First Year Law School Contracts Outline

Insufficient Agreement: Indefinite, Incomplete, and Deferred Terms a. General Rules: i. If the withdrawing party has explicitly conditioned a willingness to deal upon the other party's clear agreement to material terms and the other has failed or refused to agree, no liability should attach ii. Where a phrase of contract is reasonably capable of different interpretations there is no contract b. Defective Formulation and Expression of Agreement c. Raffles v. Wichelhaus (Peerless) ***Landmark i. When there is no consensus ad idem, there is no binding contract ii. Restatement 20 (2nd) from this case - exception to objective test, cares about what the parties subjectively believed iii. Effect of misunderstanding 1. There is no manifestation of mutual assent to an exchange if the parties attach materially different meaning to their manifestations and: a. Neither party knows or has reason to know the meaning attached by the other or b. Each party knows or has reason to know the meaning attached by the other 2. The manifestations of the parties are operative in accordance with the meanings attached to them by one of the parties if a. That party does not know of any different meaning attached by the other and the other knows the meaning attached by the first party or b. That party has no reason to know of any different meaning attached by the other party and the other has reason to know the meaning attached by the first party. Indefinite Agreements a. Varney v. Ditmars (Employer offers 'Fair share of profits') i. Cardozo's Dissent 1. Creates a test for determining if a term is too indefinite a. First, did the parties manifest a contractual intent? If so; b. Is there an established benchmark for objectively resolving the uncertainty i. Believes damages can almost always be objectively assessed b. Schade v. Diethrich - Codification of Cardozo Dissent i. Restatement 33 - Certainty 1. Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain. 2. The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for a giving an appropriate remedy. 3. The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance Incomplete and Deferred Agreement a. Metro-Goldwyn-Mayer, Inc. v. Scheider (Actress and after pilot not wanting to be in show) i. Where the parties have completed their negotiations of what they regard as essential elements, and performance has begun on the good faith understanding that agreement on the unsettled matters will follow, the court will find and enforce a contract even though they have left those other elements for future negotiation or agreement. (Look at objectively) ii. Need intent and objective criteria (must be reasonable) and good faith understanding that agreement will follow b. Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher (rental agreement and increasing rate) (old law re: agreement to agree) i. A mere agreement to agree in which a material term is left for future negotiations is unenforceable, unless there is an established methodology for determining the missing term ii. Note - Agreement to Negotiate in Good Faith: Unlike an agreement to agree, which does not constitute a closed proposition, an agreement to use best efforts [or to negotiate in good faith] is a closed proposition, discrete and actionable (Channel Home Centers Division of Grace Retail Corporations v. Grossman) c. Oglebay Norton Company v. Armco, Inc. (Long-term contract for shipping iron) (new law re: agreement to agree) i. General Rule: "If it is found that the parties intended to be bound, the court should not frustrate this intention, if it is reasonably possible to fill in some gaps that the parties have left, and reach a fair and just result" ii. Rest 33, comment e: Where the parties intend to conclude a contract for the sale of goods and the price is not settled, the price is a reasonable price at the time of delivery if the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded iii. Rest 33, comment a: The actions of the parties may show conclusively that they have intended to conclude a binding agreement, even though one or more terms are missing or are left to be agreed upon; in such cases courts endeavor, if possible, to attach a sufficiently definite meaning to the bargain iv. UCC 2-305 - Open Price Term (not sale of goods, but applied by analogy) 1. The parties if they so intend may conclude a contract for sale even if the price is not settled. In such a case the price is a reasonable price at the time for delivery if: a. Nothing is said as to price; b. The price is left to be agreed by the parties and they fail; or c. The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded. v. vi. 2. A price to be fixed by the seller or by the buyer means a price to be fixed in good faith. General Rule: When there is evidence that the parties clearly intended to be bound, the price that the court will enforce is "the price that is reasonable under all of the circumstances at the time the service is rendered" and this is also guided by similar industry rates at the time Note: UCC 2-204(3): Even though one 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 1. Remedies where Agreement Incomplete or Indefinite a. General- Sliding scale of remedial protection i. If the incomplete or indefinite agreement is enforceable by whatever test, the plaintiff may seek to protect the expectation interest through specific performance or damages. ii. If these remedies are not available because of indefiniteness in the agreement, alternative remedies protect the reliance and, if all else fails, the restitution interests b. Hoffman v. Red Owl Stores, Inc. (Invested money in starting grocery store) i. To enforce a promise under promissory estoppel, the promise does not need to be as definite as an offer, it does not need all of the necessary terms to be enforced ii. No pre-contractual duty to negotiate in good faith, except if it is a contract to negotiate iii. "Neither UCC 1-205 nor Restatement 205 impose a duty of good faith in the negotiation of a contract, although protection may be achieved through such doctrines as unconscionability and through remedies in restitution or tort." iv. Section 90 only requires: 1. A promise the type that promissory should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promise 2. Did the promise induce such action or forbearance, 3. can injustice be avoided only by enforcement of the promise? The first 2 questions are the be determined by the jury and the jury in this case found in favor of Plaintiff. The last question requires court’s discretion and the ct. finds that justice can only be avoided if Plaintiff is compensated. c. Copeland v. Baskin Robbins U.S.A. (During negotiations for ice-cream) i. Rule: "A contract to negotiate the terms of an agreement is not, in form or substance, an "agreement to agree." 1. There is "no reason why in principle the parties could not enter into a valid, enforceable contract to negotiate the terms of a co-packing agreement; a contract after all is 'an agreement to do or not to do a certain thing'" 2. "Persons are free to contract to do just about anything that is not illegal or immoral, conducting negotiations to buy and sell ice cream is neither." 3. "If despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue, the contract to negotiate is deemed performed and the parties are discharged from their obligations." 2. Avoidance of Contracts (Defenses) a. Capacity to Contract i. Generally: Restatement 12: "No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties" ii. Assumption by courts that you have the capacity to contract iii. Infancy 1. Term of art - Governed by Restatement 14 a. Unless a statute provides otherwise a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person's 18th birthday. b. Once minor is adult can affirm or ratify iv. Void vs. Voidable 1. Void - DOA - Contract is void at its conception / null 2. Voidable - valid contract except it cannot be enforced against the party who's voidability is in favor of. a. I.e. Contract is voidable at the discretion at the minor, minor can seek to enforce it or void it. v. Bowling v. Sperry (16 y/o buying a car) 1. Restatement 14 - see above 2. Lying Exception: Contract valid if minor lies about his/her age (depends on jurisdiction). In this case, D was aware of P’s age when sale was negotiated. 3. Necessaries Exception: Infants can contract for necessities if they are offered at a reasonable price. Burden of proving this is on the D. In this case, it does not seem that the car was necessary to P. a. Condition of Life + Actual Need at the time of delivery b. Contract is still voidable even if it is a necessity (not enforceable against the infant) c. Does not resurrect the contract - pay a reasonable price, similar to promissory estoppel/unjust enrichment, minors will pay reasonable price when a necessary 4. Standard remedy is restoration- just give back whatever the minor has in its current condition. Does not matter even if P caused the damage to the car. The parties do not need to be placed in status quo (rescission would require the item to be back in its original state). 5. If contract is strictly between the vendor and the infant, it does not matter if there were adults present with the infant - only makes a difference if the adults are also a party to the contract 6. Note: As far as the effect of misrepresentation of age, the jurisdiction are all over regarding the approach to such misrepresentations a. Three approaches (See pg. 457, Note 8):  Majority: Mass. Rule (Minor not liable, contract voidable)  Minority: Tort Damages Rule (minor not contractual bound, but liable for tort damages)  Minority: Estoppel Rule (minor estopped from changing position) b. Checklist for Infancy i. Are they of age ii. Is it a necessary? 1. Suitable to their condition in life? 2. Actual need at time of delivery (i.e. no other reasonable means of obtaining the necessary)? iii. Is there a misrepresentation of age? c. Mental Incompetence - note that the exception for necessaries also applies for mental incompetence i. Conflicting Policies 1. Protect incapable persons v. protect security of transaction ii. Different from Infancy in that infancy is brightline, whereas here incompetence comes in gradations/variety iii. Restatement 15 1. Mental Illness or defect a. A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect i. He is unable to understand in a reasonable manner the nature and consequences of the transaction, or (Cognitive test) ii. He is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know his condition. (Behavioral test) b. Where the contract is made on fair terms and the other party is without knowledge of mental illness or defect the power of avoidance under subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires. iv. Restatement 13 1. A person has no capacity to incur contractual duties if his property is under guardianship a. Narrowly interpreted, only if someone has been legally adjudicated as incompetent and appointed a legal guardian. 2. Inadequacy of consideration plus something else, inadequacy of price within itself and disconnected from all other facts cannot be a ground for setting aside a contract or affording relief against it. There must be something else besides there mere inadequacy of consideration or unequal in the bargain to justify a court in granting relief by setting aside the contract. v. Heights Realty, Ltd v. Phillips (Old woman losing wits, selling property) 1. The test of mental capacity is whether a person is capable of understanding in a reasonable manner the nature and effect of the act in which the person is engaged 2. There is a presumption of competency which the party claiming incompetency must overcome with clear and convincing proof. If incompetency of a general permanent nature has been shown to once exist before the incident, it is presumed to continue and the party claiming competency must show with clear and convincing proof to the contrary. 3. Clear and convincing evidence standard: More than preponderance of evidence and less than beyond a reasonable doubt (evidence of condition prior to the incident is admissible to show condition at time of issue) vi. Citifinancial, Inc. v. Brown (mentally retarded son signs loan agreement) 1. Rule: Without consent of both parties there can be no contract, and without capacity to comprehend the nature, and terms of the proposed contract, there can be no consent 2. Issues of competency should be decided by the court and not arbitrators d. Intoxication i. Restatement 16 1. A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication a. He is unable to understand in a reasonable manner the nature and consequences of the transaction, or b. He is unable to act in a reasonable manner in relations to the transaction ii. Ervin v. Hosanna Ministry, Inc (Entering rehab and sign arbitration clause) 1. Following Restatement 16 - a party cannot be bound to a contract if they were intoxicated at the time when they entered into the contract. 2. Courts generally have been reluctant to allow for a voluntary intoxication defense - Varies by jurisdiction 3. Defects in the Bargaining Process a. The law assumes that you have given your consent unencumbered by anything other than your own self-interest i. Base level IQ; base level self-awareness; you know what you're doing b. Unilateral and Mutual Mistake i. General Assumption: An assumption has been indulged that the negotiating parties have roughly equal intelligence, information and economic resources and that one party has not abused any superiority in bargaining power or ability ii. iii. iv. v. Restatement 152: When Mistake of Both Parties makes a Contract Voidable - Mutual Mistake 1. Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154 2. IN determining whether the mistake has a material effect on the agreed exchange of performances, account is take of any relief by way of reformation, restitution or otherwise. Restatement §153- When mistake of ONE party makes a contract voidable - Unilateral Mistake 1. Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake…., 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 the mistake Restatement § 154- When a Party Bears the Risk of a Mistake 1. A party bears the risk of mistake when a. The risk is allocated to him by agreement of the parties, or b. He is aware, at the time the contract is made, that he has only knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or c. The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so Cases: 1. Boise Junior College District v. Mattefs Construction Co. (Subcontractor retracts bid) a. Rule: One who errs in preparing a bid for a public works is entitled to equitable relief for rescission if establish that i. the mistake is material ii. enforcement of a contract pursuant to the terms of the erroneous bid would be unconscionable iii. the mistake did not result from violation of a positive legal duty or from culpable negligence 1. Good Faith required and no gross negligence 2. Clerical errors made using reasonable caution/ordinary care are not material, so long as they are not done in bad faith iv. the party to whom the bid is submitted will be prejudiced except by the loss of his bargain AND v. prompt notice of error is given b. Differs from Drennan, in Drennan would have suffered an injury, here only less profit c. Just because a mistake is material does not mean it is also unconscionable i. Enforcement of a bid is deemed unconscionable as working a substantial hardship on the bidder where it appears he would incur a substantial pecuniary loss d. Notes: i. If the offeree knew or should have known about the mistake it is arguable that he or she had no power to accept the offer at all ii. The offeree will not be permitted to snap up an offer that is too good to be true; no contract based on such an offer can then be enforced by the acceptor iii. A bidder should not be allowed to rescind a mistaken bid if the bid were made in bad faith iv. In cases of apparent mistakes and in cases where the contracting officer has reason to believe that a mistake may have been made, the contracting officer shall request from the bidder a verification of the bid, calling attention to the suspected mistake 2. Beachcomber Coins, Inc. v. Boskett (Selling unauthentic coin) a. A person must be aware of the risk (i.e. false fact), even if it is small, for them to be assuming the risk i. "Where the parties know that there is doubt in regard to a certain matter and contract on that assumption, the contract is not rendered voidable because on is disappointed in the hope that the facts accord with his wishes" b. Negligent failure of a party to know or to discover the facts as to which both parties are under a mistake does not preclude rescission or reformation on account thereof 3. Sherwood v. Walker (moo cow…landmark) a. Distinguishing types of mistakes: substantial vs. quality If the mistake is to the very substance or nature of the object then that is a valid claim ii. If the mistake is to the value or quality, then that is not a valid claim b. This is NO LONGER GOOD LAW 4. Lenawee County Board of Health v. Messerly (OVERTURNS SHERWOOD - Undisclosed Septic Tank Problem) a. Rule: A contract may be rescinded because of a mutual misapprehension by the parties, but this remedy is granted only in the sound discretion of the court i. A court need not grant rescission in every case in which the mutual mistake relates to a basic assumption and materially affects the agreed performance of the parties (case-by-case approach) ii. Restatement 154- basic assumption / materially impact b. No longer any distinction between value and quality in regards of mistake, material mistake is what matters 5. Ayer v. Western Union Telegraph Co. a. Rule: "As between the sender and receiver, the party who selects the telegraph as the means of communication shall bear the loss caused by the errors of the telegraph" b. If a 3rd party makes the mistake in transmission, the sender may get relief from the 3rd party for the cost of the mistake (actual value minus the mistaken value) c. Fraud and the Duty to Disclose i. Generalities- misrepresentation (fraud); omission (failure to disclose) 1. General Rule: No general duty to disclose 2. "Fraud is kaleidoscopic, infinite": Courts have been hesitant to define the bounds of fraud a. Otherwise, liars would side-step the law just enough to avoid being sued ii. Laidlaw v. Organ (purchase of tobacco, buyer had privileged information regarding future value increase) 1. Rule: "Each party must take care not to say or do anything tending to impose upon the other" a. But what does "impose" mean? Pretty broad… b. If asked directly for information, omission equivalent to misrepresentation iii. Vokes v. Arthur Murray, Inc. (dancer induced to buy lessons; "praise made just to ring the cash register") 1. Rule: Generally, misrepresentations to be actionable must be one of fact rather than opinion i. iv. a. Under what circumstances can an opinion be considered an actionable misrepresentation: i. When fiduciary relationship 1. Guardianships, Executor, Banker, lawyers, Trustees ii. When artifice or trick iii. When parties do not deal at arm's length 1. Relationships (Familial Relationships) iv. When representee does not have equal opportunity to become apprised of the truth or falsity 1. When one party has superior knowledge 2. Rule: Even in contractual situations where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries respecting such facts, the law is if he undertakes to do so he must disclose the whole truth Hill v. Jones (termite inspection and failure to disclose--when is there a duty to speak?) *** (well-written) 1. Rule: Modern view of affirmative duty to disclose, when (COURT'S version of 161) a. disclosure intended to prevent previous assertion from being a misrepresentation or from being fraudulent or material; b. disclosure would correct mistake of the other party as to a basic assumption on which that party is making the contract AND if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing i. combining basic assumption with nondisclosure is failure to act c. disclosure would correct mistake of other party as to contents or effects of a writing, evidencing or embodying an agreement in whole or in part d. other person entitled to know the fact b/c of relationship of trust and confidence b/w them (fiduciary relationship plus) 2. Rule: Under certain circumstances nondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist a. Thus nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation b. One area that this is applicable: the nondisclosure of material facts affecting the value of property known to the seller but not reasonably capable of being known to the buyer v. 3. Materiality: "A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question" Notes: 1. Promissory Fraud: a. General Rule: "Since a promise necessarily carries with it the implied assertion of an intention to perform, it follows that promise made without such an intention is fraudulent" b. This is not about future action, but present action (when the promise was made) c. Not established cause of action in all jurisdictions 2. If the misrepresentation involves the very instrument (the contract) then impact is that the contract is void. As opposed to if a misrepresentation goes to the inducement of the contract (e.g. value, quality), then the contract is voidable. a. most cases deal with inducement, but some cases are about what people are signing (e.g. sick person signing something that was misrepresented) 3. Remedies: a. Tort b. Contract: Equitable rescission i. rescind – purpose is restitution 1. only entitled to be returned to the status quo 2. Lower bar- misrepresentor doesn't have to intend to deceive ii. Innocent misrepresentation or half-truth representations can also justify rescission 1. Still unjust to allow the misrepresentor to retain the fruits d. Duress and Undue Influence i. In general, duress has moved a lot from the original common law 1. Originally needed actual physical harm to occur in order to have a duress claim 2. Now a much broader definition (economic, mental distress, etc.) 3. Legal recognition has expanded greatly a. Seems to be slightly undermining the need for undue influence ii. Rubenstein v. Rubenstein (arsenic- wife getting hubby (bad dad) to divest property) 1. Rule: For a duress defense to apply, the pressure must be wrongful (but not all pressure is wrongful) a. Court takes subjective approach to wrongfulness b. Modern approach is objective (Restatement 174, 175, and 176 {list of the activities is generally accepted, 176(2) is tricky to apply/less accepted}) iii. Austin Instrument, Inc. v. Loral Corp (Austin muscles Loral for price increase and bigger order) 1. General Rule: "A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of free will" a. Test: i. Party who asserts business compulsion must show that he has been the victim of a wrongful or unlawful act or threat ii. Such act or threat must be on which deprives the victim of his unfettered will; forced to comply because has no reasonable alternative b. Establishes Economic duress rule (Restatement §175 (1)) i. Improper threat AND ii. No reasonable alternative iv. Machinery Hauling, Inc. v. Steel of West Virginia (paying more money for undelivered steel) 1. Rule: Restatement 175(1) a. "If a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim" b. Economic Duress: "Where the plaintiff is forced into a transaction as a result of unlawful threats or wrongful, oppressive, or unconscionable conduct on the part of the defendant which leaves the plaintiff no reasonable alternative but to acquiesce, the plaintiff may void the transaction and recover any economic loss" c. No legal right to future economic relationship, therefore threatening to not do work in the future when under no obligation does not equal an improper threat for duress. e. Undue Influence i. Unfair persuasion that may fall short of constituting actual duress/coercion (lower threshold than duress) ii. Usually limited to relationships of trust 1. Fiduciary relationships are sub-set iii. Relationships of domination are different, you are vulnerable, your interests aren't the dominator's concern 1. Such as employer/employee relationship f. Unconscionability i. ii. General Rule UCC 2-302 1. If the court as a matter of law finds the contract of any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result 2. When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination 3. Notes on 2-302 a. Court can bring it up on its own b. More liberal rules of evidence i. No fear of contaminating the jury ii. Can only judge if the contract is fair by looking at the broader scope of the situation iii. Doctrine is flexible, do not want to define unconscionability because will be easy to get around Consumer Transactions 1. Williams v. Walker- Thomas Furniture Co. (bought 14 items on credit, clause says company still owns) a. Rule: UCC 2-302 i. "When a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms" 1. "in such a case the usual rule that the terms of the agreement are not to be questioned (freedom to contract) should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld" 2. Balancing act between "freedom to contract" to "protection of contracting parties" b. Unconscionability is: i. Absence of meaningful choice (procedural) plus (pp. 541-542) 1. Lack of knowledge 2. Lack of voluntariness Unreasonably disproportionate terms (one side gets a huge advantage) (substantive) 1. Terms are oppressive, one-sided, or no remedy c. Why do we need the two part test? i. If there is a meaningful choice, then you could have walked away ii. If the terms are reasonable, it doesn't matter that you didn't have a choice because you got a fair deal d. Dissent: Must take caution when not upholding contracts i. Don't want to discourage creditors from dealing with lower class population ii. Will do more harm than good 2. Fleet v. US Consumer Council, Inc. (council overcharges lowincome people for referral) a. Rule: "If the price is grossly excessive in relation to the seller's costs, and if in addition the good sold have little or no value to the consumer for the purpose for which he was persuaded to buy them and which the seller pretended they would serve, the price paid by the consumer takes on even more serious characteristics of imposition" 3. Ferguson v. Countrywide Credit Industries, Inc. (employment contract requiring arbitration / sex harassment) a. Balancing test of procedural and substantive unconscionability- subject to court discretion i. "in order to render a contract unenforceable under the doctrine of unconscionability, there must be both a procedural and substantive element of unconscionability…" ii. "these two elements, however, need not both be present in the same degree... the more substantively unconscionability oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable" b. Procedural test whether the manner in which the contract was negotiated and the circumstances of the parties at that time focuses on two factors: oppression and surprise i. Oppression arises from an inequality of bargaining power resulting in no real negotiation and an absence of meaningful choice ii. iii. iv. Surprise involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the written instrument c. Substantive test focuses on the terms of the agreement and whether those terms are so one-sided as to shock the conscious Commercial Transactions 1. General Notes a. It is much easier to win on unconscionability in a consumer contract as opposed to a commercial contract (between 2 businesses) i. A higher level of sophistication is presumed to occur in the marketplace 2. Weaver v. American Oil Co. (employment contract with "hold harmless" clause and gas fight- think Zoolander) a. Same test of unconscionability in UCC 2-302, but in light of general commercial background and commercial needs of the particular trade b. Signing/making of hold-harmless/indemnification agreements must be done willfully/knowingly - if not, then it tends to show procedural unconscionability i. Hold harmless clauses by themselves aren't unconscionable ii. Can contract away your negligence liability but not liability for intentional torts 3. Zapatha v. Dairy Mart, Inc. (franchise of Dairy Mart and termination clause) a. Why is this contract upheld? i. No procedural unconscionability 1. Agent read and explained the contract to Zapatha 2. Agent encouraged Z to consult an attorney regarding the contract terms 3. Z had studied business and should have known what he was getting into and what the implications were ii. Court assumes he could have freely walked away 1. Not an assumption you can just make, have to pay attention to the background facts 1. Does every franchise have this type of agreement? 2. Is Dairy Mart the only franchise available in the area? Notes: ii. 1. Concerning procedural unconscionability, courts will examine and consider (p. 570): a. the educational background and work experience of the parties b. Relative bargaining power c. Age of the parties d. Whether alterations were possible e. Whether alternate sources of supply for the goods in question f. Whether the terms were explained to the weaker party g. Who drafted the contract, et cetera 2. Concerning substantive unconscionability, courts will examine and consider (p. 570): a. Whether the terms were contractually reasonable 3. Adhesion Contracts a. Non-negotiable, "take it or leave it" contract b. Usually enforceable, unless circumstances leave no meaningful choice 1. Restatement 208 a. If a contract or term thereof is unconscionable at the time the contract, is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable terms as to avoid any unconscionable result g. Illegality: Agreements Unenforceable on Grounds of Public Policy i. General 1. Sect. 512 - Bargain illegal if tortious/criminal/opposed to public policy 2. Sect. 598 - if both parties are equally involved in illegality, neither can recover damages for breach, nor, by rescinding the bargain, recover the performance that he has rendered thereunder or its value a. Basically, the parties are left where they stand; generally, the court will not intervene to help when both parties are culpable 3. Sect. 178 - When a Term is Unenforceable on Grounds of Public Policy a. A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms ii. iii. b. In weighing the interest in the enforcement of a term, account is taken of a. The parties justified expectations (expectation is the end product that the parties look forward to), b. Any forfeiture that would result if enforcement were denied, and (forfeiture means out of luck, out of pocket losses) c. Any special public interest in the enforcement of the particular term. c. In weighing a public policy against enforcement of a term, account is taken of a. The strength of that policy as manifested by legislation or judicial decisions, b. The likelihood that a refusal to enforce the term will further that policy, c. The seriousness of any misconduct involved and the extent to which it was deliberate, and d. The directness of the connection between that misconduct and the term (this seems more/most important!) 4. Purpose - discourage illegal bargaining 5. Illegal/contrary to public policy makes the contract void Sinnar v. Le Roy (plaintiff gives $$ to guy to get beer license, guy steals $$) 1. Illegality of beer license is serious - condemns contract 2. Pari delicto - equality of fault- relief denied to both parties 3. Rule: "it is within the realm of contemplation that a contract of this nature would readily suggest to one desirous of securing a highly compensatory result, to employ means which the law, good morals and public policy do not sanction" a. "To anticipate and prevent a subversion of a proper administration of justice, the law should make it impossible for any such temptation to be carried into fruition by condemning a contract that contains the germ of possible corruption." 4. Parties are kept in the position they entered the court, no restitution for either party Homami v. Iranzadi (Iranian brothers, loan between the two, trying to avoid having to pay taxes on the interest) 1. Rule: If a plaintiff requires the aid of a illegal transaction to establish his case, the contract is unenforceable 2. Illegality does not have to be pled, can be raised at anytime during the proceeding/court can bring it up on its own (sua sponte) a. Very liberal rule of evidence (note- burden on the person claiming public policy) iv. v. vi. 3. Contract was based on an illegal goal (not having to pay taxes) - therefore an illegal contract and void Data Management, Inc. v. Greene (covenant not to compete for 5 years - employee) 1. Court prefers 3 approaches to correcting unenforceable noncompete agreements (must first consider whether it is unenforceable): a. Throw contract out; hold agreement unenforceable b. Throw offending provisions out (blue pencil rule) c. Or redraft contract to make enforceable (court in this case accepts the third approach) 2. Two things courts generally examine in covenants not to compete a. Whether it protects some legitimate interest of the promisee a. What are you trying to accomplish b. Whether it is reasonable in scope. a. Reasonableness factors are listed on pg. 594 3. Note (pg. 596): General rule: "an employer is not entitled to protection from an employee's use of his knowledge, skill, or general info acquired or increased through experience or instruction while in the employment" Watts v. Watts (co-habitation agreement with stay at home mom) * good practice pointer for Unjust Enrichment 1. For public policy, must balance in light of the circumstances a. the interest in enforcing a promise against the policy of enforcement Wallis v. Smith (woman hoodwinked guy and she got pregnant) 1. Takeaway: "not all misrepresentations are actionable" 2. Impact of father's argument would be contrary to public policy a. Allows him to shirk his statutory and common law responsibilities to take care of his progeny 3. Contraception is non-delegable duty 4. PERFORMANCE a. Determining Scope and Content of Obligation i. Integrated Writings and Parol Evidence Rule ii. Two major issues 1. Is the writing a final and complete expression (intent) 2. Whether the stuff contradicts what is in there (reasonable standard inquiry / interpretation inquiry) iii. Parol evidence rule 1. Enter into an agreement a. Usually a writing exists i. Then there is something said that is collateral to the writing iv. ii. There was something else agreed to on top of b. Cannot be contrary to valid K c. Nothing after the writing only before and collateral to d. Not talking about subsequent modification i. Those are governed by the rules involving modification 2. Is it a complete and final agreement? a. Did parties intend for the agreement to be the complete and final ? 3. Does it contradict the statements in the final contract? a. Usually a question of intent 4. The court will use the tests outlined by the common law for the application of the PER  Then it is for the jury to decide whether the evidence is credible or not and if should be integrated into the written agreement  So technically, the judge doesn't make the final determination, but decides whether or not the evidence should even be admitted to begin with Background - 4 Tests  4 Corners Test a. Judge looks closely at contract to see if it is "complete" i. Complete = All terms you would expect to be there are there (i.e. price, quantity, etc.) b. If complete then no parol evidence allowed c. If not then parol evidence is allowed  Collateral Contract Test a. Judge looks at the alleged evidence and the contract to see the relationship between them b. If too remote, then there is no connection between the two and evidence is not allowed c. It too close, then it is assumed that it should have been in the contract and therefore is not allowed d. If in the gray murky between the extremes, then it is deemed "collateral" and allowed  Williston Test (objective) a. Look at the contract, the alleged evidence, and the context in which the contract was entered b. In the context of the situation, would a reasonable person "naturally omit" the alleged evidence? i. If yes, then evidence is admitted 1. If reasonable parties would naturally omit it, the court will allow the parol evidence to be admitted ii. If no, then evidence is not admitted v. 1. If reasonable person would have included it, then the writing must be fully integrated because otherwise it would have been included  Corbin/UCC/Restatement (subjective) a. Corbin/UCC 2-202 Comment 3: i. Looks at the parties subjective intent. Would the parties have naturally included the term, given the context of the situation?  If yes, then contract is deemed complete and alleged evidence is not admitted  If no, then evidence is admitted b. Restatement Section 216: i. Evidence of consistent additional terms is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated. ii. An agreement is not completely integrated if the writing omits a consistent additional agreed term which is  Agreed to for separate consideration, or;  Such a term as in the circumstances might naturally be omitted from the writing. Intergration / merger clause  Clause saying fully complete contract - but merely strengthens presumption that the writing is the final and complete agreement a. Is rebuttable (integration clause is not absolutely conclusive) Mitchill v. Lath (oral agreement for ice house removal didn't invoke PER) 1. Majority uses a little four corners and collateral and reasonable person 2. Dissent uses Williston, but not clear as to what "naturally" means Masterson v. Sine (land conveyed with buy-back option; disagreement about meaning of buy-back consideration clause, should evidence have been admitted regarding assignability to keep in family) 1. Rule: UCC - "If additional terms are such that, if agreed upon they would certainly have been included in the document in the view of the court. Then evidence of their alleged making must be kept from the trier of fact. vi. vii. Rule: Restatement (First/Don't care about it) 240 - "Is such an agreement as might naturally be made as a separate agreement partiers situated as were the partiers to the written contract." viii. Alaska Northern Development, Inc. v. Alyeska Pipeline Service 1. An integrated writing exists where the parties intend that the writing be a final expression of one or more terms of their agreement a. General rule: "An earlier agreement may help the interpretation of a later one, but it may not contradict a binding later integrated agreement; whether there is a contradiction depends on whether the two are consistent or inconsistent" 2. Evidence which contradicts the contract cannot be admitted under PER a. Utilize two tests to determine if something contradicts a. Hunt test - only exclude that which contradicts the writing b. Snyder test - only exclude that which is not in reasonable harmony with the contract (this is modern majority test, somewhat more flexible than Hunt test) ix. Luther Williams, Jr., Inc. v. Johnson 1. Gives us an exception to PER a. Evidence regarding conditions will generally be admitted b. "Parol testimony to prove such a condition is admissible when: a. The contract is silent on the matter b. The testimony does not contradict nor is it inconsistent with the writing, and c. If under the circumstances it may property be inferred that the parties did not intended the writing to be a complete statement of their transaction" 2. Evidence pertaining to other defenses will also always be admitted b. Interpretation i. General - let evidence of interpretation come in if the language of the contract is "reasonably susceptible" to the meaning being offered 1. Question of law issue 2. Different from PER in that this deals with the MEANING of the contract ii. Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. (indemnity clause for gas fight) 2. iii. iv. 1. This is an interpretation question and not PER because presented as "we meant" and not "we agreed" or "we told them" 2. Plain Meaning Rule - Examine the plain meaning of the word in contention a. Unless the plain meaning is ambiguous, there is no question over interpretation 3. Modern Rule: Look at whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible a. Evidence will be allowed if the term is reasonably susceptible to it b. Not looking for the "meaning of the term" so much as what the parties intended the term to mean c. Final determination of what the term means is a question of fact for the jury; judge determines as a matter of law whether the term is reasonably susceptible to different interpretations 4. Circumstances- object, nature and subject matter of the writing so that the court can place itself in the same situation in which the parties found themselves at the time of contracting" A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc. (Broke down engine in chartered ship) 1. Kemp wants PER, but in order to use, must first determine whether language is "reasonably susceptible" to Kemp's meanings (interpretation) a. Won't know if it would have been naturally omitted without knowing what the hell it is in the first place b. Rule: "The PER requires that courts consider extrinsic evidence to determine whether the contract is ambiguous, but if the extrinsic evidence advances an interpretation to which the language of the contract is not reasonably susceptible, the evidence is not admissible" Frigaliment Importing Co. v. B.N.S. International Sales Corp. (what the hell is a chicken anyway!!!!) 1. Contra Proferentem: "In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds." 2. Court considers all circumstances when determining meaning (especially, in this order, course of performance, course of dealing, usage of trade) 3. See Rest. 202, pg. 655 (for summary of interpretation rules/guidelines) 5. The Duty of Good Faith i. General Rules / Ideas i. General definition: UCC 1-201: is "honesty in fact and the observance of reasonable commercial standards of fair dealing" ii. 4 settings where claims of bad faith are frequently made: 1. Prevention, hindrance, or failure to cooperate 2. Exercise of discretion granted by the contract 3. Contract modifications 4. Termination of the contract for reasons other than breach iii. Good faith de minimus 1. Honesty in fact in conduct (varies within context) 2. UCC expands - fair dealing is more than just honesty in fact community standards of decency, fairness, reasonableness ii. Scope and Content of Good Faith i. Centronics Corporation v. Genicom Corporation (too what extent can discretion be limited with regard to escrow account funds withdrawals) 1. 3 types of situations which tend to give rise to the idea of good faith in contracts a. Standards of conduct in formation i. Think misrepresentation, check on freedom to contract b. Limits on discretion in contractual performance i. Illusory promises, etc.; again, check on freedom to contract c. Termination of at will contracts i. Can't be fired for the "wrong reason" but can be fired for no reason at all 2. Definition of good faith a. Consistency with mode of behavior (fair dealing) b. Fidelity to the common purpose c. Fidelity to reasonable expectations 3. There is a fine line between seeking enforcement of good faith in performance of a contract and back-handedly seeking a revision in the obligations of the parties 4. Rule: if an objective basis exists to infer that the parties never bargained away the right of either of them to condition some term upon discretion of one or both of the parties, then a party reserving such discretion cannot be guilty of bad faith by insisting on exercising that discretion iii. Prevention, Hinderance, and the Duty of Corporation i. General 1. What is the common project? 2. What are reasonable expectations? (implied duty to not frustrate other parties reasonable expectations) ii. Patterson v. Meyerhofer (woman bypasses contract at land auction) iii. iv. v. vi. vii. 1. Once you enter into a contract, you can't frustrate the common purpose a. Implied Duty to Cooperate: implied undertaking for each party to not intentionally and purposely do anything to prevent or frustrate the other party from carrying out the agreement on his part Iron Trade Products Co. v. Wilkoff Co. (P frustrates the rail market, D has trouble performing) 1. Implied Duty to Cooperate a. However, if P's actions make it more difficult for D to render performance it does not violate the implied duty. This is the old rule b. Modern Rule: i. You can't take steps which you know will make performance burdensome for the other party  Seems logical, how can you be in good faith when you are going out of your way to make it hard for them to do  Also, seems to be following the doctrine of impracticability (used to be impossibility as the standard) - law makes the defense more flexible, does not have to be impossible but simply unreasonably burdensome KW Plastics v. United States Can Co. 1. (there is a tort of intentional interference with prospective business relationship…jury must be able to be reasonably certain of loss of profits) (SEE p. 675) Stockton v. Sowerwine (assigned son tries to exercise option to repurchase / guy frustrates) 1. Rule: One who prevents or makes impossible the performance or happening of a condition precedent upon which his liability by the terms of a contract is made to depend cannot avail himself of its nonperformance. Market Street Associates Limited Partnership v. Frey (non-disclosure of penalty to sell building at fixed price if negotiations broke down) 1. Good faith - half-way between fiduciary duty and duty to refrain from active fraud 2. Takeaway: "Contracts do not just allocate risk; they also (or some of them) set in motion a cooperative enterprise, which may to some extent place one party at the other's mercy; the office of the doctrine of good faith is to forbid the kind of opportunistic behavior that a mutually dependant, cooperative relationship might enable in the absence of the rule" Hindrance Wrap Up 1. Seen as a violation of the implied duty of good faith 2. No fiduciary duty to help the other party, but a duty to not hinder/deter/etc. 3. Fidelity to a common project is the operating mechanism, don't frustrate the reasonable expectations of the other party iv. Exercise of Reserved Discretion i. General: 1. Start with the question, is there discretion? 2. If there is, what is the nature of the discretion? a. If unchecked/boundless then make sure it is not an illusory promise b. If not illusory, then discretion is checked by good faith. i. Standard can be both objective or subjective depends on the subject matter 3. Market fluctuations tend to be a reason why people try and back out of deals a. Never seen as a sufficient reason for backing out of the contract ii. Billman v. Hensel (real estate contract subject to procurement of financing) 1. Rule: condition precedent clauses impose upon the buyers an implied obligation to make a reasonable and good faith effort to satisfy the condition 2. Rule: "A promisor cannot rely upon the existence of a condition precedent to excuse his performance where the promisor, himself, prevents performance of the condition" iii. Neumiller Farms, Inc. v. Cornett (I can buy potatoes all day for $2, biatch) 1. Focus in discretion cases is on the motive of the person exercising the satisfaction clause a. Must be made in good faith o General Rule: "Where the condition requires satisfaction as to commercial value or quality, operative fitness, or mechanical utility, an objective standard is to be used in determining whether the clause has been satisfied; on the other hand, if a judgment dependant upon personal taste or fancy, such as design of a dress or execution of a portrait is involved, a subjective test is appropriate"  Restatement 228: "if it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied" b. Objective or subjective standard? iv. Prefer objective standard if practicable  Industry standards  Reasonable person  Etc. ii. Subjective applies when satisfaction is dependent on personal taste - still must be in good faith Feld v. Henry S. Levy & Sons, Inc. (ewww breadcrumbs/output contract; cessation of manufacture) 1. Good faith cessation terminates future obligations (e.g. if bankruptcy would ensue), but generally not ok if you are just wielding less of a profit 2. Rule: UCC 2-306(2): "A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale" i. v. Modification i. Roth Steel Products v. Sharon Steel Corp. (selling steel and not in honesty in fact def modifies for higher price) 1. Two step process for determining if modification is valid a. Whether the party's conduct is consistent with "reasonable commercial standards of fair dealing in the trade" i. Party seeking modification must demonstrate that the modification is the result of a factor, such as increased costs, which would cause an ordinary merchant to seek a modification of the contract b. Whether the parties were in fact motivated to seek modification by an honest desire to compensate for commercial exigencies (honesty in fact) i. Party asserting the modification to demonstrate that he was, in fact, motivated by a legitimate commercial reason and that such a reason is not offered merely as pretext, can't be trying to get a modification through an impermissible attempt to obtain a modification by extortion or overreaching 2. Note 4 on pg. 709 a. Mere threat not to deliver goods by itself is not enough to constitute economic duress; the receiving party must also not be able to obtain elsewhere 3. Note 5 on pg. 709 (Mahmud said this is important to remember)  "a party advantaged by changed circumstances has no duty to negotiate with the disadvantaged party unless the contract so requires, even then, the duty is to negotiate in good faith, not to agree to modification" vi. Termination of Contractual Relations for Other Than Breach i. General 1. Dissolution of contractual relationship - generally, foul play goes up when you are ending a contractual relationship 2. Commercial contracts- assumption of equality of bargaining power/knowledge/etc. ii. Commercial Contracts 1. Zapatha v. Dairy Mart, Inc. (franchise agreement termination also in unconscionability section) a. Honesty in fact found b/c the contractor was "honest" in why he was terminating it (doesn't matter that it was a crappy reason) b. If there is no evidence of bad faith, e.g. fraud, dishonesty, deception, unfairness, then must presume good faith i. Burden is on the party asserting bad faith to support the assertion with proof; otherwise good faith is assumed iii. Employment Contracts 1. Hillesland v. Federal Land Bank Association of Grand Forks (banker's son bought property from client and fired) a. Employer may discharge "at will" with 2 exceptions i. Public policy (typically civil rights issues) - can fire for no reason, but not wrong reason ii. Implied covenant of good faith and fair dealing (majority of states follow) - minority think good faith is too burdensome on businesses  This court doesn't accept this exception  "To imply into each employment contract a duty to terminate in good faith would subject each discharge to judicial incursions into the amorphous concept of bad faith."  Every state but Missouri will follow an express covenant of good faith 6. Allocation of Risk: Conditions a. Express Conditions - Nature and Effect i. General 1. Condition (defn)- a thing which may not happen, but has to happen in order to make your obligation under a contract absolute 2. Why people have them: a. Protect themselves i. Allows you to get what you want, but still leaves you an escape hatch 3. Classifications of Conditions a. Precedent i. Must be satisfied in order to trigger the other's obligation ii. Proceeds performance by other party b. Concurrent i. 2 or more conditions/performances contingent on each other ii. "yours triggers mine and mine triggers yours" c. Subsequent i. Performance is a continuing performance, but if something happens it is stopped  i.e. I will sell you X for $Y unless Z happens.  Something which cuts off obligation to perform 4. How do conditions arise? a. Express - can be oral or written (Dove v. Rose Acre Farms, Inc.) b. Can be implied in fact (implied conditions) (Wal-Noon Corp. v. Hill) i. Even if contract does not expressly say so, the circumstances may support a construction that something must happen before performance becomes due ii. Circumstantial intent c. Can be implied in law (constructive conditions) i. Centers on demands of justice, not circumstances ii. If justice demands implication of a condition, then the court will construe the contract as such 5. Q's to ask for exam: a. Is there a condition? b. If so, what type? c. Has the condition come through? Or failed? d. If it has failed, no performance due by other, one has forfeited their right to the other's performance i. Usually, end of story ii. iii. iv. v. But not, if there is an excuse to perform the condition or sustain some condition? e. If condition has come through, then performance due, unless some excuse to performance Dove v. Rose Acre Farms, Inc. (the bonus case; worker gets strep throat) 1. "Conditions bite hard:" failure to perform the condition results in forfeiture; substantial performance is not enough 2. Where an express condition was fairly bargained for, the court will strictly enforce it 3. This is a good example of an express condition and a condition precedent (performance triggers pay) 4. How do we determine if it is a condition or a promise? a. Language is key: "subject to," "provided," "conditioned on," etc. indicate condition b. The "on and off switch" for my performance is your performance or non-performance, not your promise Wal-Noon Corp. v. Hill (lessor fixed roof before notifying owner and then asked for $$ for it) 1. Court says the condition precedent is implied in fact; circumstances make it so that the absence of the condition frustrates the intent of the parties per the contract a. That which is necessarily implied in the language of the contract of a contract is as much a part of it as that which is expressed b. Will be implied in fact if not doing so would prejudice one of the parties (in a way that would be inconsistent with intentions of the contracting parties) Warranties v. Conditions 1. Warranties - generally treated as a promise a. Breach of promise opens the door for damages 2. Conditions a. Not seen as a promise, failure of condition simply excuses performance, results in forfeiture In re Carter's Claim (stock goes down before sale- but buyer still buys, then bitches) 1. Failure of a condition is a "shield" not a "sword" - does away with duty to perform (no damages) a. Courts generally try to read a promise rather than a condition (b/c promise doesn't stop the K) 2. Note (pg. 753): There is a fine line between condition precedent with relation to time, and a mere statement of a convenient time - looks like a condition but court's will tend to construe as a timing promise a. i.e. I'll pay you when you build my house. ii. Payment is not conditioned on completion of the house, but is simply set to be performed once the house is completed (the timing) b. John's Fancy Language Rule: "where the promise of a prime contractor to make final payment [to a sub] after he has received final payment for construction [from the owner] was said not to make such receipt of final payment a condition precedent, but rather fixed as a convenient time for payment" 3. Once there was a failure of a condition, if you go forward w/ your performance you can't then go back and get damages (waiver); you should have stopped performance once condition failed (all you could have done) b. Excuse of Express Condition i. Waiver 1. Voluntary relinquishment of known right a. Not a contract b/c no consideration b. Even if a condition is there, it can be removed by waiver c. Notion that we can part with what is ours ii. Clark v. West (writing a law school book and can't drink booze??? What is up with that?) 1. Ways in which waiver may be made: a. Express: you tell them or put in writing that you are waiving the condition b. Implied: Circumstances indicate that one doesn't care about the condition or is not going to enforce it i. By election (treating as if not there; moving forward without insisting on condition) ii. By estoppel (relies on some representation by obligor suggesting that condition will not be insisted upon) iii. Ferguson v. Phoenix Assurance Company of New York (safe robbery, insurance company says fuck you, big surprise) 1. Courts cannot relieve disadvantageous terms through a process of interpretation, unless it goes beyond reasonable requirements necessary to prevent fraud and thus contravenes public policy 2. Court holds that if evidentiary requirements are designed to defeat just claims, they will not be enforced as condition precedents (against public policy) 3. Shows us the extent that courts will go to in order to defeat failure of conditions in order to protect parties a. Specifically with insurance policies (courts will typically construe policy against insurer) i. Unequal bargaining power i. Adhesion contract Ability to absorb the impact (by ins. Companies) 4. Note: Restatement §229: a. Exception to enforcement of condition b. "To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange" c. Constructive Conditions of Exchange i. General 1. Order of performance; how much performance; result of not completing 2. How work with consideration? a. Both this doctrine and consideration are fairly new b. This is procedural (consideration is not) i. This deals with what you must plead ii. Historical Development 1. Note a. Before - assumed independent exchange of promise b. Now - assume dependent 2. Kingston v. Preston (plaint to give business when you give me security- dependant) a. Promises are considered as dependant promises unless expressly stated otherwise b. Three types of covenants (mutual and independent; conditions and dependant; mutual conditionsconcurrent) 3. Goodison v. Nunn (purchase and sale - forfeiture of earnest money) a. Unless otherwise stated in the contract, promises will be treated as mutually dependent upon one another b. Dependant - no action lies unless one performs or offered to perform his obligation 4. Palmer v. Fox (house purchase conditioned on improvements to streets; graded not cinderized) a. Rule: Covenants are dependent upon one another unless contrary to evidence of the intentions of the parties b. Note 3 on pg. 777: i. Dependency of conditions offers parties max security against disappointment and avoids placing burden of financing the other before the other has performed ii. iii. Rule: Party asserting existence of implied in fact covenant bears heavy burden to prove two things: 1. It is the more sensible interpretation 2. Promise sought to be enforced is in fact implicit in the agreement c. Note 4 on pg. 777: i. Restatement §234: 1. Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary 2. Except to the extent state in subsection 1, where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary iii. Avoidance of Forfeiture 1. In general: a. Occurs when one party has performed, but not completely/correctly b. Question is how much performance is necessary to satisfy the condition? 2. Jacob & Youngs v. Kent (Cardozo- pipe in the house was NOT Reading) a. Cardozo's checklist of things to go over (incorporated into §241): i. Purpose to be served ii. Desire to be gratified iii. Excuse for deviation iv. Cruelty of enforced adherence b. Remedy would be the difference in values, not the cost of replacement i. Diff. in value used whenever cost of completion grossly and unfairly out of proportion to the actual worth of the benefit c. Dissent says that Cardozo is mistaken i. Owner should get what he contracted for (entitled to it) 3. Restatement §241: ii. 4. In determining whether a failure to render or to offer performance is material, the following circumstances are significant: i. (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; ii. (b) the extent to which the injured party can be adequately compensated for the part of that benefit which he will be deprived; iii. (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture (magnitude); iv. (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; v. (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing O.W. Grun Roofing and Construction Co. v. Cope (brown/discolored roof: where's my russet glow!?!) a. Rule: Restatement §241 b. Rule: Material breach defeats promisor's claim despite partial performance (unless substantial performance) i. Contractor has not substantially performed where only remedy is completely redoing the work ii. To constitute substantial performance, contractor must have intended to comply and shall have substantially performed 1. Only deviations permitted are those that are inadvertent and unintentional c. Guidelines of §241 applied i. Deprived of the benefit? What he wants the house to look like (in Jacobs it was only the name on the piping – arguably less of a thing, since house is expected to be esthetically pleasing) ii. Can be adequately compensated? Need entirely new roof to get uniform color iii. Magnitude of forfeiture? Forfeiture is harm to the builder (in this case) – they would forfeit their right to the other person a. 5. 6. Assurance of cure? The roofers tried, but it didn’t work (in Jacobs it was an economic waste and not worth trying) v. Extent to which good and faith is involved? No bad faith here…no hoodwinking. But doesn’t have to. Lowy v. United Pacific Insurance Co. (excavation and grading of streets in subdivision) a. Divisible Contract -if contract can be split and parts can be apportioned to other (both sides can be reasonably split) i. breach of one part will not forfeit other parts ii. Doesn't have to be explicit in K (or intended by parties) as long as reasonably read into it iii. NOTE - §240 - requires apportionment be coupled with agreed equivalents b. Substantial performance i. where a person agrees to do a thing for another for a specified sum, to be paid on full performance, he is not entitled to any part until he has himself done the thing he agreed to, unless full performance has been excused, prevented, or delaying by the act of the other party ii. (forfeit right to what hasn't been done) c. If done something substantial on a divisible part - then entitled to remedy for that work, minus damages to other party d. Note: UCC 2-307: "Unless otherwise agreed all goods called by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot" Britton v. Turner (employee left job 70% of the way through, wants money for work he did) a. Unjust enrichment - cannot recover for contract, but can recover in restitution the NET BENEFITS conferred i. In K for labor, where party receiving benefit from day to day under expectation of full completion, cannot upon breach refuse to accept what has been done ii. Without the rule in this case, the employer may be tempted to drive off the laborer near the end of the project to escape having to pay for it iv. b. Legislation has now resolved the issue by requiring payments be made to employees at regular intervals 7. Changed Circumstances; Impracticability and Frustration of Purpose a. In General: i. Law of impracticability can be thought of as another type of implied condition ii. General Rule: Restatement §261: "Where after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary" iii. Policy - foreseeability, predictability, and certainty, capacity to contract downstream b. Existing Impracticability i. Mineral Park Land Co. v. Howard (taking dirt below water-mark would have been economically impracticable) 1. Rule: "Where performance depends upon the existence of a given thing, and such existence was assumed as the basis of the agreement, performance is excused to the extent that the thing ceases to exist or turns out to be nonexistent" a. "A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost" b. Modern term is impracticability, not impossibility ii. United State v. Wegematic (contract with government to make computers) 1. UCC 2-615 - Excuse by failure of presupposed conditions a. Except so far as a seller may have assumed a greater obligation delay, in delivery or non delivery is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made. 2. Here, the defendant assumed the risk that the product would not be able to be produced, therefore there was no impracticability (basic assumption was there was a possibility development would not work) iii. Note - Unexpected Subsurface conditions 1. Contractor assumes risk, unless government (or other person) agreed to assume the risk 2. Dove tails with issue of due diligence - contractor should be figuring out what is going on beneath the surface iv. What is the difference b/w existing impracticability and mutual mistake? 1. Note 4, pg. 812 (Restatement 266 vs. Restatement 152) 2. Both can probably be argued - difference in levels of knowledge seems to be the difference between the two c. Supervening Impracticability i. Taylor v. Caldwell (Plaintiff rents out theater, it burns down before they can use it) 1. Restatement 262: a. If the existence of a particular person is necessary for the performance of a duty, his death or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made. 2. Restatement 263: a. If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the nonoccurrence of which was a basic assumption on which the contract was made. 3. Note that here the fire was not caused by either party (you CANNOT plead impracticability if you caused it) ii. Canadian Industrial Alcohol Co. v. Dunbar Molasses Co. (Middleman can't perform delivery because his supplier couldn't supply him) - SEE NOTES FROM CLASS 1. Rule: D cannot plead impracticability to excuse nonperformance if he didn't make practical measures or reasonable efforts to avoid and employ any practicable means of fulfilling the contract 2. Test: Was the reason for failure of the contract in the contemplation of the parties? a. Look at circumstances i. Terms of the contract ii. Context/setting iii. Tacit or implied in the minds of the contracting parties 3. Policy driven: what would the impact be on K law if the D got off the hook in this case? a. Certainty of K, security of K, the K was b/w one party and the middleman, not w/ the middleman's supplier... iii. Dills v. Town of Enfield (didn't finish development plans b/c couldn't get financing) 1. If an event is foreseeable, a party who makes an unqualified promise to perform necessarily assumes an obligation to iv. v. vi. vii. perform, even if the occurrence of the event makes performance (financially) burdensome 2. Good example of conditions biting hard United States v. Winstar (govt. gives tax incentives to Winstar to take on liabilities, later regulations destroy the tax incentive) 1. Restatement §264: "If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made" 2. Basically you're free to assume that the gov't won't pass laws that screw you over 3. "if the risk was foreseeable there should have been provision for it in the contract, and the absence of such a provision gives rise to the inference that the risk was assumed" Bolin Farms v. American Cotton Shippers Ass'n (farms and cotton changes) 1. Market fluctuations are foreseeable, therefore doesn't qualify as impracticable, unless severe and unreasonable 2. Note: no excuse also when promisor's cost of performance dramatically exceeds the K price due to supervening market shifts beyond it's control and w/o its fault or negligence that affect the price of performance inputs 3. See top of pg. 834 for talk regarding increased cost of performance a. in these cases, the court should consider whether performance as agreed has been made impracticable by the risk event Kaiser-Francis Oil co. v. Producer's Gas Co. (market demand in gas goes down) 1. Force Majeure - an unexpected and disruptive event that may operate to excuse a party from a contract 2. Take-or-Pay - Take the "product" when produced and pay for it or pay without taking and expect the producer to "make-up" deliveries in the future (apportions the risk of production and sale between buyer and seller) a. The seller bears the risk of production (unless contract explicitly assigns risk to one party or the other) b. To compensate the seller for that risk, the buyer agrees to take, or pay for if not taken, a minimum quantity of gas c. The buyer bears the risk of market demand (unless contract explicitly assigns risk to one party or the other) Note - reopener clauses (aka gross inequities clause) in long-term supply contracts viii. 1. Clause for re-modification: can be included in contracts to at least partially resolve inequalities (usually gross) when there is a price adjustment Considerations 1. Foreseeability (market fluctuations, statutes, etc) a. Terms of the contract b. Contemplation of the parties 2. Fault 3. Assumption of risk d. Frustration of Purpose i. General - Restatement §265 - (becomes pointless to perform) 1. Where, after a contract is made, a party's principle purpose is substantially frustrated 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 remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. 2. Difference between frustration of purpose and impracticability a. Impracticability is when performance has become more burdensome b. With frustration of purpose, the performance has become pointless ii. Paradine v. Jane 1. Rule: A contractor party is bound by what they charge upon themselves regardless of intervening risks which preclude performance (because the parties could have included a term providing for relief in such a case) iii. Krell v. Henry (Landmark Case) (king isn't coming into town and dude no longer needs the room) 1. 3 Questions a. What was the foundation of the K? b. Was the performance of the K prevented? c. Was the event which prevented the performance of the K of such a character that it can't reasonably be said to have been in the contemplation of the parties at the date of the K? d. If the answer is YES to all three, both parties are discharged from further performance of K 2. Rule: Rest. §265 iv. Washington State Hop Producers, Inc. v. Goschie Farms, Inc. (government regulation gets rid of Hops market) 1. Rule: Rest. §265 a. Comment (a): The purpose that is frustrated must have been a principal purpose of that party in making the contract ii. The frustration must be substantial iii. The non-occurrence of the frustrating event must have been a basic assumption on which the contract was made b. Rest. Intro note pg. 854 and 855: the fact that the frustrating event was unforeseeable is significant as suggesting that its non-occurrence was a basic assumption, but is not necessarily conclusive i. The parties may not have thought it important enough to account for 8. Anticipatory Breach and Repudiation a. General Rules i. When you have repudiation, signaling to the other that you will not perform the K, even though the date for performance has not yet come, the aggrieved party doesn't have to wait to sue for breach (anticipatory breach), has a right to sue right away 1. Repudiation can be express or implied 2. But it doesn't obligate the aggrieved party to sue then (won't change the statute of limitations) 3. Purpose (policy) - mitigate damages and promote economic efficiency ii. Retraction of Repudiation 1. Retraction is kosher when: other side hasn't either initiated a law suit or changed their position in reliance on the repudiation and time of performance hasn't expired iii. Restatement §250: A repudiation is: 1. A statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach, or 2. A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach iv. Restatement 251(1): Where reasonable grounds arise to believe that the obligor will commit a material breach, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance" v. Restatement 251(2): the obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case vi. Also see 253 (effect of repudiation) and 256 (nullification of repudiation) i. b. Hochster v. De La Tour (Landmark) i. First case recognizing repudiation c. Taylor v. Johnston i. Rule: if repudiation and the aggrieved party has not sought a remedy or detrimentally relied, the repudiating party can retract the repudiation without adverse consequence d. AMF, Inc. v. McDonald's Corp. i. Rule: A K can be repudiated if a party has reasonable grounds to believe the other party will not perform and no adequate assurances of performance are given. (nervous nelly) 1. UCC 2-609: Promisee who wants to suspend must: a. Have reasonable grounds for insecurity b. Demand in writing adequate assurance; and c. Have not received adequate assurance from the promisor 2. UCC 2-610: Anticipatory Repudiation 3. Restatement 251 e. Nervous Nelly can require assurance, and def must give it i. Restatement v. UCC 1. UCC - response must come within reasonable time, not to exceed 30 days and demand for assurance must be in writing 2. Restatement - doesn't require reasonable time nor "in writing" 9. Remedies a. General i. Aim of contract remedies 1. Compensation for harms caused ii. No punitive damages (in general) 1. Policy a. No moral culpability b. Aim of law is compensation, not punishment 2. Exceptions a. Where breach of contract may be a tort b. Where may also involve a malicious conduct/breach of fiduciary duty iii. Remedies are not a private affair, are a mechanism of the courts to balance the interests of the parties b. Types (Restatement §344) i. Expectation Interest - puts you in position you would have been in, if the performance had occurred (had the contract been fully executed) ii. Reliance Interest (90) - promissory estoppel: "as justice requires" - put you where you were before contract (had the contract never been made) iii. Restitution Interest (86) - getting paid back for any unjust enrichment disgorging of benefit conferred on other party c. Considerations / Three Prong Test i. Foreseeability 1. General - naturally flows out of a breach 2. Special / Consequential - arise from special circumstances, and to collect they must have been in contemplation of a breach (by both parties) at time of breach - Foreseeable a. e.g. Baxendale ii. Unavoidability/Mitigation of Damages 1. There is a duty to mitigate damages, can't recover for damages caused by your failure to mitigate a. Positive duty / reasonable people b. Letting damages "snowball" leads to a waste of societal resources iii. Certainty of contract 1. Judicial preference for a definitive figure for damages 2. Speculative damages are not available a. Policy reasons i. Breaching party should be able to determine what their loss will be if they breach, rationale calculus of breach ii. Promote stability in contracting iii. Aggrieved party should not be able to collect windfall profits (not just out of the air) d. Liquidated i. Penalty written into the contract; provision for payments of a fixed figure should a breach occur; must be agreed to by the parties (often as a periodic penalty: for instance, $500 per day upon breach to cover for loss of revenue, etc.) 1. Coerces parties into performance to avoid having to pay excessive damages 2. Usually don’t fly unless meet a three part test: a. Intent must be compensation and not punitive b. Harm or injury from breach must be certain of being quantified c. Must be a probable estimate of a reasonable loss (many courts treat this the same as #2) 3. Attorney's fees: a. Can be written into the contract however (liquidated damages): the losing party will pay reasonable attorney's fees i. Won't fly if a fixed amount that doesn't meet the 3 part test for liquidated damages ii. Or if unreasonably high (attorney excessively over-billed his client because of expected compensation) e. Damages for emotional distress - generally not allowed but: i. Damages for mental anguish allowed if breach of K: 1. Causes bodily harm or; f. g. h. i. j. 2. Is of such a kind that serious emotional disturbance was a particularly likely result (for example, K concerning death or disposal of bodies, etc.) ii. Typically, in the case of K and Tort hybrids Nominal damages: Where there is a breach but the harm is so minimal that only a token should be rewarded for damage (usually $1) i. Done so that blame is placed when there is little or no harm actually caused Incidental Damages: costs that you incur taking care of the aftermath of the breach i. Ex. Someone sends you the wrong item, you incur costs sending it back or taking care of the package Exceptional damages i. Specific performance: Court orders performance of the contract (injunction) 1. No right to specific performance, done at the discretion of the court (rare) a. "When making its decision, the court must balance the equities between the parties to determine whether specific performance is appropriate" 2. Equitable Remedy a. Only when damages would be an inadequate remedy i. Where damages cannot be established with reasonable certainty (Covenants not to compete) ii. Unique subject (Special item - painting "starry night") iii. Insolvency of a D - defendant has no $$ b. No specific performance in Employment law i. Cannot force someone to work for you or force you to employ someone  13th amendment: involuntary servitude c. Usually in construction no specific performances i. Damages are adequate Agreements in contracts to limit remedies i. Can do so long as the specific provisions are not unconscionable Hadley v. Baxendale: i. Rule: "The defaulting party is only liable for the consequences if they are such as, at the time of the contract, he ought reasonably to have contemplated as a serious possibility or a real danger" ii. Modern formulation: 1. UCC 2-715(2): "Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty" 2. Restatement §351: a. "Damages are not recoverable for loss that the party in breach did not have reason to foresee as the probable result of the breach when the contract was made b. Loss may be foreseeable as a probable result of a breach because it follows from the breach (a)in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know c. A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation"