafax contracted with GTE to provide a call center to handle all incoming flower orders for a fee for 3 years. Termination was possible after 2 years upon a price/fee renegotiation clause. And if a party defaults, the non-defaulting party can terminate within 45 days. In the event GTE ceases to perform, it promises to pay Florafax consequential damages for lost profits. GTE also knew at the time the contract was made that is would be providing services for others (e.g. Bellerose) under the contract. GTE was also aware of the possibility it might make no money off the deal, but gambled it would. Over the course of time of the contract, GTE's performance deteriorated—in particular they failed to provide enough TSR's over mother's day. Bellerose terminated its agreement with Florafax because of the poor performance of GTE. Florafax terminated the contract with GTE, and set up it s own call center. (b) Florafax is seeking damages for: [expectations damages] 1. setting up its own call center 2. the loss of business from Bellarose special damages
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a. different expect testimony on increasing call volumes: Bellarose estimated loss of $1,921k for remainder of 3 year contract, GTE estimated $505k for remainder of 3 year contract. 3. lost profits from its own business (c) App. Ct: 1. Follows Hadley rule for loss of future profits: recoverable in a breach of contract if 1) the loss is within the contemplation of the parties at the time the contract was made, 2) if the loss flows directly or proximately from the breach, and 3) if the loss is capable of reasonably accurate measurement or estimate. Where there is sufficient evidence that the damages was in the contemplation of the parties at the time of the contract is a question of fact to be determined by the trier of fact. 2. GTE's argument that damages be for 60 day period not appropriate b/c only GTE and Bellerose could exercise that option. The appropriate minimum term was 2 years. 3. GTE's argument that the damages were too remote to be calculated is also without merit. The test is: for damages to be recoverable, they must be clearly ascertainable, in both their nature and origin, and must appear that they are the natural and proximate consequence of the breach and not speculative and continent. The plaintiff must show for the recovery of lost profits that there is sufficient certainty that reasonable minds might believe from a preponderance of the evidence that such damages were actually suffered. Here, the damages were those profits that Florafax could have made had the relationship with Bellerose survived. There is sufficient evidence that GTE's breach caused Bellerose to end its relationship. Post-breach evidence as to the value of the contract was properly entered. 4. Judgment of trial court affirmed (d) Notes 1. The norm is that in most commercial contract the parties will contract out of consequential and incidental damages. If don't contract out of damages, it is wise to put in a financial cap. 2. The UCC has specific rules governing contractual disclaimers of warranties or limitations of remedies. a. UCC 2-316 (exclusion or modification of warranty) b. UCC 2-719 (modification or limitation of remedy) 3. Statutes may regulate disclaimers and limitations. 4. Where there is no applicable UCC or statutory law, general contractual principles apply. 5. Restatement 351(3), which very few courts use, allows a court to limit consequential damages as justice requires if the disproportion between the prices charged by the defendant under the contract in question and the liability sought to be imposed upon it is disproportionate. 6. Plaintiffs must prove their damages with 'reasonable certainty' (and not speculation). Reasonable certainty requires a means of determining what the damages amount would be. Restatement 352 says need
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certainty about the fact of damage and certainty regarding the amount of damage. a. When plaintiff establishes a fact of damage, jury is given much leeway in deciding compensation. Consequently creates a lower standard of certainty by which jury can make determination. Fact damages: must show that the damages would have arisen but for the breach. Must also show causation b. The amount of damage is speculative and cannot be recovered. 7. Proof of lost profits usually requires expert testimony. Plaintiff is only entitled to recover net profits. Care must be taken to avoid double recovery. a. Technically, market price should be the same as the present value of all income that can be derived far into the future from a business. In reality, that is not the case. Court prefers the decline in market value over the value of money that was lost in the future. 8. Application of consequential damages a. Lending contract: borrow may claim the loss of the favorable interest rate (general damages) and profits from transactions that were prevented because the funds from the loan were unavailable. Duty to mitigate (take out a higher interest rate loan) or foreseeability (lender must have reason to foresee the inability to raise the funds from other sources) may limit this loss. b. For breach of employment: an employee may recover as general damages the wages that she would have received less the amount of wages that should could have earned from comparable employment found through reasonable efforts. Damage to reputation is generally not allowed unless the employee can show the loss of a particular opportunity (and not merely the harm to the general reputation). 2. Certainty a. Certainty: The requirement that damages be proved with reasonable certainty: i. the fact of damages and (needs higher level of certainty) ii. the amount of damages (general idea) 3. Causation a. Causation: The loss must flow directly, naturally, or proximately from the breach 4. Mitigation a. Theory i. Duty to mitigate damages: damages cannot be recovered to the extent they could have been avoided or minimized by reasonable efforts ii. The defendant need not compensate the plaintiff to the extent that the plaintiff's own actions were a contributing cause of her injury iii. Doctrine of avoidable consequences: The plaintiff may not recover for those injurious consequences of the defendant's breach that the plaintiff herself could by reasonable action have avoided iv. Application of doctrine of avoidable consequences varies according to the type of case under consideration
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v. "Duty to mitigate": there isn't really a duty to mitigate, but rather think: where the plaintiff fails to mitigate their damages, they are unable to shift that part of the loss onto the defendant. b. Examples i. Rockingham County v. Luten Bridge Co (a) Plaintiff Luten Bridge Company was placed under contract by Rockingham County to build a bridge. After Luten started building the bridge, the County repudiated the contract, telling Luten to stop constructions. The repudiation amounted to a total breach of contract. Up to that time Luten spent $1900 building the bridge. Luten nevertheless continued and finished building the bridge, and is suing the county for damages. (b) Issue: What damages does the County owe to Luten? (c) Trial Ct.: Holds: relevant commission told you to go ahead and build the bridge. (d) Ct. App: The secret meeting of the rump council was not a meeting of the commission b/c the mtg. wasn't publicly announced. The County owes Luten an amount sufficient to compensate plaintiff for labor and materials expended and expenses incurred in the part performance of the contract, prior to its repudiation, plus the profit which would have been realized if it had been carried out in accordance with its terms. Lower court judgment reversed and remanded for new trial. 1. Need to indicate a 'clear manifestation to breach the contract': once received, the other party cannot continue to perform and receive full damages for performance (e) Notes 1. Compensation for part performance: get compensation for (part performance prior to repudiation) plus (the profit that would have been realized if the contract had been fully performed) 2. What should Luten Bridge have done? a. Ask for adequate assurance from whoever is telling them to go ahead and perform. b. Ask for declaratory judgment by a court c. Filed suit immediately ii. Boehm v. American Broadcasting Co (Judge Hug) – wrongful termination (a) created position with the exact same base salary, although the two parties disputed whether the total compensation was the same. In the new position, Boehm would have reported to his replacement. Boehm declined the job offer, and that position was never filled. He sued for breach of implied employment contract, breach of covenant of good faith and fair dealing, NIED, and IIED. (b) ABC is using their new job offer as a way to have Boehm mitigate his damages (for loss avoided) (c) Removed to federal district court. Boehm won on breach of implied employment contract, breach of covenant of good faith and fair dealing, and NIED. $1.34m lost compensation, $150k for emotional distress. ABC
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made motion of JNOV, with the result that IIED was thrown out. ABC applied the denial of JNOV on the other claims. ABC does not deny claim of wrongful termination. (d) Circuit Court: Employer bears the burden of proof that the other employment was comparable or substantially similar to that which the employee has been deprived. If that is proven, then the failure to accept offers of employment is significant in consideration of mitigation. ABC did not carry its burden of establishing that the new position offered to Boehm was substantially equivalent to that from which he was wrongfully discharged. And the jury implicitly found that the newly created position was not sufficiently similar to his old job. Additionally, since Boehm retired instead of seeking other work, the burden is upon ABC to determine the reasonableness of his efforts to obtain other employment. And a jury's finding of damages (front pay) will be upheld unless it is grossly excessive, clearly not supported by the evidence, or based upon speculation or guesswork. Here the jury's finding of front pay was not excessive, and ABC did not show that Boehm acted unreasonably in his efforts to mitigate the damages. (e) Notes 1. Wrongful termination raises two issues: a. Was the plaintiff wrongfully terminated? b. What is the liability of the former employer for such wrongful termination? 2. Two prongs for mitigation: a. The substitute must be sufficiently similar to the original i. in a commercial context, think of companies as primarily wanting to make money, so it is more likely that any substitute would be okay (so long as the money is the same) b. Burden of proof is on the breaching party (to prove the substitute is substantially similar) i. Assume defendant has more information on mitigation possibilities: more true in employment context, less true in other contexts ii. Since defendant wants to reduce the damage award, it makes sense for the burden to be on them to show elements that would reduce the damages 3. For mitigation, new job must be substantially comparable. 4. For mitigation: must make reasonable efforts to mitigate the damages 5. General rule is that the measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon fro the period of service, less the amount that the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment. 6. Employer bears the burden of proof that the other employment was comparable or substantially similar to that which the employee has been deprived. In some states, the employer has burden of showing not
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only that the employee failed to act reasonably in seeking other jobs but also that such efforts were likely to have been successful. If that is proven, then the failure to accept offers of employment is significant in consideration of mitigation. 7. Comparable or substantially similar employment can include elements of location, type of services, hours of work, and status. a. For movies, most filmmakers use 'pay-or-play' clause, which gives one party an option to either perform under the contract or to pay the amount set forth in the clause. 8. R §350(1) sets forth three special circumstances that justify rejection of an employer's unconditional offer of reemployment: undue risk, burden, or humiliation 9. Even if the employer offers the same job, if the employee is afraid will be fired, the court may or may not consider that enough to make the job substantially different. a. If the offer is a pre-textual offer, that creates a special circumstances so plaintiff doesn't have to take the job b. If there is a change in circumstances (e.g. employee has become pregnant), that creates a special circumstance 10. UCC: although there is no explicit UCC provision on mitigation, the duty of mitigation is implicit in the general obligation of good faith in §1-203. 11. Real estate leases a. Traditionally: defaulting tenants are held to their obligations to pay the rent in full, with no obligation of the landlord's part to mitigate damages by re-renting b. Modern: the courts have a duty to mitigate. Not all courts agree. E. NONRECOVERABLE DAMAGES 1. Theory a. Speculative damages are prohibited: damages must be proved with reasonable certainty 2. Nonperformance from a. Death or incapacity is excused (R § 262) i. Unless self-induced b. Only US follows the 'American Rule' i. Two problems if impose loser pays (a) Poor litigants are excluded from the system b/c they cannot afford to pay the attorneys fees for the other side (b) Impose on the courts the need to litigate what constitutes a reasonable attorneys fee ii. Advocates of loser pays (a) Poor litigants are excluded b/c they cannot afford the regular attorney fees if they lose 1. what about contingency fees? iii. UCC: (A very few contend it) permits the award of attorney fees to a victorious plaintiff, either as incidental or consequential damages (2-270, 2-
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715). These claims are usually unsuccessful. There needs to be a clearer legislative statement to overcome the presumption in favor of the American rule. iv. CISG: attorney fees are recoverable if they are foreseeable. Prejudgment interest is also routinely available (but not under American law) v. Justifications for the American Rule: (a) Access to the court: 1. one should not be penalized for merely defending or prosecuting a lawsuit 2. the poor might be unjustly discouraged from being suit (b) Burden on judicial administration 1. The time, expense, and difficulties of proof inherent in litigating the question of what constitutes reasonable attorney's fees pose substantial burdens for judicial administration vi. Argument against American Rule: (a) fails to provide full compensation for the prevailing party (b) prevents the assertion of meritorious claims (c) other countries don't use it vii. Exceptions to the American Rule: (a) Contract Exception: the contract provides for award of attorneys fees (b) Statutory Exception: Statutes provide for such recovery (c) Court rules as exception: Court Rules may allow recovery of court fees 1. E.G.: Rule 11 FRCP that provides sanctions against attorney who multiplies proceedings unreasonably and vexatiously (d) Ethical obligations of lawyers: Lawyers who engage in improper litigation tactics may be subject to professional discipline as well as sanctions (e) Other exceptions: 1. Collateral litigation: the Δ breach of contract causes the plaintiff to engage in collateral litigation, the П may recover as a consequential damage for breach of the principal contract the attorney fees incurred in the collateral litigation. American rule only bars recovery of the litigation expenses in the case against the Δ. 2. Special relationship: An insured who incurs attorney fees in forcing an insurance company to honor its contractual obligations c. CISG: in selected areas, imposes a different outcome than would get under UCC or Common Law 3. Examples a. Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co (2001) (866) (Judge Shadur – very liberal) i. Zapata, a Mexican company, sold tins cans to Lenell, a US corporation. Lenell fell behind in making payments, so Zapata refused to make further deliveries until its account was brought up to date. Lenell in turn threatened Zapata that if it stopped shipment, Zapata would never be paid. Zapata sued in Illinois for $800,000. The court found that even though Lenell had no viable defense, it denied liability and forced Zapata to incur litigation expenses. Both sides agree their claims are governed by CISG. And the parties stipulated that
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Lenell foresaw or should have foreseen that Zapata would incur litigation costs. ii. Issue: Is the court able, and under what theories can the court impose attorney's fees on the Δs? iii. The CISG appears to allow recovery of attorneys' fees as foreseen consequential damages. Those fees are nearly universally awarded iv. The court has the inherent power for imposing a litigant's fees on its adversary where the adversary has acted in bad faith, vexatiously, wantonly, or for opposite reasons. Lenell acted with bad faith by needlessly creating a lengthy trial. b. Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co (2002) (handout) (Posner – doesn't like Shadur) i. CISG doesn't mention attorney's fees. No suggestion in background of convention that 'loss' was intended to include attorney's fees; and no suggestion to the contrary. Reimbursement is procedural and not substantive law, and cannot be drawn out of CISG—must come from country in which suit is pursued. ii. Also, interpretation of 'loss' for Zapata produces anomalies. E.G.: what if defendant won? П need to reimburse? Could winning П waive his right to attorneys fees? The US wouldn't have signed CISG if new American rule not apply. iii. In US, a breach of contract is not considered wrongful activity in the sense that a tort or crime is wrongful. There are no punitive damages b/c contract is based upon strict liability. Deliberate breaches may not be culpable, because they could improve efficiency. To get punitive damages, П must show the breach of contract involved tortious misconduct. The judge had no authority to award attorneys' fees. Attorneys' fees is just another form of prohibited punitive damages. iv. Punitive damages is a 'residual authority' to be exercised sparingly to punish misconduct (a) Occurring in the litigation itself, not in the events giving rise to the litigation (b) Not adequately dealt with other rules v. The court only has right to punish for those things that occur in its court, vi. FRCP prohibit imposition of attorneys' fees damages vii. Notes (a) Must differential between substantive rules (which must be consistent) and procedural rules (which can vary) 1. Posner is wrong: Attorney fees are substantive, not procedural 2. Posner is rejecting the universal provisions of CISG that attorneys fees be granted 3. For US Supreme: Can in the context of interpreting an international treaty, can a US court say: We think the treaty language says nothing about this topic, when every other jurisdiction has said "here is what this provision means" F. PUNITIVE DAMAGES
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1. THEORY a. Tort damages are permitted in contract cases i. where a breach of duty directly causes physical injury ii. for breach of the covenant of good faith and fair dealing in insurance contracts iii. for wrongful discharge in violation of fundamental public policy iv. where the contract was fraudulently induced b. The duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which his both intentional and intended to harm. c. A tortious breach of contract may be found when i. The breach is accompanied by a traditional common law tort, such as fraud or conversion; or ii. The means used to breach the contract are tortious, involving deceit or undue coercion; iii. One party intentionally breaches the contract intending or knowing that such breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages. d. Reasons for denying tort recovery in contract breach cases: i. The different objectives underlying tort and contract breach ii. The importance of predictability in assuring commercial stability in contractual dealings iii. The potential for converting every contract breach into a tort, with accompanying punitive damage recovery, and the preference for legislative action in affording appropriate remedies e. Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at the time; consequential damages beyond the expectations of the parties are not recoverable. f. Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result. g. When the express object of the contract is the mental or emotional well-being of one of the contracting parties, the breach of the contract may give rise to damages for mental suffering or emotional distress. h. Restatement 353 identifies two types of cases in which damages for emotional distress may be recovered: i. Breach of contract also causes bodily harm ii. Emotional distress is a 'particularly likely' consequence of the breach (a) E.G.: 1. Contracts of carriers and innkeepers with passengers and guests 2. Contracts dealing with the carriage or disposition of dead bodies 3. Contracts for the delivery of messages concerning death i. Restatement 353 test: recover only granted where either the contract or the breach in question was "of such a kind that serious emotional disturbance was a particularly likely result"
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j. Recover punitive damages in tort when "wrongdoer's conduct is outrageous because of the defendant's evil motive or his reckless indifference to the rights of others i. Why no punitive damages in contracts? (a) Contract remedies are only those that will compensate the П for harm actually cased and should not put the injured party in a better position that she would have occupied if the contract had been performed (b) Contract law is a system founded not on 'fault' but on 'strict liability' (c) Contract remedies should promote efficiency, and therefore should deter only 'inefficient breaches' of contract, punitive damages could deter even efficient breaches k. Exceptions! i. Insurance: court hold insurance companies liable in tort to their insured for bad faith refusal to honor claims brought by 3rd or 1st parties (a) Why OK? 1. Special nature of insurance contract 2. Body of case and statutory law 3. Insurance police is obtained as a protection against calamity 4. There is usually an unequal bargaining position between the parties 5. The insured expects to have protection provided by his insurance 6. The insured is in a very vulnerable economic position 7. The whole purpose of insurance is defeated if an insurance company can refuse or fail, without justification, to pay a valid claim (b) In third party insurance context, allow punitive damages (the purpose of the contract is to be defended against the potential exposure and risk) – it is so against public policy that insurance companies are liable (c) In first party insurance contract context, don't allow punitive damages (d) Insurance is based upon a special relationship that supports punitive damages ii. The breach of the contract itself constitutes a tort (will grant punitive damages here) (a) Grant based upon tort characteristics of the breach iii. Emotional Distress when contracting primarily for emotional happiness (a) available as part of expectation damages (b) in contract law, there is a preexisting relationship; in tort law, there is no premise of a preexisting relationship 1. tort law is also more premised on there being 'harm' 2. Parties have the ability to contract and therefore address the emotions of the parties (c) Make a presumption that parties could have included emotional distress if they so chose l. Argument to extent punitive damages i. There can be an independent duty arising from tort law that originates from torts other than those traditionally recognized at common law. There are intentionally tortious behaviors unique to the contractual settings.
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ii. Public policy doesn't always favor a limitation on breaches for intentional breaches of contract. Many intentional breaches are not efficient iii. It is useful to punish and deter business practices that constitute distinct social wrongs iv. An intentional breach of contract may be found to be tortious when the breaching party exhibits an extreme disregard for the contractual right of the other party, either knowingly harming the vital interests of a promisee so as to create substantial mental distress or personal hardship, or else employing coercion or dishonesty for cause the promisee to forego its contractual rights m. Dodd argues economic efficiency supports a rule that allows punitive damages for any willful breach of contract. Two types of willful breaches: i. Opportunistic: an attempt by the breaching party to gain at the expense of the non-breaching party (a) punitive damages should be awarded here ii. Efficient: the breaching party seeks to engage in another transaction that is more profitable than the existing contract (a) punitive damages may be wise her as well to encourage the breaching party to negotiate with the nonbreaching party to obtain a release from the contract. 2. EXAMPLES a. Erlich v. Menezes (874): Justice Brown (currently being filibustered for US Supreme) i. Erlich contracts with Menezes to build their dream house. Menezes negligently builds the house: it has serious defects in the roof, exterior, windows, waterproofing, and structural components. The Erlich's sue for breach of contract and emotional distress. ii. Jury found Menezes breached contract by negligent construction and awarded $406,700 for repairs. Each spouse was awarded $50k for emotional distress. Barry Erlich received an additional $50k for physical pain and suffering and $15k for lost earnings. iii. Ct. of App: Affirmed judgment including the emotional distress award. Majority held a contractual duty may support an action in tort. iv. Sup. Ct: Overturned emotional distress award. v. Conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from the principles of tort law. Mere negligence breach is not sufficient, except where the actions that constitute the breach violate a social policy that merits the imposition of tort remedies. That action is available when there is a special relationship. Mendez did not act intentionally, and was not guilty of fraud or misrepresentation. The breach did not cause physical injury. And there was no reasonable expectation that the home would be error free. vi. Emotional distress should not be included as consequential or special damages in a contract claim. vii. The balance of policy considerations: the potential for significant increases in liability in amounts disproportionate to culpability, the court's inability to formulate appropriate limits on the availability of claims, and the magnitude
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of the impact on the stability and predictability in commercial affairs – counsel against expanding contract damages to include mental distress claims in negligent construction cases b. XII. ALTERNATIVES TO EXPECTATION DAMAGES A. Theory 1. Three basis for contractual liability a. Private autonomy: parties have a right to bind themselves to certain commitments, and when they do so the courts will hold them to their promise b. Reliance: the other party relied on the promise that was made, and we will enforce c. Unjust enrichment/restitution: Take damages from breaching party for any benefit they derive 2. Reliance is both a measure for damages and a basis for liability a. Basis for liability: will use phrase reliance and/or promissory estoppel 3. There are some situations where amount of reliance damages equals or even exceeds expectations damages B. RELIANCE DAMAGES 1. Theory a. Only used when expectation damages do not work (a) E.g. the standard for relief under expectation damages is too high b. Use reliance when expectation damages cannot be proven with reasonable certainty. c. Types of reliance i. Essential (a.k.a. direct) reliance: costs of performing the contract ii. Incidental (a.k.a. consequential) reliance: the costs incurred in collateral transactions related to the contract (a) almost always much higher than essential damages – is equivalent to consequential damages d. Normally the nonbreaching party recoups incidental reliance expenses through transactions with third parties e. Doctrines that usually apply to limit recovery in expectation damages also apply to limit recovery in reliance damages (from Rest. 352 comment a) (e.g. foreseeability, causation, certainty, and mitigation) i. Equal opportunity exception to mitigation: П has no obligation to mitigate their damages if Δ had the same opportunity as П to take that action ii. Offset loss: (from R 349) recovery should be offset by any loss that the party in breach can prove with reasonable certainty the insured party would have suffered had the contract been performed. The Δ has the burden of proving the contract would have been a losing one for the П. iii. Pre-contract reliance: A party may not recover for reliance costs incurred before the contract was made f. Sometimes, protection of injury to П's reliance extends to take into account the gains the П would have made had she not relied on the Δ's promises g. P.E. was originally a substitute for consideration. But now P.E. can also be used as an alternative basis for liability. Elements of P.E. theory of recovery i. A promise
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ii. That was justly relied upon iii. Promisor reasonably expected the reliance iv. May be limited as justice requires h. Trial courts should have flexibility in discretion as to award expectation, reliance, or some other form of remedy when the basis of recovery is P.E. However, some courts will hold that cannot award expectation damages for P.E. i. Scholars argue that the test for using expectation damages is whether the promisee was induced to make a substantial change in his life that is not easily reversible j. In real life, expectation-based remedies are commonly and routinely awarded in P.E. cases k. Cases involving land are good candidates for specific performance (which is an expectation-based remedy) l. In construction bidding cases, courts follow Drennan v. Star Paving awarding damages on P.E. theory to the general contractor injuried by the withdrawal of a subcontractor's bid, despite the failure of the parties to conclude a formal contract biding the general contractor as well m. Expectation damages are not necessarily greater than reliance damages n. Commercial v. Non commercial transaction i. If commercial: expectations damages are more common: party may have given up alternative opportunities that are no longer available ii. In non-commercial context: there is less worry that party may have given up alternative opportunities iii. Some courts say expectations damages are not recovery when the theory is promissory estoppel b/c П is at fault b/c П didn't really enter into a contract [this is a bizarre argument] 2. Examples a. Wartzman v. Hightower Productions, Ltd. i. Brief (a) Guy sitting on top of a pole. Lawyer failed to comply with securities law. (b) Ct. of App: Lawyer owes a ton of money b/c failed to prove that full performance of contract would have resulted in loss to П. Court uses reliance damages. b. Walser v. Toyota Motor Sales, USA i. Brief (a) Toyota dealership tells Walser that will receive Lexus dealership, so Daddy buys property for the dealership. Toyota later says it will not send the letter of intent. (b) Walser cannot recover expectation damages b/c the contract was not finalized. Can only get the difference in value between the price of the land and the price paid for the land (for reliance damages). ii. Notes C. RESTITUTIONARY DAMAGES 1. Theory a. Used in situations where neither expectations nor reliance damages will help the nonbreaching party; also when of no benefit to the breaching party
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b. A nonbreaching party may elect recovery of restitution rather than expectation damages for breach of contract (§373) (both breaching and nonbreaching party) i. Even if there is only part performance (§374) c. If the performance obligation has been discharged due to incapacity (§376) or impracticability (§377), either or both parties are entitled to restitutionary relief d. Same is true for statute of frauds (§375) e. Best example is when a party enters into a losing contract (E.g. Coastal v. Algernon) f. In this class use Implied in law contracts, quantum meruit contracts, quasicontracts synonymously for when one party is unjustly enriched at the expense of another party, that unjust enrichment (benefit) will be taken from them 2. Examples a. United States ex rel. Coastal Steel Erectors v. Algernon Blair i. Coastal Steel Erectors brought restitution damages suit against Algernon Blair's American surety for breach of contract. Blair contracted with Coastal to perform steel erection and supply equipment. Coastal did so, supply cranes and labor, and Blair refused to pay for the Crane rental. Coastal sued under the Miller act. ii. The district court found Blair's refusal to pay for the Crane rental to be a breach of contract. But under expectation damages, Coastal's expenditures were $37,000, but they would have lost more than that if they had completed performance. So, no damages to Coastal. iii. Appellate court overturned the "no damages" component of the decision. Because Blair retained the benefits of Coastal's work without fully paying for them, Coastal is entitled to restitution. The measure of recovery for quantum meruit (restitution) is reasonable value of performance (the value of the benefit conferred upon the other party). Remanded for the district court to determine the reasonable value of performance iv. §373: two standards by which determine restitutionary recovery; Restitution when the other party is in breach (a) cost avoided: what would it cost the Δ to obtain the same benefit from a person in the П's position (from someone else) (b) net enrichment: the amount by which defendant was enriched; what was the increase in the value of Δ's property (c) courts generally award the smaller amount (d) Because restitution is an equitable remedy, the court will consider what fairness requires (even if it is the larger amount) v. Miller Act: any contract for construction, alteration, or repair of any public building or public work of the US exceeding $100,000 requires the contract to furnish both performance and payment bonds issued by a surety. Protects gvt against contractor's imperfect performance, and subcontractor who may sue the contractor vi. Market value restitution: When a plaintiff elects restitution as a remedy for breach of contract by the defendant, the measure of recovery is the reasonable value of the performance, and recovery is undiminished by any loss that would have been incurred by complete performance
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(a) When П rescinds the contract and recovers in restitution, the contract no longer legally exists (b) It is unfair to allow the Δ, the breaching party, to detain the benefit of the bargain (c) Critics: normal rule of damages should apply – the injured party should not be placed in a better position than would have been in otherwise (d) Critics: should focus on fairness, and not use the label of market value for restitution – shouldn't place the non-breaching party in a better position than he would have been in (e) Market value restitution is the majority rule (f) Contract price (in some courts) is considered as a alternative basis for determining the market value (with contract price being a cap on the damages allowed) (g) Contract price (in some courts) is considered as probative evidence to determine the market value (to help determine what is reasonable) (h) Full performance exception to market value restitution: if the nonbreaching party has fully performed and all that is remaining is the payment, the nonbreaching party may not elect restitutionary recovery but is limited to expectation damages (§373(2)) (i) To have the court perform the restitution calculation would be a waste of time when it can just use contract value in this instance (j) Most jurisdictions agree with Restatement, except notably New York and Massachusetts where quantum meruit is recoverable only if the party can prove both substantial performance and an endeavor on his party in good faith to perform fully (k) An intentional variation from the terms of the contract will preclude restitution (§374 comment b): one who intentionally varies or build a building materially different from what he promised is regarded to have acted officiously and not in part performance (l) No requirement of willful or deliberate breach, as contract law isn't about punishing the breaching party, and wants to encourage efficient breach; also a difficult assessment to make (m) Restitution should be measured in the lesser of either (a) the value of the benefits conferred or (b) the defendant's increase in wealth. The breaching party should never be allowed to recover more than a ratable portion of the total contract price where such a portion can be determined R 374, Comment b. (n) Under modern view, restitution is available even to the breaching party (o) A party who breaches after almost fully performing is penalized more severely than a party who breaches by acting not at all or just beginning to act (p) In this case there is a borrowing from the UCC into the common law, even though this is not a sale of goods case; UCC provides some guidance (q) Four ways in which restitutionary recovery is limited 1. Restitutionary recovery by the breaching party is limited by the nonbreaching party's right to offset damages (that is, the nonbreaching
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party gets all the damages they need to be fully compensated – they get all their expectation damages) 2. Restitutionary recovery is limited to actual enrichment; cannot exceed a ratable portion of the contract price (a proportion of the total contract price of what they did) 3. Restitutionary damages to the non-breaching party will be denied if there is a valid liquidated damages clause (a provision that says, if you breach the contract, I get $30k) 4. Restitutionary recovery will be denied to the breaching party if the injured party seeks or is entitled to specific performance b. Lancellotti v. Thomas i. Lancellotti entered into two agreements with Thomas. First, Lancellotti agreed to purchase Thomas' business for $25,000 plus promise that Lancellotti would own and operate the business and would build an addition to the existing building at least 16x16 that cost over $15,000 and would be 75% complete by May 1, 1973. Second, Lancellotti agreed to lease Thomas' property for five years, with a 5 year extension option, for $8,000 a year, with a condition of the lease being the building of the addition in return for no rental charges until August 31, 1973. An addendum to the second contract stated that if the addition isn't built, Lancellotti would owe Thomas $6,665 as rental. The agreement was made, and Lancellotti built the 20x40 addition for $11,000. In 1974 Lancellotti lost interest in operating the business. Thomas resumed possession of the business in 1974, and found some equipment missing. ii. Trial Court: Lancellotti owes Thomas $25,000 already paid, plus $6,665 rent. iii. Ct. App: Changes common law rule to that from Restatement. Lower court failed to recognize that the nonbreaching party should not obtain a windfall from the breach. So incorporated R §374. A party who committed a breach should be entitled to recovery any benefit in excess of the loss that he has caused by his own breach. Remanded to trial court to determine on this new basis. Also T.C. must determine if retention of $25k was reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof and loss. iv. Dissent: Common law is that a breaching party cannot recovery unless there contract itself is void or voidable. Restitution shouldn't be allowed when there is bad faith, which is probably what happened here as after Lancellotti left Thomas' property it started its own. 3. Ventura v. Titan Sports i. Ventura suing WWF for a series of contracts he entered into to do commentary. Two issues: (a) Pre-Bloom unjust enrichment: WWF's selling videotapes of Ventura's commentary – oral contract 1. Ventura cannot void the effects of the contract. All he is arguing is that Titan's sale of videotapes went beyond the scope of the oral contract. 2. No room for a quantum meruit claim where there is an express contract. Here, there is no claim of breach of contract. Rather, restitution is being used here as a theory of recovery. Ventura and Titan had never
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entered into a contract for Titan's resale of the videotapes. There is an implied-in-law contract. (b) Post-Bloom: fraudulent misrepresentation as to the availability of royalties 1. Restitution is available when a contract is rendered unenforceable for a variety of reasons including fraud. If a court rescinds the contract on one of those bases, each party must make restitution for value received for the value received to the other party. ii. Court says there is a right to publicity. The sale of these tapes violated Ventura's right to publicity. So there is an implied-in-law contract, and Ventura gets damages. D. SPECIFIC PERFORMANCE 1. Theory a. Not a remedy П is automatically entitled, even when an unexcused breach has been clearly established b. Problems with specific performance: i. Inadequate (a) time-specific performance required (b) damages cannot be calculated (c) the repayment is insufficient (d) insufficient (1) certainty, (2) foreseeability (3) causation ii. Ineffectiveness/Good Faith (difficult to determine if performance will be adequate when the actor doesn't want to perform) iii. Court supervision is a problem (courts have become less concerned with this as a result of getting experience with civil rights cases) iv. Autonomy (forcing people to do thing they don't want to do on an ongoing basis creates concerns) v. Economic inefficiency (a) Must know what parties damages will be to determine economic efficiency vi. The item desired may no longer exist (an irreplaceable car) vii. The item may already be sold to a third party c. History of Specific Performance (Damages versus injunctive relief) i. Early common law courts used specific relief on basis of unjust detention of something belonging to П. Over time evolved into use of money damages. Based upon jurisdiction over property, not person. ii. Early equity courts were based upon jurisdiction over the person—a personal command that Δ do something. iii. Modern courts will not try to coerce a performance that is personal in nature, nor those where there is difficulty in supervision or enforcement. iv. Use specific performance as a means of avoiding conflict and unfairness where no clear standards can be framed in advance. v. Historical limits on specific performance: (a) Extraordinary: If the remedy at law was 'adequate', that is, money damages ok, no need to order specific performance
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(b) Discretionary: Chancellor could act upon his conscience, and may withhold relief where considerations of fairness or morality dictated vi. Current trend is in favor of extension of specific relief d. Injunctive relief (specific performance) only available when damages is not sufficient e. Circumstances which support a claim that damages are inadequate: i. The difficulty of proving damages with reasonable certainty (R 360) ii. The difficulty of procuring a suitable substitute performance by means of money awarded as damages; and (R 360) iii. The likelihood that an award of damages could not be collected (R 360) iv. Contract is the product of mistake or unfair practices (R 364) v. Contract exchange is grossly inadequate or the terms are unfair (R 364) vi. Contract would cause unreasonable hardship or loss to the party in breach (R 364) f. Court does not limit access to equitable relief by requiring П to show that an 'irreparable injury' will result. Courts also consider i. Hardship to the Δ or others ii. Hostility to the merits of the П's case iii. Certain values such as freedom of speech or freedom from compulsory service 2. Examples a. City Stores Co. v. Ammerman i. City Stores sent a letter to owners of Tyson's Corner development site for their use in obtaining zoning in return for (the court held) getting a spot in the new development with equal terms to the other department stores if the developers were successful in getting the zoning. ii. The court held there was an option contract with certain conditions precedent to its operation: the securing of necessary zoning and entering into leases with other major store tenants. The details were sufficiently definite b/c they come from the terms the developers enter into with the other stores. And, the court may fashion an equitable response based upon court's discretion if there are no other adequate remedies (e.g. damages). Here there are not. (a) An option contract that is indefinite that is contingent upon (1) getting other leases and (2) getting zoning approved iii. Court grants specific performance requiring developers to give City Stores a spot, and if they cannot reach agreements on the rest of the terms the court will appoint a special master. The consideration that Tyson's developers cannot put in the Sears store they wanted to is irrelevant b/c they made that deal after they got the property they wanted. A loss of money is not sufficient reason to deny specific performance. (a) Notes 1. Specific relief will not be denied merely b/c the parties have left some matters out of the agreement or to future agreement, particularly where the parties agree on all material terms and equitable factors are present. 2. The failure to agree on material terms may result in the denial of specific relief.
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3. Contracts involving land are prime candidates for specific enforcement. The remedy is traditionally available to buyers and sellers, but rarely awarded to sellers. 4. Ordinary building contracts are unlikely to be specifically enforced b/c of difficulties of supervision and b/c construction services can readily be purchased 5. Courts sometime consider effects on third parties (R 364(1)) – if impinges upon contractual rights of other buyers 6. Kronman: efficient remedial rule upon unique contract ok when a. Judicial computation of damage award is extremely difficult and expensive b. The efficient rule is one that the parties would have agreed to if they were free to make their own remedial rules and had deliberated about the matter at the time of the contracting 7. Schwartz: money damages are often under-compensating 8. UCC (2-716) specific performance may be decreed where the goods are unique or in other proper circumstances
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