Contracts II – Popovich – Spring 2007 PROMISSORY ESTOPPEL Overview: o Traditionally, a situation where consideration is lacking (particularly the bargained for element), but the court wants to find a K anyway. o Not used frequently (not doing away with consideration) – an equitable remedy o Hypo: A promises B $5K towards a vacation for her birthday. B makes plans based on his promise, i.e. in reliance of his promise. It is foreseeable that S would make the plans, but the promise was not induced by detriment. However, is it fair that B will injure herself financially (for example, put down a deposit on travel plans, etc.) based on A’s promise? Under Restatement (1st): B would get the $5K Under Restatement (2d): B would get reliance damages, i.e. the amount she suffered by the reliance (deposit she can’t get back; penalty fee for canceling reservation, etc.) Restatement Definitions: o Restatement (1st) § 90: A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promise and which does not induce such action or forbearance is binding if injustice can be avoided by the enforcement of the promise. o Restatement (2d) § 90: (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promise 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. (2) A charitable subscription or a marriage settlement is binding under Subsection (1) w/o proof that the promise induced action or forbearance. Elements: o A promise by the promisor o Must be foreseeable reliance on the promise by the promisee (with some exceptions) o The promisee must actually rely on the promise to his or her detriment o Injustice can be avoided only by enforcement of the promise Enforce like normal K; or Make sure the person isn’t injured, i.e. compensate for the detrimental reliance, but don’t enforce the K entirely.
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Feinberg v. Pfeiffer: ∏ worked for ∆ for 37 years when the BOD adopted a resolution to give her a raise and then pay her $200/month when she retired. She worked for a year and a half and then retired. ∆ began paying her the retirement money, but after leadership changes, refused. During that time she turned 63. Court held that it was foreseeable she would rely on the promise and b/c she was 63, she couldn’t get another job. Court found enforceable K out of a gift promise. Gratuitous Bailment o Someone promises to do a favor for the other party, usually taking care of something Example: A asks B to take care of his dog and B says ―yes.‖ The dog dies b/c B doesn’t take care of it. o Majority/historical approach: focus on difference between nonfeasance and misfeasance Nonfeasance: Don’t do the favor at all – never pick up the dog No liability Misfeasance: Act on the promise poorly – fed the dog chicken bones Liability through promissory estoppel Minority approach: don’t distinguish between nonfeasance and misfeasance East Providence Credit Union v. Geremia: ∆s got a mortgage from ∏ for a car. Terms required insurance. If ∆s could not pay the insurance, the morgatee would and the amount would be added to their balance. After 2 years, insurance co informs both parties that a premium payment was not made and the policy would be cancelled if it was not received. ∆ could not pay and thought ∏ would pay it, but they did not. The car was destroyed in an accident and insurance co would not pay. Court held: There may have been consideration b/c of interest computed in money owed. Even if interest would not have been added, there was PE b/c: o ∆s made a promise which they rx should expect would induce ∆s not to do something (here, not drive the car or get money elsewhere); o The promise induced such non-action; and 3) injustice can only be avoided by enforcing the promise. *This is minority b/c it was nonfeasance (∏ didn’t pay), but court held them liable anyway* Charitable Subscription o Restatement (2d) changed this area – charitable subscription is now an exception to PE rule – don’t need to prove reliance. This is a minority view that is gaining popularity Most jurisdictions follow the Restatement for PE, except with regard to charitable subscriptions. Salsbury v. Northwestern Bell Telephone Co.: ∏ established a college and was raising money to build. ∆, who did not have a pledge form, wrote a letter promising a contribution of $15K to be paid in 3 installments. Court held that charitable subscriptions
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serve public interest and for projects that call for subscriptions to be binding, they should be. Also, that they should be enforceable w/o consideration or detrimental reliance. Make revocable offer irrevocable (classic use of PE) o Known reliance on an offer keeps it open/irrevocable o Must be reasonable reliance If promisee knows the offer is wrong, he is on notice of mistaken and it is unrx to rely on it. Drennan v. Star Paving Co.: ∆, a subcontractor, made a bid to ∏, a GC and ∏ used ∆’s bid and was awarded the K. The next day, before ∏ told him it had been accepted, ∆ claimed the bid was a mistake and they couldn’t do the job for that amount. ∏ had to find another company to do the job for an amount btw the ∆’s first bid and claimed amount. Court held ∏’s reliance made the offer irrevocable b/c ∆ submitted the bid with knowledge that it might be used and could foresee harm from a mistake. As btw the parties, loss should fall on the party who caused it. Determining Damages o Williston and Restatement (1st): Treat it like a valid K and enforce it if there is reliance. o Restatement (2nd): Remedy is limited to what justice requires PE shouldn’t be used to cure indefiniteness or enforce a K if justice only requires reliance damages. Wheeler v. White: ∏ owned a tract of land on which he wanted to build a commercial building. He and ∆ entered into an agreement that would obtain a loan or provide the $ himself. He would get some back plus get a percentage from rentals. After they signed the K, ∆ urged ∏ into demolishing the existing building to prepare for construction. ∆ never obtained loan and refused to perform. Court held ∏ could get reliance damages, but not loss of profits. PER and INTERPRETATION Parol Evidence Rule (What is in the K) Basics o Total integration A written agmt intended to be a final and total expression of the agmt (total integration) cannot be contradicted or even supplemented by parol evidence o Partial Integration When a written agmt is intended to be final, but still only a partial expression of the agreement (partial integration) then the agmt can’t be contradicted but can be supplemented by parol evidence o When doesn’t the PER apply? PE can generally be admitted in determining If there is or isn’t consideration for the K Whether the K is void or voidable, including whether there was fraud, mistake, duress, lack of capacity, etc. When there are subsequent agmts or mods to the K
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Conditions precedent to the formation of the K PE generally allowed to show there was a CP to the formation of the K; it just can’t be contradictory to the K A few courts hold the PER allows evidence that there’s a parol CP to the formation of the K itself even if contradictory If there’s a CP to K formation written into the K, and parties claim another parol CP also, court says the parol CP is impliedly contradictory and thus not allowed
Steps o Is there a final written expression? (rarely at issue) Judge decides this More complete on its face – more likely it will be held to be final Presumption of finality unless there is persuasive evidence to the contrary o IS the final written agmt a total or partial integration 3 main views Williston Rules (remain popular today, essentially the Rest 1st) o Generally, gives greater respect to the writing o Rule 1 – Merger Clause – if there’s a clause in the K that says it’s the total agmt (known as a merger or integration clause), then it is a total integration UNLESS The merger clause was included by fraud or mistake or The writing is obviously incomplete on its face o Rule 2 – Examining the doc on its face – in the absence of a merger clause, look at the writing itself. If it’s obviously incomplete on its face, then it’s only a partial integration o Rule 3 – If the K looks complete – Absent a merger clause, if the K looks complete, then it’s a total integration unless the additional (supplement, not contradictory) terms were such that a rx person who is a party to the K would naturally enter into a separate agmt regarding those additional terms…in which case it’s a partial integration Corbin’s Views (Modern Trend) o Generally, more loosely constructed o Merger Clause – If there is a merger clause, it’s not conclusive. Rather it’s only a factor in determining if it’s a total or partial integration
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o Examining the doc on its face – merely examining the face of the agmt cannot determine whether it’s partial or total. Thus, there should be a liberal admission of evidence to determine if the writing is the total or partial expression o Intent of the parties – the KEY point is to determine the actual intent of the parties concerning whether it was total or partial UCC o Generally, leans more towards Corbin’s views than Williston o Merger Clause – if there is one, then it’s strong evidence of a total integration. Some courts say strong evidence is conclusive. Others say, semiconclusive. Other courts put more weight in the conclusiveness if the clause was bargained for, and less weight to the clause if it’s merely boilerplate. o If there is no merger clause, then more like Corbin’s views: Presumption of only a partial integration (the alleged terms would certainly have been included in the writing. Thus the K could be supplemented with 1)Course of dealing (prior dealings of the parties) 2) Usage of trade (practice commonly done in the trade or industry) 3) Course of performance (how the K b/t the parties has been performed) 3 other approaches: Collateral K approach (older approach) o IF the subject of the offered term or parol evidence is dealt with at all in the writing, then it’s a total integration. o However, if the term or parol evidence relates to a subject not contained in the writing, then the writing is a partial integration Four Corners Rule (older approach, the most formalistic) o If the writing is complete on its face – presumed to be total integration. Court only looks w/in the four corners of the writing itself nd Rest 2 (similar to Corbin’s views, but not popular) o Indication that it’s always going to be a partial integration, thus allowing supplemental terms from parol evidence, except in extreme situations
Interpretation (what the K words mean) Basics
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o Extrinsic evidence is broader than PE. It includes more than just alleged prior agreements. The basic question is whether such extrinsic evidence should be considered in interpreting the meaning of the K 4 main views o Plain Meaning Rule (oldest, criticized, fairly broad support) The meaning is determined by looking w/in the four corners of the agreement If it’s plain and unambiguous on its face, then it’s interpreted w/o extrinsic evidence – exception – extrinsic evidence can be admitted to explain the meaning of a non-ambiguous technical or obscure term If any part of the agmt is ambiguous, then extrinsic evidence can be used to help interpret the meaning o Williston’s Approach (emphasis on the written document) If there’s an integration (final writing, either total or partial) The meaning is whatever a rx intelligent person acquainted with all the usages and circumstances surrounding the integration would give. But if the rule results in ambiguity, then drop below for non-integration rule o The Integration rule Excludes the following evidence: Statements or communications b/t parties during negotiations leading up to the K Testimony regarding subjective intent as to the meaning of the K If there is NO integration (could include oral Ks), then the meaning is what a person proposing the term to be used in the K should reasonably expect the other party to give to the term (objective theory). o Evidence allowed: Testimony concerning what the parties said to each other in the negotiations Exception: no subjective intent allowed UNLESS the term is ambiguous. If the ambiguous term is material, and the subjective intent of the parties differs over the meaning of the term, then the meaning is whatever the meaning the party who was unaware of such ambiguity if the other party knew or had reason to know it was ambiguous. Ex is when one party proposes a material term, knowing there is a special meaning for him, and knowing the other party doesn’t know the special meaning,
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then the ―blameless‖ party’s meaning will be used. But if both parties are equally guilty or blameless regarding the varying understandings of a material term, then there is NO K. o Corbin Approach (more liberal, Modern Trend, effectively Rest. 2nd, not widely accepted) All relevant extrinsic evidence can be considered for interpretation. This includes: what the parties said to each other in negotiations, and testimony concerning subjective intent as to the meaning This Liberal admission of extrinsic evidence is tempered by the judge acting as a gatekeeper In a Preliminary Hearing, the judge decides if the extrinsic evidence shows a party’s interpretation of the disputed term is reasonable o If the judge determines there is no ambiguity – jury will no hear of possibility of different interpretations o If the judge determines there is ambiguity – evidence is admitted for the jury to decide amongst the offered interpretations o UCC Rejects the plain meaning rule and permits extrinsic evidence, even if there was no ambiguity, concerning: What was said in negotiations Subjective intent as to the meaning UCC also looks to usage of trade, course of dealing, and course of performance CAPACITY OF PARTIES Minors General Rule o Voidable at the option of the minor Exceptions: Child Support Bank Loans, education loans, military enlistment Disaffirmance o When? Can avoid the K even after turning 18 if w/in a rx time…could be months or years depending on statute o Real Estate Traditional/fading rule says a minor can’t disaffirm a real estate K until he’s reached the age of majority o Disaffirmance is irrevocable o Disaffirmance is for all of the K, not just parts Minor’s obligations after Disaffirmance
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o Minor as D Traditional Rule – no obligations Modern Rule – Must return the thing if he has it still. But no need for restitution of damage or consumption Exception – minor must pay for necessaries, i.e., food, shelter, clothing o Minor borrows money from lender to buy food and clothes, then looses it at poker, Lender sues to get it back. If the minor had used the money to buy necessaries they’d have to pay it back. However, here the minor lied If it is said and believed it’s for necessaries then restitution is appropriate Disaffirm If the lender doesn’t believe it’s for necessaries and it’s not used for necessaries the probably not restitution However, fairness will usually mean that restitution will be paid If the minor sold the item, must return money that is traceable o Minor as P Traditional Rule – same as minor as D…just give it back Modern Rule – Minor must return item and pay restitution for damage or consumption when trying to get his money back in a lawsuit If the minor ends up owing more than what he paid initially for the item: o Some court say no additional obligation o Some say he must pay that extra amount Don’t have to pay damages if there was fraud or overreaching o Small Modern Trend – minor must pay restitution regardless of whether he is P or D Can a parent bind the child to the K? o Parent cannot bind to the K, but could settle cases for the child through court appointed guardians ad litem How to Ratify o After reaching 18, don’t do anything…ratification can be express, or implied through conduct Mental Incapacity General Rule o Traditional Rule – when the mind was so affected as to render him wholly and absolutely incompetent to comprehend and understand the nature of the transaction, then the K is voidable, regardless of whether the other party knew of the incapacity
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o Modern (2nd Rest) – if, b/c of mental illness or defect in relation to the transaction, the party is not acting in a rx manner, AND the other party has reason to know, then K is voidable Doesn’t have to be unable to comprehend, just unable to act rationally Traditionalists don’t like the modern definition b/c people can always find psychiatrist to testify that the decision was irrational o Adjudicated Incompetent Traditional Rule – K is void regardless of whether the other party knew of the incompetence Majority Rule – Doesn’t change anything, see above for the rules o Obligations after Disaffirmance If rx person knows or should know of incompetence of other party, then incompetent party can disaffirm and no liability for ANY restitution…still have to give the thing back though But have to pay for necessaries If rx person doesn’t know and shouldn’t know of incompetence of other party, then there is restitution for damages, but not to the extent of the benefit of the bargain Ratification o Cannot Ratify while still incompetent. Once competent, can ratify expressly or impliedly by doing nothing Intoxication o Undue influence – watch out for this, the intoxication might not be so severe so as to incapacitate, but could however leave party vulnerable to undue influence o Involuntary Vast Majority – if the party is so intoxicated so as not to understand, then voidable o Voluntary Traditionally – unfavorable to the incapacitated party Modernly – see involuntary above
AVOIDANCE FOR MISCONDUCT AND NON-DISCLOSURE The party harmed can rescind or ratify at his option Duress o Threatened or acted upon so not acting out of free will. Generally talking about improper coercion, threats, and underlying intentional torts. Threat of a lawsuit is insufficient, unless it’s a totally unrelated matter o Duressee has the burden of showing czn…that he entered into the K b/c of the duress o Ratification – Can be express or implied by conduct…any ratification that is under duress is invalid o Economic Duress: has to be more than a bad biz decision Threat of a breach of K Non-breaching party has no other ex alternative
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Ordinary remedies in K law are inadequate Undue Influence o Milder form of duress – unfair persuasion; improper persuasion (as opposed to coercion) so that the person is expressing the will of the person exerting the influence o Almost always a situation b/t people in a relationship of trust, e.g., attorney, doctor, priest, trustee, spouse, etc. o Elements Susceptibility – often mentally weak and dependant Opportunity to exercise undue influence Check the relationship of the parties. If not a traditional relationship of trust then check factors: o Discussion of the transaction in unusual place o Insistent demand that the biz be finished at once o Extreme emphasis on adverse consequences of delay o Use of multiple persuaders o Absence of third party advisors Improper action on behalf of the party in power. Factors: Resulting transaction is unnaturally unfair Misrepresentation (fraud) o Misrepresentation of Fact Materiality of the fact – the degree to which the misrepresented fact influenced to the decision to enter into the K is important Unintentional Misrepresentations – requires material misrepresentation o Objective standard – would the misrepresentation influence the decision of a rx person? If the misrepresenting party knows the fact will influence the decision of the other party, then it’s deemed material regardless of whether a rx person would’ve been influenced Intentional Misrepresentation – need not be material o Subjective standard – was the person influenced by the misrepresentation? Doesn’t matter if a rx person wouldn’t have been influenced Causation – for avoidance of the K by misrepresentation, party needs to show causation. This includes: Deception – if the party didn’t believe the misrepresentation, then there is no deception and thus no avoidance of the K Reliance – Misled party must have relied on the misrepresentation that caused the party to enter into the K Injury Modernly – no requirement for showing injury as a result of the misrepresentation
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o Misrepresentation of Opinion Not a basis for avoidance of the K. Mere puffing is not a basis for avoidance Exceptions: o Relationship of trust or confidence o Experts o 3rd party posing as a disinterested party, but who in fact, is not o Misrepresentation of Law – see Opinion o Fraud in Factum – switching one document for another…the old switch a roo – void Non-Disclosure o No duty to disclose facts Exceptions: Statutory requirement to disclose Concealment or deliberate action to conceal Partial disclosure where it is misleading (half-truth) Representations made in good faith but the representing party later learns that it’s false Knowledge that the other party is operating under a mistake of fact (can’t just keep your mouth shut) o Some relationships make non-disclosure tantamount to misrepresentation Transactions involving: Surtyship Insurance Partnership Joint ventures Relationships: Fiduciary Confidential (h/w, pastor/parishioner, attorney/client, doctor/patient) Mistake o Traditional Rule – Must have a mutual mistake for the K to be voidable. Unilateral mistake can make K voidable when there is a unilateral nondisclosure of a known mistake about the material detail o Modernly – only need a unilateral mistake to make K voidable o Mutual Mistake Rest View Mistake goes to the basic assumption of the K (mistake about the barren cow, or habitable apartment building) Mistake has material effect on agreed exchanges or performances of the K (unbalanced) Party adversely affected did not bear risk of mistake generally parties are responsible for knowing the law o Party has assumed the risk of the mistake when:
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Parties allocate the risk in the K or He is aware at the time of the K that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient (conscious ignorance…woman selling the topaz didn’t do her homework) or The risk is allocated to him by the court on the ground that it is rx in the circumstances to do so
o Unilateral Mistake Traditional view – Unilateral mistake can make K voidable when there is a unilateral nondisclosure of a known mistake about a material detail Rest. View – (Traditional View) – one party knows there is a mistake that the other party doesn’t know about, and it’s material, and the party doesn’t disclose it OR Meets 3 requirements for mutual mistake plus the effect of the mistake is that enforcement is unconscionable and the parties can be restored to their position b/f they entered into the K o Mistake of judgment Generally no recovery, but a partial mistake of fact mixed with partial mistake in judgment, then there could be recovery if the mistaken party acted with rx diligence and in a non-negligent manner o Mistake of Performance One party mistakenly believes that they have an obligation under a K and therefore perform pursuant to this belief Generally the P will be able to recover and the other party will not get to benefit from this…just like traditional view for unilateral mistake Reformation o Remedy in Equity – Rewriting a K to make fair what was unfair o Very uncommon – could maybe be used when parties want to keep the K but it’s unfair as is Unconscionability o Courts don’t want to protect everyone from making bad deals…only in cases when the deal is so bad that it shocks the conscience. Very fact intensive o Possible Remedies Void the K Excise unconscionable part and enforce balance Reform entire K o 2 Types of Unconscionability
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Substantive – terms are unconscionable, e.g., refrigerator sold for 2.5 x it’s value Procedural – Methods of the deal are unconscionable, e.g., don’t speak the language, unexpected clause in K with poor and uneducated consumer, or ill o K of Adhesion Lots of standardized Ks now-a-days with boilerplate material. Non-negotiable, take it or leave it. Just b/c there is disparity in bargaining power or take-it-or-leave-it basis doesn’t make it unconscionable necessarily…although K of adhesion sometimes can be voidable if also unconscionable Duty to Read o Generally, there is a duty to read Exceptions: Fraud Duress Undue influence Mistake Unconscionability Super duper fine print in an unexpected place
CONDITIONS, PERFORMANCE, AND BREACH Generally o Conditions are promise modifiers that are part of the K o Conditions occur or do not occur; they cannot be breached like promises o Passage of time is not a condition, e.g., ―I promise to pay you in two weeks‖ doesn’t create a condition b/c passage of time is not a contingency Classifying Conditions by time o Precedent The condition must occur before the duty to perform becomes absolute o Subsequent The condition must occur after the duty is absolute to discharge the duty o Burden of Proof Promisee must prove a condition precedent has occurred to make the promisor’s duty absolute Promisor must prove a condition precedent has occurred to discharge his absolute duty Express Conditions o Strict compliance required to ripen the promises If the condition occurs then the parties are bound by the K, but if the condition doesn’t occur, then the promises have not ripened o Unilateral Ks by their nature have express conditions precedent…performance is the condition to the promise to pay o Is it an express condition or a promise? 13
If it’s a close call, courts generally prefer to construe it as a promise rather than a condition b/c risk of forfeiture is great when construed as condition when compared to risk when construed as a promise Sub and General Ks – paid when paid clause o In large commercial Ks, sub K and general K sometimes has sub will get paid when the general is paid clauses. The favored interpretation is to say it’s a promise…not a CP b/c that would have big risk of forfeiture; will interpret as CP if it’s really really clearly a CP like in JJ Shane below Builder to use a certain brand of pipe o Builder puts in different manufacture of pipe than the K says. Probably a promise, not an exp. cond. b/c risk of forfeiture is huge. If promise, then immaterial breach and damages are minimal. CP to K formation o Buyer of apt. says he can revoke his K to buy b/c clause says he must be approved by the board and he hasn’t been approved yet. This is express condition precedent. This it’s CP to performance, not to K formation, thus both parties are obligated o Cases where CP could be to the K formation itself: where there’s a superior authority (typically in govt K) reflecting a limited power in an agent to bind a principal Implied in fact Conditions o STRICT compliance required to ripen the promises…treated the same as express conditions o Examples A promises to paint B’s house and B promises to supply the paint. A cannot perform w/o B first supplying the paint. Thus, supplying the pain is implied in fact condition to A’s duty to paint. Constructive Conditions (Implied in law) o Requires only substantial performance o Not agreed to by the parties, nor implicit from the K itself…courts impose constructive conditions to ensure justice. Addresses 1) the order of performance and 2) the degree of performance that is required b/f it’s substantial performance Example Shirlene promises to paint Pop’s house and Pop’s promises to pay Shirlene. What at CL was two independent promises, is modernly a dependant promise constructive conditioned on an independent promise. Thus, Shirlene will have to substantially perform her promise first before Pops has to pay.
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o Newbury Where a K is made to perform work and no agreement is made as to payment, the work must be substantially performed b/f payment can be demanded. The other party’s promise to pay is to conditioned upon substantial performance of the work. Normally, the performance that requires a lengthy period of time must occur before the performance that takes a short period of time is due o Concurrent Conditions Each party’s promise is dependant upon the other and both can be performed at the same time…meaning both parties are ready and willing to perform, with a present ability to do so, and with notice to the other party of such readiness. Neither party can sue the other until that party has tendered himself (showing up…ready, wiling, able to perform) o What is substantial performance? Is the breach material or partial? Willful breach – lean towards material Hardship/extreme forfeiture – maybe only a partial breach If money damages are sufficient – maybe only a partial breach Bottom line is did the person get what they bargained for? Immaterial breach/partial breach – substantial performance See example above…If Shirlene substantially performed, but didn’t completely fulfill the promise, then Pops still has to pay her. In that case, Shirlene is only liable for the damages on the partial breach…typically an offset of damages against the promised payment Delay in performance is typically not a material breach…fact sensitive…was the delay rx under the facts and circumstances? o If there’s a time is of the essence clause, then more likely to find a material breach Is there a chance to cure for non UCC? Material breach – less than substantial performance If Shirlene’s performance is less than substantial, the Pops is relieved from his promise to pay Alternating Dependant conditions Find out if someone materially breached, thereby relieving the other party of his promises. If the breach was only partial, then the other party has to keep going o Jacobs & Young v. Kent: Gen’s obligation to pay periodically is dependant on the constructive condition that sub performs in workman like manner and submits requisition. Once the sub damaged the house (failed to substantially perform 15
in workman-like manner) and refused to pay for it, then the Gen withheld its payments. Sub said Gen breached by not paying and so Sub stopped working. The sub’s damage was a material breach, thus Gen didn’t have to pay. Then the sub breached a second time by stopping work. The 6M dollar question: Does your client have to keep his obligations under the K when the other party ―hasn’t lived up to his end of the bargain?‖ o Step 1: Is the promise subject to an express condition or implied in fact condition? If yes, and the condition hasn’t occurred, then your client is relieved of his promise to perform. (Not an issue of materiality or substantial performance) If yes, and the condition has occurred, then your client’s promise has ripened and he must perform or he’ll be in breach If not a promise subject to express condition, then go to step 2 o Step 2: Is your promise to perform an independent promise (no constructive conditions) If yes, then you must perform, but can then sue the other party for breach If no, meaning your promise is constructively dependant, then go to step 3 o Step 3: Was there a substantial performance of a constructive condition? If yes, then you have only a partial breach and must perform as promised, but can then sue for breach and may be entitled to some damages. If no, then there is a material breach and you do not have to perform your promise…proceed now to step 4 o Step 4: Has the other party’s breach been cured or not lasted beyond a rx time? If yes, then the breach has not ripened into a total breach, Generally, you must begin to perform again If no, then material breach has ripened into a total breach and you do not have to perform and can sue for breach Constructive Conditions under the UCC o Perfect Tender 2-601 If goods or tender of delivery fail in any respect to conform to K, then buyer can: Reject the whole or Accept the whole or Accept any commercial unit or units and reject the rest o Rejection 2-602 Must be w/in a rx time after delivery or tender. It’s ineffective unless the buyer seasonably notifies the seller What obligations does the buyer have to the seller regarding the rejected goods?
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o Buyer has to hold goods w rx care at seller’s disposition for time sufficient to permit seller to retake the goods, but the buyer has no further obligations with regard to goods rightfully rejected o Opportunity to Cure 2-508 Seller has time to cure the rejected tender If the time to perform hasn’t expired yet o The seller may seasonably notify the buyer of his intention to cure and may then within the K time make a conforming delivery If the time to perform has expired o Seller gets a rx time to substitute a conforming tender IF the buyer rejected a non-conforming tender which seller rx believed would be acceptable and seller gave seasonable notice o Has the buyer accepted the goods? 2-606 Acce3ptance of goods when: After the rx opportunity to inspect, buyer tells seller that goods are conforming or that he will retain them in spite of non-conformity or After rx opportunity to inspect, buyer fails to make effective rejection (give seasonable notice w/in rx time after tender) or Acts inconsistent w/ seller’s ownership Buyer can revoke his acceptance in whole or in part 2-608 If buyer has accepted the tender, but the non-conformity substantially impairs its value to him, then the buyer may revoke his acceptance in whole or in part when: o Buyer rx assumed it would be seasonably cured, but it was not or o Buyer was unable to discover the non-conformity b/c it was either difficult to do so b/f acceptance or seller gave assurances Buyer has to have notified the seller of the problem w/in rx time after discovery or should have discovered o When buyer wrongfully rejects tender of goods, or fails to make a payment due on or b/f delivery… 2-706 Seller may resell the goods. When resale is in good faith and in a commercially rx manner, seller may recover the difference b/t the resale price and the K price together w/ any incidental damages. o Requirement for Notice Affects Buyers Remedies 2-607 Where tender has been accepted, the buyer must w/in a rx time after discovering a breach, notify the seller of breach or be barred from any remedy. is filing the lawsuit sufficient notice??? SPLIT Less than Substantial Performance: Quasi-K Recovery (quantum meruit)
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o Traditional Rule – no recovery if less than substantial performance (material breach) o Modern Trend – award restitution to the breaching party for any benefit conferred in excess of the loss his breach caused (some recovery minus the damages caused) Most courts w/in the modern trend will not give quantum meruit recovery if the breach is WILLFULL o UCC – Liquidated Damages 2-718 Where the seller has justifiably withheld delivery b/c of the buyer’s breach, then buyer is entitled to recover the amount he has paid in excess of: the amount the seller gets by the K’s liquidated damages terms OR in the absence of such terms, 20% of the value of total performance for which the buyer is obligated under the K OR $500, whichever is smaller o example K is for $1M. Buyer made a down payment of 217k. Buyer defaulted and buyer seeks to recover down payment. Seller counters saying he’s been damaged b/c of the drop in the value of the goods. Step 1: which is smaller…20% of the value or $500? o 20% of 1M = 200k, thus $500 is smaller Step 2: subtract 500 from the amount buyer paid o 217k – 500 = 216.5K is the amount buyer gets back. HOWEVER, buyer’s restitution is offset by seller’s damages. Recovery by a party in Default – divisible Ks o These are situations where the party has not substantially performed, but they get restitution for their part performance because the contract is divisible in some manner… Test = if parties thought about it, and were fair and rx, would they logically think the K would be divisible? Examples o A promises 3 varying tasks to B for 10k. A performs 1, but not 2 or 3…probably a material breach. However, logically, court might split up the K into 3 separate Ks, and thus B would have to pay for task 1.
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o Breaching party made 2 video games, although had K for 4 games, was divisible…could be different if the games were highly interrelated. o Construction or painting K is not typically divisible o Recovery is offset by damages caused by the breach. Wrongful Prevention and Non-Cooperation o These are situations where there is a breach of a contract, but it is excused for some reason o Wrongful Hindrance When there is condition precedent that a party has control over, then implied duty of good faith and fair dealing not to hinder, delay or prevent…in fact duty of good faith to use rx efforts to cause the condition to occur o Failure to cooperate When court finds affirmative duty to cooperate, either expressly or by implication, that is tantamount to wrongful prevention or hindrance When there is some type of licensee situation/codependent relationship o Must perform reasonable efforts and due diligence in order to maximize profits, e.g., P was vendor at stadium, didn’t want to sell beer when the D allowed him to apply for license, court found P had a duty to attempt to qualify himself to sell beer and to apply for the license With respects to leases and businesses: o There is generally no implied promise to remain open or stay in business when leasing a commercial property Exception: When the fixed rent is way below fair rental value, implying that the lessee is in some way paying a portion of their rent through a percentage of the profits generated at their store…percentage lease combined with way-low rent o Real Property Seller has an affirmative duty to clear all minor defects in the title o Time is of the essence clause P proved that D wrongfully hindered him from completing the project on time, thus the clause was excused, and a rx time for completion was substituted o Remedies Party who is hindered or suffers from non-cooperation can: Be excused from a condition Rescind the K Sue for $$
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Waiver, Estoppel, and Election o This is when the party, who the condition favors, will not insist on the occurrence of the condition for his promise to ripen. Can occur at 3 times: Waiver prior to the K being formed (during negotiations) Scenario: One party is alleging that the condition was waived, but the final writing still contains the condition, and the party says it’s not really a part of the K. 3 views: o Traditional View – PER applies…if there’s a total integration then the waiver is an inadmissible contradictory term o Modern Majority – courts use promissory estoppel…if the party for whom the condition was waived during negotiations, detrimentally and rx relied on that, then the PER doesn’t bar admission of the evidence of the waiver o Small Minority – proving a waiver of a condition prior to formation of the K is an exception to the PER and is thus allowed Waiver after the K is formed but b/f the condition has not occurred Is the condition material? o Test = is the condition material to what the K is all about? (look to see who it’s material to) Is it a really important part of the original deal? Yes – material condition need consideration (or a consideration sub like PE) in order to waive the condition…this follows the traditional rules of K modification No – immaterial condition doesn’t require consideration to waive the condition, but the waiver can be re-imposed by the waiving party if there hasn’t been detrimental reliance on the waiver Examples of immaterial conditions o Time of performance (Time of the essence can be waived to a rx time; doesn’t mean it’s an immaterial term b/c it’s an express condition but it means it’s generally immaterial for waiver purposes), manner of performance, notice
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UCC doesn’t require consideration for contract modification, thus generally follows the rules above Repeated waivers of a condition do not automatically waive it in the future unless there is detrimental reliance on such earlier waivers. o No waiver clause (no waiver of a condition shall be a waiver of any subsequent breach) SPLIT some courts say the repeated waivers waives the no waiver clause others say the clause is effective no matter how many times a condition is waived Waiver after failure of the condition (election) generally don’t need consideration for election. Usually arises in the case of a material breach. In such cases, the person has the option to cancel the K…but could waive the failed condition either expressly or impliedly, then the party could no longer cancel the K and must rely on damages for the breach of the K. Cannot re-impose the condition after waiver. Example (TOE) o If TOE, and party is late, and the other party continues to perform, it may be an implied waiver of the TOE condition b/c the party never cancelled. However, the late party will still be liable for damages resulting from the breach. But if the party waived TOE b/f the deadline, then likely an immaterial condition that doesn’t require consideration and there would be no breach. Relief from Forfeiture o A rare situation when the failure to meet a condition is excused b/c the degree of forfeiture is so GREAT o Test = a condition may be excused when: Forfeiture is extreme (disproportionate forfeiture) AND The existence or occurrence of the condition forms no essential part of the exchange for the promisor’s performance Conditions of Satisfaction o These conditions must be express o Satisfaction of one of the parties Objective standard if K relates to mechanical fitness, utility, e.g., construction Subjective standard if K relates to ―taste and fancy,‖ e.g., artwork, catering, decorating
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All that is required to satisfy this condition is good faith…the person who is unsatisfied can be unreasonable so long as he is being honest o Satisfaction of a third party If the third party is truly independent: Vast Majority: Subjective standard, must have good faith o Some courts in the majority say that if the opinion of the third party is soooo grossly erroneous, then that indicates bad faith Small Minority (Nolan Rule): satisfaction is judged by an objective standard…the third party needs to be reasonable If the third party is more like an agent of a contracting party, or acting in collusion with a party, then apply objective standard o Check for quantum meruit recovery if party is validly dissatisfied, but the other party has already performed Prospective Failure of Condition and Breach by Repudiation o Examples Prospective failure of a condition: S Ks to paint Pop’s house, but books other jobs during the same time she’s supposed to paint Pop’s house Anticipatory breach: S has K to paint at a future date, but she tells Pop ahead of time that she won’t do it o When the PR tells the PE he will not perform when supposed to under the K, then can the PE sue the PR b/f the PR actually fails to perform? SPLIT MA view: can’t sue for damages if just an anticipatory breach, must wait for the actual failure to perform…the actual breach Other view: can sue for anticipatory breach if the statement is clear enough o Can you suspend your performance under the K or cancel the K? Mere expression of doubt is not repudiation, nor is hearing a rumor that the PR won’t perform If the PR becomes insolvent/files for bankruptcy, then can ask for ASSURANCES o Assurances: When there are rx grounds to believe there will be a breach, the PE can demand adequate assurances of performance, and may suspend his own performance until receiving such assurance. If no assurance is given w/in a rx time, then it’s deemed repudiation o UCC Right to adequate assurances of performance 2-609 When the PE has rx insecurity about whether the PR will perform, then PE can in writing demand adequate assurances, and may suspend his own performance PR has a rx period to give assurances, not to last longer than 30 days, and failure to give such assurances is deemed a repudiation of the K
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Anticipatory Repudiation 2-610 When the PR repudiates, the aggrieved party may: o Wait for the PR to perform OR o Resort to any remedy for breach and o In either situation above, suspend his own performance Retracting Anticipatory Breach 2-611 Until the repudiating party’s next performance is due, he can retract repudiation UNLESS: o The PE cancelled the K or o Detrimentally relied or o Indicated he considers the repudiation final Retraction must include assurances demanded and must clearly indicate intention to perform
THIRD PARTY BENEFICIARIES Basics o The benefit of one party’s promise to the other party in the K flows not to the Promissee, but to the 3rd party. The question is whether the 3rd party has rights to sue for benefits under the K. Intended, Incidental, Creditor and Donee Beneficiaries o Who is a valid 3rd Party Beneficiary? OLD common law and can’t sue if no privity…this is not the rule in the US Traditional-Modern Law (1st Rest.) Valid o Creditor Beneficiary The PE owes money to the 3rd party and uses the K to pay the debt, thus the money flows from the PR to the 3PB o Donee Beneficiary The PE wishes to give a gift to the 3PB by means of the K, thus the benefit of the PR’s promise flows to the 3PB Invalid o Incidental Beneficiary – anyone who isn’t a creditor or donee beneficiary is considered an incidental beneficiary and has no rights of enforcement Modern-Modern Law (2nd Rest) Valid o Intended Beneficiary What is an intended Beneficiary? Includes creditor and donee beneficiaries To whom does the benefit run?
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o If the benefit runs directly to the 3rd party, and it’s stated so in the K, then strong indication of an intended beneficiary. o If the benefit runs to the PE, with only some benefit running to the 3rd party, then some good indication of only an incidental beneficiary Is there Rx reliance? o If the 3rd party rx relied on the K, then good indication of intended beneficiary
Invalid o Incidental Beneficiary – anyone who isn’t an intended beneficiary is incidental and has no rights of enforcement o Common Scenarios Mortgages Terminology o Assuming the Mortgage – assuming personal liability…creditor is a valid 3PB o Taking subject to the mortgage – agreeing to buy the property with the loan still on it, but not formally assuming personal liability to pay it…no promise, thus no 3PB If the last person to buy the property assumed the mortgage, then can the bank sue the last person? SPLIT o The chain is broken, the bank can’t sue o Modern Trend says bank can sue if the last person assumed the mortgage Public Benefit Scenario: Gov enters into a K with construction co to build a road…can a member of the public sue as a 3PB? o It’s very difficult to show that a member of the public is an intended beneficiary. Could possibly be considered an intended beneficiary when the K indicates liability towards a specific person or group of people or when the construction project is clearly intended for a small group of people Named Beneficiaries in a Will These are valid 3PB with standing to sue Defenses, Vesting and Relative Rights of Parties o Basics: Here, we already have a valid 3PB
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o Vesting The issue: Only an issue when the PR and PE attempt to vary, modify, or terminate the rights of the 3PB. If the 3PB’s rights have vested, then the rights cannot be altered or destroyed, but if they haven’t vested, then the 3PB’s rights are subject to evaporation When has the 2PB’s rights vested? Minority (1st Rest.) – Creditor Beneficiary’s rights vest once the 3PB: o Brings an action to enforce such rights OR o Detrimentally relies on the intended benefit b/f learning of the modification o Donee Beneficiary’s rights vest immediately when the K is made and cannot be modified w/o the 3PB’s consent Greater protection is afforded to Donee Beneficiaries b/c the creditor beneficiary can still sue the PE for the underlying debt, while a donee would be left high and dry. Majority/Trend (2nd Rest) o Intended Beneficiary’s rights vests when the 3PB: Brings an action to enforce the rights or Justifiably relies on the promised benefit to his detriment or Manifests his assent to the promised benefit if requested or invited by the PR or PE Notice Requirements o Under either Rest, if the 3PB has notice of the mod or termination of his rights, then he cannot then undertake a vesting action. He can only undertake a vesting action b/f the 3PB learns of the termination or mod K can stipulate all of this o The K can provide for the parties to have continuing rights to end or modify the K, in which case the 3PB’s rights will not vest o Alternatively, the K can provide for the 3PB’s rights to be absolute and unchangeable w/o the 3PB’s consent o Defenses Winning on the Merits Just b/c 3PB can sue, doesn’t mean that he’ll win on the merits K formation or performance Aside from winning on the merits, a PR can generally assert any defense against the 3PB that the PR could raise
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against the PE regarding K formation or performance. These include: o Fraud, mistake, undue influence, duress, lack of consideration, material breach, non-occurrence of a condition, etc. Such defenses generally result in the PR having no duty to perform under the K and thus no duty to render the benefit flowing to the 3PB Recoupment for an immaterial breach If the PE breaches, but has substantially performed, then the damages flowing from the PE’s breach could be deducted from the PR’s liability to the 3PB Set-off In a Small Minority, any claim or defense the PR has against the PE (even if unrelated to the basic K giving rise to the 3PB’s rights) can be used to off-set the liability of the PR to the 3PB When the PR has assumed the PE’s debt/obligation owed to the 3PB, can the PR use a defense that the PE has against the 3PB? Depends on the wording… o In order for the PR to assert a defense the PE has against the 3PB, the PR must have been super duper specific about how he assumed the PE’s obligation owed to the 3PB Ex.: ―I recognize your note, and I promise to pay you the amount the PE owes to you.‖ o If it’s not specific enough, or it seems like the PR just took on his own obligation to pay, then the PR cannot assert a defense the PE would have against the 3PB Ex.: ―I promise to take over the loan.‖ Mortgage situation: the bank can only sue the PR when the PR has assumed the mortgage, and assuming the mortgage is not the same as assuming the PE’s obligation owed to the bank. Thus if assumed the mortgage—cannot assert a defense the PE would have against the 3PB o Relative Rights of the Parties 3PB v. ? In a creditor beneficiary situation, if the PR doesn’t pay the 3PB, then who can the 3PB sue? o The 3PB/creditor can sue either the PR, or the PE/debtor (on the underlying debt), or both, but is only entitled to a single satisfaction
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Exception: Novation When the PR takes over the PE’s obligation owed to the 3PB/creditor, and the 3PB agrees, then the 3PB cannot sue the PE anymore. This is called novation. In such situations, there’s really no 3PB conflict anymore b/c it’s as if the 3PB and PR made a new K Must be express, can never be implied 3PB v. PE to enforce a donee beneficiary’s rights 3PB generally CANNOT sue the PE b/c it’s really just an unenforceable gift promise; must sue the PR to enforce 3PB rights. PE v. PR to enforce 3PB’s rights Creditor beneficiary situation o PE can sue the PR to enforce the 3PB’s rights Donee beneficiary situation o Traditionally, the PE could not sue the PR o Modernly, the PE can sue for specific performance
ASSIGNMENT AND DELEGATION Generally o Assignment X and Y have a K, X is obligor. Y assigns his benefit to Z. Z is assignee o Delegation X and Y have a K, X assigns his duties to A. X is a delegator. A is a delegatee. o Different from 3PB b/c this is full transfer of rights/duties as opposed to a 3PB standing outside of the K What words constitute an assignment? o Rule: words must be a clear manifestation of a present transfer of rights under existing Ks. Must be expressed to the assignee. (objective) If the words are said to anyone other than the assignee, it is invalid Can be donative…no consideration necessary Can assign a future right so long as you do it presently o ―H is entitled to ½ of the commission from my sale‖ not specific enough…it’s a separate K How do you revoke an assignment o Assignments for consideration Cannot be revoked o Gratuitous assignments Automatically revoked upon: Death of assignor
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Reassignment by assignor or Notice of revocation given to either assignee or obligor EXCEPTION: become irrevocable when: Delivery = giving the assignee some symbol of the assignment, e.g., letter, note Fx, rx detrimental reliance When the obligor has already performed and paid the assignee When can you NOT assign? o Materially change the duty of the obligor, e.g. A is supposed to paint B’s small house but B assigns the right to C whose house is way bigger and farther away o Materially increase the burden or risk imposed on the obligator, e.g., A is a good driver w/low premiums and he assigns this to B who is a bad driver o Materially impairs the obligor’s chances of obtaining return performance or materially reduces it’s value to obligor, e.g., nexus…assigning the benefits of the exclusive distribution K to the subsidiary impaired value to the obligor (nexus) o Forbidden by statute, precluded by the K, or against public policy, e.g., assigning future alimony rights When can you Delegate duties? o Generally allowed, but exception is when the K is for personal services. This is when the duties are unique, not generic. Also not allowed when K prohibits,, against public policy or law. Generally easier for corporations to delegate b/c it’s often more generic UCC delegation o Implied duty to make best efforts in an exclusive K…this conflicts w/ delegating duties to competitors of the promisee Vast majority of Ks don’t have to be in writing 1 year rule: K must be in writing if it cannot be performed w/in 1 year from the date the K is made o Ambiguous or indefinite time periods are not w/in SOF, even if everyone knows kit can’t be done w/in the year. It has to be death impossible to finish w/in the year to be w/in SOF Is the K within SOF? o Must be in writing in most states: Executors, administrators, trustees Marriage promises Land 1 year rule UCC – sale above 500 bucks o Termination clauses
SOF
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Majority – for a K that can’t be performed w/in a year, but there’s a termination clause, it’s within the SOF b/c termination has nothing to do with performance Minority (CA, NY) – if K can’t be done w/in the year, but it’s got a termination clause, then it’s outside the SOF o Covenant not to compete Modernly, not w/in SOF b/c performance could always end in theory w/in the year if the guy dies What is a valid memo? o Signed by party to be bound Could be X, initial, stamp, typed, ―XYZ corp undertakes to perform the following‖…doesn’t matter where in the document it is o ID of parties o Description of the subject of the K o Essential terms and conditions o By whom and to whom the promises are made (Emails and fax counts) Can multiple documents create a valid memo? o Stapled together – valid o Signed doc expressly referencing other unsigned doc – valid o Signed doc not expressly referencing unsigned doc Tradition – not valid, needs to be express Modern Maj – if there’s sufficient connection by reference to the same transaction, then parol evidence allowed to show the connection b/t the docs and to establish acquiescence of the party to be charged K is w/in SOF, but there is relief o Always check for quantum meruit if no relief!!!! o Full performance exception to SOF Vast Majority – removed from SOF A few w/in the majority say it’s out of SOF so long as performance was done w/in 1 year Small Minority – still w/in SOF o Part performance Generally, still w/in SOF but LARGE MAJORITY recognizes exception: Promissory estoppel (rx, fx detrimental reliance and injustice only avoided by enforcing the K)
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