Law School Outline - Contracts-Ahdieh

Contracts Master Outline QUESTION 1: IS THERE A VALID CONTRACT? ....................................................................................................... 3 I. General Description ............................................................................................................................................ 3 II. Objective Theory of Contract ......................................................................................................................... 3 III. The Doctrine of Consideration ...................................................................................................................... 3 E. §79 Adequacy of Consideration; Mutuality of Obligation ........................................................................... 5 F. Pre-existing Duty rule: .................................................................................................................................... 5 IV. Reliance: Protection of Unbargained-for Reliance ....................................................................................... 5 A. Detrimental Reliance: ..................................................................................................................................... 5 E. Charitable subscriptions: ................................................................................................................................ 6 F. Duty to Bargain in Good Faith: ..................................................................................................................... 6 G. UCC: ................................................................................................................................................................. 6 V. Reliance: Commercial Promises & Rescue in the Absence of a Promise ...................................................... 6 A. Principle of restitution:....................................................................................................................................... 6 D. Substantial performance: .................................................................................................................................... 8 VI. Offer & Acceptance (Bargained-for-Exchange) ............................................................................................... 8 C. Bilateral Contract ................................................................................................................................................ 8 D. Certainty: .............................................................................................................................................................. 8 E. §26 Preliminary Negotiations: ............................................................................................................................ 9 F. §50 Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise ............................ 9 G. Acceptance occurs when: ....................................................................................................................................... 9 H. §36 Methods of Termination of the Power of Acceptance ............................................................................... 9 M. Mailbox Rule: .............................................................................................................................................. 9 N. Unilateral Offers ............................................................................................................................................ 10 O. Indefinite Offers: ....................................................................................................................................... 10 P. Silence as Acceptance: §69 Acceptance by Silence or Exercise of Dominion .......................................... 10 VII. Promissory Estoppel to Enforce Offers ....................................................................................................... 10 A. Former Rule – Reliance Irrelevant.................................................................................................................... 10 B. Modern Rule - §124 ......................................................................................................................................... 10 D. Damages: ....................................................................................................................................................... 11 VIII. Firm Offers & Battle of the Forms ........................................................................................................... 12 A. Irrevocability by statute: §2-205 UCC Firm Offers: .................................................................................... 12 B. §2-206 Offer and Acceptance in Formation in Contract............................................................................. 12 D. Irrevocable Offers: ......................................................................................................................................... 12 F. §2-207: “Mirror-image” ................................................................................................................................. 12 IX. Agreements to Agree ..................................................................................................................................... 14 QUESTION 2: IF THERE IS A VALID CONTRACT, IS IT ENFORCEABLE? ........................................................ 15 X. Scope and Sufficiency of Memorandum .......................................................................................................... 15 XI. Part Performance and Promissory Estoppel Exceptions, and UCC Statute of Frauds ........................... 15 C. Non mutuality:............................................................................................................................................... 15 D. Equitable estoppel:........................................................................................................................................ 15 E. Equal dignity rule:......................................................................................................................................... 15 QUESTION 3: WHAT ARE THE TERMS OF THE CONTRACT? (expressed/implied) ............................................ 16 XII. Express Contracts ......................................................................................................................................... 16 XIII. Implied Contracts...................................................................................................................................... 16 XV. Parole Evidence Rule .................................................................................................................................... 18 XVI. Implied Obligations: ................................................................................................................................. 20 1 Contracts Master Outline D. Requirement contracts: ............................................................................................................................. 21 E. Output contract ............................................................................................................................................. 21 QUESTION 4: IS THERE A DEFENSE AGAINST ENFORCEMENT OR AN EXCUSE FOR BREACH? ............ 21 A. Behavior defenses. ......................................................................................................................................... 21 XIX. Contract Defense ....................................................................................................................................... 22 E. Intoxicated persons: ...................................................................................................................................... 23 F. Misrepresentation: §162 – when a misrepresentation is fraudulent or material ....................................... 23 G. Nondisclosure................................................................................................................................................ 23 XX. Public Policy .................................................................................................................................................. 24 XXI. Mistake, Changed Circumstances and Contractual Modifications: ..................................................... 24 E. Impossibility Doctrine: ................................................................................................................................. 25 F. Impracticability and frustration of purpose: ............................................................................................... 25 QUESTION 5: WAS THE CONTRACT MATERIALLY BREACHED? ..................................................................... 26 XXII. Material Breach ......................................................................................................................................... 26 XXIII. Anticipatory Repudiation & Adequate Assurances of Performance ..................................................... 27 XXIV. Express Conditions: .................................................................................................................................. 27 QUESTION 6: WHAT ARE THE REMEDIES FOR THE BREACH? ........................................................................ 29 XXVI. Computing Expectation Damages; Real Estate Contracts.................................................................... 29 XXIX. Mitigation: ................................................................................................................................................. 31 XXX. The Theory of Expectation Damages ..................................................................................................... 32 B. Efficient Breach:............................................................................................................................................ 33 XXXI. Nonrecoverable Damages ........................................................................................................................ 33 XXXII. Reliance and Restitution ...................................................................................................................... 34 A. Reliance damages ......................................................................................................................................... 34 B. Restitutionary claims: ................................................................................................................................... 34 XXXIV. Specific Performance ............................................................................................................................ 35 THIRD PARTY BENEFICIARIES ................................................................................................................................ 35 XXXV. Third Party Beneficiaries, Assignment & Delegation ............................................................................ 35 2 Contracts Master Outline Contracts Outline QUESTION 1: IS THERE A VALID CONTRACT? I. General Description A. Consideration (Expectation Interests): Something given in exchange for the promise. Also what should have been received had the contract been kept, opportunity costs and lost profits. Besides monetary obligations that are not honored, the court will usually compute a money equivalent of the plaintiff‟s lost expectation: the difference in amount they had to pay and the amount that was paid to finish the job that wasn‟t done. This is about the Promisor. B. Reliance (Promissory Estoppel): Damages paid for expenses incurred under assumption that the contract would be honored. This is about the Promisee. C. Restitution (Unjust Enrichment): The promisor has somehow been enriched by breach of contract/or by entering the contract. This is about the Promisor. Objective Theory of Contract A. Mutual Assent: For a contract to be formed, the parties must reach an agreement to which they “mutually assent.” This mutual assent is almost invariably reached through what are called “the offer” and “the acceptance.” Say “objective manifestation of mutual assent” in essay. 1. Not Subjective Agreement: This requirement of “mutual assent” does not mean that the parties must have subjectively been in agreement. Rather, it means that each party must act in such a way as to lead the other to reasonably believe that an agreement has been reached. The doctrine that only the parties‟ acts, and not their subjective thoughts, are relevant in determining whether there has been mutual assent, stems from the objective theory of contracts, as discussed below. This standard does not apply, however, in the case of fraud or misrepresentation (Park 100 Investors v. Kartes where defendants signed a personal guaranty under the impression that it was only the lease). 2. Agreement required only as to major terms: the requirement of mutual assent does not mean that the parties must agree on all the terms of the contract. Instead, they must agree on the “major” or “essential” terms. If they disagree on minor terms, or if they have simply not provided for such minor terms, the court may conclude that one party‟s understanding controls, or may supply the missing terms. But the parties must, despite the minor gaps or minor disagreements, intend to have a contract. B. Objective theory of contracts: Is a classical approach: Because neither contracting parties nor courts are mindreaders, it is important that the existence and terms of contracts be determined from the manifestations made by each of the parties, rather than by each party‟s subjective intention. Thus a party‟s intentions are to be gauged objectively, rather than subjectively. An example of the objective theory: Ray v. William Eurice. Modern contract law, unlike classical approach is more concerned with general standards, like unconscionability, than clear rules. 1. Test for intent: The objective measure of a party‟s intention is, in most circumstances, what a reasonable person in the position of the other party [the promisee] would conclude that his objective manifestations of intent meant. I.E: if promisor A makes an offer in jest and promisee B proves that he had reason to believe the offer when he accepted, court will likely rule in favor of B. Alternatively, if A can prove that B knew it was a joke, or that a reasonable person in B‟s position would conclude it was a joke, then the court will most likely not enforce the promise. 2. Other uses for objective theory: The objective theory of contracts will be used not only to determine whether the mutual assent necessary to form a contract has occurred, but also to determine the meaning of particular terms of the contract. The Doctrine of Consideration A. Hamer v. Sidway, where the grandson agreed not to drink etc until 21st b-day. We learn that forbearance is a valuable consideration. Hamer v. Sidway also uses the old theory of legal benefit v. legal detriment, as opposed to the more modern bargained-for-exchange which is not concerned with the value of what is exchanged. B. Most contracts are unenforceable if the promisee has not given “consideration” for the promise – although it is not required of all contracts. Consideration and legal formalities serve three functions: 1. Evidentiary function: The existence of consideration helps to provide objective evidence that the parties intended to make a binding agreement. It helps courts distinguish those agreements that were intended by the parties to be legally enforceable from promises which were intended merely as obligations of honor, II. III. 3 Contracts Master Outline promises of gifts which neither party expected to be enforceable in court, or any other arrangement as to which the parties did not contemplate legal consequences. It shows that a contract was made, for example, by requiring a writing or a certification of notary, etc. 2. Cautionary function: the requirement that promises be supported by consideration serves a cautionary function as well. This is to forewarn the party that this cannot be undone. If the parties are aware that the providing of consideration by one will make the other‟s promise enforceable, the parties may act more carefully and will be less likely to make thoughtless or bad bargains or mistakes. It deters people from breaking contracts, and from making promises they don‟t intend to keep. Conversely, parties may take fewer precautions during negotiations because they know that their statements will not be enforceable in the absence of consideration; fewer precautions during the initial stages of the bargaining process will in turn reduce transaction costs. 3. Channeling function: An efficiency function analogous to the evidentiary function, but streamlines process. A “seal” of the contract that can attempt to avoid going to evidentiary function evidence to prove the enforceability of a contract. C. Definition: According to Cardozo in Allegheny College v. National Chautaugua County Bank) three conditions must be met: 1. The promisee must suffer a “legal detriment,” which means that the promisee must either do or promise to do something that she is not legally obligated to do, or she must refrain from doing or promise to refrain from doing something that she is legally privileged to do. Legal benefits and detriments are different from actual benefits or detriments. 2. The detriment must induce the promise. That is, at least part of the promisor‟s motive in making the promise must be that he wishes to exchange his promise for the promisee‟s detriment. 3. The promise must induce the detriment. All this really means is that the promisee must suffer his detriment at least in part because of the promise. This requirement is seldom important for practical purposes, since it will always be satisfied where the promisee knows of the promise and intends to receive its benefit. D. Consideration is essentially a bargained-for-exchange 1. To constitute a valid bargained for exchange, the promisor and promisee must: a. Promisor: i. Make a promise or conditional promise ii. A legal benefit must be conferred iii. The promise/consideration must not be a sham b. Promisee: i. Must know about promise ii. Must have consideration, but not past consideration iii. A legal detriment must be incurred. c. The detriment/benefit requirement is part of older contract law. With bargained-for-exchange, the value of the exchange is not taken into account. 2. Consideration and condition must be distinguished: if the Professor says “If you come to my office, I‟ll give you this book,” he doesn‟t want you to come to his office, he is just saying that you coming is a condition to getting the book. In Kirksey v. Kirksey, where the brother-in-law invited his brother‟s widow to abandon her home and live with him, the majority ruled that the inconvenience of leaving her home and moving (and eventually losing it) was a condition of the gratuitous promise and not consideration. In Greiner v. Greiner, however, where mother changes her mind about willing part of her estate to her son, the son‟s moving and improvements on the land show detrimental reliance. 3. Gratuitous promises: a. Kirksey v. Kirksey, the brother-in-law took the widow and her children in and changed his mind later. His actions were gratuitous and the promise was not enforceable in court. (the promise may have been enforced under promissory estoppel). 4. Illusory promises a. are not valid consideration: i. For example, seller enters into a contract to buy from the farmer as much of a certain product that he wants at a certain price. Quantity was not specified. This is an illusory 4 Contracts Master Outline promise. If the seller promised to buy only from this farmer, then that would be consideration. b. §77 Illusory and Alternative Promises i. A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless a. Each of the alternative performances would have been consideration if it alone had been bargained for; or b. One of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration 5. Consideration may be either promise or performance a. Performance consideration = unilateral contracts b. Promise consideration = bilateral: there are rights and duties on both sides. Both have consideration. Mutuality of Obligation. 6. In bargained-for-exchange, the value of the items/performance bargained for is immaterial. Rest.2d§79: “If the requirement of consideration is met, there is no additional requirement of…(b) equivalence in the values exchanged.” Bastakis v. Demotsis (WWII). There is no concern for fairness in the consideration doctrine. a. In Bastakis we learn about the conditional privilege of private necessity where in a condition of life and death, an individual has the right to do whatever to help themselves, but will be liable for damages later on. Bastakis was not a life or death situation according to the court. 7. Consideration is inadequate if there is evidence of fraud, duress or unconscionability. a. Unconscionability: while the court will not say that consideration is inadequate because the things exchanged were grossly unequal, it may say that the agreement is unconscionable. 8. Past consideration is no consideration, Mills v. Wyman. E. §79 Adequacy of Consideration; Mutuality of Obligation 1. If the requirement of a consideration is met, there is no additional requirement of: a. A gain, advantage, or benefit to the promisor or a loss, disadvantage or detriment to the promisee; or b. Equivalence in the values exchanged; or c. “Mutuality of Obligation” F. Pre-existing Duty rule: 1. pre-existing duties cannot be used as consideration. Reliance: Protection of Unbargained-for Reliance A. Detrimental Reliance: 1. There are some promises that lack consideration but which induce the promisor to rely on them to his detriment, and courts have increasingly begun to enforce them – thereby mitigating the rigidity of strict bargained-for-exchange consideration. a. Some courts are broadening the doctrine of promissory estoppel and are enforcing some promises that have not been detrimentally relied upon such as charitable promises (different from gratuitous promises). b. §90 of the Restatement says: “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.” c. Damages: i. Some view the doctrine as an action on the contract, or simply as supplying consideration, and so reliance damages rather than the usual contract expectation damages will most likely be awarded ii. Others view the doctrine as a component of tort law, and in this case, the damages will almost always be reliance, and not expectation. B. Actual reliance: IV. 5 Contracts Master Outline 1. The promisee must have actually relied on the promise – if reliance is forbearance, the promisee must demonstrate that the action would have been taken had the promise not been made. C. Foreseeability of reliance: 1. The promisee‟s reliance must have been reasonably foreseeable to the promisor – not just that the promisee would have relied, but that the promisee would have relied in that particular way. D. Promises to make gifts: 1. intra-family promises to make gifts are rarely enforceable since there rarely exists an intent to contract, nor consideration – in some cases, if the promisee can demonstrate detrimental reliance, then the promise may be enforceable. E. Charitable subscriptions: 1. For public policy purposes, although charities rarely bargain for charitable contributions, promises to make donations can be enforced. Courts are concerned with making people weary of making charitable promises, so they are still reluctant to enforce promises in the absence of promissory estoppel or consideration. a. Judge Cardozo in Allegheny College v. National Chautaugua County Bank of Jamestown said that in the case where the charity promised to name the scholarship fund after the donor, there was a bilateral contract and consideration was given – although he did mention that the doctrine of promissory estoppel could be used to enforce it. b. This applies only to written promises, and not oral promises. F. Duty to Bargain in Good Faith: 1. If parties sign a letter of intent, then the court may use this letter to amount to a promise to negotiate in good faith. a. Damages: For being found to have acted in bad faith is based on expectation and not reliance damages. G. UCC: 1. Promissory Estoppel is not officially recognized in the UCC, but some courts have applied the reasoning. See “Firm Offer” doctrine. H. Shield or Sword: If the other party claims lack of consideration, PE can be used as a “shield” to seek enforcement. It can also be used as a “sword” when a suit is filed based on this doctrine. 1. Damages: Usually courts use expectation damages (with these reliance cases) but if the doctrine is used as a “sword” then the court may (but not necessarily) apply a reliance standard. Expectation damages are higher, so it is more commonly used as a shield. Reliance: Commercial Promises & Rescue in the Absence of a Promise A. Principle of restitution: 1. there are two types of implied contracts actionable in assumpsit a. Implied-in-fact i. This is p129 “where services are rendered by one person or another without his expressed request, but with his knowledge and under circumstances” fairly raising the presumption that the parties understood and intended that compensation was to be paid. Here the law implies the promise to pay a reasonable amount for services. ii. Existence of a benefit to the promisor does not matter – it is a contract, benefit to promisor not relevant. b. Implied-in-law (quasi contract) i. For an implied-in-law contract we need knowledge and consent: it is a legal fiction, creating an obligation to prevent unjust enrichment. ii. Elements: a. The plaintiff has conferred a benefit on the defendant b. The defendant has knowledge of the benefit c. The defendant has accepted or retained the benefit conferred d. The circumstances are such that it would be inequitable for the defendant to retain the benefit without paying fair value for it. 1. In Wisconsin, the elements are: a. a benefit conferred on the defendant by the plaintiff b. appreciation or knowledge by the defendant of the benefit V. 6 Contracts Master Outline c. Acceptance or retention of the benefit by the defendant to retain the benefit. 2. Credit Bureau Enterprises Inc., v. Pelo you must have consent and knowledge that you are going o receive services, and then you‟ll be expected to pay. iii. This was founded on the notion of unjust enrichment, and in modern law has no relationship to contract. a. If the person receives the benefit that s/he did not request, under what circumstances would it be unjust or unfair for that person to retain the benefit without compensating to the party that provided the benefit. b. The Restatement does not call it quasi contract, it says restitution instead as being more accurate. c. Both damages and equitable injunctions are available in restitutionary actions. d. There is no promise exchange, no contract claim, but no tort claim either. 2. This is not a basis for enforcing promises, there is no consent, intent, consideration or even promise. 3. It is an alternative basis for determining contractual obligation (although different from reliance, which is an alternative basis for enforcing a promise). 4. Officious interference: difficult to distinguish from restitution because of mistake and the officious intermeddler who, in an unbargained-for-exchange gives service to someone who is not given the opportunity to decline it. Restitution is not granted here. 5. Restitution is a measure as well as a basis for recovery and a cause of action. 6. Calculating restitution damages: a. Two different standards i. Based on the reasonable value of services provided: how much would it have cost to provide someone else for the same services; ii. Net enrichment: how much was the wealth of the court increase b. Interfamily services are presumed to be gratuitous. Watts case: contract law should not be brought home. i. Sexual relationship is not sufficient for consideration: bargains must be independent of this illicit relationship (although two people contracting are free to engage in whatever they want). 7. Restatement of Restitution §116 says a. A person who has supplied things or services to another, although acting without the other‟s knowledge or consent, is entitled to restitution therefore, and i. He acted unofficiously and with intent to charge therefore, and ii. The things or services were necessary to prevent the other from suffering serious bodily harm or pain, and iii. The person supplying them had no reason to know that the other would not consent to receiving them, if mentally competent, and iv. It was impossible for the other to give consent or, because of extreme youth or mental impairment, the other‟s consent would have been immaterial. a. Comment on this section is: Knowledge of dissent. There can be no restitution for services or things rendered to a person who refuses to accept the services and who is of sufficient mental capacity to understand the necessity of receiving them. If, however, the person is insane, or if he is otherwise B. PAST CONSIDERATION IS NO CONSIDERATION: it is not a true bargain because it is already done: promissory restitution is a recognized exception. C. Moral Obligations are not enough: Mills v. Wyman where in a transient feeling of gratitude father offers to pay but then later changes his mind. Court says that father is a snake, but can‟t obligate him. 1. The Good Samaritan is not protected: although the son may have been held liable. 2. In Webb v. McGowin where the employee crippled himself while diverting a falling brick that would have injured or possibly killed his employer. For 8 years following, the employer paid Webb weekly. And then employer died and estate refused to pay. The court upheld this as valid, possibly because: 7 Contracts Master Outline He paid it for 8 years so he really did want to pay it – served evidentiary function, and maybe even cautionary function. b. The person who made the promise is the person who benefited c. When the promisee cares for, improves and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisor‟s subsequent agreement to pay for the service, because of the material benefit received. NOT ALL COURTS AGREE WITH THE MATERIAL BENEFIT RULE. d. Appellant was crippled for life – this was part of consideration. D. Substantial performance: 1. If one party fails to substantially perform (ie, material breach) their duties according to contract, the other party is released from their obligations. 2. If one party does substantially perform, the other party is not released from their obligations under the contract. a. The substantially performing party can sue for expectation (ordinary) damages if the other party fails to perform according to contract. Offer & Acceptance (Bargained-for-Exchange) A. Under the classical system, there needs to be a bargained-for-exchange: the parties must objectively manifest and intend to enter into a contract and exchange consideration. The parties show they intended to be bound based upon whether a reasonable person in the position of the listener would think that the given party would intend to be bound. 1. It is not benefit or detriment or equivalency of values that determines consideration. a. There is a duty to read, but there are exceptions: fraud B. Definition of offer according to the restatement: §24 of the Restatement 1. 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. a. To constitute an offer, it must meet two criteria: i. intent to enter into a bargain ii. definiteness of terms. 2. Offer v. Invitation to deal a. If it does not constitute an offer according to the criteria above, it may be an invitation to deal. b. C. Bilateral Contract 1. the offer is one promise, the acceptance is another. It does not have to be written, there can be less than explicit, unwritten contracts. According to the Restatement §25 a. If a promise, or a manifestation of intention, or from the circumstances existing at the time the person to whom the promise or manifestation is addressed knows or has reason to know that the person making it does not intend it is an expression of his fixed purpose until he has given a further expression of assent, he has not made an offer. b. Commercials are requests for offers. They don‟t have the specific detail required to constitute an offer and they are directed to the general public. The more specific they are, however, the more likely they will be considered an offer: specificity, size of the group targeted, number and importance of terms left out (price/quantity), the course of dealing between the parties (custom in the place ad is placed), and REASONABLE STANDARD. It doesn‟t matter what the plaintiff though, only what he should have thought. Lefkowitz: $1 stoles to women advertised (store thought to women) and court ruled in favor of Lefkowitz because ad was specific enough to constitute offer. D. Certainty: 1. §33 of the Restatement: the terms of the contract have to be certain for there to be a valid contract: a. 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. b. 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. a. VI. 8 Contracts Master Outline c. 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 indeed to be understood as an offer or as an acceptance. §26 Preliminary Negotiations: 1. How do we know when the preliminary negotiations are over and the offer has been made? a. A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent. §50 Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise 1. Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer 2. Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise. 3. Acceptance by a promise requires that the offeree complete every act essential to the making of the promise. Acceptance occurs when: 1. Acceptance is accepted when it is taken out of the offeree‟s possession (mailbox rule – can‟t take it back). a. Revocation of an offer is only effective when received – acceptance accepted once it is put in mailbox. This goes back to the issue of reliance and the importance of the ability of the offeree to rely on the promise. §36 Methods of Termination of the Power of Acceptance 1. An offeree‟s power of acceptance ma be terminated by a. rejection or counter-offer by the offeree, or i. (not in Restatement: if the offeror says the offers still stands or if the offeree says she doesn‟t want to accept now but will consider it for the future, the offer may still stand §38). b. lapse of time, or c. revocation by the offeror, or d. death or incapacity of the offeror or offeree. 2. In addition, an offeree‟s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer. If no time is specified to accept the offer, we use a reasonableness standard (and we consider the method of communicating the offer) §58 Necessity of Acceptance Complying with Terms of Offer: An acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered. The Offeror is the master of his offer. §59 Purported Acceptance Which Adds Qualifications: A reply to an offer which purports to accept it but is conditional on the offeror‟s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer. Terminating the power of acceptance. 1. Counteroffers terminate the original offer §39 2. §38 Rejection a. An offeee‟s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention. b. A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement. 3. §43 Indirect Communication of Revocation a. An offeree‟s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect. Mailbox Rule: 1. also applies to offers: offers take into effect when it is placed in the mail. It can be revoked anytime before it is accepted, so it might not really matter when it is taken into effect. This is to protect the reliance of the offeree and not the offeror, who is the master of his promise/offer. E. F. G. H. I. J. K. L. M. 9 Contracts Master Outline N. Unilateral Offers 1. Exchange of the offeror‟s promise for the offeree‟s act: Promise to reward for lost cat: don‟t promise to find cat, just find it, I don‟t want promise to find cat, just find cat. 2. Only full performance will constitute a contract, and offer can be revoked any time before then. (although if the offeree begins to perform, it can be construed temporarily as an Option Contract. This info taken from emmanuel‟s not book). a. Option Contracts, §25 i. An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor‟s power to revoke an offer. b. Option Contracts: §45 Option Contract created by Part Performance or Tender 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. c. There are three stages of paying: i. Manifestation of an intent to make payment ii. Tendering of payment iii. Receipt of payment d. Problems under the present §45 rule is that someone who *says* they will find the cat will have to be paid. 3. The offeree must intend to accept the offer by their actions, it can‟t be coincidental. O. Indefinite Offers: 1. Parties must reach mutual assent on these essential terms where valid: a. Parties b. Subject Matter c. Time for Performance d. Price P. Silence as Acceptance: §69 Acceptance by Silence or Exercise of Dominion 1. Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: a. Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. b. Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. c. Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. 2. An offeree who does any act inconsistent with the offeror‟s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. a. If you exercise dominion over the property, you are only liable for the fair-market value of the property, because the offeror can be making an unreasonable request Promissory Estoppel to Enforce Offers A. Former Rule – Reliance Irrelevant 1. Kirksey v. Kirksey, §123, Old rule was that reliance was irrelevant and donative promises with reliance were unenforceable without consideration. B. Modern Rule - §124 a. If a donative promise induces reliance by the promisee in a manner that the promisor should have expected, then the promise is legally enforceable to the extent of the promise. C. §90 of the Restatement: “A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” VII. 10 Contracts Master Outline 1. The purpose of §90 is to make a promise binding in the absence of consideration with bargained-forexchange Damages: 1. §90 limits the remedy “to the extent of the reliance” i.e., reliance damages, not expectation. 2. Limiting the Offeror‟s Power to revoke: The Effect of Pre-Acceptance Reliance: Article 16 of the Convention on Contracts for the International Sale of Goods: a. Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. b. However, an offer cannot be revoked: i. If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or ii. 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. Justice Learned Hand in James Baird Co. v. Gimbel Bros, Inc.: where defendant submitted erroneous bid to the Department of Highways in Pennsylvania and revoked it before the offer was accepted. Plaintiffs assert promissory estoppel in enforcing the promise: although promissory estoppel was traditionally only used to enforce revoked donative offers. 1. Justice Hand: if the plaintiffs had accepted the bid and typed it into their computers but then went to another merchant, then the defendants would not be able to sue. There is a necessity for formal acceptance, and mere acceptance of the bid cannot be substituted. 2. Promissory estoppel can be used for donative promises, this is a bargained-for-exchange and consideration had not yet been received. 3. Promissory Estoppel is not contract law, it is an intention to give a gift, and there is no gratuitous feel to the contractor‟s bid. Although nominal consideration or sham bargains are generally not accepted by the court, the court will be much more willing to consider it as an option contract because it precludes the contract and the ultimate goal is being able to rely on enforceability. 1. §87 Option Contract 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 for 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. i. Option contracts must have reasonable time limits. Even if it is a reasonable price, we want to avoid the prospect that the offeror is locked into the price if the market changes. 2. The contractor could have made a Conditional Acceptance, accepting the offer on the condition that he wins the bid. But this is a counter-offer and he would give the right to accept to the sub-contractor, thus giving away his ability to sub-shop. Judge Trainor: Drennan v. Star Paving Co.: Contractor was taking bids from subcontractors, and subcontractor entered erroneous bid. Contractor calculated his bid according to the subcontractor‟s, but subcontractor stopped in the next day to say that the bid was wrong. 1. The defendant‟s (subcontractor) promise induced actions of a definite and substantial character on the part of the promisee. The offer was not revocable because the plaintiff reasonably relied on the promise. i. . b. §45: “If an offer for a unilateral contract is made, and part of the consideration request in the offer is given or tendered by the offeree in response thereto, the offeror is bound by a contract, the duty of immediate performance of which is conditional on the full consideration being given or tendered within the time stated in the offer, or, if no time is stated therein, within a reasonable time.” c. Judge Trainor relied on Option Contract theory: I won‟t revoke the offer until you win the bid – the plaintiff relied on the offer. D. E. F. G. 11 Contracts Master Outline 2. Battle of the Titans: Judge Hand did not read into it as an option contract, he said, it‟s an offer, take it or leave it. Judge Trainor said, there is an option contract, and even if it was a sham or nominal bargain, then it is fine. Judge Trainor used option contract, based on promissory stoppel and some resulting reliance: Baird is no longer adapted. Firm Offers & Battle of the Forms A. Irrevocability by statute: §2-205 UCC Firm Offers: 1. An offer by a merchant to buy or sell goods in a signed writing which by its terms gives 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. B. §2-206 Offer and Acceptance in Formation in Contract 1. Unless otherwise unambiguously indicated by the language or circumstances a. An offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in circumstances; b. An order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. 2. Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. C. Auctions are not offers unless they are “auctions without reserve” D. Irrevocable Offers: 1. With consideration, it‟s irrevocable, without consideration it may be irrevocable only if it complies with UCC. 2. Option contracts: that have been made irrevocable by an option contract. 3. Temporary irrevocability as a result of the offeree‟s part performance or detrimental reliance. 4. Firm Offers under the UCC a. An offer by a merchant that is in signed writing and gives explicit assurance that the offer will be held open. This is irrevocable even though it has no consideration. i. But these are only open for a reasonable period (no greater than 3 months) or a stated period. ii. If the form is drafted by the OFFEREE then it is irrevocable only if the “firm offer” clause is separately signed by offeror. b. It is irrevocable for the time specified, or otherwise, three months. E. The UCC has been adopted by every state except Louisiana: it‟s aim is to simplify the law and provide default rules where parties have not addressed an issue. 1. Princess Cruises, Inc. v. General Electric Co. The court decided that when the predominant purpose of a maritime or land-based contract is the rendering of services and not the furnishing of goods, the UCC is inapplicable and common law principles should be used. F. §2-207: “Mirror-image” 1. gives a “varying” acceptance the effect of only a counter-offer, preventing the contract from being made on the terms of the original offer; a conditional offer. A “varying” offer gives the effect of a counter-offer, not an acceptance. In this case, to constitute an acceptance, it must be an acknowledgment of the terms and conditions as is, acceptance and offer should “mirror” one another. There are some very very limited exceptions to this “mirror-image” rule: a. A response is not a rejection if the acceptance just attempts to make explicit, something that was implicit in the offer. b. Article 19(2) says that changes to the offer that are not material and the offeror does not accept them, then the purported acceptance is an acceptance and the additional or different terms become part of the contract (but material relevance is so broadly defined, it is difficult to determine where this applies). c. Acceptance merely suggests a term, and does not require them for exception. VIII. 12 Contracts Master Outline d. Lack of enthusiasm or dissatisfaction is still an acceptance. An offer is a binding option. e. The offer explicitly states that it will stay open despite a rejection: how is this different from an option that doesn‟t have consideration? That was actually bargained for, that was the consideration. f. The acceptance reserves the right to keep the offer under advisement. Not an acceptance or rejection, but, contemplates giving a counter-offer. The offer isn‟t dead yet, until either the counter-offer is made, or the offeror (who still can) revokes the offer. g. A mere inquiry: is that your best price: this does not constitute a revocation of offer. G. When this mirror image rule is applied, it is applied through forms that will compete usually. 1. The four most significant forms: a. the buyer‟s request for a price-quote; b. the seller‟s quote; c. the buyer‟s purchase order (usually considered an offer); d. the seller‟s order acknowledgment. 2. These forms come in a pre-printed format, and they just fill in blanks, no one reads the other forms, no one reads their own. The parties are basically only bargaining over those blank spaces: the price, quantity, the delivery terms, the insurance, quality, etc. Depending on whose form it is, it‟ll be pro-buyer or pro-seller, and lawyers draft these and no one reads them. The forms produced will generally mirror each other in the basic terms but will generally not mirror each other in the fine print, or the boilerplate. Boilerplate language gives way to two problems: a. Welsher problems: people try to welsh on a deal: for various reasons, someone wants to get out of the contract and the forms from the two parties vary, and sometimes will not show that there was a contract: because of the mirror-image rule, where the forms don‟t match, there is no contract. b. “Battle of the forms” we keep responding back to each other with our own forms, each saying that they will only agree to the contract on those specific terms, but by this point, they have already begun the transaction, so which terms apply? 3. “Last shot” rule applies here: “Last shot” rule, a party impliedly assented to and thereby accepted a counteroffer by conduct indicating lack of objection to it. This tends in practice to favor sellers over buyers because sellers normally “fire the last shot”, i.e., send the last form. Whoever‟s last counter-offer was presented an accepted, those terms apply. H. §2-207 the U.C.C.‟s attempt to respond to the difficulties arising above. Is there a contract? If there is a contract, what are its terms. What‟s the basic difference between §2-207 and the mirror-image rule? Under §2-207, a purported acceptance is an acceptance even if it contains additional or different terms.§2-207 applies only to the sale of good, other types of contracts cannot use UCC. I. §2-207 (1): Where changes are made but the offer is generally accepted, it is considered an acceptance if: 1. The acceptance must be made within a reasonable amount of time 2. The acceptance must be a definite expression of acceptance: a. a formal acceptance with a material alteration. Formal acceptance that changes a material term is a definite expression of acceptance. Does it matter than changing the warranty, constitute a material change? No, it doesn‟t matter. J. Once you alter a material term, what are the terms of the contract? A material alteration may not become part of the contract, but now, what are the terms of the contract. The important thing is, a contract is now established: killed the Welsher threat. K. See §2-207(b), Addresses the issue, is there a contract, and what are the terms of it. 1. If we have a formal acceptance, but it changes a basic term, a contract is not formed. What‟s basic? a. Price b. Quantity c. Maybe quality and d. Maybe the delivery terms. 2. With a material change or addition, there is still a contract, but it is not definite whether or not the addition or change is a part of the terms. This section changes the default “mirror-image” rule saying that a definite and seasonable acceptance is an acceptance and not a counter-offer. 13 Contracts Master Outline L. Common Law: always counteroffer except in strictest terms. 2-207 says: when we make a change, it doesn‟t prevent an acceptance from occurring. Regardless of what the offeror says for automatically rejecting changes or additions to terms, a contract can be made when the offeree proposes new changes, and to decide on whether the new terms apply or not later. Unless the offeree expressly conditions it on acceptance of his terms, then we have a counteroffer. Expressly limiting the offer. M. Written confirmation arises in a situation where we haggle over the phone and we reach a basic bargain-for-terms for the exchange, an order acknowledgement is not the acceptance, we already agreed on the phone. For a written confirmation, we skip #1, determining that we have a contract. All we are concerned about at that point with the written confirmation, is what are the words of the contract and whether the terms of the contract are altered by the written confirmation. N. We have two situations where we don‟t have expressed acceptance: where we change a basic term, and that the acceptance is expressly conditioned on the new terms. When basic terms are changed or there is conditional acceptance, but if you act as if we have a contract, then we do have a contract. O. If either one of the parties is not a merchant, the additional terms simply become proposals which only become terms of the contract if they are expressly assented to. So, the terms of the offer are governed. If we are both merchants, such terms become part of the contract unless one of three scenarios: 1. the offer expressly limits acceptance to the terms of the offer; 2. they materially alter it; or 3. notification of objection to them has already been given or is given within a reasonable time after notice of them is received. P. §2-207(2) doesn‟t include “different” terms. Common practice: most buyer forms will now expressly limit the offer to the terms, and most seller forms will make their acceptance expressly conditional in order to bring themselves within the last clause of §2-207(1). As a result? We end up in §2-207(3): which says, we are going to take the terms that you agree on, and then we will use the default U.C.C. provisions. The better alternative is to negotiate, of course. Q. On written confirmations, See comment 6 on 2-207, we look at the terms on which they originally agreed, any terms on which the confirmations agree, additional terms if they are not in conflict, and are not seasonably objected to, and U.C.C. default provisions. R. §2-204 Formation in General 1. A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. 2. An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. 3. Even though on or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. Agreements to Agree A. See §33 Certainty. The relevant question is: did the parties in fact intend that the preliminary document, although it did contains some terms (although not all of them) did they intend to be bound: 1. Is the language ambiguous on the parties‟ intent? a. If it isn‟t, then they determine the intent and make it binding. b. If it is ambiguous: the court says we use parol evidence which includes oral evidence, extraneous evidence, prior written documents: and it becomes a question of fact whether the parties intended to be bound, as opposed a question of law. 2. Is this the type of contract that is usually in writing? 3. Is a large or small amount of money at stake? 4. Are there many or few details? 5. Is it a situation where formal writing is required because of the various covenants, or warranties, habitability, etc, are essential terms? 6. Reliance? 7. Why did they stop? 8. Is there was a cancellation clause? IX. 14 Contracts Master Outline QUESTION 2: IF THERE IS A VALID CONTRACT, IS IT ENFORCEABLE? X. Scope and Sufficiency of Memorandum A. Prohibits enforcement in the absence of a written memorandum or an applicable exception. P. 296. The UCC statute of frauds is different from the general statute of frauds. 1. Statute of frauds is statutory, but they have taken on a distinct common law flavor. Because it has been changed so often and reproduced, it is possible to generalize in common law fashion about the construction of the statute of frauds – sometimes it is necessary. 2. Whenever it is asserted as a defense, the following questions arise: a. Is the contract at issue one of the types to which the statute of frauds applies, so that a signed memorandum will be required for its enforcement? b. (if yes to above) Is the statute of frauds “satisfied”? That is, is there some sort of written statement of its terms, signed by the defendant that is sufficient to the statute‟s requirements? i. If the answer is no to the 2nd question and yes to the 1st, it doesn‟t necessarily mean that it is barred from trial, other factors may then be considered such as reliance or performance. B. Crabtree v. Elizabeth Arden where the company signed and did not sign various documents regarding the employee‟s salary, and later denied contractual obligation because one of the documents was not signed. The judge said: 1. That although the statute of frauds requires a signature, it doesn‟t require that the entire memorandum be in one document. “A sufficient connection between the papers is established simply by a reference in them to the same subject matter or transaction…The statute is not pressed „to the extreme of a literal and rigid logic.‟” p. 300. All of them must be set out in the various writings presented to the court, and at least one writing, the one establishing a contractual relationship between the parties, must bear the signature of the party to be charged, while the unsigned document must on its face refer to the same transaction as that set forth in the one that was signed.” a. There is a risk of enforcing contracts that were never made, but it would be a greater risk to not enforce contractual obligations. b. Parole evidence: i. outside of contract evidence; can be used to show assent to the unsigned document (witness testimony) Part Performance and Promissory Estoppel Exceptions, and UCC Statute of Frauds A. § Section 139 : Promissory Estoppel Exception: Courts end up hearing the kinds of claims that the statute of frauds is generally understood is designed to prevent them from hearing. B. There is a continuous battle about how broad §139 should be and if it is applied. Even if it is applied, doesn‟t mean that the contract is going to be enforced: the only time it will be enforced is if injustice can only be avoided that way. §139, unlike §90, it enumerates circumstances where injustices can be avoided C. Non mutuality: 1. where one party is bound and the other party is not bound – where the court basically can enforce the contract one on party and not the other. D. Equitable estoppel: 1. where I have asserted a fact, I am equitably estopped from asserting an opposing fact. If a plaintiff sues defendant for breach of contract, the defendant can counter-sue the plaintiff for breach of contract and under equitable estoppel, the plaintiff cannot invoke the statute of frauds and escape their duties. a. By making a subsequent promise, that party has waived the statute of frauds defense. E. Equal dignity rule: 1. Comes mostly in agency relationships. Someone working in a store, the manager of the store, even if he doesn‟t own the store, he is an agent of the store. In an agency relationship, if the statute of fraud applies to some contract which has been signed by an agent, the agency relationship itself becomes subject to the statute of frauds. A written memorandum of the agency relationship has to be signed by the participating parties. When there is a subsidiary contract that comes under a larger contract that comes under the statute of frauds, the subsidiary contract comes under the statute of frauds too, even if it normally wouldn‟t come under the statute. XI. 15 Contracts Master Outline In general, courts show hostility to the statute of frauds and read its requirements loosely. The statute of frauds is there to prevent fraud, so when courts have established that there really was a genuine contract, they show some reticence to apply the statute of frauds with rigor is their reluctance to allow people to get off on a technicality. i. Letterhead on a memorandum of the party to be charged: courts have found this sufficient to satisfy the requirements of the statute. F. Most commonly applied to: 1. Transfers or realty and real estate. In most jurisdictions, this encompasses not only sales of barbar or apartments or houses, but any lease in excess of a year; 2. sales of goods of a price of over $500 (covered by UCC); and 3. contracts which include an obligation that cannot be performed within one year of the making of the contract. a. Are lifetime contracts under statute of limitations? i. For no, you could die any time, maybe I have a terminal illness, etc. ii. For yes, it‟s a lifetime, longer than a year. a. General rule, it is not under the statute. QUESTION 3: WHAT ARE THE TERMS OF THE CONTRACT? (expressed/implied) XII. XIII. Express Contracts A. If mutual assent is explicitly manifested in oral or written words of agreement, the resulting contract is said to be express. Implied Contracts 1. there are two types of implied contracts actionable in assumpsit a. Implied-in-fact i. This is p129 “where services are rendered by one person or another without his expressed request, but with his knowledge and under circumstances” fairly raising the presumption that the parties understood and intended that compensation was to be paid. Here the law implies the promise to pay a reasonable amount for services. ii. Existence of a benefit to the promisor does not matter – it is a contract, benefit to promisor not relevant. b. Implied-in-law (quasi contract) i. For an implied-in-law contract we need knowledge and consent: it is a legal fiction, creating an obligation to prevent unjust enrichment. ii. Elements: a. The plaintiff has conferred a benefit on the defendant b. The defendant has knowledge of the benefit c. The defendant has accepted or retained the benefit conferred d. The circumstances are such that it would be inequitable for the defendant to retain the benefit without paying fair value for it. 1. In Wisconsin, the elements are: a. a benefit conferred on the defendant by the plaintiff b. appreciation or knowledge by the defendant of the benefit c. Acceptance or retention of the benefit by the defendant to retain the benefit. 2. Credit Bureau Enterprises Inc., v. Pelo you must have consent and knowledge that you are going o receive services, and then you‟ll be expected to pay. iii. This was founded on the notion of unjust enrichment, and in modern law has no relationship to contract. a. If the person receives the benefit that s/he did not request, under what circumstances would it be unjust or unfair for that person to retain the benefit without compensating to the party that provided the benefit. a. 16 Contracts Master Outline b. The Restatement does not call it quasi contract, it says restitution instead as being more accurate. Principles and Sources of Interpretation, Adhesion Contracts p. 349-381 A. Is consideration a requirement of form or substance? B. Interpretation: refers to the process which a court gives meaning to contractual language that parties disagree on. This will usually also include the construction – some find it unnecessary to distinguish between construction and interpretation. C. Over the first three-quarters of the 19th Century, English and American law adopted a subjectivist approach to contract interpretation. This approach meant that when a contract was entered into by two parties who applied different meaning into the language, then there is no contract. The problem with this is the difficulty of its enforcement, particularly its abuse. D. The strict objectivist theory approaches contract law by setting the standard for interpretation at reasonable person familiar with the circumstances. The problem with this is the potential for a court enforcing a contract that neither party agreed to. E. Modern contract law applies a modified objectivist approach as outlined by Professor Corbin, two questions must be asked: 1. Whose meaning controls the interpretation of the contract, and 2. What was the party‟s meaning? F. If the two parties attached different meanings to the language, but one party knew of the intended meaning of the other, the meaning of the innocent party would apply. If neither party knew of the others‟ meaning, then no contract exists because of the absence of mutual assent. G. Joyner v. Adams, where there is no “meeting of the minds” a court will not interfere. 1. In NC, where one party knows or has reason to understand the language in the contract, and the other party does not know or have reason to know, then the court will enforce according to the innocent party‟s meaning. a. The rule is usually applied in cases involving an adhesion contract or where one party is in a stronger bargaining position, although it is not necessarily limited to those situations. In this case, where parties were at arms length and were equally sophisticated, we believe the rule was improvidently invoked. H. Firgaliment Importing Co. v. B.N.S. International Sales Corp, and the chickens. 1. Holmes‟ remark “that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs – not on the parties‟ having meant the same thing but on their having said the same thing. The defendant‟s subjective intent coincides with the dictionary and USDA‟s meaning. 2. The plaintiff has the burden of proving that the defendant knew or should have known what the plaintiff thought. I. C & J Fertilizer, Inc. v. Allied Mutual Insurance Co., factory robbed by what appeared to be an insider with a key to the outside door, but who had damaged the safe inside the building – insurance required evidence of break-in in the outside of the building and refused to pay. The plaintiff with the insurance policy was a farmer with high school education and so the two were not of equal bargaining power. 1. Insurance contracts are contracts of adhesion which are standardized forms, disparities in the bargaining powers of the two parties involved, a take it or leave it form. a. Few people understand what the terms of their contracts are. b. Reasonable expectations: The objectively reasonably expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. Customers are not bound to the terms that are beyond reasonable expectation to understand c. Dissent: it affords plaintiff ex post facto insurance coverage which it nt only did not buy but which it Knew it did not buy… d. In a world where there is limited opportunity to negotiate or discuss the terms of insurance agreements etc, we need to apply reasonable expectation standards. Without applying this standard, we are giving these private companies the power to make law, and we should give the legislature and the courts power to police this. The legislature cannot really police it, so the courts will step in. XIV. 17 Contracts Master Outline i. This is difficult from the classical doctrine where there is a duty to read. This duty is relatively broad, and this duty is not dead, we still have a duty to read, but the reasonable expectation doctrine challenges it on some level. XV. J. Parole Evidence Rule A. Parol evidence rule does not define what evidence is affirmatively admissible, it only operates to exclude evidence. It has the effect of preventing one party from introducing into court extrinsic (or “collateral”) evidence of matters not contained in the written agreement between the parties (hence, “extrinsic” to it), where that evidence is offered to supplement or contradict the written agreement. 1. To determine whether evidence is admissible, the judge will hold an “in camera” hearing out of the presence of a jury. Both parties make their arguments and the judge decides. Although the “in camera” hearing procedure is used with jury-less trials, it is significant in that if the judge bases his decision on the inadmissible evidence, appeal courts can overrule those judgments. B. Parol evidence cannot be admitted to add another term to the agreement. The rule forbids to add by parol where the writing is silent, as well as to vary where it speaks. Instead, it applies the contract to its subject matters or it clarifies the understanding of the language of the contract. C. To justify the admission of a parol promise by one of the parties to a written contract, on the ground that it is collateral, the promise must relate to a subject distinct from that to which the writing relates. 1. To make the decision if the contract is integrated or not, in the classical approach, we use the “four corners” approach. Under modern contract law, we use Professor Corbin‟s contextual approach. a. A merger clause is not required to establish that a contract has been integrated. Under the modern approach, courts are much less likely to give a merger clause the same kind of deference that it was given under the classical approach, especially if the contract was a generic fill-in type of contract. i. Integration: a. The concept that parties typically arrive at contract terms through a process of preliminary negotiations and then produce a writing containing the final terms that have been mutually adopted. ii. Complete Integration: a. The final and exclusive expression of the agreement of the parties. iii. Determining Integration: a. Williston says that the inclusion of a “merger clause” would conclusively establish integration, although some courts will say that a merger clause cannot solely determine integration. Professor Farnsworth reports that most courts favor the Corbin-Restatement Second approach: A finding of integration should always depend on the actual intent of the parties. Intent is to be determined by examining evidence of all the facts and circumstances surrounding the execution of the agreement, as well as the contract itself. iv. Partial Integration: a. That specific elements/issues are fully integrated, but that one element is not fully integrated yet. b. Four Corners Approach: i. Thompson v. Libby A worry about moving away from the Four Corners Approach means we are working away from questions of law and more towards questions of jury. D. Parol Evidence says that evidence is inadmissible of oral contracts entered into prior to entering a written agreement. A completely integrated contract renders all other documentation, oral agreements, etc, unenforceable under that contract and it represents a full embodiment of the parties‟ understanding of the agreement. E. Courts cannot adopt a strict exclusionary rule without adopting a universal statute of frauds rule – and that would also prevent parties from enforcing what they genuinely intended to enforce. F. Parol evidence rule has no application to oral agreements entered into after the execution of written agreements, although problems of proof and verification still exist. G. Over the years, the exceptions to the parol evidence rule have expanded. Although these exceptions have not yet eliminated it, the rule itself can only be understood in light of its exceptions. Exceptions: 1. The parol evidence rule does not apply to evidence offered to explain the meaning of the agreement 18 Contracts Master Outline 2. The parol evidence rule does not apply to agreements, whether oral or written, made after the execution of the writing. 3. The parol evidence rule does not apply to evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent. 4. The parol evidence rule does not apply to evidence offered to show that the agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake or illegality. 5. The parol evidence rule does not apply to evidence that is offered to establish a right to an “equitable” remedy, such as “reformation” of the contract: if a party can prove that a part of the contract was inadvertently left out (e.g., printer problem) then they can seek judicial reformation of the agreement. This can only generally be shown by clear and convincing evidence though. 6. The parol evidence rule does not apply to evidence introduced to establish a “collateral” agreement between the parties: The revised Restatement says that an agreement will not be regarded as fully integrated if the parties have made a consistent additional agreement which is either agreed to for separate consideration or is” such a term as in the circumstances might naturally be omitted from the writing.” It‟s part of the agreement that we would not expect to see within the “four corners” of the contract. H. Taylor v. State Farm Mutual Automobile Insurance Co. 1. Restrictive view: Under the “plain meaning” view of the parol evidence rule, prior negotiations may be used for interpretation only upon a finding that some language in the contract is unclear, ambiguous or vague. (can also be called the Willistonian rule). 2. Corbin view: The court considers all of the proffered evidence to determine its relevance to the parties‟ intent and then applies the parol evidence rule to exclude from the fact finder‟s consideration only the evidence that contradicts or varies the meaning of the agreement. 3. Arizona view: First, the court considers the evidence that is alleged to determine the extent of integration, illuminate the meaning of the contract language, or demonstrate the parties‟ intent. Second, the court involves “finalizing” the court‟s understanding of the contract. Here, the parol evidence rule applies and precludes admission of the extrinsic evidence that would vary or contradict the meaning of the written words. a. Modern view: that the judge has to consider the extrinsic evidence and then he makes the decision to admit or not to admit, but he can‟t limit himself to the four corners of the agreement because at least one party is claiming that the contract is ambiguous. The judge examines the extrinsic evidence to make the determination about whether or not it is fully or partially or integrated at all. A “merger clause” is not dispositive. b. Classical Approach: the central question is whether it is fully or partially integrated or integrated at all. We look at the “four corners” in this approach. A “merger clause‟ is dispositive. I. Parol evidence rule does one of the following 1. Contradict the terms 2. Supplement the terms 3. Interpret the terms J. Integration is a question of law for the judge to decide. 1. If it is fully integration, parol evidence is not permitted, it 2. If is partially integrated, those parts can be supplemented by prior or contemporary outside oral or written statements or documents. 3. If it is not integrated at all, then the parol evidence rule does not apply. K. The court also looks at or may look at the following aspects of the contract to determine whether or not the contract is partially/fully integrated and whether or not to allow parol evidence. 1. Whether it is a normal situation in which the parties would want to put the agreement into writing. 2. Court may also take into account the size of the contract and 3. Whether or not the contract was handwritten – vs. form agreement. 4. Was it specially prepared for this transaction? 5. The sophistication of the parties 6. The formality of the setting. 7. Whether there is a “merger clause” 19 Contracts Master Outline L. Even if the court decides that there is full integration, this does not bar a collateral agreement (a completely distinct agreement between the parties). It might have a relationship to the earlier contract, but it is still a separate agreement – separate consideration, acceptance, etc. Parol evidence does not apply to this agreement, regardless of whether it is written or oral. M. Reformation: if there is clear and convincing evidence that what was written was not in fact the agreement, the party can seek reformation so that the agreement is brought in line with what the true agreement was (for example, a printer messed up, etc). Where this applies, the parol evidence rule doesn‟t apply because that means that there wasn‟t an agreement, what was written is not a statement of what the agreement that was actually reached was. It says that there was a prior agreement but it wasn‟t reflected in the writing. XVI. Implied Obligations: A. These are the terms that the parties would have agreed upon had they negotiated or discussed the issue. B. In Wood v. Lady-Duff, if he closed some deals relying on their agreement together, then his actions can be taken as consideration for a bilateral contract. C. §30 (2) says that the way we determine whether the promise was meant to illicit a term promise or performance by looking at the language and the circumstances surrounding the making of a promise. 1. But in a unilateral promise, the person promising doesn‟t have to actually have to perform, but here, LadyDuff was not giving Wood the option to perform, she wanted him to promise her that he would act, or at least make an effort to perform. 2. §2-306 Best Efforts: in these situations we will assume that the seller and buyer will make their best efforts to supply and sell the products. It‟s an implied-in-law promise. Similar to Wood where the court only decides if he made a “reasonable effort.” a. Good Faith: In the context of merchants, good-faith means more than subjective honesty. Good faith means not having malicious intent. Merchants have to have good-faith but also something more: an objective meaning on top of the subjective standard of good-faith. The objective aspect is to look at the reasonable commercial standard in the industry. i. U.C.C. §2-103(1)(b): “Good Faith” a. in the case of a merchant means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade. 1. ***Be careful of falling into the trap of getting too technical – this is the agreement and it doesn‟t include a certain term explicitly. In the real world, vague contracts will win, not because the courts want to impose justice where the parties didn‟t agree, but because the contract wouldn‟t make sense without imposing the implied terms and the parties were highly unlikely to have agreed to the contract without those terms. 2. In Leibel, the court finds the implied terms in the U.C.C. In Wood, the court said that the contract would not have made sense if the implied contract didn‟t exist between Lady Duff and Wood. 3. We want to enforce these implied terms for purposes of efficiency when drawing up contracts, but also because we want people to be able to enter into contracts. ii. Contracting to exit without notice: a. UCC 309 if the parties agree in contract that they can exit contract without notice, then it‟s fine. Unless it is unconscionable. 1. Usually though, termination term would only give way to an illusory promise if one of the party is unfettered and can terminate any time. If there is any kind of restriction, then the judge will likely not consider it to be an illusory promise and the contract will be upheld and held enforceable. 2. Imply notice: UCC 2-309 (3): implied at law restriction. Courts will always imply notice, regardless of what the contract says – even if there is explicit term in the contract saying that notice is not necessary, court will cross that term out and require notice. Only when it is unconscionable. 20 Contracts Master Outline D. Requirement contracts: 1. Empire Gas Corp. v. American Bakeries Co.: situation where the buyer agrees to purchase all its requirements of a certain commodity from the seller and the seller agrees to supply all of the buyer‟s requirements. a. The seller is ordinarily free to sell to any other buyers as long as they can continue to meet the buyer‟s requirements. For the seller, they know that there is a certain supply avenue for the product he produces. b. From the buyer‟s point of view, the contract guarantees the supply of his requirements for the life of the contract. i. According to Posner, if the buyer decides they want less than agreed upon, they can go as far down as they wan, but with good reason, unprofitability is not (although bankruptcy is). But he says there needs to be good-faith, because if the market price shot up and the buyer decided to buy much more and open up their own side business of that commodity, it would not be right. E. Output contract 1. requires all of their output of a certain commodity to the buyer and it imposes a duty on the buyer to purchase all of that output. If the buyer wants to go and buy even more propane, the buyer is free to do that, as long as it buys all the output as produced by the seller. a. This contract provides the seller a guaranteed output for their production and as a result its in their interest to enter into this contract. b. It also gives the buyer assurance that they will have this guaranteed supply of the output of that commodity. F. Locke v. Warner Bros. (Clint Eastwood) Suit about whether or not they considered her scripts in good-faith as a part of her contract with them. 1. Reasonable expectations is the standard. Where the reasonable expectations of the party were not met, then there it is not act on good-faith. QUESTION 4: IS THERE A DEFENSE AGAINST ENFORCEMENT OR AN EXCUSE FOR BREACH? XVII. Minority and Incapacity, p507-526 XVIII. Duress and Undue Influence, p. 526-543 A. Behavior defenses. 1. Duress and undue influence: if you are over 18 yrs old, you weren‟t drunk and can‟t prove that mental incapacity –turn to a behavioral defense and assert that entered contract under duress or undue influence. a. Our system of contract law is based on a presumption of informed freely given consent. In the case of duress and undue influence, we worry that even if there may be consent but it may not have been freely given. The informed element of it speaks to other problems including mistake and misrepresentation – in which case we worry that the assent was not informed. 2. Totem Marine Tug & Barge, Inc. v. Aleyska Pipeline Service Co. A contract can be avoided on the ground of duress only if a party could show that the agreement was entered into for fear of loss of life or limb, mayhem or imprisonment – this has been broadened to include economic coercion which forces a person to involuntarily enter into a particular transaction. a. Duress exists where: i. one party involuntarily accepted the terms of another ii. circumstances permitted no other alternative, and iii. such circumstances were the result of coercive acts of the other party. a. There also needs to be causation b. Problems with duress: According to Roberto Unger, there are rare cases where there is no disparity in bargaining power, so duress could be used to strike down every contract in dispute. b. There are three elements that the court uses to test the case: i. A wrongful or improper threat ii. A lack of reasonable alternative and 21 Contracts Master Outline c. Odorizzi v. Bloomfield School District School teacher was arrested for homosexual activities, and approx. two days later his two bosses come to his school and convince him to resign. He is later cleared of the charges and wants to go back to teaching but they don‟t allow him to so he brings suit alleging that his resignation was submitted under undue influence (not duress). i. Court says, there are five possible arguments and talks about them individually. a. There are seven considerations of undue influence (not all have to be shown): 1. unusual or inappropriate time, 2. an unusual place extreme 3. emphasis on consequences of delay 4. demand that It be finished at once 5. use of multiple persuaders against a single person 6. absence of third-party advisors to the servient party 7. statements that there is not time to consult financial advisors of attorneys. b. It would be better to go with undue influence than duress because duress requires wrongful or improper threat which is difficult to show. 1. excessive strength/pressure by the bargaining party; 2. undue susceptibility to pressure; 3. misrepresentation; 4. bad faith Contract Defense A. Alternative basis for contract liability are: Promissory estoppel, restitution (promissory restitution, or proper restitution). B. STATUS DEFENSES, BEHAVIOR DEFENSES AND SUBSTANTIVE DEFENSES. 1. Status defenses: This concerns the status of one of the bargaining parties. This is when we think that one of the parties is not responsible enough to freely engage in the bargaining process. 2. Behavior defenses: one of the parties is engaged in behavior that we find sufficiently reprehensible that we won‟t hold the other to the promise. 3. Substantive defenses: consideration doctrine says: if there is a bargain for exchange, we are not concerned with the substance of exchange, the value of what is being exchanged – that‟s for the parties to decide. There are some exceptions, however, to that doctrine. For public policy reasons, we do not want this to absolutely apply. For example, illegal promises: exchange for crack. a. Courts look to the fairness of the agreement: unconscionability. If the bargaining power looks fair and their actions appear to be in good faith, then the court will be less likely to strike the contract down. C. A binding contract is voidable at the option of a minor. 1. Emancipation statutes: a minor‟s petition to declare themselves emancipated. Once the court grants this status, they become eligible to enter into binding contracts and minority rule no longer applies to them. 2. Dodson v. Shrader: Minor buys a truck and he takes the car and wrecks it. He returns it in a heap and says that there never was a valid contract to begin with. Dealer doesn‟t want to give the boy back his $20,000 that he paid for the truck. The boy didn‟t misrepresent his age. If he did, many courts will say, then it‟s not a contract that is void. If he didn‟t misrepresent his age, it will differ from court to court. Some will say you can‟t take depreciation. a. He wants to depreciate the value of the damage: he wants to pay him back the value of the truck as it was returned. In this case, because the car was smashed it was substantial, but in any case, depreciation principle is USE and how much benefit the boy extracted from the car. 3. Necessaries: they have to pay back necessaries. This includes food, medicine, shelter, etc. Minor is liable for the fair market value. If I was a minor and paid $200 for some groceries – I have to pay for the groceries because they are necessaries, but I have to pay the fair market value of those goods. 4. When the minor comes of age: the minor can again affirm or disaffirm the contract. They can explicitly affirm or fail to disaffirm in a reasonable amount of time. D. Mental incapacity: Can void all contracts that they entered into while they lacked capacity. It is not a low standard under section 16 – either you have an inherent mental disability, mental disability. It is not meant to protect people who are stupid, foolish, uneducated, etc. XIX. 22 Contracts Master Outline 1. In addition to showing that you have the mental illness, you also have to show that you lack capacity under the two tests set out in section 15.1 – a cognitive test and a volitional test. 2. COGNITIVE §15.1 (a) ability to understand the nature and consequences of one‟s actions. 3. VOLITIONAL §15.1(b) ability to control you actions in a reasonable way. 4. Usually, if the other party did not know of the impairment, the court will consider if the result is unjust and may not allow it because of that. Intoxicated persons: 1. There is a cognitive and a volitional test a. But courts have in general only applied the cognitive test, not the volitional test. Also, the other party has to have reason to know of your impairment. i. In general, however, in mental incapacity cases and even more in intoxicated persons cases, there is substantially more protection for the other party. ii. If the other party did not know of the impairment, the court will consider if the result is unjust and may not allow it because of that. Misrepresentation: §162 – when a misrepresentation is fraudulent or material 1. There has to be a fraudulent or material misrepresentation (or both) 2. You must have relied on the misrepresentation in entering into the contract. 3. That reliance was justified. a. FRAUDULENT MISREPRESENTATION: i. Fraud comes in two forms, it is a subset of misrepresentation: a. Fraud in the inducement (§162) which arises where the relevant misrepresentation is knowing or conscious omission or statement made with the intention to deceive the other party and induce them into entering the contract. b. Fraud in the factum: the contract is void (there is no contract). When a misrepresentation prevents the existence of a contract. It keeps the party from knowing the character or the essential terms of the proposed contract. ii. To avoid a contract based on misrepresentation it is not necessary that the statement be made with intent to deceive or bad faith or anything like that, those are the requirements for fraud, not misrepresentation. b. MATERIAL MISREPRESENTATION Nondisclosure 1. A failure to speak as an assertion and it is actionable as misrepresentation. 2. If you say something and then subsequently learn that what was said was false – there is a duty to correct mistake. 3. Half-truths will sometimes be actionable as misrepresentation. 4. Where a confidential or fiduciary relationship exists. 5. Hill v. Jones where plaintiffs bought a house with undisclosed termites. a. Hills did not exercise reasonable diligence in ensuring the condition of the house b. But Jones had dramatically more information than the Hills – so there IS a duty to disclose. i. This is a material fact that would dramatically affect the value of the property. 6. Duty to speak: The general rule, there is no legal obligation to share what you know, but there are exceptions (See §161): a. If you are asked a question, you can‟t lie. b. If you say something, you can‟t tell half the truth. c. You also can‟t act affirmatively to conceal the information. d. Otherwise: caveat emptor, buyer beware. 7. For innocent nondisclosure it‟s more had reason to know than actually knew. In general with the nondisclosure, it‟s *did* you know than *should* you have known. Williams v. Walker Mrs. Williams buys furniture from Walker (over 5 years) and makes the payments in regular fashion then purchases a $514 stereo and defaults on her payments. Company comes after her to take the stereo and everything else purchased pursuant to an “add-on” clause. It is a testament to the extent to which language can obfuscate as much as it can reveal. She could have paid for all her furniture but the stereo but take all the furniture. The District of Columbia enforces this add-on clause and the Court of Appeals reverses it on grounds that there E. F. G. H. 23 Contracts Master Outline were no findings of fact on unconscionability – that the lower court erred in refusing to consider if it might be unconscionable and remanded it back to the court to engage it in fact finding on that decision. 1. How does the court find unconscionability? Two parts: a. the absence of a meaningful choice on the part of one of the parties. This arises from unequal bargaining power, hidden or additional terms, or status and behavioral terms. The court says that you have to show terms which unreasonably favor one of the parties (substantive unconscionability). b. The manner in which the contract is made is important, did the party have a reasonable opportunity to exercise their options, what was the level of education and the ability of the parties to understand the terms and how visible were the terms. Unconscionability is determined as of the time the contract is made – circumstances/understanding/level of knowledge may subsequently change. This determination is very fact intensive and is non-mechanical – who makes the determination of unconscionability? The judge. Public Policy A. R.R. v. M.H. & another: A couple with an infertile wife sought a surrogacy service company and the husband entered into a contract with a woman who volunteered to be inseminated by the husband and carry the baby to term after which she would turn over full custody rights to the biological father. 1. For public policy reasons, the court says that the agreement is unenforceable. Under the terms of the contract, she had agreed to give away custody of the baby she was pregnant with to the father before the baby was born and physically after 4 days of the child‟s birth. Public policy: you can‟t sell your children. Court is worried that women who are poor, economically invulnerable and could be taken advantage of if this contract is valid. Defendant was counseled throughout. Mistake, Changed Circumstances and Contractual Modifications: A. defect in the bargaining process or status issue – some minority or incapacity issues or they involve some problem with the substance of the contract. 1. There‟s two types of mistake: mutual mistake and unilateral mistake/ also as to value or nature of the thing. a. Value: I intended to buy this for the purpose of that but I no longer need it b. Nature: difference between barren cow and fertile cow – it‟s not a mistake in the identity of the actual cow but the very nature of the cow 2. Mutual Mistake: a. §151 When Mistake of Both Parties Makes a Contract Voidable: i. Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made ha a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154. ii. In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution or otherwise. a. (Remember: Misrepresentation is an assertion that is not in accordance with the facts.) b. Rescission is available here. 3. Unilateral Mistake a. §154 When Mistake of One Party Makes a Contract Voidable i. Where mistake of one party at the time of a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in §154, and a. The effect of the mistake is such that enforcement of the contract would be unconscionable, or b. The other party had reason to know of the mistake or his fault caused by the mistake. 1. Generally, unilateral mistake is only usual with mathematical or clerical errors, but not errors of judgment are usually protected. Allowing XX. XXI. 24 Contracts Master Outline judgment mistakes would result in people changing their mind and rescinding contract. Math errors difficult to prevent, inefficient to check math 20 times. 4. §154 When a Party Bears the Risk of a Mistake a. A party bears the risk of a mistake when i. The risk is allocated to him by agreement of the parties, or ii. 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 iii. The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. b. Lenawee Count Board of Health v. Messerly: Lenawee County Board rejects the Sherwood (barren cow case) in that it cannot differentiate between differences in value and nature. The court rests on the “as is” clause, but implies that the buyer should have gone to inspect the property. There are three common law doctrines that exemplifies change circumstances: impossibility, impracticability and frustration of purpose. They are also analogous U.C.C. provisions. Wel-Fred‟s, Inc. v. Metropolitan Sanitary District: Sanitary District invited bids to rehabilitate one of its water reclamation plants. Wel-Fed submitted the lowest bid but shortly after submission discovered that their bid was substantially lower than even the next lowest bid and realized that its calculations were erroneous and tried to withdraw bid. The District refused withdrawal and accepted bid thereafter. Wel-Fred seeks injunction: rescission. 1. Court allows rescission: district should have known mistake, especially since they changed material req. 2. Unconscionability: the mistake was severe enough to cause substantial loss. Strict liability: notion that liability in a given circumstance has nothing to do with whether you were at fault or negligent. Contract law used to be a strict liability doctrine. Relatively early in the life of the common law, the rule becomes subject to three exceptions: 1. Government action: if there is some supervening governmental action that makes performance either illegal or impossible, then performance is excused. 2. Death of the promisor. If the person‟s existence is necessary for performance and the person dies, then the duty is discharged. 3. If the existence of something is necessary for the party‟s performance, the party is excused if the destruction or deterioration of the thing prevents performance. Impossibility Doctrine: 1. THESE EXCEPTIONS ADD UP TO THE IMPOSSIBILITY DOCTRINE. Your own actions cannot create impossibility: if I burned down the building that needed to be rent out, I am not excused of duty. a. If a contract guarantees performance contracts the party out of impossibility doctrine. b. If a painter under contract is pre-paid $1000 to paint a house that burns down before performance: yes, but not under breach of contract because of impossibility doctrine. They can sue on unjust enrichment to recover the value of what was paid but not earned. i. What if the painter spent $400 on special paint before the house burned down that no one wants to buy back from him? Sue on unjust enrichment, but painter cannot recover $400. There is no unjust enrichment for the painter getting the paint. Impracticability and frustration of purpose: 1. Karl Wendt Farm Equipment Co. v. International Harvester Co. The court ruled that it was not a basic assumption that the market wouldn‟t see a downturn. Court resistant to defenses invoking market change, even when dramatic, even natural disaster or war (exception: Boston Opera v. Wolftrap – but here it was more safety concern than financial loss). a. On impracticability, the court looks at Restatement §261: Discharge by Supervening Impracticability i. Where, after a contract is made, a party‟s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. b. For frustration of purpose: there has to be three factors fulfilled: B. C. D. E. F. 25 Contracts Master Outline the purpose frustrated by the supervening event must have been the “principal purpose” of the party making the contract. ii. The frustration must be substantial: it‟s not enough that it is less profitable. iii. The frustrating event must have been a “basic assumption.” The non-occurrence of this event was a basic assumption of this agreement. 2. Unforseeability: Some courts say that in order to assert the defense, the event must be unforeseeable. Not all courts, however, do not. At some point, you can say that everything is foreseeable – we have insurance for natural disasters, lightening striking, etc etc. G. Economic analysis: law and economics: Who is the better risk-bearer. Who can better avoid the problem and absorb the losses? 1. The UCC looks at unforseeability while the common law doesn‟t. a. UCC 2-615 It provides the “hook” on which these common law defenses of frustration of purpose, impracticability and impossibility although not as much as the first two, are asserted in the sale of goods context. UCC 2-615 encompasses all these attempted justifications. It refers to the seller and is directed towards his interest, but it has consistently been interpreted to include the interests of either side. It refers to: destruction of the subject matter of the contract, government regulation, an unforeseeable, or at least, unforeseen, cataclysmic event. H. Alaska Packers‟ Association v. Domenico **** IMPORTANT CASE Fishermen get to see to go fish – they get to Alaska and then they say that they will not continue to fish until they get a pay raise. Because of where they were and the difficulty of getting someone else, the captain agrees. The fishermen and a representative of the company in San Francisco make the agreement, but he says that he is not authorized to make that agreement binding on the company. When they return to San Francisco, the fishermen want the modified payment, but the company refuses. Fishermen bring suit to get the modified salaries (the difference of the salaries). 1. The issue of contract modification is grounded in two doctrines: doctrine of consideration, bargainedfor-exchange; doctrine of duress. Suppose a seller of goods threatened to breach the contract unless they agreed to pay a certain price. QUESTION 5: WAS THE CONTRACT MATERIALLY BREACHED? XXII. Material Breach A. Most contracts are bilateral and consist of an exchange of promises which ultimately look to an exchange of performances. If the obligation is not satisfied, then it gives action for breach. What constitutes breach? And even if there is an action for breach, is your own performance excused or not. All rules for breach are designed to protect the exchange to the extent possible. A breach can be insubstantial or material. 1. Material Breach: Jacobs & Youngs, Inc. v. Kent (reading pipe): Homeowner wanted a house built with a specific type of pipe, but the contractor did not use the specific type of pipe. Homeowner refused to pay and contractor sued. 2. Court said that difference in piping is not considered a breach. The homeowners had moved into the house and seemed to be functioning fine but refused to make the last payment. Owner said that he will not pay until the piping was replaced. Court concluded that there wasn‟t a material breach, but an insubstantial breach: substantial performance. 3. Although there was nonperformance on the part of the builder, the homeowner excused themselves from performing on the basis that the builder had materially breached the contract. If there was a material breach, that would be accurate, but the court ruled that it was a breach with substantial performance. 4. Breach with substantial performance is not an excuse from performance: although the homeowner can still sue for damages – it is just unclear how much can be recovered. As a result, however, the homeowner has materially breached the agreement by complete failure to perform. a. The two differences that Cardoza dicusses. i. Dimunition/difference in value: paying money. ii. Cost of completion/performance: replace all the piping. This is substantial – ripping everything out and doing it again. i. 26 Contracts Master Outline B. Contracts have “satisfaction” clauses, which the parties did do. However, the homeowner had moved in and appeared to be using the house and all its functions normally so this is probably why the majority chose to ignore the clause. 1. Courts will look at the purpose of the contract: for example, if they were building a model Reading Pipes house, then it would‟ve been a material breach. Court might look at the amount of the damages: if dimunitive damages give them nothing but they think that they should be able to recover, they might give them material breach. Court will also look at how much performance there was. Court will also look to hardship of breaching party. Rebuilding a whole new house is a substantial hardship. Negligence or willful behavior, and the likelihood of full performance. The court will also likely find material breach if it is difficult to calculate the loss or damages. a. There is always a risk for substantial performance, because you might think there is material breach but a court may think otherwise. As a consequence, you should always continue with your own performance. C. Total breach: is a material breach that is not cured after a reasonable period of time so that the other party does not have to perform and can sue for damages. D. Partial breach: is a breach where there can be temporary suspension of performance until breach is cured, and if they do cure their breach, then the non-breaching party will need to continue performance, and they can only due for the delay. 1. See §241, and the degree of importance of the breach to determine total or partial breach. How does the repudiating party give notice? One way is in the mail, the other way is to sue them. XXIII. Anticipatory Repudiation & Adequate Assurances of Performance A. Anticipatory Repudiation: It can be clear by dint of what is said or done, but there needs to be clear intention to breech, not necessarily written or vocal expression of intention, declaring bankruptcy can be seen as anticipatory rep. 1. Truman Flatt v. Shut : Court says that for there to be anticipatory repudiation there has to be a clear manifestation of intent not to perform. B. Hornell Brewing Co. v. Spry: If I request adequate assurance of performance and is granted them, I have to perform unless there are further changes in circumstances. Spry provided the first adequate assurance, but Hornell discovers that Spry has no regional staff and that the whole operation was a sham, and so they requested adequate assurance again. Although – neither party made this argument, the court corrected both sides and told them that this is what was done. Plaintiff said that defendant did not provide adequate assurance to the one request, and defendant said they did, court corrected and said that two requests were made, the first was responded to, the second not. 1. Standard for the request for adequate assurance of performance: when there are reasonable grounds for insecurity, a party can demand adequate assurances of performance and can suspend their performance until they receive those assurances. 2. UCC: Once the seller has been given reason to believe that the buyer‟s performance has become uncertain, it is an undue hardship to force him to continue his own performance. 3. Requirements for insecurity: If I find out that although you continue to make payments to me, but have defaulted on your debts with someone else, then that would be ground for concern. The analysis is a case by case situation. Consider commercial reasonableness and factual conditions. a. After insecurity is determined, need to request assurance in writing (according to the UCC) although some courts will accept verbal requests. i. If you don‟t get adequate assurance, you have anticipatory repudiation. XXIV. Express Conditions: A. Expressed Conditions Judge Cardozo (Jacob & Youngs, Reading pipe) 1. Constructive Conditions: In Jacob Youngs, the pipes condition was independent of the condition to pay the builder for the house. The condition that the homeowner would pay the builder was not dependent upon whether Reading pipes were used. This is another way to say that he substantially performed. 2. Constructive conditions are in a situation where the parties do not say that if you don‟t do this, I don‟t have to do this. That would be an expressed condition. Expressed conditions are always dependent, but the terms “independent” and “dependent” are only used with constructive conditions. The “expressed condition” or, because of Cardozo, the constructive condition, was a satisfaction clause. 27 Contracts Master Outline B. Oppenheimer v. Oppenheim: Oppenheimer argues waiver and estoppel and that they substantially performed. Oppenheimer said that they called by the deadline and that they substantially performed to the conditions of the contract. 1. Substantial performance doesn‟t apply in expressed condition. 2. Expressed conditions are designed to protect the parties. The reason that the condition would exist that says “you have to use Reading pipe” because that might be the reason that the party is entering into the contract. It is explicitly in the contract to protect the interest of the party, so the judge can‟t turn around and say that it isn‟t important. C. In Jacobs & Young, there was no question whether the homeowner could sue for damages – that was a given, the question was whether he still had to write the last check, i.e., whether his duty to perform was terminated. Court says there is the claim for damages but that he cannot suspend performance. D. In making this decision, Cardozo has to answer the question of whether or not the homeowner‟s promise to pay is an independent or dependent promise. 1. If it is an independent promise, it doesn‟t make any difference what pipe was used because the promise to pay was independent of what pipe was used. The builder still needs to use the correct pipe and if he fails to do so, he will be sued for damages – but the homeowner‟s duty to pay still exists. 2. If it was dependent, then the duty to perform is waived. If it was dependent, then it is a constructive condition. The reason it is called a constructive condition is because the judge constructed it. Also known as an implied condition. It is an equitable condition a. Constructive condition is equated with a dependent promise. b. So the difference between expressed condition and constructive conditions is the adequacy of substantial performance. i. Say the contract says “send a telegram” and the plaintiff sends a fax. The court can interpret the expressed condition as a constructive condition or as a promise (this is called adverse interpretation). Cardozo for example, ignores the expressed condition in Jacob & Youngs, this is adverse interpretation ii. If it is interpreted to be a promise, then the other party needs to fulfill it. If the promise was materially breached, then the other party does not need to perform. “Materially” is important, because if he uses another type of pipe, and it becomes a non-material breach, then we allow substantial performance. E. Condition could be both a promise and an expressed condition. This means that if Oppenheimer fails to perform, then the condition is not met and the contract is null and void. If it is a promise, then that means that Oppenheimer will make a good faith effort to fulfill that promise, and can be sued for bad faith and failure to fulfill the promise. 1. If it is an expressed condition, what follows expressed condition does not occur, then performance is not necessary 2. If it is also a promise, then that means that it prevents the duty of the party fulfilling the condition to perform to sabotage the condition. It also means that the other party cannot say that there was not exact performance (when there is substantial performance). I.e., this means that the expressed condition cannot be used to get out of the contract. F. Waiver of estoppel: imagine you rent an apartment on an agreement that requires payment on the first of each month. One month you ask landlord if you pay ten days late, and landlord agrees. On the third of the month, landlord says she changed her mind and wants payment immediately. Do you have until the tenth or not? Yes, it is now too late to retract the waiver. There is reliance on the waiver and cannot be retracted. What if you regularly make payment on the fifth and she rejects check and says you will be evicted – she can‟t do this because of estoppel. Even though the agreement provided that you need to pay on the first, she needs to give notice. G. Estoppel: prevents 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 justifiably relies on that belief. In the context of estoppel, you need to show reliance. But it is okay if the relevant condition that is being asserted is a material condition. H. Waiver: It is a voluntary abandonment of a contractual right. For such a voluntary abandonment, there is no requirement of reliance, but it you are not allowed to waive a material condition. Waivers can be retracted prior to 28 Contracts Master Outline the time for the condition‟s fulfillment unless there has been detrimental reliance, but this is only true if there is no consideration. If there is consideration, then we would call it a modification of the contract. I. Conditions and timing clauses: A builder agrees to put up a house on your land, the builder hires a subcontractor and the contract between the two says that the builder will pay the subcontractor when the builder gets paid by you. What if the homeowner goes bankrupt, does the builder still have to pay the subcontractor? In a judicial or statutory matter, they have always construed this condition as a matter of *when* to be paid, and not whether to get paid at all, so it cannot be used as a defense by the builder. J. J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc. Original lease says if you give six months notice you can renew the least for 10 years. Failing restaurant giving lease away to other restaurant (Chelsea) that wants a 24 year lease. The contract was modified to include a 24-year renewal provision given 6-months notice, which Chelsea failed to do. Chelsea thought that the modified contract already renewed the lease, and the tenants want Chelsea to vacate the building. 1. Forfeiture: A court avoids the affect of an expressed condition on grounds of forfeiture. There are three grounds that the court ultimately rules for Chelsea: a. they had made improvements on the building, in particular, after the 6-month window had passed. b. Moving to a new location would have lost goodwill, their customers who know where they are. c. There has been no evidence of prejudiced on the JNA side – it won‟t cost JNA much, whereas it will cost Chelsea substantial amounts. K. Morin Building Products Co. v. Baystone Construction, Inc: Defendant contracted with GM to construct a factory, and hired Morin to construct and erect aluminum walls, specifically that it was mill finish and that it has a uniform finish (although mill finish sheets are known to have a non-uniform finish). 1. The contract says that it is not an objective standard, not a reasonable person standard, it is up to the client to decide: good faith standard, subjective standard, honesty standard. Language that said “artistic” is boilerplate, it doesn‟t matter what factory wall looks like. a. The greatest impetus for interpreting a subjective clause as an objective one is where there is a risk of forfeiture to one party and gain to the other party. b. **Intermediate level, courts may or may not interpret an subjective clause to be objective where there is a risk of forfeiture but no gain to the other side. For example, special order goods, manufacturer will be unlikely to be able to resell these goods if the customer is not satisfied. c. Courts are least likely to interpret it as an objective clause where there is no risk of forfeiture and there is no benefit to the owner. 2. Who will be the judge of satisfaction in satisfaction clauses? There are three possibilities: 3. That a third party will be the judge of satisfaction; courts will likely let that judgment stand even if it is unreasonable, if they have truly exercised independent judgment. If a third party judge cannot perform their function, or they refuse to exercise independent judgment, the condition of satisfaction may be deemed to be waived. 4. Where one of the contracting parties is the judge. There are a few possibilities: the first possibility is that you are talking about something that will depend on “taste or fancy.” As a result, we are going to use a subjective standard, and the contracting party needs to be honest and act in good faith. 5. With a contracting party judge: If we are talking about issues that are not of taste of fancy, for example, the brand of the furnace, as opposed to color of the wallpaper, the courts will then interpret the condition by an objective standard rather than a subjective standard. XXV. Excuse and Interpretation of Conditions, p. 791-804 QUESTION 6: WHAT ARE THE REMEDIES FOR THE BREACH? XXVI. Computing Expectation Damages; Real Estate Contracts A. Standard of expectation damages: the goal is to put the non-breaching party in the position they would have been in if the contract had been performed. 1. Formula for expectation damages: a. Loss in value + other loss – cost avoided – loss avoided = general measure of damages for total breach. See §347 29 Contracts Master Outline b. Loss in value + other loss = general measure of damages for partial breach. i. Cost avoided: What you save from not honoring the contract ii. Loss avoided: Costs mitigated and reallocated. iii. Other loss: consequential damages and incidental damages. a. Speculative losses aren‟t calculated. b. DAMAGES ARE MEASURED AT TIME OF BREACH 2. An alternative formula used: a. expected net profit on the entire contract + unreimbursed expenses at the time of total breach 3. Damages in awards in contract law should take into account the plaintiff‟s needs, values, opportunities, idiosyncrasies – it is a subjective standard. 4. There are some objective aspects like: forseeability; that the particular damages are non-speculative, the need to mitigate damages. This is the measure for total breach, the alternative to total breach is partial breach. In total breach, performance is not excused, in partial breach, it is. B. Turner v. Benson: Couple wants to sell house with daycare center, but defendants breach the contract. Couple also wants to buy another house, but are unable to do so until the first house is sold. Couple eventually sells house for $1,000 more than what they were going to originally sell it for. 1. Apply contract value – market value (at the time of breach) 2. Vendor is entitled to the difference between the contract price and the fair market value of the property at the time of the breach. In this case, there is no loss in value because the market value was higher than the contract value. C. American Standard, Inc. v. Schectman: Court says that the difference in value is appropriate when there is substantial performance. The court does not want to order specific performance when, like in Jacob & Youngs where it defendants would have suffered unreasonable economic waste if they were ordered to replace identical pipes in the house. 1. In Jacob & Youngs, however, the breach was unintentional and the consequences of omission trivial, and that the cost of replacing the pipe would be “grievously out of proportion” to the significance of the default, the court held the breach to be immaterial and the proper measure of damage to the owner to be not the cost of replacing the pipe but the nominal difference in value of the house with and without the Reading pipe. 2. Standard is diminution in value: 3. The general rule of damages for breach of a construction contract is that the injured party may recover those damages which are the direct, natural and immediate consequence of the breach and which can reasonably be said to have been in the contemplation of the parties when the contract was made. a. “It does not lie with the defendant here who has received consideration for his promise to do the work “to say that his own performance would not be beneficial to the plaintiffs.” b. The idiosyncratic expectations and goals of the particular plaintiff must be considered – what is the plaintiff bargaining for. The damages standard will be designed to get the plaintiff the same result (of what they bargained for, or why). D. Hadley v. Baxendale: Millers at Gloucester had a broken crank shaft that needed to be fixed, and so they contacted a delivery service who said that they could it get it to its destination by the next day. Millers did not tell the delivery service that the only reason the mill was not working was because of that one part. Plaintiff is trying to recover damages for lost profits because the mill was unable to operate. 1. Damages awarded: general damages + special damages a. General damages: follow directly from the breach of the contract (arise naturally from the breach) natural consequences that accrued as a result of the breach of contract: the delivery costs (and even this would be a stretch since it was eventually delivered, but not according to date). b. Special damages: are reasonably within the contemplation of the parties when they made the contract as the probable result of the breach. c. Was it foreseeable that the mill would be shut down as a result of the crank shaft being delivered two three days late: i. they may have another crank shaft ii. there might be other stuff broken too iii. they might not need it to run the mill. 30 Contracts Master Outline E. Florafax International, Inc. v. GTE Market Resources, Inc. Flowers and telecom services. 1. If we have our general measure of damages: a. Loss in value (this contract) + other loss – cost avoided – lost avoided. b. Don‟t worry about differences between general and specific damages. c. Consequential damages, in order to be awarded, must be foreseeable. i. Consequential and incidental damages are other loss. d. §351 allows courts to limit damages as justice requires like: when consequential damages are substantially larger than the contract amount. Courts will often say, this is not foreseeable (even when it was foreseeable), but §351 gives courts an excuse to disallow it. e. Reasonable certainty: damages must be provided with this standard (absolute certainty not required) i. Two elements of certainty: a. What the amount of damages would have been; b. That there would have been damages at all as a result of breach (fact of damages). 1. Court will usually decide if there is a fact of damages, and then send it to jury to determine how much. 2. We hold the fact of damages at a relatively high standard of safety, and definitely much higher than the amount of damages. f. Net profits are the standard, not gross profits. g. To loss profits, not need a precise showing of the dollar amount lost, but you do need some degree of certainty and some evidence what the amount would have been. h. Under the limitation of forseeability, the only damages that can be recovered are those which arise naturally from the breach, or losses that are reasonably within the contemplation of the parties at the time the contract was made. i. Causation: The loss must flow directly, naturally or proximately from the breach. 2. You only get damages if you have breach + injury and the above requirements are fulfilled. If there is a breach, but you can‟t show that an injury was foreseeable, causation, and certainty, you get damages, but only nominal damages (a dollar). XXVII. Expectation Damages in Employment and Construction Contracts, p. 820-831 XXVIII. Forseeability, Certainty, & Causation, p. 831-847 XXIX. Mitigation: A. Duty to mitigate: there is no real *duty* to mitigate, but where the plaintiff fails to mitigate their damages, they are unable to shift that part of the loss onto the defendant. So it‟s not duty – plaintiff is not legally bound to mitigate damages, but a consequence of their failure to mitigate, they may not be able to recover those damages. B. Rockingham County v. Luten Bridge Co. Luten Bridge Co. hired to build a bridge, but the county changed their mind and told the company that they were rescinding the contract before construction commenced. 1. There was a breech of contract and no right to rescind but in order to recover, cannot continue to increase damages after notice given. a. His remedy is to treat the contract as broken when he receives the notice, and sue for the recovery of such damages as he may have sustained from the breach, including any profit which he would have realized upon performance, as well as any other losses which may have resulted to him. 2. Professor Williston says: “There is a line of cases running back to 1845 which holds that, after an absolute repudiation or refusal to perform by one party to a contract, the other party cannot continue to perform and recover damages based on full performance. This rule is only a particular application of the general rule of damages that a plaintiff cannot hold a defendant liable for damages which need not have been incurred; or, as it is often stated, the plaintiff must, so far as he can without loss to himself, mitigate the damages caused by the defendant‟s wrongful act. The application of this rule to the matter in question is obvious. If a man engages to have work done, and afterwards repudiates his contract before the work has begun or when it has been only partially done, it is inflicting damage on the defendant without benefit to the plaintiff to allow the latter to insist on proceeding with the contract. The work may be useless to the defendant and yet he would be forced t pay the full contract price. On the other hand, the plaintiff is 31 Contracts Master Outline interested only in the profit he will make out of the contract. If he receives this it is equally advantageous for him to use his time otherwise.” C. According to Novelty Advertising Co. v. Farmers‟ Mut. Tobacco Warehouse Co.: 1. “While a contract is executory a party has the power to stop performance on the other side by an explicit direction to that effect, subjecting himself to such damages as will compensate the other party for being stopped in the performance on his part at the stage in the execution of the contract.” 2. Adequate assurance of performance: This *recommendation* to seek a declaratory judgment is not a duty on the defendant to seek adequate assurance of performance to ensure that they are protecting themselves. The county itself was not bound to remind the bridge company throughout the construction that they were not intended to perform. D. Boehm v. American Broadcasting Co. ABC Vice President was fired from his position and was supposedly given another position of comparable salary. He moved to Pebble Beach, FL, and ABC insists that this took him out of the job market and he didn‟t exercise reasonable efforts to obtain employment (or to mitigate the damages). The position that he was removed from was never filled, and he was required to answer to someone in the position he was in. His compensation was also lower, not because of salary, but because of the commission that he used to receive under the prior contract. 1. In wrongful termination actions, two issues arise: a. whether the plaintiff was wrongfully terminated; and b. The liability of the former employer for such wrongful termination. 2. Burden of proof to show mitigation didn‟t occur is on the breaching party (the defendant – because it benefits the defendant). If mitigation didn‟t occur, that would increase the loss avoided sum and thus benefit the defendant (both loss and cost avoided benefit the defendant). a. The employer (breaching party) bears the burden of proving that „comparable, or substantially similar,‟ employment was available to the employee; the employee is not required to prove mitigation. b. Some jurisdictions go even further and say that not only does the employer bear the burden of proving that employment was available, but also that efforts to obtain employment would have been successful. c. Ford Motor requires that a former employer establish that the plaintiff failed to accept an unconditional offer to a job substantially equivalent to the one denied. It is only when the employer carries this initial burden that the plaintiff must establish “special circumstances” justifying a rejection of the offer. 3. Fair v. Red Lion case says that it is not important that the person is apprehensive to work for them. Even if they offer the same exact job, they have been burned by the company before and the circumstances may have changed then. Court concludes that pre-textual offers (offers just put in place to protect them from damages), then the employee has the right to reject (this is special circumstances). a. You don‟t have to take an inferior position, but if you do, then wages that you take from it will be subtracted from the damages – this is to protect against overcompensation. This is different in cases where you can do both things – for example, if you could keep both jobs, then it would not be subtracted for mitigation. E. Incidental expenses that arise from attempts to mitigate are also recoverable (Turner case, tried to sell house at auction unsuccessfully, but recovered costs). XXX. The Theory of Expectation Damages A. We protect the parties after promisors repudiate contracts because…Atiyah: we enter into contracts caring more about the terms than the actual contracts. 1. We want to encourage the use of contracts. 2. There is a property interest at stake and we don‟t want to brush it aside. 3. They have been deprived of something that is “theirs,” psychic gain. 4. Will-theory: made law between parties. 5. Justice/morality: what do they dictate? 6. Efficient adjudication, it‟s hard to calculate damages. 7. Lost Opportunity/reliance: they could have been making other contracts, for example. 32 Contracts Master Outline 8. Executory Contract: no one has done anything – this is very rare, people enter into contracts so that they can take action, and especially if there is immediate breach after entering into contract, there is no change in circumstance yet. 9. Rarity of Executory contracts is an argument for expectation damages: we give expectation damages where there has been no reliance, but usually there always is reliance just because usually time has passed before breach at which point people have already acted. 10. Law wants to encourage cooperation. 11. Cautionary function in entering into contracts. 12. Facilitating planning (by deterring breach in most cases) 13. Protection of a risk allocation that the contract was created to effectuate (eg, a contract for future delivery at a fixed price, made in order to allocate the risk of price changes between the time of contract and the time set for performance). B. Efficient Breach: 1. This is a hotly contested issue. It says that there is no connection between the requirements of law and the requirements of justice and reality. a. No court has quoted Posner and openly endorsed efficient breach. b. Concept of, if you concede that entering into a contract means nothing more than I have to pay if I breach is negating all the values that scholars and judges and lawyers have preached – there is a fear that not only will efficiency come out as the primary value, but as the only value in the legal system. c. Criticisms of law of economics: i. That it is not really efficient ii. It ignores transaction costs iii. Full recovery does not fully compensate the plaintiff for the breach. (e.g.: attorneys‟ fees, emotional distress, etc.) XXXI. Nonrecoverable Damages A. Contract law is strict liability as opposed to fault (like Tort law). Although  there are some contract doctrines that encompass fault, for example, impracticability says, you couldn‟t do it, it‟s not your fault. B. Punitive damages is contrary to allowing efficient breach. When would we want to use punitive damages in contract law? 1. When the breaching party acts in bad faith 2. Where there were special relationship contracts (for example, insurance doesn‟t pay because they know you won‟t litigate). 3. Where the breach of contract is tortuous. C. Emotional Distress: Tort law is different from contract law: we would assume for most contracts that there is no emotional dimension involved. Where it is the case, emotional distress damages will be available. 1. Justice Brown: Erlich v. Menezes  Conservative black lady judge. 2. Judge Hug: Boehm v. ABC shoplifted suit D. Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co. Judge Shadur (liberal) v. Judge Posner. Posner sends the case back to someone else and basically says that Shadur is incompetent. 1. American rule:  If you impose on the losing party the obligation to compensate the other side, you get two problems: a. Do you potentially exclude poor litigants from the system because they cannot run the risk of not only not winning but also of having to pay the other side‟s attorney‟s fees. b. “Costs” are not attorneys‟ fees, they are court costs and add up to hundreds or thousands of dollars in a complicated case (attorneys‟ fees are much higher). i. Proponents of the American rule say that even a no-brainer case may not be taken to court on the miniscule chance that it may lose. CISG: in selected areas will impose a different outcome that we would otherwise get under the UCC or Common Law in the US. 2. Here the question is if under the CISG attorney‟s fees should be awarded in a case where there appears to be bad faith litigation; and does the inherent power of the court to punish bad behavior allow the court to do this? The lower court says yes, attorney‟s fees should be granted. Argument: CISG needs to be consistent. Judge Posner says: you have to differentiate between substantive rules and procedural rules. 33 Contracts Master Outline However, Posner is wrong, it is universally recognized that attorney‟s fees are substantive and not procedural. He is also rejecting the CISG‟s provision for recovering substantive fees in his interpretation. XXXII. Reliance and Restitution A. Reliance damages 1. used when for some reason expectations cannot be calculated. a. Otherwise we don‟t use them is because they tend to overcompensate. 2. In cases where neither expectation nor reliance damages work, plaintiffs have the right to use restitutions damages. 3. This is a right for the non-breaching party, and in limited situations, also the breaching party. i. For some reason or another, restitution damages would give a larger award in some cases – a case of that is Algernon Blair case: where the party entered into a losing contract. a. Say I enter into contract to build a $60,000 for $30,000 – (of course not knowing how much it will cost to build). In this situation, expectation and reliance damages would not help. B. Restitutionary claims: 1. implied in law contracts, quantum meruit contracts and quasi-contracts. This is used synonymously to refer to the idea where one party is unjustly enriched at the expense of another party – that unjust benefit that they derived will be taken from them. C. Costal Steer Erectors v. Algernon Blair: Plaintiff does not want expectation damages because it would have calculated to a loss for them. But court says that the plaintiff can still recover in restitution for the value of the benefit conferred on the other party. This is the rule of 1. §373 of the Restatement 2. §371 of the Restatement: restitutionary recovery can be measured by one of two standards: a. Cost avoided (what would it have cost the defendant to obtain the same benefit from a person in the plaintiff‟s position). b. Net Enrichment: the amount by which the defendant was enriched; what was the increase in value of the defendant‟s property. i. Courts will generally reward the smaller amount. But restitution is an equitable remedy and a court will likely consider what fairness requires, so can potentially reward the greater sum of fairness dictates. 3. In Algernon Blair the court reward depended on market-value restitution. The problem with market-value restitution is that labels should not control how much the value: potentially, if you grant market-value restitution, then you might be placing the plaintiff in a better position than they would have been in. D. Full Performance Exception: if everything but the payment has been completed: if the non-breaching party has fully performed and the breaching party has not paid §373(2): you cannot get fully restitution if you as the nonbreaching party have fully performed (i.e., built the $60,000 house) but the breaching party has not paid, they can only pay you the agreed upon $30,000 because of your full performance. 1. Traditionally, restitutionary damages were also limited (like all the other damages) to the non-breaching party, and the breaching party was not able to get it. However the modern view, set out in §374 of the Restatement is that restitution is available, even to the breaching party (unlike expectation and reliance damages). 2. A party who breaches after fully performing is penalized more severely than the party who breaches before acting at all, or before slightly acting. There was a requirement that if the breach was willful or deliberate, then the breaching party was not able to get restitutionary damages. a. This willful or deliberate requirement encompasses a notion of punishment alien to contract law. 3. There are a couple of limitations on the rights: §374 of the restatement says: a. Recovery should be limited to the lessor of either i. The value of the benefits conferred or ii. The defendant‟s increase in wealth. b. And “in no case will the party in breach be allowed to recover more than a ratable portion of the total contract price where such a portion can be determined. c. Restitutionary damages to the breaching party will be denied if there is a valid liquidated damages clause. 34 Contracts Master Outline d. Restitutionary recovery will be denied to the breaching party if the injured party seeks or is entitled to specific performance. Jesse Ventura v. Titan Sports, Inc. Ventura is suing the WWF for restitutionary damages on implied contract. 1. Two bases for restitutionary liability that the court looks at: a. Pre-Bloom unjust enrichment by selling Ventura video-tapes. b. The post-Bloom fraudulent misrepresentation as to the availability of royalties. i. The post-Boom misrepresentation: The basic idea is that restitution is available when a contract is rendered unenforceable for any number of a variety of reasons (fraud, unenforceability, etc). If the court rescinds the contract on any of those bases, each party must make restitution to the benefit received by the other party. The contract was rescinded: but the court didn‟t say that he needs to give his salary back – this is because he also did a job, that‟s the way the court says that they are even between the salary and the service Ventura provided. It‟s only about the royalties off the videos. c. The court says, there is no room for a quantum meruit claim when we have an expressed contract. Think back to the Algernon Blair case, Coastal was allowed to get restitution, even though there was a contract. In Algernon Blair though, Algernon Blair breached the contract, and we want damages – here there is no claim of breach. Titan Sports entered into contracts and paid Ventura for those contracts. Here restitution is not just being used as a measure of recovery, it is being used as a theory of recovery. Here, Titan Sports and Ventura have both fully performed their parts of the oral contracts, here the court is implying a contract. d. In the Coastal case, there is no question that the court does not need to imply a contract, there is no need for an implied-in-law contract because it was breached. Here restitution is used as a theory of recovery – we have an implied in law contract, the court is implying a contract in order to avoid an unjust result. Until this case, we used restitution, expectation or reliance after a contract was breached. Now we are using restitution for implied in law contracts. Restitutionary Damages in Other Situations, p. 953-965 Specific Performance What are problems with specific performance? 1. A lot of contracts are time specific, i.e., specific performance is inadequate or impossible. 2. Ineffectiveness/Good Faith 3. Court supervision. 4. There‟s an autonomy concern, forcing people to do things they don‟t want to do. 5. Economic inefficiency 6. Specific performance may not be available: the unique product may not exist anymore, destroyed or sold to someone else. Specific performance is available where 1. Damages are inadequate. 2. Required performance is unique, for example, land is unique, or a car driven by Elvis is unique. 3. Constitutional/moral limitations: for example, court supervision may violate. 4. Definite/specificity, is the court ordering parties to do what they didn‟t actually agree to 5. Hardship to defendant 6. Public policy: constitutional moral issue, if the court should be in the business of long-term supervision 7. Unfairness: the court will not grant equitable relief if it is unfair. City Stores Co. V. Ammerman. They had an option contract. Tyson‟s Corner sent Lansburgh department store‟s president an option contract letter that said if they get their zoning, then they would give them a place in the mall at least equal to other major department stores in the center (ie, at the rate that they negotiate with other people). So this is contingent on both the zoning and the negotiation of other leases with major department stores. 1. Court awards specific performance because it cannot calculate damages 2. Damages have to be certain, foreseeable, and there needs to be causation. THIRD PARTY BENEFICIARIES XXXV. Third Party Beneficiaries, Assignment & Delegation E. XXXIII. XXXIV. A. B. C. 35 Contracts Master Outline 1. Restatement §302: Intended and Incidental Beneficiaries. a. Incidental beneficiaries derive benefit from the contract (and aren‟t intended) and cannot recover as a third-party beneficiary. An intended third party beneficiary‟s interests are central to the contract. Is appropriate to effectuate the intent of the parties. 2. The second requirement under §302, there should be either a creditor beneficiary(a) or a donee beneficiary (b). a. If either of the two parties want to modify the contract, then A or B can do so until the third-party has relied on the contract. The original parties in privity can otherwise modify it without the consent of the third party, but it is subject to the protection of the third-party‟s justifiable reliance. 3. Vogan v. Hayes Appraisal Associates, Inc. The main contract at issue here is the one between MidAmerica and Hayes and the Vogans are suing as third-party beneficiaries. Hayes said that the Vogans are not third-party beneficiaries. a. There needs to be intent of the promisee and that the promisor understood that the promisee had intent to benefit a third person. b. There does not need to be a specific manifestation by the promisor of an intent to benefit the third person. 4. Zigas v. Superior Court: Essential contract is about financing and granting it to the land owners – a provision of the contract sets out a schedule of rent that the landlords cannot change unless they get permission. The landlords increase the rent by $2 million. The issue: a. Whether or not federal or state law applies, b. Whether petitioners have standing to sue and c. Whether the action has become moot as a result of real parties‟ repayment of the HUD insured loan. 5. In Martinez: the government was giving funds to hire people who had been unemployed in a long time. The purpose of the Martinez statute was to benefit the neighborhood, not the individuals who were being employed. In Martinez, the money was out of pocket for the government. Plaintiffs were seeking compensatory damages. Problem with compensatory damages is that they are relatively open-ended. 6. In the Moch case, the court ruled that plaintiffs who lost their house in a fire sued the water company for not providing adequate water pressure that it was contracted with the city to provide could not recover. Such liability may be blown out of proportion. B. Assignment and Delegation: Assignment is an issue of contract rights. There was once some question about whether you can assign your rights under a contract. In general, in a commercial economy which is driven by credit, it was essential for parties to have the ability to assign their rights. The way to get credit for a future transaction is by past transactions – so that means that the previous contracts would have to come through before entering new contracts. 1. Under §317 there are three circumstances under which you cannot assign your rights: a. If the assignment of one‟s rights under the contract violates some statute or some public policy. b. Where assignment of one‟s rights has a material adverse affect on the other party. c. Where there is a valid preclusion of assignment under the contract. 2. Delegation of duties under a contract: This is about delegating the duties under a contract. The extent to which the court will permit a delegation of duties will depend if the duty was specifically directed to one individual. The delegation of an assignment does not eliminate the responsibilities and duties of the original person. Until performance, the first person continues to have a duty to the promisee. The exception to that is if the promisee clearly releases the promisor from the duties and allows complete delegation to someone else. This is called NOVATION. 36